The Option Investor Newsletter Sunday 07-28-2002 Copyright 2002, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 7-26 WE 7-19 WE 7-12 WE 7-05 DOW 8264.39 +245.13 8019.26 -665.27 8684.53 -694.97 +136.24 Nasdaq 1262.12 - 57.03 1319.15 - 54.35 1373.50 - 74.86 - 16.58 S&P-100 426.93 + 3.83 423.10 - 35.81 458.91 - 33.75 + 2.54 S&P-500 852.84 + 5.09 847.75 - 73.64 921.39 - 67.64 - .79 W5000 8091.63 + 8.63 8083.00 -628.50 8711.50 -601.90 - 70.63 RUT 382.26 - 3.94 386.20 - 27.08 413.28 - 27.64 - 21.74 TRAN 2254.79 - 77.39 2332.18 -147.96 2480.14 -172.50 - 77.68 VIX 40.44 - 3.01 43.45 + 5.12 38.33 + 8.12 + 1.08 VXN 69.02 + 7.85 61.17 - 4.83 66.00 + 9.72 - 1.67 TRIN 1.21 1.44 0.89 0.28 Put/Call 0.70 1.14 0.64 .77 ****************************************************************** Outstanding - Don't Pinch Me! by Jim Brown If I am dreaming don't pinch me! I do not want to wake up from a dream where the Dow closed up +245 points on the week and stands a good chance of carrying that gain over into next week. The Dow rebounded from its Wednesday lows of 7532 to close +732 points higher on Friday at 8264. Considering the -1191 point drop in since July-17th this is remarkable. Even more remarkable was the fact that it did not give back any of those gains and finished near the highs of the day. Even the Nasdaq, which had a rough Thursday, finished positive +22 points. Dow chart Nasdaq Chart Friday started out with CEO checkers as Tyco announced they had recruited Motorola President Edward Breen as their new CEO. Motorola quickly said they named Mike Zafirovski as president and CEO saying he had turned around their mobile phone business. TYC gained +3.78 or +45% on the news and MOT dropped -1.28 or -10%. Breen is well thought of and is walking into a win-win deal. If he pulls Tyco out of its problems he will be a hero. If he can't do it then everyone will say it was too far gone anyway but he made a heroic effort. No mention of compensation was made. Goldman, trying to be on the bleeding edge again, upgraded the chip stocks this morning after TSM warned of weaker conditions ahead on Thursday. While Goldman grabbed the headlines with the call you need to read this carefully. Goldman said it was increasing its rating on chip equipment makers to market overweight from market weight saying that "investors have finally accepted that orders have turned down and things are getting worse." "While fundamentals are not likely to improve in the near-term AND the stocks could go lower still, investment from funds and seasonality may drive a meaningful move in the stocks." On CNBC the analyst agreed fundamentals would get worse before they got better and this was for traders with a long time horizon. While I may poke fun at them for their call I do think it is a good one. Most chip makers have fallen -50% or more and should represent value soon. With AMAT at $14 how much more risk can there be? We are not likely to quit using chips anytime soon. IBM was the big drag on the Dow on Friday with a -2.95 loss on worries they have some hidden accounting problems. Barrons is rumored to be doing a hatchet job on them in this weekends edition. At the close IBM issued a statement that their CEO would sign the accounting certifications in the normal course of business when the time came. They said they were very comfortable with their accounting. Depending on the Barrons article IBM could bounce off the 52-week low set on Friday. The good new/bad news story. TrimTabs.com reported on Friday that -$18.5 billion dollars flowed out of equity funds in the week ended on Wednesday. Very ugly! More than twice the average rate for the prior four weeks. Investors are capitulating at twice the prior rate. The good news? They also said there was a net inflow of cash on Thursday after that huge rebound on Wednesday. So, investors are not dead or ignorant of the market. They are just not willing to sit and watch their accounts shrink on a daily basis. I did not catch the inflow amount but you can bet it was nowhere near the prior outflows. The Consumer Sentiment numbers were actually better than expected which makes me wonder who they actually asked about their feelings. The 88.1 final number was better than the 86.5 preliminary number but still well below the 92.4 from last month. The main issues impacting the final numbers included the markets, corporate accountability and employment. Nothing new here! The problem remains that spending is rumored to be slowing and that will be the kiss of death to the fragile recovery. The bounce this week was remarkable but not likely to continue much longer. The problem is stock valuations. With the Nasdaq PE at 44 and the S&P at 19 we could be approaching historical value levels if the economy was in strong growth mode. Unfortunately we continue to hear about reduced expectations, slower sales, shrinking margins and increased competition. Add to that the move to trash the current multiple accounting standards and increased scrutiny and the earnings will fall. With this likely to be the last quarter of cookie jar accounting the earnings we get next quarter may be significantly different than the ones we have been seeing. There could be a lot more downward revisions from more conservative accounting methods as well as from the downturn in the economy. The stock market is very good at factoring in problems and discounting future results but it needs a base to start from. We do not currently have a clue what real earnings for the 3Q will look like and that makes the markets very nervous. With the certifications beginning August 14th, only 13 trading days away, the odds are good that there are some surprises in our future. Next week there is a technology conference in Boston presented by Soundview and that could give tech stocks some visibility. Increased visibility did not help AOL this week. S&P cut their outlook for AOL to negative saying the cash drain from AOL would put a strain on other Time Warner divisions. AOL has clearly become the ugly duckling and will be kicked out of their flock as soon as they can arrange it. Bullish markets, what a change. The action today may not have been outstanding compared to the triple digit finishes as of late but at least it was positive. Bullish points during the day included the lack of a serious drop on the new Israeli killings and vow by Israel to get tough. There was no drop when the news reported that four American servicemen had been captured and seven killed in Afghanistan. The story was later denied by the U.S. There was no major sell off of the gains made on Wednesday. There was no major sell off when Citigroup was rumored to have said, "somebody said it was ok so we thought it was ok." Duh! The markets even rallied late in the afternoon in front of the weekend. Considering Mondays have not been kind recently this is remarkable. The Dow stopped right at significant resistance where two different retracement brackets converge. If you draw a retracement bracket from the July-17th high to the Wednesday low you get a 61.8% fib level at 8268. If you draw one from the July-8th high you get a 38.2% level at 8249. The Dow closed right between them at 8259. Dow 60 min retracement Dow 90 min retracement A strong open on Monday could propel the Dow over these levels and hopefully the next resistance at 8300 as well. Once clear of 8300 the Dow could easily run to near 8600 before sellers appear in volume. I emphasize the word "could". Personally I am surprised at the strength of the rally and probably agree with one trader in his analysis. "The shorts have been squeezed out so many times in the last two months only to have the markets roll over again, that there are quite a few trying to tough it out." They are likely going to sweat over the weekend and a big open on Monday could break their pain threshold and burst the dam. While everyone certainly hopes he is correct there is no guarantee. Next week the earnings will slow to a crawl but economic reports will flourish. We get the Consumer Confidence, different from Consumer Sentiment but the same concept, on Tuesday. The Wednesday reports include the Q2 GDP, PMI and the Beige Book. Thursday is ISM, Construction Spending and Auto Sales. Friday closes the week with the Nonfarm payrolls, Personal Income and Spending and Factory Orders. As you can see the boat is loaded to the roof and balanced to perfection. Any one of those reports can tip the current bullish balance and swamp the boat and the markets. As an investor why should you buy in front of these economic time bombs unless you simply don't care where the economy is going. Stocks are cheap relatively speaking but they can still get cheaper! I took some heat for suggesting we could get a strong relief rally soon in last Sunday's newsletter. I also pointed out that the VIX at 43 was definitely high but could easily hit the 57-60 levels seen on prior crashes. The high for the week for the VIX was 56.74 and the Dow rebounded over +700 points off the lows when that level was hit. The bottom line for next week. Protect any long positions on Monday and prepare to take profits if the rally runs out of steam. The two worst months of the year, August and October are still ahead of us. The question remains, why buy? As traders we will play the moves but without real buyers to power the market those coming moves may be to lower lows. We need your help. We don't know where the Dow is going to close next Friday. We decided to offer a reward to anyone that can tell us. We are giving away a very high-end video card that supports two monitors on one PC to anyone who comes the closest to the correct closing number for the Dow next Friday. Go to this page and enter your guess! It is free and this is a great video card. 64MB DDR ram and two 350MHZ processors! It paints screens so fast you will not even see them blink! (grin) Go here: http://www.OptionInvestor.com to enter your guess. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor Was this commentary helpful to you? comments@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** WHAT A WEEK! by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - After making new 52-week low, the S&P 500 (SPX) managed to eke out a 0.6% gain. The Dow Jones Industrials finished the week up 3.1%. Both indexes have had losses for 8 of the past 10 weeks. The Nasdaq Composite closed the week off 4.3%, extending its losing streak to 4 straight weeks. However, key Nasdaq stocks look like they may have bottomed for now, along with the Composite and Nasdaq 100. The next few days should tell the story, as follow through buying is needed to get the key bellwether stocks like GE, for the NYSE and CSCO, for Nasdaq, up above their next levels of resistance. By the way, both GE and CSCO had classic "bear trap" reversals; i.e., a move to a clear new low, followed by a same-day rebound to above the prior close and, in the case of GE, a close above the prior daily high - also making it a "key" (1-day) reversal up. As far as an "ultimate" bottom, this is another story - it's long been my thought that the fall period, especially October, may see a retest of whatever index lows are made this summer. All the media now seems to be talking about the volatility this, the volatility that - "its here to stay", etc. This facet of business journalism is why the "bear" on the cover of Time or Business Week is usually a sure sign of a bottom! - the media is most often "lagging" the market, reflecting the "public" viewpoint quite closely also I might add. Actually, the public has stopped trading and investors are not opening their 401k and mutual fund statements, the classic "head in the sand" treatment for the worst and final stages of a bear market. Based on lagging perception of volatility, with VIX, our most objective measure of market volatility, falling rapidly, the business writers and talking heads are to some extent talking about "old" news. Only VXN, the CBOE Nasdaq 100 volatility index has continued to rise into the end of the week - it will be interesting to see now if VXN has made a "double top" relative to its recent high, not its high from September. Speaking of tops, the Eurodollar has made a classic top - the dollar, a bottom - at least for now. The next chart's pattern below (I should remove the symbol!) may look familiar, as it resembles the look of many Nasdaq charts at their 2000 tops - the point at which the move becomes almost straight up is the warning of a top; i.e., the (parabolic) "arc" traced out by the rising trend gets to a point in its "curve" where it is going nearly vertical. I will say this just once and hope you remember - THEN you will know more than most of the talking heads on TV - DOLLAR STRENGTH/WEAKNESS IS NOT NORMALLY LINKED TO BULL OR BEAR MARKETS IN STOCKS. Does anyone remember what the dollar was doing at the time of the 2000 top? However, anything that market participants take as an important determinant for market direction should be noted. S&P 100 (OEX) Index - Daily/Hourly charts: OEX has broken out above the steeper (green) down trendline and looks poised to rally further, such as advancing up toward the old top of its broader downtrend channel (dashed lines). I'm a buyer in the 410 area, a seller at 445-446, at resistance - I should also note potential resistance at the downside chart "gap" around 340. A next major resistance zone above 445 is at 458-460. Key technical support is at 405-406, then around 400. IF an intermediate-term low has been put in, this magnitude of a pullback is unlikely however. Such weakness would call into question the more bullish scenario or picture that I am describing. "Bellwether" GE - GE has been typically the best "bellwether" or related predictor of the broader S&P indices. Its recent low, at the bottom of its down trendline on the daily chart, is a classic "V" bottom - and, on very heavy volume although this is not shown on the chart above. Looks like it was a climax type bottom - subsequent rebound paid handsomely in the nearby long calls. Of course, you had to turn off CNBC and just look at the technicals to have "believed" it! S&P 500 (SPX) Index - Hourly chart: The first "leg" up in SPX may be equaled by a second "leg" up - this is what a "measured move" is basically; i.e., a second price swing in a trend often will at least equal the extent of the first. A measured move objective for the S&P 500 is to the 900 area, where there is resistance based on the sideways consolidation that developed in the 895-905 area on the hourly chart. Key support is at 835 - the way trading has and is unfolding, it is one (finally) where it may end up to "pay" to have just stayed long calls (versus trading in and out), assuming you bought on the dip under 800. Dow Index (1/100: $DJX.X) - Daily/Hourly charts: More upside is apparent in the chart pattern - perhaps back up to the 86 area, although next resistance looks like 84-84.5 area at the low end of the hourly consolidation from mid-month (July). In the 86.5-87 area I would become a seller. Key support is at 79.5-80. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: While its not anything "dramatic" like the S&P chart reversal bottom, the Nasdaq 100 appears to be in a "bottomING" process. I have more conviction related to a QQQ bottom when I look at the key Nasdaq stocks, which is why I include some further on here. The 23.5 area is a next upside objective. Key "must hold" support is 22 currently. The stock has upside potential to the 24.5-25 area before it runs in more major technical resistance. A close up look at the daily QQQ chart below shows some things not as apparent on the two charts above. That the recent low was AT the low end of a well-defined downtrend channel is most apparent on the daily chart as shown above. The other noteworthy technical feature relating to a probably bottom, was the bullish price/RSI divergence that developed as prices well to a new low "unconfirmed" by a new, or lower, low in the Relative Strength Indicator" (RSI). Use of the RSI oscillator often will "show" more of bullish or bearish type "divergences" than will the Stochastics oscillator usually. The other noteworthy technical aspect is the apparent volume "climax" in the QQQ stock. Average daily volume went up substantially during the last sell off - and, there were significant daily volume "spikes" on a couple of recent lows, especially the one on the day having the lowest low to date. Nasdaq "bellwether" stocks - There is also, of course, Intel (INTC) and Qualcomm (QCOM), but only thing you need to note currently about these two is that both (so far) put in weekly lows last week that are ABOVE their prior bottoms. MSFT fell to bottom of its downtrend channel on HUGE volume, then rebounded from this low which looks like "selling climax", is an upside reversal pattern and suggests that the low for this current move is in place. A "Bear trap" reversal pattern in CSCO results from the fall to a new low, followed by a sharp upside move from there within the same day. Also, this low was not just ANY low, but one in the area of the low end of its recent trading range. Key resistance areas are noted by the down arrows - Cisco's chart would look pretty bullish if the stock got above $15. One of my favorite stocks - careful of what I say about it, as I OWN it in my account and buy more on every price dip to its (up) trendline. Friday's rebound put ORCL above its minor down trendline and the stock looks like it may now head back up to test key resistance at 10, at the down trendline there and at 10.5 at its prior swing high. I measure upside potential to the $12 area currently. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** Extremely Confusing I really stirred up a hornet's nest with my editor's play last week. I got tons of email from readers who were totally confused. I had people asking me where to get the $23.50, 23.25, 22.75 strikes. Didn't I know they only came in $1 increments? I got questions from people at the bottom of the dip asking if they should sell 10 contracts as each .25 price point was reached on the way back up. I had readers ask me what good did it do to buy the puts at the bottom after they bought all the calls? I got dozens more covering every possible variable. I was amazed! First I want to start by reviewing the play from last week and then give you another one for the coming week. The concept from last week was to enter a large LONG CALL position with the Aug-$24 calls by purchasing a portion of the position each time the NDX/QQQ reached a TRIGGER point on the down leg of the expected dip. The suggested trigger points were: 10 @ $23.50 (NDX 940) 10 @ $23.25 (NDX 930) 10 @ $23.00 (NDX 920) 10 @ $22.75 (NDX 910) 10 @ $22.50 (NDX 900) All the trigger points were hit and the estimated entry prices looked like this. 10 @ $23.50 (NDX 940) $1.25 total invested $1250 avg $1.25 10 @ $23.25 (NDX 930) $1.10 total invested $2350 avg $1.175 10 @ $23.00 (NDX 920) $1.00 total invested $3350 avg $1.116 10 @ $22.75 (NDX 910) $0.90 total invested $4250 avg $1.062 10 @ $22.50 (NDX 900) $0.85 total invested $5100 avg $1.02 (This was -$35.00 less than the expected $5,135 last week) The article suggested BUYING 20 contracts of a protective August $25 put which was ask at $2.05 at that Friday's close. At the open on Monday it traded between $1.70 and $1.85. Using the high number our total expense in this trade is $3700+5100 or $8,800. The concept was to hold the puts until the QQQ reached the same price that you paid for it or the QQQ hit $24 again. This was for insurance only and was not intended to be profitable. The alternate suggestion was to sell the puts on any huge drop and use the proceeds to offset the cost of the entire position and end up with a boatload of calls for very little invested. The puts traded at $3.60 for 30 min on Wednesday and offered traders a great chance to sell them for $7,200 and end up owning the 50 contracts of calls for an investment of only $1600. The calls were worth $.75 cents at the close on Friday. ($3,750 for 50 contracts) Had you taken the option of selling the put then you would have $2,150 in profits already in the calls. If the QQQ returns to the $23.97 level it was when this trade was first written then the calls should be worth $1.25 each after allowing for reasonable premium decay. That is $6,250 total minus your remaining investment of $1600 which equals a $4,650 profit. If the rally continues for another day with the QQQ moving over $24 the numbers go off the scale. But I did not sell the put! No problem that was only one option. If you are still holding the puts you are doing just fine. They were only meant for catastrophe insurance to begin with. We wanted something to protect us in case the QQQ went down and did not come back up. If the QQQ continues upward traders should sell the puts when they reach the point that they bought them. If you paid $1.85 for them as the charts show you should have then you still own them at $2.85 (Friday's value) and your total position is worth $9,450 with a cost of $8,800. This is not a roaring profit but the play still has three weeks to run. The two scenarios play out like this: The QQQ continues to go up: You sell your puts for $1.85 when the QQQ reaches the level where you purchased them. You put a stop loss on your profitable calls and let the play run. The QQQ continues to go down: You maintain your put position until you can exit the puts near the cost of the entire transaction and you remain long the calls for next to nothing until expiration. Or, depending on the speed of the drop you remain long the puts until profitable and close them for a win and either liquidate the calls for a few cents or hold them until expiration and hope they go back up. Remember: This trade was predicated on an expected SHARP drop and SHARP rebound last week. We got exactly what we expected and with any follow through on Monday will have a very profitable play. THIS TRADE IS OVER!! I had readers emailing me on Friday wanting to know if they should enter it now. NO, it is over. It was based on a market setup that was a one time thing. For a recap of the initial description check out the editors plays for Sunday July 21st. ***************************** New Play ***************************** Okay, you have the concept! I am going to diagram the same play on the DJX (Dow). Because there is a possibility of a strong short covering bounce on Monday followed by another deeper drop I am going to do the same strategy with puts. Because the DJX options are more expensive, (because the Dow moves faster than the QQQ), I am changing the parameters slightly. I am going to cut the number of contracts down on each increment with a balloon on the last trigger. That means when it is the most oversold we will double our last buy. I am going to use the August $82 puts. (DJX-TD) The closing ask on Friday was $2.80 but they should be cheaper at the open on Monday due to premium decay. I am using $2.50 as my opening estimate but we all know that real life will be different once the Dow starts moving up. I am using the August $84 call as the insurance strike. (DJX-HF) It closed Friday at $2.15 ask. This will also change by Monday morning. Here is the play: At the open on Monday buy 20 contracts (or any number you are more comfortable with) of the August $84 call at market. This is your insurance against a runaway market. Buy the Aug-$82 PUT contracts listed each time a trigger point is hit. Here are the trigger points to buy the puts: qty 5 @ $83.00 (DOW 8300) $2.50 total invested $1250 avg $2.50 qty 5 @ $83.50 (DOW 8350) $2.10 total invested $2300 avg $2.30 qty 5 @ $84.00 (DOW 8400) $1.95 total invested $3275 avg $2.18 qty 5 @ $84.50 (DOW 8450) $1.80 total invested $4175 avg $2.09 qty 5 @ $85.00 (DOW 8500) $1.65 total invested $5000 avg $2.00 qty 5 @ $85.50 (DOW 8550) $1.45 total invested $5725 avg $1.91 qty 10@ $86.00 (DOW 8600) $1.25 total invested $6975 avg $1.74 Including the cost of the calls the total for the entire position would be $6975 + $4300 for the calls or $11,275. Remember, this is just a suggestion. You can buy any number of contracts you are comfortable with as long as you use the same ratios. Results: If the Dow runs up to 8600 and triggers all your put contracts your calls will be worth somewhere around $4.75 each. That is $9500. Your puts would be worth somewhere in the $1.00 range (you just paid $1.25 for the $86 trigger) or $4,000+ You have paid in $11,275 and the position is worth $13,500. (these are just estimates of course) Now you are faced with two possibilities: 1. Sell the calls for the $9,500 and you have 40 contracts of the Dow puts with a basis of $1,775 ($.44 cents each) 2. Set a stop loss on the calls of $2.15 and wait for the Dow to roll over and your puts to go back up in value to the $2.50 you paid for the first trigger at Dow 8300. Your calls will be stopped out for no gain/loss at $2.15. Your puts will be worth $10,000 (est) with a basis of $6,975. Set a stop loss and let the play run. If the Dow does set a new low this would turn into a home run. For every 100 points the Dow drops the put price would increase about $.85 cents. On Tuesday of last week those puts traded for $6.60 when the Dow was below 7800. Do the math. Of course I am not claiming that this play or any other will ever work out exactly as planned. This is just an example of how to enter a potentially very profitable trade with a minimum of risk. Two points: First, this is a trading play only and should not be held long term. The overall market trend is still down but the Dow could remain up for days or weeks. I would like to think that the Dow will roll over well below 8600 but anything is possible. If you plan on holding longer be sure to buy the calls and don't sell them until the play is profitable. Second, do not try to do this with limit buys based on option prices. The prices quoted were the closing prices on Friday. There is no way to predict the actual price on Monday or Tuesday. Trying to make a limit buy in a fast moving market more often than not leaves you standing on the sidelines unfilled. Use a limit based on the DJX price or enter the orders manually, but enter the option order at market. For 50 contracts or less they will be filled automatically at bid/ask and nobody will have the chance to jack you around. ********************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** So Far So Good By Steven Price This morning started on a positive note with a chip equipment sector upgrade from Goldman Sachs. The sector had been beaten severely in recent months, with the Semiconductor Index (SOX.X) reaching a new 52-week low on Thursday. Finally someone was showing a little faith, even after yesterday's announcement from Taiwan Semiconductor that they were cutting their capital spending budget by more than $500 million. The recommendation was lukewarm, however, basically saying business cycles could help the sector, even though there was no immediate change in fundamentals ahead. In spite of the upgrade the SOX ended on another 52-week low. Senator Carl Levin sent letters to the CEOs of Citigroup and J.P. Morgan, requesting that they personally answer questions regarding their companies' dealings with Enron. The Senate set a Monday deadline for them to provide the information. In the past week, Citigroup CEO Sanford Weill sent a memo to Citigroup employees assuring them that the company's dealings with Enron were legal and met accounting standards. What I find interesting about the memo is the wording: "And our people, relying on the advice of independent legal and accounting experts, believe they were doing the right thing." It seems to leave the door open for blame to be placed for any wrongdoing on following the advice of independent experts, rather than simply stating that there was no wrongdoing. J.P. Morgan CEO William Harrison also announced on Wednesday that the company acted "properly and with integrity" in its dealings with Enron. It will be interesting to see how forthcoming these two men are with the Senate. If they choose not to respond, we could see their companies' stocks give up their gains, and return to the levels they saw on Tuesday. On a similar note, Merrill Lynch announced that it had suspended its managing director of energy banking, Schuyler Tilney, who refused to testify before the Senate Permanent Subcommittee on Investigations. While this demonstrates Merrill's intent to cooperate with the investigation, it is also worrisome that Tilney apparently has something to hide. The gold index (XAU.X) has given up all of its gains for the year, as the dollar has rallied over the last week and a half - keep your fillings. The sector index closed at 55.73. Gold futures fell as low as 302, before bouncing off support at 300 from April, and finishing at 305.2, giving up 6.5 on the day. GE announced a reorganization of its financial services unit, GE Capital, into four separate divisions. Each division will report its financials separately. This portion of GE generates 40% of the company's earnings. The four new units will be GE Commercial Finance, GE Insurance, GE Consumer Finance and GE Equipment Management. GE finished up $1.15 to $27.80 Microsoft made back almost half of its losses this week, after the company announced they were expanding the R&D budget, hiring 5,000 additional employees, and still has $60 billion in cash. The Dow continued its surge. After an up and down day that saw a low of 8114.59, it closed at 8264.39, just 3 points off the high of the day. The index added 70 points overall to Wednesday's rally. The S&P 500 finished up 14.16 to 852.84, adding 9.41 to Wednesday's close. The Nasdaq finished up 22.04, to 1262.12, 28.11 points below Wednesday's rally numbers. Although this number was down from Wednesday, the index regained some of Thursday's 50-point drop. On a day that could have seen bulls taking profits from the first large rally in months, it is encouraging that the week finished in rally mode. Heading into next week, the rally could continue, unless we see bad news from Citigroup or J.P. Morgan. Other concerns are the semi-conductor sector, which continued its fall despite the upgrade. However, after a 500-point gain on Wednesday, and negligible down day (5-points) on Thursday, the rally today seems promising. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8264 Moving Averages: (Simple) 10-dma: 8221 50-dma: 9289 200-dma: 9788 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 775 Current : 852 Moving Averages: (Simple) 10-dma: 860 50-dma: 987 200-dma: 1087 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 869 Current : 910 Moving Averages: (Simple) 10-dma: 961 50-dma: 1091 200-dma: 1377 ----------------------------------------------------------------- The Semiconductor Index (SOX.X) started off the morning in positive territory after reaching a 52-week low on Thursday. Goldman Sachs upgraded the semiconductor equipment makers this morning, however its comments were very cautious, attributing the upgrade to cyclical factors, rather than improving fundamentals. This upgrade was not enough to overcome yesterday's announcement from Taiwan Semiconductor (TSM), the world's largest semiconductor foundry, stating that they were cutting their budget for 2002, possibly by as much as $500 million. The index was unable to hold its gains and set a new 52-week low. 52-week High: 657 52-week Low : 315 Current : 315 Moving Averages: (Simple) 10-dma: 357 50-dma: 418 200-dma: 508 ----------------------------------------------------------------- Market Volatility It appears the Volatility index has lost some of its steam. This is actually a result of the market's continued rally, easing the fears of traders afraid to sell puts too cheap. This is also reflected in the CBOE put/call ratio falling from .87 to .70, reflecting fewer puts traded relative to the number of calls. Although a market drop could see this number soar back into the 50s, historically the VIX has dropped steadily after surges to recent levels. This is a result of the market subsequently rising and holding gains, so next weeks activity in the underlying markets will be the key. CBOE Market Volatility Index (VIX) = 40.44 –4.21 Nasdaq-100 Volatility Index (VXN) = 69.02 –0.46 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.70 564,059 396,501 Equity Only 0.59 454,318 265,918 OEX 0.79 22,186 17,474 QQQ 0.24 45,855 10,807 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 25 + 0 Bull Correction NASDAQ-100 26 - 2 Bull Correction DOW ($INDU) 3 - 0 Bear Confirmed S&P 500 14 + 1 Bear Confirmed S&P 100 10 - 0 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.22 10-Day Arms Index 1.32 21-Day Arms Index 1.35 55-Day Arms Index 1.37 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1926 1239 NASDAQ 1874 1424 New Highs New Lows NYSE 22 199 NASDAQ 74 245 Volume (in millions) NYSE 2,136 NASDAQ 1,502 ----------------------------------------------------------------- Commitments Of Traders Report: 07/23/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials increased both longs and shorts, however increased long contracts totals by an additional 10,000 contracts more than shorts. Small traders continued to get longer, while adding 2,800 net longs to their position. Commercials Long Short Net % Of OI 07/09/02 396,321 456,164 (59,843) (7.0%) 07/16/02 388,943 464,162 (75,219) (8.8%) 07/23/02 405,969 471,704 (65,735) (7.5%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 07/09/02 145,017 71,402 73,615 34.0% 07/16/02 157,370 67,247 90,123 40.1% 07/23/02 166,713 73,778 92,935 38.6% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials added contracts both long and short to their positions, maintaining approximately the same ratio, however increasing their positions by approximately 8,000 total contracts. Small Traders added to their short positions reducing their net by approximately 400 contracts. Commercials Long Short Net % of OI 07/09/02 31,227 39,592 (8,725) (12.3%) 07/16/02 33,152 39,866 (6,714) ( 9.2%) 07/23/02 37,204 43,601 (6,397) ( 8.0%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 07/09/02 12,520 8,348 4,175 20.0% 07/16/02 12,816 10,774 2,042 8.7% 07/23/02 12,756 11,152 1,604 6.7% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials added 2,000 contracts to their long position, while adding only 671 to their shorts. Small Traders increased both sides of their position, however added almost 2,000 more short contracts than long contracts. Commercials Long Short Net % of OI 07/09/02 20,761 14,122 6,639 19.0% 07/16/02 20,357 14,074 6,283 18.2% 07/23/02 22,369 14,745 7,624 20.5% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 07/09/02 6,831 6,623 208 1.50% 07/16/02 8,524 10,133 (1,609) (8.62%) 07/23/02 9,101 12,604 (3,503) (16.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COMING EVENTS ************* ================================================== Market Watch for the week of July 29th ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ACE ACE Limited Mon, Jul 29 After the Bell 0.84 ARG Airgas Mon, Jul 29 After the Bell 0.22 AFC Allmerica Financial Mon, Jul 29 -----N/A----- 0.76 AWK American Water Works Mon, Jul 29 Before the Bell 0.45 AHS AMN Hlthcre Serv, Inc. Mon, Jul 29 After the Bell 0.25 BLDP Ballard Power Systems Mon, Jul 29 -----N/A----- -0.41 STD Bnc Santander Cntl His Mon, Jul 29 -----N/A----- N/A CB Chubb Mon, Jul 29 Before the Bell 1.13 DPL DPL Mon, Jul 29 After the Bell 0.33 EOP Equity Office Prop Mon, Jul 29 After the Bell 0.77 FIA Fiat S.P.A. Mon, Jul 29 Before the Bell N/A FHCC First Health Group Mon, Jul 29 Before the Bell 0.31 HIG Hartford Finl Serv Mon, Jul 29 After the Bell 1.15 HMC Honda Motor Mon, Jul 29 -----N/A----- N/A HUM Humana Mon, Jul 29 Before the Bell 0.27 JP Jefferson-Pilot Mon, Jul 29 After the Bell 0.84 K Kellogg Mon, Jul 29 Before the Bell 0.42 KIM Kimco Realty Mon, Jul 29 After the Bell 0.75 KG King Pharmaceuticals Mon, Jul 29 Before the Bell 0.31 KB Kookmin Bank Mon, Jul 29 Before the Bell N/A MCY Mercury General Mon, Jul 29 Before the Bell 0.59 MIR Mirant Corporation Mon, Jul 29 -----N/A----- 0.34 NFS Ntnwde Fncial Serv Mon, Jul 29 After the Bell 0.82 OGE OGE Energy Mon, Jul 29 Before the Bell 0.25 PPE Park Place Enter Mon, Jul 29 Before the Bell 0.16 PSO Pearson plc Mon, Jul 29 Before the Bell N/A PCZ Petro-Canada Mon, Jul 29 -----N/A----- 0.45 RCII Rent-A-Center Mon, Jul 29 After the Bell 1.18 ROH Rohm and Haas Mon, Jul 29 Before the Bell 0.46 RSE Rouse Mon, Jul 29 -----N/A----- 0.78 TU TELUS Communications Mon, Jul 29 Before the Bell 0.02 TEVA Teva Pharmaceutical Mon, Jul 29 Before the Bell 0.62 TOM Tommy Hilfiger Mon, Jul 29 -----N/A----- 0.00 TRI Triad Hospitals Mon, Jul 29 After the Bell 0.37 TSN Tyson Foods Mon, Jul 29 Before the Bell 0.26 WRI Weingarten Realty Mon, Jul 29 Before the Bell 0.80 ------------------------- TUESDAY ------------------------------ ACS Affiliated Cmptr Serv Tue, Jul 30 Before the Bell 0.49 AGU Agrium Tue, Jul 30 After the Bell 0.13 AYE Allegheny Energy Tue, Jul 30 After the Bell 0.45 AHM Amersham Tue, Jul 30 Before the Bell N/A AOT Apogent Tue, Jul 30 Before the Bell 0.34 ARW Arrow Electronics Tue, Jul 30 -----N/A----- 0.04 BSG BISYS Group Tue, Jul 30 After the Bell 0.30 BOW Bowater Tue, Jul 30 Before the Bell -0.77 BP BP plc Tue, Jul 30 Before the Bell 0.63 BTI British Am Tobacco Tue, Jul 30 Before the Bell N/A BPO Brookfield Properties Tue, Jul 30 During the Market 0.57 CAJ Canon Tue, Jul 30 Before the Bell N/A CRL Charles River Lab Tue, Jul 30 After the Bell 0.32 CVX ChevronTexaco Corp. Tue, Jul 30 Before the Bell 1.37 COH Coach Tue, Jul 30 Before the Bell 0.17 CEFT Concord EFS Tue, Jul 30 Before the Bell 0.18 CVH Coventry Health Care Tue, Jul 30 Before the Bell 0.48 CREE Cree Tue, Jul 30 After the Bell 0.02 DTE DTE Energy Tue, Jul 30 After the Bell 0.44 EPN El Paso Energy Prtnrs Tue, Jul 30 Before the Bell 0.18 ETR Entergy Tue, Jul 30 -----N/A----- 1.14 FLR Fluor Tue, Jul 30 After the Bell 0.50 FMS Fresenius Medical Care Tue, Jul 30 -----N/A----- 0.25 FDP Fresh Del Monte Tue, Jul 30 Before the Bell 0.96 HLT Hilton Hotels Cor Tue, Jul 30 Before the Bell 0.20 ICST Integrated Circuit Sys Tue, Jul 30 After the Bell 0.18 KLAC KLA-Tencor Tue, Jul 30 After the Bell 0.20 MXICY Macronix International Tue, Jul 30 Before the Bell N/A MFC Manulife Financial Tue, Jul 30 During the Market 0.44 NI NiSource Tue, Jul 30 Before the Bell 0.10 OCAS Ohio Casualty Tue, Jul 30 -----N/A----- 0.18 OMG OM Group Incorporated Tue, Jul 30 Before the Bell 0.89 IX Orix Corporation Tue, Jul 30 -----N/A----- N/A PH Parker Hannifin Tue, Jul 30 Before the Bell 0.50 PFGC Performance Food Tue, Jul 30 Before the Bell 0.46 PER Perot Systems Tue, Jul 30 Before the Bell 0.18 IQW Quebecor World Tue, Jul 30 Before the Bell 0.36 RCI Renal Care Group Tue, Jul 30 After the Bell 0.43 REP Repsol YPF, S.A. Tue, Jul 30 -----N/A----- N/A RYG Royal Group Tech Tue, Jul 30 Before the Bell 0.46 IMI SanPaolo IMI SpA Tue, Jul 30 After the Bell N/A SVM ServiceMaster Tue, Jul 30 Before the Bell 0.21 SKE Spinnaker Exploration Tue, Jul 30 -----N/A----- 0.17 STTS ST Assembly Test Serv Tue, Jul 30 After the Bell -0.27 TLM Talisman Energy Tue, Jul 30 After the Bell 0.71 RIG Transocean Inc. Tue, Jul 30 Before the Bell 0.22 UMC Un Mcrelec Corporation Tue, Jul 30 Before the Bell 0.05 UPM UPM-Kymmene Group Tue, Jul 30 Before the Bell N/A VLO Valero Energy Tue, Jul 30 During the Market 0.11 WSH Willis Group Hld Lmtd Tue, Jul 30 Before the Bell 0.29 XL XL Capital Tue, Jul 30 After the Bell 0.55 ----------------------- WEDNESDAY ----------------------------- ACL Alcon Laboratories Wed, Jul 31 -----N/A----- 0.43 AIB Allied Irish Banks Wed, Jul 31 Before the Bell N/A AW Allied Waste Inds Wed, Jul 31 After the Bell 0.24 AFG American Financial Grp Wed, Jul 31 Before the Bell 0.57 APU AmeriGas Partners Wed, Jul 31 -----N/A----- -0.39 ABC AmerisourceBergen Wed, Jul 31 Before the Bell 0.81 AU Anglogold Limited Wed, Jul 31 Before the Bell 0.43 APPB Applebee`s Intl Wed, Jul 31 After the Bell 0.36 AVE Aventis Wed, Jul 31 -----N/A----- N/A BSY Brit Sky Brdcstng Grp Wed, Jul 31 -----N/A----- N/A CSC Computer Sciences Corp Wed, Jul 31 After the Bell 0.46 CEG Constellation Enrg Grp Wed, Jul 31 Before the Bell 0.51 COX Cox Communication Wed, Jul 31 Before the Bell -0.08 CVS CVS Wed, Jul 31 Before the Bell 0.43 DDR Dvlprs Dversfied Rlty Wed, Jul 31 Before the Bell 0.60 RDY Dr. Reddy`s Labs Wed, Jul 31 Before the Bell N/A DRE Duke Realty Corp Wed, Jul 31 -----N/A----- 0.65 E ENI SpA Wed, Jul 31 Before the Bell N/A EPD Enterprise Products Wed, Jul 31 Before the Bell 0.17 EPC Epcos Wed, Jul 31 Before the Bell N/A EQR Eqty Res Prop Trust Wed, Jul 31 Before the Bell 0.62 EXC Exelon Corporation Wed, Jul 31 Before the Bell 1.08 FSH Fisher Scientific Intl Wed, Jul 31 After the Bell 0.42 GRMN Garmin Ltd. Wed, Jul 31 Before the Bell 0.29 GGP General Growth Prop Wed, Jul 31 After the Bell 1.17 HTV Hearst-Argyle TV Wed, Jul 31 Before the Bell 0.30 IM Ingram Micro Wed, Jul 31 -----N/A----- 0.06 IRM Iron Mountain Wed, Jul 31 Before the Bell 0.17 JBX Jack in the Box Wed, Jul 31 Before the Bell 0.60 JNY Jones Apparel Wed, Jul 31 -----N/A----- 0.43 MKL Markel Wed, Jul 31 Before the Bell 2.01 MAS Masco Wed, Jul 31 -----N/A----- 0.42 MC Mats Elctrc Indl Co. Wed, Jul 31 -----N/A----- N/A MX Metso Corporation Wed, Jul 31 Before the Bell N/A NBIX Neurocrine Biosci Wed, Jul 31 -----N/A----- -0.68 PIO Pioneer Corporation Wed, Jul 31 -----N/A----- N/A STR Questar Wed, Jul 31 After the Bell 0.32 RDA Reader`s Digest Ass Wed, Jul 31 Before the Bell 0.19 RGC Regal Enter Grp Wed, Jul 31 Before the Bell 0.27 SPP Sappi Limited Wed, Jul 31 Before the Bell 0.26 SPG Simon Property Group Wed, Jul 31 -----N/A----- 0.85 SLC Sn Lfe Fin Srvcs Cnda Wed, Jul 31 -----N/A----- 0.37 SYY Sysco Wed, Jul 31 Before the Bell 0.29 TKTX Transkaryotic Wed, Jul 31 After the Bell -0.53 UN Unilever N.V. Wed, Jul 31 Before the Bell 0.89 VZ Verizon Communications Wed, Jul 31 -----N/A----- 0.77 VSH Vishay Intertechnology Wed, Jul 31 Before the Bell 0.11 ------------------------- THURSDAY ----------------------------- APCC American Power Con Thu, Aug 01 After the Bell 0.13 RMK ARAMARK Corporation Thu, Aug 01 Before the Bell 0.29 BCS Barclays Bank Plc Thu, Aug 01 -----N/A----- N/A BAY Bayer AG Thu, Aug 01 Before the Bell N/A BNN Brascan Corporation Thu, Aug 01 After the Bell N/A CPN Calpine Thu, Aug 01 Before the Bell 0.17 CPT Camden Property Trust Thu, Aug 01 After the Bell 0.83 CCJ Cameco Thu, Aug 01 After the Bell N/A CMCSK Comcast Thu, Aug 01 -----N/A----- 0.19 DVA DaVita Thu, Aug 01 Before the Bell 0.38 DEG Delhaize Group Thu, Aug 01 -----N/A----- N/A DVN Devon Energy Thu, Aug 01 Before the Bell 0.85 XOM Exxon Mobil Corp Thu, Aug 01 During the Market 0.46 GRP Grant Prideco Thu, Aug 01 Before the Bell 0.03 HAN Hanson PLC Thu, Aug 01 Before the Bell N/A ICI Impl Chem Ind Plc. Thu, Aug 01 Before the Bell N/A JHF John Hnck Finl Serv Thu, Aug 01 After the Bell 0.71 KTC Korea Telecom Thu, Aug 01 -----N/A----- N/A LNC Lincoln National Thu, Aug 01 Before the Bell 0.85 MDP Meredith Corporation Thu, Aug 01 Before the Bell 0.46 NWL Newell Rubbermaid Thu, Aug 01 Before the Bell 0.37 OCR Omnicare Thu, Aug 01 -----N/A----- 0.35 OKE Oneok Thu, Aug 01 After the Bell 0.22 OHP Oxford Health Plans Thu, Aug 01 Before the Bell 0.70 PNP Pan Pacific Retail Thu, Aug 01 -----N/A----- 0.72 PCG PG&E Thu, Aug 01 -----N/A----- 0.55 PDS Precision Drlng Corp Thu, Aug 01 Before the Bell 0.06 RD Royal Dutch Petroleum Thu, Aug 01 -----N/A----- 0.72 SLE Sara Lee Thu, Aug 01 Before the Bell 0.42 SC Shl Trnsprt Trdng Cmp Thu, Aug 01 Before the Bell 0.62 SHPGY Shire Pharm Group Thu, Aug 01 Before the Bell 0.29 SNN Smith & Nephew Thu, Aug 01 -----N/A----- 1.00 SRCL Stericycle Thu, Aug 01 During the Market 0.25 TLD TDC Thu, Aug 01 Before the Bell N/A TDK TDK Thu, Aug 01 -----N/A----- N/A DIS Walt Disney Thu, Aug 01 After the Bell 0.17 WMI Waste Management Thu, Aug 01 Before the Bell 0.35 WGL WGL Holdings Inc Thu, Aug 01 After the Bell -0.20 ------------------------- FRIDAY ------------------------------- AAA Altana AG Fri, Aug 02 -----N/A----- N/A AVZ AMVESCAP PLC Fri, Aug 02 Before the Bell 0.26 CRE CarrAmerica Realty Fri, Aug 02 Before the Bell 0.85 CI CIGNA Fri, Aug 02 Before the Bell 1.95 DTC Domtar Fri, Aug 02 -----N/A----- 0.09 FS Four Seasons Hotels Fri, Aug 02 Before the Bell 0.31 LYG Lloyds TSB Group Fri, Aug 02 -----N/A----- N/A RSG Republic Services Fri, Aug 02 Before the Bell 0.35 TMIC Trend Micro Fri, Aug 02 -----N/A----- N/A UNEWY United Business Media Fri, Aug 02 Before the Bell N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CHS Chicos FAS 2:1 07/26 07/29 ACMR A C Moore Arts & Crafts 2:1 07/31 08/01 FVB First Virginia Banks 3:2 08/09 08/12 SSD Simpson Manufacturing 2:1 N/A N/A - awaiting shareholder approval at 7/29/02 meeting. -------------------------- Economic Reports This Week -------------------------- With the market surrounded in fog, use this market watch as a beacon of light to help guide you through the next week. ============================================================== -For- Monday, 07/29/02 ---------------- None Tuesday, 07/30/02 ----------------- Consumer Confidence(DM)Jul Forecast: 102.0 Previous: 106.4 Wednesday, 07/31/02 ------------------- GDP-Adv. (BB) Q2 Forecast: 2.3% Previous: 6.1% Chain Deflator-Adv.(BB) Q2 Forecast: 1.3% Previous: 1.2% Chicago PMI (DM) Jul Forecast: 56.5 Previous: 58.2 Fed’s Beige Book Thursday, 08/01/02 ------------------ Initial Claims (BB) 07/27 Forecast: N/A Previous: 362K Auto Sales (NA) Jul Forecast: 6.4M Previous: 5.8M Truck Sales (NA) Jul Forecast: 8.4M Previous: 7.3M Construction Spening(DM)Jun Forecast: 0.2% Previous: -0.7% ISM Index (DM) Jul Forecast: 55.0 Previous: 56.2 Friday, 08/02/02 ---------------- Nonfarm Payrolls (BB) Jul Forecast: 55K Previous: 36K Unemployment Rate (BB) Jul Forecast: 5.9% Previous: 5.9% Hourly Earnings (BB) Jul Forecast: 0.2% Previous: 0.4% Average Workweek (BB) Jul Forecast: 34.3 Previous: 34.3 Personal Income (BB) Jun Forecast: 0.5% Previous: 0.3% Personal Spending (BB) Jun Forecast: 0.6% Previous: -0.1% Factory Orders (DM) Jun Forecast: -2.2% Previous: 0.5% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Sunday 07-28-2002 Sunday 2 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - 7/28 by Leigh Stevens Semiconductor equipment stocks were pounded last week on concerns of NO pick up in demand from major customers in the second half. This weakness and a move to new lows below the Sept. bottom at 344 in the SOX index put serious selling pressure on the Nasdaq. There is nothing more "tech" than the chips that make tech run. st week at the largest semiconductor equipment trade show, top executives seemed resigned to a flat second-half of the year as a technology spending malaise shows no signs of improvement. Further, the stock market's brutal slide has some concerned about access to new sources of money for those further down the food chain. SOX fell 50 points from its opening level, which was down nearly 14% on the week! This after a long slide already - it often seems to get worse before it gets better! UP on Friday - DOWN on Friday - UPSIDE REVERSAL PATTERNS - "part 2" Sectors showing recent bullish promise after having upside reversals: The Amex Composite (small cap), Bank Index (BTK), Biotech, Broker-Dealers (XBD), Cyclical sector (CYC), (NYSE) Financial Index (NF), Defense (DFI), Forest & Paper Products (FPP), Healthcare (HMO), Oils (OIX), Drugs (DRG), Retail (RLX), the Russell 2000 (small caps) (RUT), and the Dow Transports (TRAN). The(PC) Boxmakers (BMX) and Software (GSO) sectors follow through was not as consistent with a tradable bottom. SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW/OPEN TRADE RECOMMENDATIONS - Buy BBH at 73.00 (Biotech HOLDR's) Stop at 69.35 TRADING STRATEGY NOTE: I may be being too conservative in looking for a 3 point dip from Friday close or to back to the top end of the recent upside price "gap" in the HOLDR's as a place to buy - having been "stopped out" previously in trying to play a rebound in this sector, I'm being cautious in looking for an entry. It's possible that the upside price gap from Wed.-Thurs. is a "breakaway" gap and will not be "filled in" anytime soon. The gap is between 72.72 and 73.80. Friday's low was 74.11. My upside objective is to 89.00, so, relative to entry even around Friday's close at 77.30, risk of say 5 points, still gives a decent upside IF my trading objective is realized. TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT - Of the sectors highlighted, the Biotech HOLDR'S continue to look to have the most further upside potential. 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 Biotech index (BTK) has a strong rebound from its last decline to the low end of the downtrend channel line. Friday's trading looks like a consolidation day, before the Index continues to move higher, perhaps back up to the high end of the downtrend channel, which intersects around 395 in the Index and at 90 in the Biotech HOLDR stock. UPDATE: 7/28 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week JNJ 49.61 0.68 1.55 3.62 1.00 7.91 Drop, Profits EFX 20.63 -1.67 -0.38 0.80 0.72 -1.22 Good Credit BAX 36.58 -0.92 0.73 2.85 1.24 4.71 Healing ADP 35.71 1.61 1.26 0.64 -0.33 4.21 New, Fill the Gap LTR 45.08 -1.40 -0.47 1.98 0.13 1.33 New, Catch Up MMM 120.85 -1.00 0.76 7.95 0.44 10.85 New, Dow Strength LLY 53.70 0.78 -0.27 1.90 2.16 5.80 New, Firming Up MSFT 45.35 -2.66 -3.31 4.48 -2.63 -3.60 New, Still Hiring WMT 48.18 -1.65 0.10 6.44 -0.70 2.23 New, Bargain Buy PUTS EBAY 54.97 -3.64 -2.89 2.59 -2.39 -3.77 Drop, Bids Back GDW 60.00 -0.31 -1.93 1.45 -0.60 -1.00 Drop, Moving On LOW 35.59 -1.11 -0.70 3.28 -2.42 0.34 Drop, Slow Going MHK 44.61 -0.32 -1.48 2.20 -1.02 1.79 Still Weakening EXPE 47.09 -1.12 -5.89 6.77 -3.21 -6.28 Flight Cancelled BBOX 36.97 -0.57 -2.16 2.33 -1.25 -2.82 Blackballed CBE 27.95 -0.38 -1.80 1.20 -1.20 -5.13 Pockets of Weakness LLTC 25.16 0.15 -1.41 3.79 -2.55 -3.96 Breakdown ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* WMT - Wal-Mart $48.18 +1.18 (+1.68 for the week) See details in play list Put Play of the Day: ******************** BBOX – Black Box Corporation $36.92 (-2.30 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ JNJ $49.61 +0.91 (+7.76 for the week) Johnson and Johnson has performed well this week. This play was picked at $41.85 after the stock was severely oversold on news about a federal probe into one of its manufacturing facilities. It has filled its gap from last week, and gone on to approach $50. We are closing this play and taking our profits, as we see $50 as a resistance point. PUTS ^^^^ GDW $60.00 (-0.08) Taking a break from their recent volatile action, the broad markets traded in a fairly narrow range all day on Friday before a final hour ramp to close at the high of the day. Shares of GDW barely moved at all after opening just below our $60 stop, failing to respond to any bearish advances. With the push higher into the close, GDW closed right on our stop, underscoring the fact that it is time to move on. GDW treated us well, but the ride is over. Close out any remaining positions on Monday. EBAY $54.97 +1.61 (-4.48 for the week) Originally picked at $59.45, EBay dropped after fund managers finished their buying spree last Friday. OI feels that this stock had been artificially propped up as it was being added to the S&P 500. The problems with continuing growth and a high P/E ratio screamed, "overvalued!" Eventually, the market heard the screams. If the Nasdaq rebounds next week, playing catch-up with the Dow and S&P 500, this stock could be swept along with it, overvalued or not. We are closing this play and taking profits. LOW $35.59 +0.51 (-0.44 for the week) Originally picked at $37.60 on July 16th, Lowe's has made it down to $32.70, and then rebounded with the rest of the retail sector. Fellow retailers Wal-Mart, Home Depot and Target were all on the positive side, along with LOW today. This slow mover could take a while before it sees that level again. While the stock has failed to hold its high from Wednesday's rally, positive consumer sentiment numbers on Tuesday could continue to lift the sector. We are closing this play for a profit and moving on to our next winning trade. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 07-28 2002 Sunday 3 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** ADP – Automatic Data Processing $35.71 (+2.60 last week) Company Summary: Through its many subsidiaries, ADP is a provider of computerized transaction processing, data communication and information services. The company's operations are divided into Employer Services, Brokerage Services, Dealer Services and Claims Services. Among the activities managed by the Employer Services division are payroll, human resources, benefits administration, tax filing and reporting and retirement plan services. Why We Like It: The widespread selling of good and bad stocks over the past couple weeks has created a lot of attractive call candidates, so long as the fledgling broad-market rally doesn't fall apart as quickly as it began. Keeping our attention focused on the importance of relative strength, it is worth noting that our new ADP call play bottomed over a week ago and didn't even dip as the rest of the market sold off to new multi-year lows. Perhaps the relative strength seen last week is due to the fact that the stock had already sold off to new all-time highs, or perhaps it was the combined effect of several analysts making positive comments about the stock. Whatever the cause, ADP found support near $31 and has been steadily climbing since then, coming to rest just below $36 on Friday. Overhead resistance is being created at the $36 level, by the combined effect of Wednesday's intraday highs and the declining 10-dma ($35.85). A continued rally through the $36 level is what we want to use for initiating new positions. Even though the near-term upside is likely limited to the $39-41 area, (the site of significant price congestion just prior to the sharp downward move on July 18th), we don't want to buy dips until the stock can prove its willingness to move through the $36 level. Initial stops are set at $33.25. BUY CALL AUG-35*ADP-HG OI=2177 at $2.25 SL=1.25 BUY CALL AUG-37 ADP-HU OI= 593 at $1.25 SL=0.50 BUY CALL SEP-35 ADP-IG OI= 119 at $3.30 SL=1.75 BUY CALL SEP-37 ADP-IU OI=1015 at $2.05 SL=1.00 BUY CALL SEP-40 ADP-IH OI= 620 at $1.20 SL=0.50 Average Daily Volume = 2.61 mln --- LTR – Loews Corp. $45.08 (+2.73 last week) Company Summary: Loews Corporation is a holding company with subsidiaries engaged in property, casualty and life insurance (CNA Financial Corporation); the production and sale of cigarettes (Lorillard, Inc.); the operation of hotels (Loews Hotels Holding Corporation); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling), and the distribution and sale of watches and clocks (Bulova Corporation). Why We Like It: It didn't take a rocket scientist to notice that consumer-related stocks were really catching a bid after the markets apparently bottomed on Wednesday. Tobacco stocks had been under a fair amount of selling pressure in recent weeks due to renewed litigation concerns, and the carnage in Insurance stocks was truly amazing. But those concerns were apparently waning early last week ahead of the market lows reached on Wednesday. That lack of selling pressure can be seen in shares of LTR, which was refusing to drop below its intraday support near $42. While the climactic selling on Wednesday briefly violated that level, the buyers recognized the attractive entry point and piled in when the stock rebounded from the level of its September lows and continued buying right through the close on Friday, handily propelling the stock through the $44 resistance level on the way. Even though the stock has had quite a move off its lows, it looks like it still has room to run before running into formidable resistance near the $48-49 level. While momentum traders may want to initiate new positions on a push through the $46 level, we would prefer to wait for an intraday pullback to the $44 or even $43 support levels. We are placing our coverage stop at $42.40. BUY CALL AUG-45*LTR-HI OI=100 at $1.70 SL=0.75 BUY CALL AUG-50 LTR-HJ OI= 95 at $0.30 SL=0.00 BUY CALL SEP-45 LTR-II OI= 2 at $2.80 SL=1.50 BUY CALL SEP-50 LTR-IJ OI= 20 at $0.95 SL=0.50 Average Daily Volume = 556 K --- MMM - 3M Company $120.85 +0.90 (+11.97 for the week) Company Summary: 3M is a $16 billion diversified technology company with leading positions in health care, safety, electronics, telecommunications, industrial, consumer and office, and other markets. Headquartered in St. Paul, Minnesota, the company has operations in more than 60 countries and serves customers in nearly 200 countries. 3M businesses share technologies, manufacturing operations, brands, marketing channels and other important resources. 3M, which marks its 100th anniversary this year, is one of the 30 stocks that make up the Dow Jones Industrial Average and also is a component of the Standard & Poor's 500 Index. Why We Like It: 3M has had a very volatile month. The stock traded as high as $129.95 on July 8, before dropping 16% to $108.88. The stock has mirrored the plummeting Dow Jones since the beginning of July, as it is (currently) the Dow's most heavily weighted component. This factor has weighed heavily on the stock. 3M released earnings on July 22, which surpassed analysts' expectations by $0.02 per share. The company's net income more than doubled from the previous year, an impressive statistic in a very difficult year for the U.S. economy. 3M also raised its profit forecasts for the third quarter and full year. The company said it expects to earn $5.15 to $5.30 per share, ahead of last year's earnings of $4.36 per share. Prior to this announcement, expectations were for $5.14. 3M's success has come from strength in overseas markets and, most importantly, from controlling operating costs in a difficult environment. A continued rally in the Dow should lift this stock along with it (and vice-versa, since 3M carries the heaviest weighting, a rally for 3M will help push the index higher). 3M has already broken round number support at $120, closing today at $120.85. OI sees this price level as an entry point to go long. The chart also shows the stock breaking through its 200-dma of $118.09, which for many stocks can form a heavy ceiling. There may be some minor resistance around $123.50, however, beyond that level, $130 looks to be the next significant resistance. Our initial price target will be this stock's recent high of $129.00. While near term considerations are most important for many OI readers, it is interesting to note that 3M has been in a rising channel on its monthly chart since 1992. While option volume does not always foreshadow movement, it is also worthy of noting that there was excessive selling of August 115 puts on the CBOE throughout the trading day on Friday, a bullish sign. We will place our stop loss on 3M at $117.50, which puts it below the 200-dma. BUY CALL AUG-115 MMM-HB OI=1342 at $8.30 SL=5.00 BUY CALL AUG 120 MMM-HD OI=2208 at $4.80 SL=2.50 BUY CALL SEP-120 MMM-IC OI= 287 at $7.40 SL=4.00 BUY CALL SEP-125 MMM-IE OI= 712 at $4.80 SL=2.50 Average Daily Volume = 2.21 mln --- LLY - Eli Lilly Company $53.70 +1.89 (+5.55 for the week) Company Summary: Lilly, an innovation-driven corporation, is developing a growing portfolio of best-in-class pharmaceutical products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Ind., Lilly provides answers – through medicines and information -- for some of the world's most urgent medical needs. (source: company release) Why We Like It: Lilly sank earlier this month, along with the rest of the drug sector. Problems at Merck and Johnson and Johnson, along with Wyeth, combined to hammer the sector. LLY released earnings July 18. The numbers were disappointing due to poor sales of Prozac, which lost market share to generic competitors. In addition, there were quality control problems at some of its manufacturing plants, which led to problems with the FDA. Subsequently, LLY sold off heavily, reaching a low of $43.75 on the 18th. Fortunately for investors, all the sellers appear to be exhausted as the stock has been on the rise since then. In spite of the FDA problems, two of the drugmaker's important products, Strattera, for attention deficit and hyperactivity disorder, and Cialis, for erectile dysfunction, should not be affected by the manufacturing problems, although their U.S. approval may be delayed. Lilly attempted a comeback over the $53 level, but was thwarted late last week, only to make another run this week. The stock surpassed this resistance Friday, to close at $53.70. OI sees this price level as an entry point. Why the recent rally? In spite of the aforementioned FDA problems, it appears that Cialis will be approved in Europe for use this year. Lilly announced on Thursday that a European scientific committee recommended the drug for approval. The drug will now move on to the European Commission, which has authority to grant marketing authorization for the European Union. While the U.S. market release may be delayed, getting the drug approved for use in Europe would be important for both name recognition and profits. Besides...the ENTIRE drug sector has been so beat up for so long, we suspect that smart money may be buying them for a rebound now that they are so cheap. All of this bad news that has almost cut the industry values in half (check the DRG.X) "should" pass as investors tend to have short memories. One note of caution for real technical traders...if you draw a trendline from the tops of LLY's chart starting at the March 2002 highs it would indicate that LLY might be close to encountering resistance near $54.00 to $54.50. We believe this level won't be a real hurdle but it happens coincide closely with any potential round-number issues associated with the $55 mark. We are setting our stop loss at $50.00. This stock has had relatively wide daily trading ranges and we don't want to get stopped out on a minor pullback. BUY CALL AUG-50 LLY-HJ OI=3702 at $4.60 SL=2.25 BUY CALL AUG 55 LLY-HK OI=2422 at $1.45 SL=0.50 BUY CALL SEP-50 LLY-IJ OI= 467 at $5.80 SL=2.75 BUY CALL SEP-155LLY-IK OI=1370 at $2.95 SL=1.50 Average Daily Volume = 4.24 mln --- MSFT - Microsoft $45.35 +2.52 (-4.21 for the week) Company Summary: Founded in 1975, Microsoft is the worldwide leader in software, services and Internet technologies for personal and business computing. The company offers a wide range of products and services designed to empower people through great software -- any time, any place and on any device. Why We Like It: Microsoft has been one of the biggest stories of the week. Leading up to Bill Gates' speech on Thursday, Microsoft was pounded to a new 52-week low of $41.41. Investors were jittery about what the Chairman might say and rushed to unload the stock to avoid any surprises. Lo and behold, Gates announced expansion. He said the company would be hiring 5,000 new employees and boosting payroll by 10%. He also announced a 20% increase in R&D spending. The new R&D budget will be $5.2 billion, about 16% of revenue. Gates also said that Microsoft is maintaining strong product momentum, based on its SQL Server 2000, and Windows XP. We believe this stock has been oversold, and will benefit greatly from upward momentum should the Dow and broader markets continue their rise next week. A look at Microsoft's chart shows the stock closing near its highs both on Wednesday, as the Dow rallied 500 points, and again on Friday as the Thursday's sellers got out of the way after Gates' news had time to settle in. This company has plenty of cash reserves and is in a good position to weather short term market weakness. They are increasing their SQL Servers sales force by 22% in the 2003 fiscal year, showing a commitment to growing their already massive product presence. The stock was up $2.52 today, and has shown resilience from the pounding it took earlier in the week. This stock will be a prime target of investors trying to get on board with a rising market. The stock has fallen from consolidation between $51 and $55. This range will be our upside target. OI sees the current price level as an entry point. We will place our stop loss at $42, just below Thursday's low. BUY CALL AUG-42.50 MQF-HV OI= 3412 at $4.50 SL=2.25 BUY CALL AUG-45.00 MQF-HI OI=15954 at $2.90 SL=1.50 BUY CALL SEP-42.50 MQF-IV OI= 722 at $6.00 SL=3.00 BUY CALL SEP-45.00 MQF-II OI= 8313 at $4.50 SL=2.25 Average Daily Volume = 41.7 mln --- WMT - Wal-Mart $48.18 +1.18 (+1.68 for the week) Company Summary: With annual sales of $218 billion, Wal-Mart Stores, Inc. operates more than 2,780 discount stores, Supercenters and Neighborhood Markets, and more than 510 SAM'S CLUBS in the United States. Internationally, the company operates more than 1,170 units. Wal- Mart employs 1.3 million associates worldwide. The company's securities are listed on the New York and Pacific stock exchanges under the symbol WMT. Why We Like It: Wal-Mart has led the retail sector around by the nose the last few weeks. As a Dow stock it has suffered from the recent beating the index has taken. It has also been a contributor the Dow's problems. Poor mid-July consumer sentiment numbers helped send this stock downhill, along with the rest of the retailers. The Retail Index ($RLX.X) fell dramatically, shedding 23.5% from the end of June until it bottomed on July 24. It fell through support levels as though they were glass floors. Now the index seems to have found a bottom, led back up by Wal-Mart, which has rebounded from its low of $43.72 on July 24. Wal-Mart blew through previous resistance levels of $45 and $47, which had served as support on its way up past $63. Consumer Confidence numbers released Friday morning were disappointing, but better than expected, and also helped to give this sector a boost. Wal-Mart achieved its bearish vertical count on the point and figure chart of $46 on July 19, and continued downward with the rest of the market. However a big day from the Dow was all it took to get the bears off Wal-Mart's shoulders and allow it to gain some momentum. Although the stock is up over $4.00 this week, there is till plenty of room to the upside. OI sees current the level as an entry point to go long. There may be some round number resistance at $50, however this did not serve as support for more than one day on the way down. The latest price movement has created a three-box reversal up on the point and figure chart, and a trade of $49 will create a new buy signal. However, the pattern on this chart has already begun showing a higher low with Wal-Mart's latest bounce off of $45. Wal-Mart has been resilient to rough economic times in the past, as many shoppers flock to their stores to save money on recession proof household items like toothpaste and toilet paper. In addition, the back to school shopping season has begun, and Wal- Mart's sales should be impressive. If Tuesday's consumer sentiment numbers are positive, the entire retail sector should get a boost, led higher by Wal-Mart. We will place our stop loss at $45.00, just above Thursday's low. BUY CALL AUG-47.50 WMT-HW OI= 2326 at $2.80 SL=1.35 BUY CALL AUG-50.00 WMT-HJ OI= 9800 at $1.50 SL=0.75 BUY CALL SEP-47.50 WMT-IW OI= 437 at $3.90 SL=1.85 BUY CALL SEP-50.00 WMT-IJ OI= 3263 at $2.50 SL=1.25 Average Daily Volume = 41.7 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** BAX – Baxter International $36.58 (+5.63 last week) Company Summary: Baxter engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the healthcare field. BAX's products are used by hospitals, clinical and medical research laboratories, blood and blood dialysis centers, rehabilitation centers, nursing homes, doctor's offices and by patients at home, under physician supervision. The company manufactures products in over 28 countries and sells them in over 100 countries. Why We Like It: It may not look like much on the daily chart (especially after the strong gains over the prior 2 days) but BAX continued to demonstrate its relative strength on Friday, tacking on nearly 2% to close just over the $36.50 level. Traders that took advantage of the midday consolidation on Friday to enter the play near the $36 level (prior resistance that has now turned to mild support) appear to be well positioned should the rally continue next week. Judging by the bullish slope on the daily Stochastics, that is the likely outcome. Those still looking for an entry point will want to take advantage of an intraday dip down to either the $36 or $35 support levels. The markets aren't out of the woods yet, and a drop to major support near $34 can still be considered for new entries so long as the rebound is accompanied by strong volume. We are raising our stop to $32.50, as last week's bullish action suggests that the recent lows shouldn't be tested anytime soon. Should BAX continue to rally next week, a push through Friday's highs can be used for momentum-based entries. BUY CALL AUG-35*BAX-HG OI=4296 at $3.10 SL=1.50 BUY CALL AUG-40 BAX-HH OI=2819 at $1.00 SL=0.50 BUY CALL SEP-35 BAX-IG OI= 115 at $4.10 SL=2.50 BUY CALL SEP-40 BAX-IH OI= 129 at $1.85 SL=1.00 Average Daily Volume = 3.80 mln --- EFX – Equifax, Inc. $20.63 (+0.45 last week) Company Summary: Equifax is a source of consumer and commercial credit information throughout North America, Europe and Latin America. The company provides, to a wide range of customers, information management, consumer credit information, marketing, business information and identity verification services to enable credit and business decisions. Through its Consumer Direct business, EFX provides credit reporting and identity theft monitoring services directly to consumers, enabling them to proactively manage their credit health and safeguard against identity theft. Why We Like It: Consolidation was definitely the name of the game on Friday, with numerous stocks posting inside days, coiling up for the next big move. Shares of EFX joined in that pattern, easily trading within Thursday's range and closing in the upper half of that range. That is constructive for our play, as it presents us with a couple of attractive ways to enter the play, without taking on undue risk. The first possibility is that the broad markets are going to follow through on Friday's late rally, and if that gives a positive boost to EFX, then we can consider new entries on a breakout over Thursday's intraday high of $20.80. Of course there is the distinct possibility that Friday's bullish action at the close was simply shorts covering ahead of the weekend and we could see more selling at the open. That would give the dip buyers an attractive entry into the play, as EFX would likely find support near the $20 level. We're raising our stop to the $19.40 level this weekend, as a close below there would represent both a bearish resolution of the inside day formation, as well as a drop below the $19.50 support level. BUY CALL AUG-20 EFX-HD OI=20 at $1.65 SL=0.75 BUY CALL AUG-22*EFX-HX OI= 1 at $0.55 SL=0.25 BUY CALL SEP-20 EFX-ID OI= 0 at $1.85 SL=1.00 BUY CALL SEP-22 EFX-IX OI=95 at $0.90 SL=0.50 Average Daily Volume = 443 K ************* NEW PUT PLAYS ************* BBOX – Black Box Corporation $36.92 (-2.30 last week) Company Summary: As a technical services company, Black Box Corp. designs, builds and maintains network infrastructure systems. The Black Box team serves more than 150,000 clients in 132 countries, providing technical services on the phone, on site and online. Through its catalogs and Website, the company offers more than 90,000 infrastructure and networking products, and designs and builds more than 650,000 custom products each year. Why We Like It: While the major market averages were looking pretty healthy at the end of the day on Friday, there were some stocks that went right back into reverse following Wednesday's snap-back rally. Dragged lower by the carnage in the Semiconductor sector, the Networking index (NWX.X) drilled down to new all-time lows on Friday. It should therefore come as no surprise that networking company BBOX dropped to a new 3-year closing low on Friday on fairly heavy volume. Judging by the recent price action, BBOX is headed substantially lower. Note that the PnF chart is on the edge of giving another triple-bottom sell signal, which will come with a print of $36. Not only that, but the current bearish price target is down at $24. With formidable resistance now in place at $40 (prior support), we can limit our risk with a stop at $40. Use a failed rally below this level to initiate new positions or else wait for a breakdown under $36 on continued heavy volume. Use the action in the NWX to confirm weakness in BBOX before playing. BUY PUT AUG-40 QBX-TH OI=161 at $4.40 SL=2.75 BUY PUT SEP-35*QBX-TG OI=395 at $1.80 SL=1.00 Average Daily Volume = 437 K --- CBE – Cooper Industries, Ltd. $27.95 (-4.75 last week) Company Summary: Cooper Industries operates in two business segments: Electrical Products and Tools & Hardware. CBE is among the leading manufacturers in the world of electrical distribution equipment, wiring devices, support systems, hazardous duty electrical equipment, emergency lighting, lighting fixtures, fuses, non-power hand tools and industrial power tools. Cooper manufactures, markets, and sells its products and provides services throughout the world, serving three major markets: industrial, construction and electrical power distribution. Why We Like It: Despite the ability of the broad market to rebound off its lows last week, there are still pockets of extreme weakness for hungry bears to exploit. Shares of CBE have had a rough time over the past month along with the rest of the market, declining well over 30% and currently showing no signs of letting up. In fact, the 2-day decline following Wednesday's short-covering rally left the CBE resting at a new all-time low. Part of the problem here is the company's earnings report from Tuesday. While profits were up, the company guided down for the full year, citing a weaker than expected business rebound. With comments like that, it should come as no surprise that the bears had another feast on the stock as the week drew to a close. The last line of defense for the bulls had been the $30 level and now that CBE is below there, we can expect that level to present some formidable resistance. While an oversold rebound to give us a nice entry on the rollover would be nice, it appears the most likely course of action will be to enter the play as it drops under the $27 level (just below Wedensday's intraday lows). Should we get a bounce, look to enter on the rollover, so long as it happens below $30. Set stops initially at $30, as well. BUY PUT AUG-30*CBE-TF OI=229 at $3.20 SL=1.50 BUY PUT SEP-25 CBE-TE OI= 0 at $0.90 SL=0.50 Average Daily Volume = 695 K --- LLTC – Linear Technology $36.50 -0.68 (-1.95 last week) Company Summary: Linear Technology Corporation was founded in 1981 as a manufacturer of high performance linear integrated circuits. Linear Technology products include operational, instrumentation and audio amplifiers; voltage regulators, power management devices, DC-DC converters and voltage references; comparators; monolithic filters; communications interface circuits; one-chip data acquisition sub-systems; pulse-width modulators and sample- and-hold devices; and high frequency devices. Applications for Linear Technology's high performance circuits include wireless and broadband telecommunications infrastructure, cellular telephones, networking products and satellite systems, notebook and desk top computers, computer peripherals, video/multimedia, industrial and medical instrumentation, automotive electronics, factory automation, process control, military and space systems, and high- end consumer products including digital cameras, MP3 players and other electronic products. (source: company release) Why We Like It: Linear Technology has been on a slow roll down hill since the beginning of March. On July 23, the company reported earnings that accelerated the downhill process. Net income fell 41%, as earnings fell from 26 cents a year ago, to 17 cents in this year's fiscal fourth quarter. The company's forecast going forward didn't sound much better. It said that because business remains sluggish, the next quarter's revenue and profits would be similar. LLTC predicted growth in the December quarter, but investors do not appear to believe very strongly in that forecast. A look at LLTC's chart shows that it toyed with support at $35.00 and again at $32.50 between May and the middle of June. After breaking that level of support, it formed a rectangle consolidation pattern, vacillating between $33 and $27.50 from the middle of June until the day after their earnings release. On July 24th they dropped out of this consolidation, a bearish sign, breaking the previous $27.50 support line. LLTC has not seen this price level since May 1999. With only hopeful predictions of a return to former growth levels, the near term future of this stock does not seem promising. Credit Suisse First Boston recently lowered its 12-month price target on this stock from $50 to $40. This is not a good sign, and even $40 does not appear to be in the picture anytime soon. OI sees the current break in price as an entry point to go short. The minimum downward price objective of the rectangular pattern from which this stock recently broke is in the $22 range. This minimum objective, however, seems generous, as the company's forward growth prospects, according to their own statements, seem unsure. We will set an initial target of $20. We are placing our stop loss at $27.25, just above the bottom of the previous formation. Keep an eye on the $SOX.X. If the chip sector continues to breakdown then LLTC's demise could be moved into fast-forward. Bulls are hoping the SOX will bounce from the bottom of its descending channel near the 300 mark. We all know how well hoping a stock or index higher works in a bear market so we're playing the downside. A breakdown below this significant psychological support level could be unnerving for those investors still holding chip stocks, which could precipitate yet another waterfall affect downward. BUY PUT AUG-25 LLQ-TE OI=2519 at $2.60 SL=1.50 BUY PUT SEP-25*LLQ-UE OI= 325 at $3.70 SL=2.00 Average Daily Volume = 7 mil ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 07-28-2002 Sunday 4 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** MHK - Mohawk Industries Inc. $44.61 -0.07 (-1.29 for 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: MHK experienced a rally on Wednesday, along with the rest of the market, however it did not make it beyond our stop loss of $46.50, and was unable to surpass its high from the previous day. MHK has been unable to close its gap of July 16th, but was able to hold on to some Wednesday's gains. We continue to see signs of weakness in the stock that is unable to hold its rally, despite good earnings from the homebuilders. Housing numbers came out Thursday morning, which showed a small increase of 0.5% in new home sales, however, sales of existing homes were down over 11%. Considering the current fears of a looming housing bubble about to burst, the negative existing homes number might continue to deflate those stocks connected to home building and furnishings. MHK attempted a rally early Friday, reaching the $44.95 level, finding resistance at $45.00. The stock saw some additional weakness as the day wore on, dropping below $44 to $43.96, before firming up and rising within $0.07 of yesterday's close. In short, it was a very narrow trading range for MHK. While the rest of the market seemed to be in rally mode, MHK was unable to sustain its own. Our new entry point of below $45 has been reached and this is considered an entry point to go short, however, considering the unexpected strength at $44 on Friday more conservative traders may want to see this level broken again before initiating new positions. Our stop loss of $46.50 remains in effect, just below Monday's high. BUY PUT AUG-45*MHK-TI OI=253 at $3.30 SL=1.50 BUY PUT SEP-45 MHK-UI OI= 38 at $4.40 SL=2.00, wait for volume Average Daily Volume = 849K --- EXPE – Expedia, Inc. $47.20 (-7.69 last week) Company Summary: Expedia is a provider of online travel services for leisure and small business travelers, offering one-stop shopping and reservation services with real-time access to schedules, pricing and availability. The company's global travel marketplace includes direct-to-consumer Websites offering travel-planning services at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.nl and Expedia.it. In addition, the company provides travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is a division of Travelscape, Inc., one of EXPE's wholly owned subsidiaries. Why We Like It: It was difficult to make much of the market action on Friday except that the quiet trade was a relief after the incredibly volatile swings seen during the first four days of the week. We were hoping for a bit more upside in EXPE to hand us a more attractive entry point, and that's exactly what we got. The stock traded in a narrow range, and then finally lifted at the close to end just below its low of the day. Thursday's inside day was followed by another one on Friday, as EXPE coiled up tight for its next directional move. Since we know that whichever way the break occurs following an inside day is likely to dictate the stock's direction, we have some readily identifiable action points. Consider new positions on a drop under Thursday's low near $43.50. Alternatively, a failed rally below the $49 level (near Thursday's high) would make for an acceptable bearish entry. Due to the dual inside day setup and the fact that the daily Stochastics have now turned bullish, we want to keep the play on a short leash and are therefore lowering our stop to $49.50, just above the top of Wednesday's gap lower. BUY PUT AUG-50 UED-TJ OI=1029 at $5.90 SL=4.00 BUY PUT AUG-45*UED-TI OI= 587 at $3.50 SL=1.75 BUY PUT AUG-40 UED-TH OI= 680 at $1.80 SL=1.00 Average Daily Volume = 2.65 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Due to technical difficulties, the Leaps section will be updated on Monday, 07/29/02 ************** TRADERS CORNER ************** Reducing Your Exposure By Covering Your By Mike Parnos, Trading With Attitude One of our readers has a problem. It seems he stayed too long and too often at the Stock Market Hilton – where your money checks in and never checks out. Today’s article will be devoted to answering his email – originally sent to friend and colleague Ray Cummins – our resident spread master. Dear Ray: I am a new reader, but long time options trader. I have enjoyed going back and reading many of your past articles. I have read both your naked puts and combos articles. As I have been stripped naked too many times, the limited downside combos are more attractive to me. The current market conditions seem ripe for naked option writing (High IV on most everything), but because I have found that strategy too risky for my appetite, the next best strategy that I can think of is OTM credit spreads. You have mentioned that this is a strategy that you regularly use. You also hammer on the theme that it is very important to have a well defined strategy with follow up action points/exit points etc, however I have not found any articles that detail this. What I am interested in is not another article or information on how credit spreads work, but a well thought out strategy as to entry, exit and or adjustment rules if things don't work out as expected. Info as to pros and cons on indexes vs. stocks, different adjustments or follow up actions would be helpful as well. Alan Dear Alan, So you were “stripped naked”? There’s nothing wrong with being naked as long as you know when to put your clothes back on. You were obviously unprepared to streak the market and got more than a third-degree sunburn for your trouble. Been there. Done that. Ouch. An expensive lesson. Are you ready for the cure? Have you suffered enough? It will require a complete change of philosophy. Going from trading naked puts to out-of-the-money credit spreads is like going from bungee jumping to watching paint dry. Welcome to the Couch Potato Trading Institute – where we learn to be patient, be conservative, plan our moves, act decisively, and to make our money in small chunks. Let’s delve into the world of out-of-the-money (OTM) credit spreads. First, what are you going to trade -- stocks or indexes? Think about it. It ain’t brain surgery. Would you rather be safely diversified in an index? Or put the family jewels into one precarious basket? It’s not impossible, especially today, that the CEOs of all the companies in an index would get indicted in the same expiration month. But it’s not likely. Since we are in a high volatility environment, the premiums are nice and juicy – ideal for the option seller. It’s important to recognize this as an opportunity. Eventually, the volatility, and option premiums, will revert back to the norm and this chance will have passed you by. Be aware! That means no napping during the commercials. Pay attention to the market. When your boat comes in, don’t be waiting at the airport. As Yogi Berra said so eloquently, “when you come to a fork in the road, pick it up.” For new readers, a credit spread consists of selling a short option, then hedging yourself with the purchase of a long option with the same expiration. Your potential profit is the money taken in. If bullish, you would use puts to create a “bull-put” spread. If bearish, you’d use calls to create a “bear call” spread. (Refer to the OI archives for Ray Cummins’ many excellent in- depth articles on spreads) Entry Points Check the underlying. Is it bouncing off support? Has it bumped up against resistance? It’s usually wise to wait for a confirmation day or two before you enter a new position. In today’s market, stocks (and indexes) blow through support and resistance levels like Dom DeLouise going through a pack of Ho Ho’s. It’s better to take a little longer and be sure (as sure as one can be in this craziness) than to rush into a position and find yourself up at 3 a.m. watching Carleton Sheets infomercials because you can’t sleep. Length Of Spread As short a term as possible – from 3-5 weeks. If you stand outside too long, admiring the sky, sooner or later a bird will . . . Exit Strategies In a perfect world, the underlying will stay comfortably away from the short strike and both options will expire worthless. Occasionally, the underlying will move dramatically away from the short position with weeks remaining before expiration. This movement reduces the value of the short option. Astute traders will buy back the short option if they can retain 75% of their profit. This accomplishes four things: 1. It locks in a profit (which is never a bad thing); 2. It completely eliminates exposure (risk); 3. It frees up the maintenance being held in your trading account against the spread that can now be used for something else, and; 4. It leaves you with a long option and weeks to go before expiration. It’s not unheard for a stock to reverse direction and, before you know it, you may find your long option nicely in the money. This newly found cash will enable you to increase your Spandex wardrobe and even pay for next year’s Option Investor subscription. What Happens If . . . Oh, oh. The underlying begins to move against you. Now what? Well, because you have a plan you won’t be caught like a deer in the headlights or the Amish at Circuit City. There are a few choices. 1) When the stock hits the strike price of your short position, you buy the stock (or short the stock if you have a put spread) to cover the short option. You monitor the underlying and continue to buy and sell it if it fluctuates above and below the short strike. You may incur a few commissions along the way, but it’s a small price to pay. If you’re trading an index, see choice two. 2) As the underlying breaks support (or resistance), it’s time to “GTFO,” which is Czechoslovakian for “liquidate your position – NOW!” This enables you to preserve your trading capital. You’ll swallow a small frog, but it’s a lot better than swallowing a huge frog, and you’ll live to trade another day. In summation, establish your plan, do your charting, check the sectors, check the volatilities, use self-discipline and some common sense. You should be fine and you’ll make money on the vast majority of your trades. However, if one aspect of your research doesn’t line up, don’t do the trade. Always hedge your positions and define your risk before you put on the trade. If you get into a bad position and don’t know how to handle it, painful things can happen. How painful? Did you see Deliverance? THAT painful! Your questions and comments are welcome at: mparnos@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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 07-28-2002 Sunday 5 of 5 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Covered-Call Basics: Q&A On Position Management By Mark Wnetrzak This week, we continue a recent discussion concerning position management strategies with covered-calls. Attn: Mark - Covered-Calls Editor Subject: Position Management Strategies Hello Again, Thanks for the info and the calculator. I've sent off for the book that you suggested, but I do have one more question. The thing that I've been the most confused on is how does the ROI vary with the price of the stock. Using the example you gave me: ITM example: XYZ @ $12.00, sold strike = $10.00, option premium = $2.50 net premium = 2.50 - (12 - 10) = 0.50 cost basis = 12.00 - 2.50 = 9.50 RC = 0.50/9.50 = 5.26% after multiplying by 100. RNC = the same. What I would like to get a handle on is what happens when the stock moves (I didn't see a way to do this with the calculator). I see that $9.50 is my BE, but what if the stock is at $9.75, $10.75, or $12.75 when the option expires? Lets say after 10 days the stock goes down to $11.00 (breaking a support area I have pegged) and I decide to close the position. I buy back the call (around $1.50 I guess) and sell all the stock. Wouldn't that be a loss even though the stock stayed above the BE? Thanks again, JW JW, First, it is very important to remember that our strategy uses a conservative covered write that views the entire position as a single entity. We are not interested so much in stock ownership or upside movement, but in obtaining a monthly return on our investment. Therefore, by using In-The-Money (ITM) covered-calls, we expect the underlying equity to be "called" away at expiration (because the stock price is above the sold strike). As for stock prices in relation to assignment, usually as long as the stock price is $0.25 above the sold strike at expiration, the stock will be assigned (called away). Using your example, XYZ would be called away both at $10.75 and at $12.75. We sold the $10 strike, which gave the buyer of the option the right to buy XYZ from us at $10. Notice that the return on investment is the same in both cases because with ITM covered-calls -- the maximum potential profit only requires the stock price to stay above the sold strike. All upside movement in the share price of the stock is meaningless, except that it increases the probability of a successful outcome. If the issue took a bearish turn and the stock price is $9.75 at expiration, the sold call will expire worthless (your obligation is removed) and you will retain the underlying stock. The play would finish with a $0.25 profit, as your cost basis (break-even point) is $9.50 (not including the cost of commissions). At this point (on the Monday following expiration), you may sell the stock and take the available (if any) profit or roll into a new position. It just depends on your outlook. If you are neutral to bullish on the underlying stock, you may decide to roll-forward (and/or down) and write new calls, to further lower your cost basis; or you may simply decide to keep the stock as a core holding in your long-term portfolio. As stock ownership is always a possibility, even with ITM covered-calls (especially in bearish market conditions), it is wise to only enter a position on an issue you wouldn't mind owning. If you decide to exit the position early, before expiration, you would simply buy back the calls (at the "ask") and then sell the stock (at the "bid"). A "net" order could be used in closing the covered-write to ensure a proper exit. You would place an order with your broker to sell the stock and "buy to close" the call for a net credit -- a price reasonably close to parity. Using your example: If you bought back the calls at $1.50 and sold the stock at $11.00, your net credit would be $9.50 (11.00 - 1.50). With an original cost basis (debit) of $9.50, the end result is a wash. Of course, the cost of commissions would actually make the outcome a small loss (the OIN calculator uses two stock commissions and one option commission in calculating a cost basis, which assumes a post expiration stock sale). Remember, there are several factors that affect the overall level of option prices: the underlying stock's value, the option's strike price, time remaining until expiration, volatility, interest rates and dividends. Just because the underlying stock's share value declines doesn't necessarily mean the price of the option will drop accordingly. An excellent resource for more information on option pricing is on the CBOE website at: http://www.cboe.com/LearnCenter. Hope this helps, Mark W. OIN SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield LVLT 5.75 5.71 AUG 5.00 1.20 *$ 0.45 10.7% AMLN 10.00 10.10 AUG 10.00 0.90 *$ 0.90 8.6% CREE 13.98 14.22 AUG 12.50 2.30 *$ 0.82 7.6% WEBX 13.88 13.10 AUG 12.50 2.20 *$ 0.82 7.6% NPSP 17.11 20.89 AUG 12.50 5.60 *$ 0.99 7.5% SNDK 14.40 13.87 AUG 12.50 2.85 *$ 0.95 7.1% TRLY 6.31 5.13 AUG 5.00 1.60 *$ 0.29 6.7% SBL 8.58 8.34 AUG 7.50 1.50 *$ 0.42 6.4% EXTR 10.67 9.60 AUG 10.00 1.70 $ 0.63 6.1% BRCD 18.50 16.54 AUG 15.00 4.40 *$ 0.90 5.5% DRIV 9.19 8.46 AUG 7.50 2.25 *$ 0.56 5.0% BRCM 20.39 17.38 AUG 17.50 3.90 $ 0.89 4.7% IVGN 30.88 32.68 AUG 25.00 6.90 *$ 1.02 4.6% JNPR 8.90 6.96 AUG 7.50 1.75 $ -0.19 0.0% *$ = Stock price is above the sold striking price. Comments: The relief rally finally materialized though the potential for further upside movement appears uncertain. A lateral move (from here) in the major indices would do wonders for creating a base from which to climb higher. The Covered-Call portfolio has held up relatively well, despite the recent selling pressure, and the early exit in Zixit (NASDAQ:ZIXI) may have been a bit premature. Stocks on the early exit watch-list include: Juniper Networks (NASDAQ:JNPR) - at a key moment; Brocade Comm. (NASDAQ:BRCD) - acting very weak again; Broadcom (NASDAQ:BRCM) - no strength; and Terra Networks (NASDAQ:TRLY) - "weak" earnings were no help. Continue to monitor your positions closely and watch for any violations of support that would suggest a negative change of character. Positions Closed: Zixit (NASDAQ:ZIXI) and Sprint PCS (NYSE:PCS). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield FTI 17.40 AUG 15.00 FTI HC 3.00 10 14.40 21 6.0% HGSI 14.98 AUG 12.50 HQI HV 2.90 419 12.08 21 5.0% HYSL 17.85 AUG 17.50 WQE HW 1.05 32 16.80 21 6.0% ICOS 19.01 AUG 17.50 IIQ HW 2.55 857 16.46 21 9.2% IMDC 16.00 AUG 12.50 UZI HV 3.90 0 12.10 21 4.8% IVGN 32.68 AUG 27.50 IUV HY 6.00 1 26.68 21 4.5% NPSP 20.89 AUG 17.50 QKK HW 4.00 190 16.89 21 5.2% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ICOS 19.01 AUG 17.50 IIQ HW 2.55 857 16.46 21 9.2% FTI 17.40 AUG 15.00 FTI HC 3.00 10 14.40 21 6.0% HYSL 17.85 AUG 17.50 WQE HW 1.05 32 16.80 21 6.0% NPSP 20.89 AUG 17.50 QKK HW 4.00 190 16.89 21 5.2% HGSI 14.98 AUG 12.50 HQI HV 2.90 419 12.08 21 5.0% IMDC 16.00 AUG 12.50 UZI HV 3.90 0 12.10 21 4.8% IVGN 32.68 AUG 27.50 IUV HY 6.00 1 26.68 21 4.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** FTI - FMC Technologies $17.40 *** Bottom-Fishing *** FMC Technologies (NYSE:FTI) designs, manufactures and services technologically sophisticated systems and products for customers through its Energy Systems and Specialty Systems segments. Energy Systems is a supplier of systems and services used in the offshore, particularly deepwater, exploration and production of crude oil and natural gas. Specialty Systems provides technologically advanced handling and processing systems to industrial customers. FMC Tech reported earnings this week, showing a 42% rise in profit on net income of $17.8 million and revenues of $542.3 million. With the strength in its subsea business, FMC Tech reaffirmed it guidance for the year, expecting $0.95 per share. The reversal this week in share price has formed a “hammer” bottom on the long-term chart which suggests further upside potential. Traders can speculate on the near-term performance of the issue with this position. AUG 15.00 FTI HC LB=3.00 OI=10 CB=14.40 DE=21 TY=6.0% ***** HGSI - Human Genome Sciences $14.98 *** New Drug Speculation *** Human Genome Sciences (NASDAQ:HGSI) is a genomics and biopharma- ceutical company focused on therapeutic product development and functional analysis of genes using its proprietary technology platform. HGSI discovers, develops and intends to commercialize novel compounds for treating and diagnosing human disease based on the identification and study of genes. HGSI reported earnings this week which reflected the loss of expired relationships (for exclusive access to its genetic database) with several drug companies. The company is now free to pursue more lucrative deals as well as further develop its own product pipeline. Human Genome has recently received a milestone payment form GlaxoSmith- Kline (NYSE:GSK) and this week granted Schering-Plough (NYSE:SGP) exclusive rights to develop and commercialize two human antibodies. We simply favor the recent technical trend and this position offers a viable way to speculate on the future movement of the issue in a conservative manner. AUG 12.50 HQI HV LB=2.90 OI=419 CB=12.08 DE=21 TY=5.0% ***** HYSL - Hyperion Solutions $17.85 *** Earnings Rally *** Hyperion Solutions (NASDAQ:HYSL) delivers business performance management solutions that enable companies to continually measure performance, anticipate results and drive profitability across key business activities. The company's customers rely on HYSL's products to help them collaborate across the enterprise, focus resources, improve operational efficiencies and leverage oppor- tunities for growth. Hyperion reported solid earnings this week as license revenue grew 22% sequentially. The company reported net income of $6.9 million and revenues of $135.8 million for the quarter. On Friday, Janney Montgomery Scott analyst Robert Mattson upgraded the stock to "buy" from "hold," as he believes the company has put its problems behind it. The strong rally on on Friday has formed a short-term double bottom and the heavy volume suggests further upside potential. The stock appears poised to move higher in the coming sessions and traders who believe the issue is destined for a future rally can profit from upside movement with this position. AUG 17.50 WQE HW LB=1.05 OI=32 CB=16.80 DE=21 TY=6.0% ***** ICOS - ICOS Corp. $19.01 *** New Drug Approval Soon? *** ICOS (NASDAQ:ICOS) develops pharmaceutical products with major commercial potential by combining its capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and gene expression profiling. The company applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis, pulmonary arterial hypertension and other cardiovascular diseases, as well as inflammatory diseases. Though ICOS reported a wider loss this week, the stock rallied on Wednesday’s news of a delay in a rivals impotence drug. On Thursday, a European scientific committee recommended approval of Cialis, Eli Lilly’s (NYSE:LLY) and ICOS’ potential rival to Pfizer (NYSE:PFE) anti-impotence drug Viagra. Investors appear to be pleased with the news as the issue has shown new signs of a bullish trend and this position offers a way to speculate con- servatively on the company's future share value. AUG 17.50 IIQ HW LB=2.55 OI=857 CB=16.46 DE=21 TY=9.2% ***** IMDC - INAMED $16.00 *** On The Rebound *** INAMED (NASDAQ:IMDC) is a global medical device company that develops, manufactures and markets a diverse line of products that enhance the quality of people's lives. These products include breast implants for aesthetic augmentation and recon- structive surgery following a mastectomy, a range of dermal products to correct facial wrinkles, and the LAP-BAND and BIB systems used to treat severe and morbid obesity. IMDC’s shares crashed earlier this month after the company’s CFO resigned. Add a medical review by the FDA and U.S. lawmakers asking for records documenting the safety of saline-filled breast implants. The company said its 5-year follow-up data from 686 breast augmentation recipients and from 140 breast reconstruction patients showed follow-up compliance rates of 81% and 80%, respectively. We simply feel the sell-off was a bit over- zealous and that the stock will likely rally in the short-term. Speculators who agree may profit on the rebound with this conservative position. AUG 12.50 UZI HV LB=3.90 OI=0 CB=12.10 DE=21 TY=4.8% ***** IVGN - Invitrogen $32.68 *** Positive Earnings! *** Invitrogen (NASDAQ:IVGN) develops, manufactures and markets more than 10,000 products for the life sciences markets. The company's products are principally research tools in reagent and kit form, biochemicals, sera, media, and other products and services, which Invitrogen sells to corporate, academic and government entities. The company focuses its business on two principal segments, Cell Culture Products and Molecular Biology Products. Invitrogen said on Wednesday it swung to a second-quarter profit from a loss as sales of its tool kits for genetic research rose and it ceased writing off costs of a merger. Invitrogen posted a net profit of $8.1 million, or $0.15 a share, while revenue increased to $164.3 million. A conservative entry point for those investors who have a bullish, long-term outlook for the company. AUG 27.50 IUV HY LB=6.00 OI=1 CB=26.68 DE=21 TY=4.5% ***** NPSP - $20.89 NPSP - NPS Pharmaceuticals $17.11 *** On The Move! *** NPS Pharmaceuticals (NASDAQ:NPSP) is a biopharmaceutical company engaged in discovering, developing and commercializing small molecule drugs and recombinant proteins. The company's product candidates are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders. NPS Pharmaceuticals has three product candidates in active clinical development and several pre-clinical product candidates. Two of these product candidates, Preos and AMG 073, are in Phase III clinical trials. The company's third product candidate, ALX-0600, is in a pilot Phase II clinical trial. NPSP rallied in early July after a favorable Salomon Smith Barney release said the company has been making solid progress in resolving the manufacturing issues with its lead drug candidate Preos. This week, NPS reported that it has successfully produced additional supplies of the drug and that it now can supply patients in all of its current clinical trials into the 1st-quarter of 2003. Traders can speculate on the near-term performance of the issue with this conservative position. AUG 17.50 QKK HW LB=4.00 OI=190 CB=16.89 DE=21 TY=5.2% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield FFIV 11.15 AUG 10.00 FLK HB 2.10 331 9.05 21 15.2% AVCT 15.41 AUG 15.00 QVX HC 1.25 121 14.16 21 8.6% DT 11.82 AUG 10.00 DT HB 2.30 4626 9.52 21 7.3% CVTX 19.91 AUG 17.50 UXC HT 3.20 48 16.71 21 6.8% CREE 14.22 AUG 12.50 CVO HV 2.25 3315 11.97 21 6.4% CCRN 28.66 AUG 25.00 QCK HE 4.70 101 23.96 21 6.3% JPM 22.25 AUG 17.50 JPM HW 5.40 101 16.85 21 5.6% XRX 6.37 AUG 5.00 XRX HA 1.55 2323 4.82 21 5.4% SY 10.61 AUG 10.00 SY HB 0.95 325 9.66 21 5.1% ***************** NAKED PUT SECTION ***************** Option Trading 101: Position Management Strategies By Ray Cummins One of our new readers submitted a great question on position management techniques with naked puts. Attn: Naked-Puts Editor Subject: Rolling Positions Hi, I have noticed in the naked-puts area that a policy of rolling over a position has been advocated when the strike price is breached. Should this not be TWO decisions? The decision to close the original put is made presumably because the support area that was identified as a good strike price has gone. The decision to write a new put should presumably be taken on sound principles rather than just to reduce the debit on taking out the first failed write? Have I got that right or am I missing something? Thanks in advance TD Regarding position management with sold (short) puts: Indeed, the decision to adjust, rather than exit, any position should be based on the same components as an opening trade: the technical and fundamental outlook for the underlying issue, the position's risk-reward ratio, and the probability of profit. We do not advocate "rolling" each and every losing (naked-put) play to a lower (and/or future) strike price, but the technique can be a viable alternative to a losing trade. For readers who are unfamiliar with the technique, here is a brief explanation: The strategy of selling out-of-the-money put options on bullish issues is a relatively conservative technique but occasionally, a trader will be faced with an option that is in-the-money as the expiration date approaches. One of the most common methods for preventing a potential loss in this situation is the "roll-out" and it is used when the underlying issue remains relatively near the strike price of the sold option. Remember, selling a put obligates the writer to purchase the underlying issue at the sold strike price. If the stock remains above the sold strike, the writer retains the premium for the sold option. However, if the stock price falls, the writer may choose to roll out and forward in his position, to avoid potential assignment of the stock. He can repurchase the puts that were sold initially and sell new, longer-term options. Generally, the new options are written at the next lower strike price, or in greater quantity so as to generate a credit. In this simple recovery method, no debits are incurred but a realized loss is taken in the short term. If the stock price continues to decline, the process is repeated. Eventually, the issue stock should stop falling and the last set of written options will expire worthless. At that time, the traders' overall profit will consist of the sum of all the previous credits. There are two requirements for success in this strategy. The first prerequisite is that the underlying stock must eventually rebound and the second condition is that the trader have enough portfolio collateral to stay with the strategy even if the issue falls significantly. A large stock portfolio is best for this type of trading because the collateral required for naked option writing may be in the form of cash or securities. There are no margin interest charges and the positions in the portfolio are unaffected unless there is a need for additional funds to close the play prematurely. This simple exit strategy offers a high degree of (eventual) success although in some cases, there may be an accumulation of losses before a profit is achieved. Another approach to (naked put) position management involves the use of a protective stop order on the option to insure a profit (or limit losses) if the primary trend of the underlying changes character. The basic guidelines for establishing an effective trading stop suggests that the initial or opening "limit" should be placed at a point where primary technical support is evident. Most often, this will be a relatively small range reflecting the bottom of a basing pattern or trend-line established prior to entering the position. An important objective of this initial stop-loss order is to preserve capital if the trade goes badly and yet provide every opportunity for the position to achieve its maximum profit potential. If the primary trend is less defined, the placement of the stop will differ, depending on your overall risk/reward tolerance. One must also take into account the past movement of the issue when setting the loss-limiting order and with highly volatile instruments, this can be difficult as they often fluctuate by large amounts. Trend-lines, minor lows, and near-term technical support areas are used to assist in the correct placement of these stops. After the position has been initiated, and the outlook for the stock changes significantly, the stop may be tightened (mover closer than usual) to guarantee a small profit if "stopped out" while still allowing for a larger gain and a possible resumption of the primary trend. Regardless of the manner in which you determine the placement of stop orders, there is one fundamental rule of protective limits that remains inviolate. Once established, protective stop orders on bullish positions (such as naked-puts) must never be lowered, no matter how favorable the outlook for the underlying issue appears. A person who understands the need for a mechanical approach to trading but can not control his emotions is destined to fail in the market. One of the best ways to overcome a "reaction-based" mentality is to establish a plan of attack, before you begin to trade, that allows you take control of your feelings and remove the possibility of an impulsive action. Experienced traders use pre-determined profit targets and stop orders, as well as proven adjustment techniques for any strategies they employ and that is the fundamental basis for consistent profits in the business of trading options. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule: Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a "buy-to-close" STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield SNDK 15.08 13.87 AUG 12.50 0.55 *$ 0.55 14.9% MCDTA 9.70 9.95 AUG 7.50 0.25 *$ 0.25 12.4% DCTM 12.90 14.86 AUG 10.00 0.30 *$ 0.30 11.3% BCGI 8.90 9.90 AUG 7.50 0.25 *$ 0.25 11.3% BRCM 19.86 17.38 AUG 15.00 0.40 *$ 0.40 9.9% MU 23.39 19.63 AUG 17.50 0.45 *$ 0.45 7.6% PDLI 10.95 13.02 AUG 7.50 0.20 *$ 0.20 7.3% RIMM 13.82 11.51 AUG 10.00 0.25 *$ 0.25 7.2% DT 12.00 11.82 AUG 10.00 0.25 *$ 0.25 7.1% QCOM 28.11 25.99 AUG 20.00 0.40 *$ 0.40 5.8% QLGC 40.69 37.69 AUG 25.00 0.45 *$ 0.45 5.7% AMAT 18.48 14.32 AUG 15.00 0.55 $ -0.13 0.0% CSCO 14.38 11.82 AUG 12.50 0.50 $ -0.18 0.0% NXTL 6.64 4.53 AUG 5.00 0.25 $ -0.22 0.0% MOT 14.86 10.90 AUG 12.50 0.25 $ -1.35 0.0% *$ = Stock price is above the sold striking price. Comments: This week's big surprise came when Motorola (NYSE:MOT) shares fell to a nine-year low after the company learned of the exit of its president, Edward Breen, who had been in the post only since January. Breen was named on Thursday to the top spot at troubled conglomerate Tyco International (NYSE:TYC) and while Tyco's shared soared, Motorola's shares swooned. Traders who exited the position during Thursday's sell-off endured much smaller losses than our portfolio summary reflects, but they were losses nonetheless. Despite upbeat comments from Goldman Sachs about the semiconductor industry, chip-equipment stocks did not recover from recent heavy selling and the position in Applied Materials (NASDAQ:AMAT) remained in negative territory for a second straight session. A move below the current price range should be seen as an early exit signal. The situation is similar with Cisco Systems (NASDAQ:CSCO), as it has fallen to multi-year lows and traders who believe the wireless sector merger speculation has run its course should close the Nextel (NASDAQ:NXTL) position to avoid large losses. Other issues on the watch-list include: Broadcom (NASDAQ:BRCM), Micron (NYSE:MU), and Research In Motion (NASDAQ:RIMM). Positions Previously Closed: Royal Gold (NASDAQ:RGLD) and Atmi (NASDAQ:ATMI). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CHKP 15.69 AUG 12.50 KEQ TV 0.25 5111 12.25 21 10.7% DCTM 14.86 AUG 12.50 QDC TV 0.40 23 12.10 21 14.5% FCN 40.00 AUG 35.00 FCN TG 0.80 159 34.20 21 9.8% ISSX 15.45 AUG 12.50 ISU TV 0.30 227 12.20 21 12.3% OSIP 26.79 AUG 22.50 GHU TX 0.35 327 22.15 21 7.5% PDLI 13.02 AUG 10.00 PQI TB 0.25 940 9.75 21 12.7% SANG 23.35 AUG 20.00 QDY TD 0.35 9 19.65 21 8.0% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield DCTM 14.86 AUG 12.50 QDC TV 0.40 23 12.10 21 14.5% PDLI 13.02 AUG 10.00 PQI TB 0.25 940 9.75 21 12.7% ISSX 15.45 AUG 12.50 ISU TV 0.30 227 12.20 21 12.3% CHKP 15.69 AUG 12.50 KEQ TV 0.25 5111 12.25 21 10.7% FCN 40.00 AUG 35.00 FCN TG 0.80 159 34.20 21 9.8% SANG 23.35 AUG 20.00 QDY TD 0.35 9 19.65 21 8.0% OSIP 26.79 AUG 22.50 GHU TX 0.35 327 22.15 21 7.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CHKP - Check Point Software $15.69 *** Low Risk Entry Point! *** Check Point Software Technologies (NASDAQ:CHKP) develops, markets and supports Internet security solutions for enterprise networks and service providers, such as Telcos, Internet service providers, application service providers as well as managed service providers including virtual private networks (VPNs), firewalls, intranet and extranet security. Check Point has solutions that enable secure, reliable and manageable business-to-business communications over Internet protocol networks, including the Internet, intranets and extranets. Check Point product offerings also include traffic control and quality of service and IP address management. The company's products are fully integrated as a part of its secure virtual network architecture, and provide centralized management, distributed deployment and comprehensive policy administration. CHKP recently surpassed second-quarter earnings estimates as the company said it gained market share and closed some long-delayed deals. The Israeli firewall-software maker also said it would meet expectations for the second half of the year and analysts have an optimistic outlook for the company's recovery. Investors can establish a low risk entry point in the issue with this position. AUG 12.50 KEQ TV LB=0.25 OI=5111 CB=12.25 DE=21 TY=10.7% ***** DCTM - Documentum $14.86 *** Improving Fundamentals! *** Documentum (NASDAQ:DCTM) is the industry's leading provider of enterprise content management, automating the production, exchange and personalization of all types of content, making it easier for its customers to gain a competitive edge by connecting employees, business partners and customers, worldwide. Built on an Internet scale, XML-enabled and standards-compliant platform, Documentum products manage Web content, power portals, enable collaborative commerce, and solve regulatory content challenges. Partners in all major industries, including high tech, pharmaceutical, healthcare, consulting services, government, manufacturing, financial services, automotive, retail, and consumer goods, build and use specialized applications using Documentum's content management infrastructure. Documentum recently reported second quarter total revenue of $54 million, a 17% increase over the same period a year ago and a 7% increase from the first quarter of fiscal 2002. License revenue for the second quarter totaled $27 million, an increase of 26% over the same period a year ago and 8% over the previous quarter. The company's bottom line appears to be improving and investors who agree with a bullish technical outlook for the issue should consider this position. AUG 12.50 QDC TV LB=0.40 OI=23 CB=12.10 DE=21 TY=14.5% ***** FCN - FTI Consulting $40.00 *** Rally Underway! *** FTI Consulting (NYSE:FCN) is a multi-disciplined consulting firm with practices in the areas of financial restructuring, litigation consulting and engineering and scientific investigation. FTI serves businesses, lenders, investors, insurers and their legal counsel in adverse circumstances, such as class action lawsuits, financial restructurings and bankruptcy proceedings and accident investigations. The company has organized its business into three major divisions. The Financial Consulting division offers expert testimony, cost benefit analysis, damage assessment, competition analysis and business valuations. The Applied Sciences division offers forensic engineering and scientific investigation services. The Litigation Consulting division advises clients in all phases of litigation, including discovery, jury selection, preparation for trial and the actual trial services. FTI recently reported its thirteenth straight quarter of record results. In a separate release, FTI also announced it has agreed to acquire the domestic Business Recovery Division of PricewaterhouseCoopers. Further, FTI is also exploring the sale of its Applied Sciences Division and is in negotiations with a potential investment group led by its divisional president. Traders can speculate on the recent rise in FCN's share value with this conservative position. AUG 35.00 FCN TG LB=0.80 OI=159 CB=34.20 DE=21 TY=9.8% ***** ISSX - Internet Security Systems $15.45 *** Recovery Mode! *** Internet Security Systems (NASDAQ:ISSX) is a security software company engaged in information protection solutions dedicated to protecting online assets. The company's security management solutions include software products, managed security services and professional services that are made up of both consulting and training services. The company offers a comprehensive line of products and services for enterprise, smaller enterprise, consumer and service provider customers. The company provides its security management solutions in three primary geographic areas: the Americas (United States, Canada and Latin America), which accounted for 71% of total revenues in 2001, EMEA (Europe, Middle East and Africa), which accounted for 15% of revenues in 2001 and Asia/Pacific Rim, which accounted of 14% of revenues in 2001. A small but noticeable recovery is underway in ISSX and investors who want to establish a conservative cost basis in a leading Internet security company should consider this position. AUG 12.50 ISU TV LB=0.30 OI=227 CB=12.20 DE=21 TY=12.3% ***** OSIP - OSI Pharmaceuticals $26.79 *** Bottom Fishing! *** OSI Pharmaceuticals (NASDAQ:OSIP) is a biopharmaceutical company focused on the discovery, development and commercialization of products for the treatment of cancer. The company has built a pipeline of programs and drug candidates addressing major, unmet needs in cancer and selected opportunities arising from their drug discovery research programs that represent unique commercial opportunities outside of cancer. The company has three primary candidates in clinical trials and seven projects with candidates in late stage pre-clinical development. The company's advanced drug candidate is Tarceva, which has demonstrated indications of anti-cancer activity. The company expects to focus primarily in the areas of diabetes recently said it ended an alliance it had with Anaderm and Pfizer for the treatment of skin conditions. Banc Of America Securities initiated coverage on OSI after the announcement and apparently, investors were also happy with the decision. Our position offers conservative speculation on a well known oncology company with some unique products in their development pipeline. AUG 22.50 GHU TX LB=0.35 OI=327 CB=22.15 DE=21 TY=7.5% ***** PDLI - Protein Design Labs $13.02 *** Biotech Binge! *** Protein Design Labs (NYSE:PDLI) is engaged in the development of humanized monoclonal antibodies for the prevention and treatment of disease. The company has licensed specific rights to its humanized antibody product, Zenapax, to Hoffmann-La Roche and its affiliates, which markets it for the prevention of kidney transplant rejection. Protein Design is also testing Zenapax for the treatment of autoimmune disease. In addition, the company has several other humanized antibodies in clinical development for autoimmune and inflammatory conditions, asthma and cancer. Protein Design Labs has seen renewed buying interest in its stock recently after some favorable product developments and this play offers a great entry price for investors who want to speculate on a popular biotech issue. AUG 10.00 PQI TB LB=0.25 OI=940 CB=9.75 DE=21 TY=12.7% ***** SANG - SangStat Medical $23.35 *** Solid Earnings! *** SangStat Medical (NASDAQ:SANG) is a global biotechnology company expanding on its transplantation foundation to discover, develop and sell therapeutic products in immunology, hematology/oncology and auto-immune disease. The company is dedicated to improving the outcome of organ and bone marrow transplantation through the development and marketing of products to address all phases of transplantation in the worldwide market. Its primary products include Thymoglobulin, Gengraf Cyclosporine, Lymphoglobuline and Celsior. SangStat recently said that its second quarter swung to a profit from a year-earlier loss, helped in part by higher sales of Thymoglobulin, which is used in kidney transplants. SangStat said it earned $1.81 million, or 7 cents a share, in the quarter, compared with a loss of $2.6 million, in the same period a year earlier as net product sales rose to $30 million from $21 million. Investors cheered the news, boosting the issue from recent lows to a three-month high near $23. Traders who believe the rally will continue can profit from that outcome with this position. AUG 20.00 QDY TD LB=0.35 OI=9 CB=19.65 DE=21 TY=8.0% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield NFLD 5.46 AUG 5.00 DHQ TA 0.30 23 4.70 21 21.5% HGSI 14.98 AUG 12.50 HQI TV 0.45 493 12.05 21 16.5% VRTX 17.48 AUG 15.00 VQR TC 0.50 236 14.50 21 14.4% COCO 29.30 AUG 25.00 UCS TE 0.60 818 24.40 21 10.8% GENZ 19.98 AUG 15.00 GZQ TC 0.30 2430 14.70 21 10.1% SRCL 34.00 AUG 27.50 URL TY 0.50 495 27.00 21 9.5% VMSI 22.19 AUG 20.00 QMP TD 0.45 10 19.55 21 9.1% FAST 37.99 AUG 30.00 FQA TF 0.40 1421 29.60 21 7.2% VAR 38.26 AUG 32.50 VAR TZ 0.50 770 32.00 21 7.2% MRK 46.00 AUG 42.50 MRK TV 0.70 1438 41.80 21 6.5% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Base-Building Process Begins! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** July 26, 2002 The major equity averages ended the week with a bullish bias as buyers moved back into stocks amid optimism over a surge in the value of the dollar and favorable consumer sentiment data. The Dow Jones Industrial Average climbed 78 points to 8,264 on strength in McDonald's (NYSE:MCD), Alcoa (NYSE:AA), Microsoft (NASDAQ:MSFT), Exxon Mobil (NYSE:XOM), and General Electric (NYSE:GE). The NASDAQ Composite rose 22 points to 1,262 with Internet issues recovering from recent losses while networking, and fiber-optic stocks slumped after disappointing results from JDS Uniphase (NASDAQ:JDSU). Semiconductor equipment stocks also failed to respond to a sector upgrade by Goldman Sachs. In the broader market, pharmaceutical, finance and Internet companies were the best performing groups while safe-haven sectors such as gold, defense, chemical and utility issues all retreated. The Standard & Poor's 500-stock index added 14 points to end at 852. Volume totaled 1.79 billion on the NYSE and 1.70 billion on the NASDAQ. Market breadth ended on positive note, with advancers pacing decliners 3 to 2 on the NYSE and 4 to 3 on the technology exchange. Treasury prices finished mixed with the 10-year note down 1/32 to yield 4.38% while the 30-year government bond fell 6/32 to yield 5.31%. Yields on the 10-year treasury are at the lowest levels since mid-November of last year. On the fund flow front, Trim Tabs estimated that all funds had outflows of $20.5 billion during the week ending July 24 compared with outflows of $19.3 billion in the prior week. Bond funds had a $3.6 billion infusion versus $3.9 billion invested in the prior week. Last week's new plays (positions/opening prices/strategy): Aetna (NYSE:AET) AUG55C/50C $0.55 credit bear-call Apache (NYSE:APA) AUG60C/55C $0.50 credit bear-call Aventis (NYSE:AVE) AUG75C/70C $0.25 credit bear-call 3M Corp. (NYSE:MMM) A130C/125C $0.75 credit bear-call Pulte (NYSE:PHM) AUG55C/50C $0.55 credit bear-call Royal (NYSE:RD) AUG55C/50C $0.25 credit bear-call Amphenol (NYSE:APH) AUG30P/35P $0.80 credit bull-put eBay (NSDQ:EBAY) AUG45P/50P $0.60 credit bull-put Femsa (NYSE:FMX) AUG35P/40P $0.55 credit bull-put Idec (NSDQ:IDPH) AUG25P/30P $0.50 credit bull-put Intl. Bus. (NYSE:IBM) AUG60P/65P $0.70 credit bull-put Un. Parcel (NYSE:UPS) AUG55P/60P $0.70 credit bull-put The extreme volatility in the equity markets provided favorable entry opportunities for all but two of our new positions. The bearish spreads in Aventis (NYSE:AVE) and Royal Dutch Petroleum (NYSE:RD) were not available at the suggested prices. Many of the bullish positions struggled under the weight of continued selling pressure in equities and Fomento Economico (NYSE:FMX) slumped right from the open on Monday, despite predicting a 10% rise in quarterly operating profits on increased beer exports and higher volume and prices in its soft-drinks subsidiary. On Thursday, the company reported a 13% increase in second-quarter operating profit as solid soft-drink sales compensated for flat beer revenues. Investors focused instead on the loss of market share to rival Modelo, maker of the popular Corona beer, and the issue never recovered. Another stock that succumbed to bearish activity in technology shares was IBM and the technicals suggest a "key" moment is at hand. Traders will be looking for a break below the current support level near $65 and that event would certainly signal an early exit in our position. One last issue that requires daily monitoring is Amphenol (NYSE:APH). A move below near-term buying support at $35 would indicate a renewal of the recent downward trend. Portfolio Activity: The July options expiration left our portfolio with relatively few positions but there was some unexpected activity in one of the remaining spreads. The recent share-price volatility in Nextel (NASDAQ:NXTL) came full circle this week as the stock closed Friday's session at $4.65, only $0.13 above its original price in our aggressive "time-selling" position. The extreme gyrations further increased the option premiums but because the near-term position had so little time value, the spread credit widened further, providing a small closing profit for traders who chose to linger in the speculative play. Among the other portfolio issues, only Sei Investments Company (NASDAQ:SEIC) warrants comment. The stock price slumped to a multi-year low Wednesday, boosting the already sizable gain in our conservative debit straddle (SEP30C/30P). The overall credit for the neutral outlook position has traded as high as $7.50, on $4.60 initially invested. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** DD - E. I. DuPont de Nemours $41.88 *** Time Selling Play *** E. I. DuPont de Nemours and Company (NYSE:DD) is engaged in the science and technology business in a wide range of disciplines, including high-performance materials, synthetic fibers, specialty chemicals, electronics, agriculture and biotechnology. Dupont operates globally through 22 strategic business units. Within the strategic business units, a wide range of products are made for distribution and sale to many different markets, including the transportation, textile, construction, agricultural, motor vehicle, home furnishings, medical, packaging, electronics and the nutrition and health markets. The company operates through five market- and technology-focused growth platforms: DuPont Electronic & Communication Technologies; DuPont Performance Materials; DuPont Coatings & Color Technologies; DuPont Safety & Protection; and DuPont Agriculture & Nutrition. Traders have been commenting about the extreme volatility skews in front-month options, so we decided to look for some calendar spread candidates to take advantage of the current conditions. Dupont is one of our old favorites in the time-selling category, due to its range-bound history, and the issue's option premiums and technical indications are once again favorable. For those who are unfamiliar with calendar spreads, the basic premise in the position is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. In this case, the spread is speculative with low initial cost and large potential profits and two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. In addition, as each month passes, new options can be sold for future expiration dates (OCT, NOV, DEC) to further reduce the cost basis in the long-term position. PLAY (conservative - bullish/calendar spread): BUY CALL JAN-45 DD-AI OI=10517 A=$2.40 SELL CALL AUG-45 DD-HI OI=1335 B=$0.45 INITIAL NET DEBIT TARGET=$1.80-$1.90 TARGET PROFIT=50-75% ****************************************************************** K - Kellogg Company $33.34 *** Earnings Due! *** Kellogg Company (NYSE:K) is a producer of ready-to-eat cereal and other convenience foods such as cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts and ice cream cones. The company's products are made in 19 countries around the globe and distributed in more than 160 countries. The company's cereal products are generally marketed under the Kellogg's name. The company also markets cookies, crackers and other convenience foods of its Keebler Foods Company subsidiary under other brands such as Kellogg's, Keebler, Cheez-It, Murray and Famous Amos, and manufactures private label cookies, crackers and other products. These branded products are generally marketed to supermarkets in the United States through a direct store door delivery system, although other distribution methods are also used. Kellogg markets some of its other convenience foods products in the United States through this DSD system. Kellogg Company is due to report earnings Monday morning and if the results are "as expected" or better, the company's stock price should move higher, possibly climbing back into a previous trading range near $35. If bullish activity occurs after the results are posted, investors should consider a conservative calendar spread in the issue. The technical resistance near the sold strike will help limit K's upside initially, allowing a period of time to pass before the share value continues higher, thus offering traders the ability to sell one or more future options against the long-term position. That is the basic idea in this type of spread; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when the options return to intrinsic value. Ideally, you would like to have the stock finish slightly below the sold strike when the near-term option expires. If the sold (short) option is "in-the-money" at expiration, you will have to buy it back it to preserve the long-term position. PLAY (conservative - bullish/calendar spread): BUY CALL JAN-35 K-AG OI=470 A=$2.15 SELL CALL AUG-35 K-HG OI=149 B=$0.55 INITIAL NET DEBIT TARGET=$1.50-$1.55 TARGET PROFIT=40-75% ****************************************************************** PHA - Pharmacia $41.00 *** On The Rebound! *** Pharmacia Corporation (NYSE:PHA) is primarily involved in the development, manufacturing and sale of pharmaceutical products. Prescription pharmaceuticals is the company's only business segment and includes general therapeutics, ophthalmology and hospital products, including oncology as well as diversified therapeutics. The company also operates several business units that do not constitute reportable business segments. These include, among others, consumer healthcare, animal health, diagnostics and contract manufacturing and bulk pharmaceutical chemicals. Due to the size of these operating units, they have all been grouped into the Other Pharmaceuticals category. The company's products are sold throughout the world to a range of customers, including pharmacies, hospitals, chain warehouses, governments, physicians, wholesalers and other distributors. Here's one more candidate for a speculative time-selling play, based on the recent recovery in the share value and the solid technical resistance near the sold strike price. As with the Dupont position, the spread has low initial cost with large potential profits and two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. Also, as each month passes, new options can be sold for future expiration dates to reduce the cost basis in the long-term position. PLAY (conservative - bullish/calendar spread): BUY CALL JAN-45 PHA-AI OI=4251 A=$2.90 SELL CALL AUG-45 PHA-HI OI=1133 B=$0.40 INITIAL NET DEBIT TARGET=$2.30-$2.40 TARGET PROFIT=40-60% ****************************************************************** SRCL - Stericycle $34.00 *** Pure Premium Selling! *** Stericycle (NASDAQ:SRCL) is a regulated medical waste management company in North America, serving almost 300,000 customers in the United States, Canada, Puerto Rico and Mexico. Stericycle's services and operations are comprised of collection, treatment, transportation, disposal and recycling, together with related training and education programs, consulting services and product sales. Stericycle has a fully integrated, nationwide medical waste management network. The network includes 36 treatment and collection centers as well as 94 transfer and collection sites. Stericycle uses this network to provide medical waste collection, transportation and treatment and related consulting, training and education services and products. Stericycle's treatment technologies include a proprietary electro-thermal-deactivation system, as well as traditional methods, such as autoclaving and incineration. The current high levels of implied volatility are very favorable for traders who sell premium, as long as you can find positions where the chance of extreme, unexpected movements are minimal. Stericycle has been relatively stable, despite the recent selling pressure among broad market issues, and due to the nature of the industry, the company's upcoming earnings report is unlikely to cause a significant change in its future fundamentals. Traders who employ premium-selling strategies can use the robust option prices to initiate a neutral-outlook position with a favorable risk/reward outlook. The probability of the share value reaching our sold (short) strikes is rather low, but there is always the possibility of a break-out from the current trading range, so monitor the position daily for changes in technical character. PLAY (aggressive - neutral/credit strangle): SELL CALL AUG-40.00 URL-HH OI=236 B=$0.50 SELL PUT AUG-27.50 URL-TY OI=495 B=$0.50 INITIAL NET CREDIT TARGET=$1.00-$1.20 PROFIT(max)=13% UPSIDE B/E=$41.00 DOWNSIDE B/E=$26.50 ****************************************************************** - CREDIT SPREADS - ****************************************************************** CTSH - Cognizant Technology $56.81 *** 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. Shares of Cognizant Technology Solutions have been "on the move" since the company announced in early July that strong demand for its software services is expected to drive earnings and revenue higher than forecast in the third quarter and for all of 2002. Cognizant chairman and chief executive recently told investors to expect revenue around $57 million, or about 7% higher than forecasts for the current quarter of about $53.1 million. The executive also said the pipeline of contracts was prompting the company to raise its full-year revenue guidance to $218 million and its earnings outlook to $1.59 per share, considerably higher than the previous existing consensus forecasts for $203 million and $1.51 per share. Analysts are optimistic about the future outlook for Cognizant and based on the recent stock activity, investors are as well. Traders can speculate conservatively on the near-term performance of CTSH with this position. PLAY (conservative - bullish/credit spread): BUY PUT AUG-45 UPU-TI OI=121 A=$0.60 SELL PUT AUG-50 UPU-TJ OI=383 B=$1.20 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)=15% ****************************************************************** DB - Deutsche Bank $56.40 *** Technicals Only! *** Deutsche Bank (NYSE:DB) is a multi-specialty group of financial and banking institutions in Germany and Europe. Its activities cover a full range of corporate and investment banking, private clients and asset management products and services. Deutsche Bank has 2,000 facilities in 70 countries worldwide, of which 60% are in Germany. Deutsche Bank conducts its operations in three divisions: Corporate and Investment Bank, Private Clients and Asset Management and Corporate Investments. In addition, DB Services provides corporate services, information technology and other services to the entire organization, and the Corporate Center houses those functions that support the cross-divisional management of the organization. Deutsche Bank recently signed agreements with Zurich Financial Services to acquire the greater part of Zurich's asset management business and to sell Zurich the greater part of its insurance business. This position was discovered with one of our primary scan/sort techniques; identifying fundamentally bearish trends on issues with speculative options activity. In this case, the premiums for the out-of-the-money call options are slightly inflated and the potential for a successful (technical) recovery is affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread. PLAY (conservative - bearish/credit spread): BUY CALL AUG-70 DB-HN OI=56 A=$0.20 SELL CALL AUG-65 DB-HM OI=187 B=$0.70 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% ****************************************************************** IGT - International Game Tech. $53.14 *** Mediocre Outlook! *** International Game Technology (NYSE:IGT) is a manufacturer of computerized casino gaming products and operator of proprietary gaming systems. IGT serves the casino gaming industry in the United States. In addition to its production in the U.S., the company manufactures gaming products in the United Kingdom and through a third party manufacturer in Japan. IGT also maintains sales offices in selected legalized gaming jurisdictions globally, including Australia, Argentina, New Zealand, Peru, South Africa and The Netherlands. IGT provides gaming products in every major legalized gaming jurisdiction in the world. The leading U.S. slot-machine maker recently reported favorable third-quarter earnings, but concerns about slowing sales kept its share value in a decline. In the conference call, IGT's CEO commented that ongoing sales of sequential progressive machines didn't grow this quarter because the lucrative revenue-sharing slots were meeting with opposition from some operators who said they are too costly. Adding to concerns about lack of growth of revenue sharing machines, domestic units shipped for the quarter were down 3%, while international shipments were down 5%. IGT also said shipments were down in the important Nevada market, and that the market from native American casinos in California was also maturing. Based on the recent tepid outlook, investors are not supporting the issue at previous levels and traders who think the stock will have difficulty returning to the $60 range in the next few weeks can profit from that outcome with this position. PLAY (conservative - bearish/credit spread): BUY CALL AUG-65 IGT-HM OI=494 A=$0.25 SELL CALL AUG-60 IGT-HL OI=740 B=$0.65 INITIAL NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9% ****************************************************************** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ Great Action Points Developing To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/072802.asp ************** MARKET POSTURE ************** Catchi a Falling Semi To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/072802.asp ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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