The Option Investor Newsletter Wednesday 07-31-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Tug of War Index Trader Wrap: WHAT BEAR MARKET? Weekly Fund Family Profile: Papp Mutual Funds Options 101: Where Does The Buck Stop? Index Trader Game Plans: THE SECTOR BEAT - 7/31 Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 07-31-2002 High Low Volume Advance/Decl DJIA 8736.59 +56.56 8736.73 8537.10 2349 mln 1614/1505 NASDAQ 1328.26 -15.93 1335.79 1307.01 1613 mln 1371/1919 S&P 100 458.87 + 5.97 458.87 446.36 totals 2985/3424 S&P 500 911.62 + 8.84 911.64 889.88 RUS 2000 392.42 - 8.49 400.91 392.38 DJ TRANS 2370.05 -19.46 2390.29 2340.84 VIX 35.21 + 0.06 37.49 34.96 VIXN 57.86 + 1.40 60.15 56.92 Put/Call Ratio 0.87 ******************************************************************* Tug of War What resilience! Several economic indicators were released this morning, and what appeared to be bad news simply can't seem to break the bulls. GDP showed economic growth in the second quarter at only 1.1%, less than half of the expected 2.4%. This was a decrease from first quarter growth of 5%, which was revised downward this morning from a previously reported level of 6.1%. This downward revision from the first quarter happens to be equal to total second quarter growth. This morning's data release also altered perception of last year, showing that the economy did, in fact, slip into recession in 2001. The economy shrank in the first, second and third quarters last year, and emerged back into positive territory in the fourth. The key to these revisions was the second quarter, which had previously been reported as positive. The revision into negative territory put the economy into a solid recession with the required two straight quarters of economic contraction. In this case there were three in a row, and demonstrated a deeper problem than previously thought. The GDP report was followed by the Chicago PMI (Purchasing Mangers Index), which came in at 51.5% in July. A reading above 50% indicates expansion of activity in the manufacturing sector. This number was expected to come in at 56.8%, so it is considered a disappointment. Keep in mind that it is also only 1.6% away from contraction. The Dow started off poorly, down 143 points, but buyers shrugged off the economic data to rally the Dow 118 points from that level, before giving in after a Beige Book report that may have set a new record for use of the word "mixed" in an economic summary. The report suggested that the economy expanded modestly in recent weeks, with uneven performance across sectors. Residential real estate and construction were strong, as were purchases for the home, but commercial real estate struggled. Banks reported strong demand for home mortgages, but continued weak demand for business loans. Agricultural conditions were mostly poor. Labor markets were described as slack, but stable. Prices for most goods and services were steady. Auto and retail sales were mixed. Here is a link to the full text of this report. http://www.federalreserve.gov/FOMC/BeigeBook/2002/20020731/Default.htm This lackluster report completed the trifecta of uninspiring data, driving the Dow back down over 100 points, however unable to force its way through support at 8500. The average has come close to testing this level on several occasions the last few days, but has held firm. Chart of the Dow Jones The S&P 500 has seen similar support at the 890 level. This level in the S&P provided resistance on Tuesday morning, but ever since breaking through, has served as support for the index. Chart of the S&P 500 These levels will be important the next two days, as more key economic data is released. Thursday we will get a look at auto and truck sales, initial jobless claims for last week and construction spending. On Friday, we will see non-farm payrolls, unemployment rate for the month of July, and personal income and factory orders for the month of June. After a rally of more than 1200 points from last Wednesday's low, the bears will be looking for continued economic weakness. Although the reports today couldn't break through these support levels, bad news over the next two days could combine with today's news to break the bulls' backs. One theory on today's surge is that end of the month buyers stepped in and brought the Dow back into positive territory. The end-of-month fund statements certainly look better with higher stock prices. Why the market continues to elevate, in spite of disappointing economic reports, seems a mystery. However, valuation may be the name of this game. Goldman Sachs released data showing that they have raised their global equity weighting to 65%, right at the top of their range. The firm noted that global equities were cheap relative to bonds. Goldman reduced their bond holdings from 23% to 20%, which was at the very bottom of their range, and reduced cash holdings from 5% to 7%. "Switching out of bonds into equities at these valuation levels has proved a profitable tactic in the past," said Goldman's Neil Williams. As the market has continued to hold its gains, there has been a noticeable reversal upward of bullish percent figures, which measure the number of stocks in an index that are currently giving buy signals. The Nasdaq 100 bullish percent has reversed from a low of 8% at the beginning of the month to currently show 30% of its stocks giving buy signals. The S&P 500 bullish percent has doubled from a low of 12% to 24% and the Dow bullish percent has more than quintupled from 4% of these stocks giving buy signals to 22%. An interesting note on these percents is that toward the beginning of the month, they were diverging, with the Nasdaq 100 on the way up, while the others continued downward. At this point all three are not only on their way up, but remain in oversold territory. The Dow and S&P are both in bull alert status, while the Nasdaq 100 has been bull confirmed. General Electric certified its financial results ahead of the August 14th reporting period set by the SEC. The company also announced that it would begin expensing employee stock options. This procedure will cost GE $30 million, or less than a penny a share, from its 2002 net income. The cost will increase to about 3 cents a share over the next 3 to 4 years, as the cost is phased in. Investors rewarded GE for the announcement with a gain of $0.60, maintaining its rally of over $9 in the last week. The stock closed today at $32.20. It remains to be seen how many companies expense these options, and whether investors will react positively to a more transparent accounting procedure, or whether the earnings per share cost leads to lower valuations. We have been predicting for some time that companies would be releasing bad news ahead of the August 14 deadline for certifying financial results, and that this information could weigh heavily on the market. While this is still a possibility, we may also see some investor confidence return as more companies begin to certify, therefore reducing anxiety among investors about which company will be next to announce accounting problems. The SEC has made this information available on its website. http://www.sec.gov/rules/extra/ceocfo.htm One sector that did not get an end of day lift was the semiconductors. After yesterday's close, NVDA warned that its earnings and revenue for the just completed quarter would fall well below expectations. They attributed this to weak demand for personal computers, which could spell bad news for many other companies in the sector. The stock was pummeled today, and lost 32% of its value, trading down $5.15 to $11.07. The Semiconductor Index (SOX.X) dropped almost 5% after mounting a comeback the last two days from 52-week lows set just last week. The sector has been turned back from the index level of 350 twice, after it served as support on the way down. There is also a downward sloping trend line developing which looks bearish for the sector, when combined with the bad news that seems to come out of the sector every few days. Last week, Taiwan Semiconductor (TSM) announced they were slashing their budget for the rest of the year. Last night, KLA-Tencor (KLAC) reported earnings that fell 64%, citing languishing demand for semiconductor equipment. A Goldman Sachs upgrade of the semiconductor equipment makers last Friday provided a temporary boost, but the near-term prospects do not look good for this sector. Chart of the SOX This sentiment was reiterated by the Nasdaq Composite, which lost 15.93 on the day to close at 1328.26. AOL/Time Warner confirmed today that the Justice Department has opened a probe into its accounting practices. While the Washington Post first questioned AOL's accounting earlier this month, focusing on transactions that boosted advertising revenue through "unconventional transactions," there has been talk that the probe may now widen. A Merrill Lynch research note by analyst Jessica Cohen stated "we are not 100% sure the investigation is contained purely at the AOL division." As daily appearances before the Senate have become a regular occurrence, investors seem to be moving past these investigations and continuing to buy. While the individual issues are getting beaten up, the overall market has been holding up on decent volume, which passed the 2 billion share level once again today. A month ago, news of any investigation sent the market rolling downhill. Now it doesn't seem to register much more than a blip on the broad market. Verizon said its losses widened in the second quarter and reduced its earnings and revenue outlook for the year. Last week the company asked for help from the Federal Communications Commission in keeping its WorldCom related liabilities in check. Verizon hasn't yet finished calculating what it is owed by WorldCom. IBM announced its intention to purchase the consulting arm of Price Waterhouse for $3.5 billion after yesterday's close. Analysts have viewed this purchase as a strike at rivals Accenture, which is known as a top level IT consulting firm, and Hewlett-Packard, who will no longer have the option of reconsidering its previous decision not to purchase PwC. Another firm that may suffer from this alliance is Electronic Data Systems (EDS), which said it was "frankly surprised it took IBM this long to realize the benefit of - and to begin taking steps to leverage - the combination of consulting, implementation and outsourcing." It appears this move could be of great benefit to Big Blue, although the stock gave up $1.39 to finish the day at $70.40. In an environment with very little to get excited about, it is quite surprising that the Dow and S&P have held up so well. Keep an eye on tomorrow and Friday's data for signs of continued weakness throughout the economy. If we get more bad news, and we fall through the aforementioned levels of support, it could lead to a re-test of July's lows. If we manage to get through this data with continued support, we still need to get through congestion between 8700-8900 in the Dow. If that happens, look for a move over 9000, as has happened the last two times the Dow tested the 7500 level in January 1998 and August 1998. Respect your stops, there is pressure building in both directions, and eventually tug of wars end up with someone in the mud. Stay clean. Steven Price ******************** INDEX TRADER SUMMARY ******************** WHAT BEAR MARKET? by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - I've been commenting on the tendency for the market to more or less "ignore" bearish news. If you think back to a month ago, what would news that - - GDP that was HALF of the expected number for Q2 - there was a major suicide bombing in Israel - there could be dire economic consequences of an Iraq invasion have done to the market? Bombs away! At that time any of those items alone could have generated a lot of selling. My favorite NYSE floor broker and CNBC commentator, Art Cashin, was commenting today on how well "bid" the market has been on dips - with the speculation that there is continued short- covering going on. It is well known that NYSE Short Interest reached record levels coming into this month (July). One factor behind the shorting is the tremendous growth of "hedge funds" in the past two years. As you probably know, the typical mutual fund is UNABLE to short stocks; or, buy puts normally, etc. Private hedge funds that attract money from wealthy investors, are not bound by these niceties - some would say, by these "antiquated" rules. But that's the way it is. Meanwhile, a LOT of hedge fund managers are short up to their eyeballs and there is no way that they suddenly covered all there short positions on the rapid run up into today. It takes them time to unwind - not only that, but it is the CONTINUED firmness of the market that is convincing them that they need to buy the dips to cover and get less short. Then, of course, I didn't mention the Fed's Beige book report which shows only a tepid recovery still. Hey, this is what a bull market is supposed to do - climb a "wall of worry". Do you suppose this is beginning of the end of the bear? You will definitely NOT believe it if you still think that the stock market is a completely rational or logical mechanism that determines "fair value" for stocks on any given month - WRONG! The market has a "logic" of its own, which at times is quite hard to figure - until 6-8 months later, when we see what it (the market) was pointing to or "telling" us. There is a lot more media attention and focus on what the seeming single-minded intent of this administration to invade Iraq, would cost us big time - that's you and I, the taxpayers. The bill from the Iraq war of 11 years ago was about $60 billion, of which 80% was picked up by Japan, Saudi Arabia, Kuwait, etc. However, in today's dollars, we can look forward to paying maybe $80 billion by ourselves. If you recall the recession that followed the huge spike up in oil prices after the first Gulf war and the fragileness of this economy recovery - one question is: Are we being asked to play Russian roulette with the economic consequences of Gulf War II? Actually, I wish we were asked in a referendum or something - having grown tired of the long bear market, I was looking forward to a baby bull in the New Year! UPSIDE OBJECTIVES - Still the same - possible objectives can be calculated to around 9000 in the Dow, the 950 area in SPX, to 473 or higher in the OEX - (480 is the key Sept low that we could "retest"). In Nasdaq, using our most popular trading instrument - QQQ - 26.50 is a possibility, maybe back to 27.00, at the Sept. low, but the Nasdaq is lagging the S&P of course. The Composite (COMPX), Nasdaq 100 (NDX) and the QQQ tracking stocks, are all consolidating UNDER their "pivotal" 21-day moving average. But, they are consolidating, not falling apart. On the hourly charts, all started a strong rally in the final hour. Stay tuned! S&P 100 (OEX) Index - Daily/Hourly charts: The hourly and especially the half hourly (30 min.) chart today looked like OEX had formed a possible Head & Shoulder's top, with a "neckline" drawn through upward through the lows - however, we never got the confirming "break" of that trendline, which is what a neckline is. This may be why you WAIT for the "confirming" break of the neckline before you toast your latest success being short and in puts. I continue to see the key upside target zone to be 465 - 470/472, which is the top of the hourly downtrend channel and the current intersection of the upper envelope lines, respectively. The bears have got the bulls right where they want them - overconfident! - but who is losing money? Stay tuned!! By the way, watch for when the daily stochastic is showing fully overbought - we haven't seen that in a while - not since the last big shoring opportunity. Support is 443-446 and 428 becomes my downside target if there is a break of 443. S&P 500 (SPX) Index - Hourly chart: The bears are in danger of losing control here, with the S&P 500 poised to break out above the hourly downtrend channel (at the red arrow) that the index has been trading in for weeks. If so, we need focus on the prior rally peaks as possible next resistance points - that would be 919, then 934. 926 is the upper trading envelope line that I'm using currently - I don't consider SPX to be getting overly "extended" until it hits this upper band. I have no desire to try to "call" a top - we'll see it when we see it! Again, don't get too "logical" in trying to figure that this market "should not" be going up. Support is at 884 to 891 - below this zone, we're looking at support down in the gap area at 855. A long ways lower now! Dow Index (1/100: $DJX.X) - Daily/Hourly charts: No bust out above DJX resistance yet, but a small push tomorrow will put DJX above its key down trendline on the hourly chart. If so, 90-90.5 looks like an area that might be a next top - I would be a seller in this area to book profits and maybe take go into puts - especially as we get closer to overbought readings on the DAILY stochastic model. I have been guilty of trading while looking in a rear view mirror - don't do it by assuming that hourly overbought readings "signal" an end to the trend like it has before this most recent rally. You have to know when an indicator stops "working" as an automatic given. Or, for that matter know when to throw out a "set" bullish/bearish point of view on the market. The top professional traders I've known always were only interested in trading on the side of a trend - caring little whether the trend direction "fit" their expected market view. Support is at 85.3; then, if exceeded, at 82.8-82.5, the area of the upside chart gap. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: I'm still waiting for that big yellow circle of the upside chart gap to be "filled" by QQQ retreating into this area. By the way, when a stock or index "resists" falling back into an upside gap, it is acting as support. Another example of rigid thinking is to figure that a gap "has to" get filled. The market doesn't have to anything - except confound us at times! However, I think there is an even chance that the Q's get to the 23 area, especially if they don't immediately climb back above near resistance at 24.00. 24.7-25 is "pivotal" resistance, such that a close over 25, suggests that QQQ could see 26.5-27.00 before coming down again in a significant correction. You'll note that the Q's are far from overbought by a look at the Daily stochastic. However, price action is not overly strong, so I continue to think that the stock will come down first before a next significant rally. Time will tell. No trading recommendation in the middle range. For new positions, I'm a buyer at 22.50-23, a seller at 26.5-27 as I wait for a next "extreme" - trading new positions in the middle of a probable trading range is harmful for the health of my trading account! Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Papp Mutual Funds The Papp Mutual Funds is a family of five no-load equity mutual funds, which are characterized by low turnover and a pro-growth investment style. Most growth-oriented funds are characterized by high turnover as growth managers shift assets to the sectors and securities with the best earnings growth prospects. Papp's approach is more long-term natured, focusing on very consistent earnings, dividend and cash flow growth. L. Roy Papp & Associates, LLP, based in Phoenix, Arizona serves as the investment adviser to the Papp Funds. Like other mutual fund advisers, Papp & Associates provides continuous investment supervision and management to the Papp Funds under an agreement advisory agreement. For these services, the adviser receives a management fee equal to 1.00% per year of assets from each fund. The prospectus states that Papp & Associates, LLP has agreed to reimburse each Papp fund to the extent its total annual expense (excluding taxes, interest and extraordinary litigation) during any fiscal year exceeds 1.25%. That's good to know and adds to the appeal of the Papp funds in our opinion (that fund expenses are capped at the annual rate of 1.25% of average daily assets). L. Roy Papp & Associates is also investment advisers to private clients, trusts, retirement plans, endowments, and foundations. As of March 31, 2002, the company had more than $780 million in total assets under management. The Papp Mutual Funds require a $5,000 minimum initial purchase ($1,000 for IRA accounts). There's only one class of shares to consider and they come with no front-end and back-end load fees. The mutual funds have widespread brokerage availability and are available on a no-load no-transaction fee (NTF) basis through a number of leading NTF networks, such as Schwab Retail OneSource NTF, TD Waterhouse NTF, and Fidelity Retail Funds Network - NTF. For more information or a fund prospectus, you can call the Papp Mutual Funds at 1-800-421-4004 or logon to www.roypapp.com. Additional Background L. Roy Papp is a veteran of the money management field - having served in the investment industry since 1955 with the exception of two years when he was U.S. director of and ambassador to the Asian Development Bank, Manila, Philippines. Roy Papp has been sole proprietor of or a partner of L. Roy Papp & Associates LLP and its predecessor since 1978. Rosellen C. Papp, L. Roy's daughter-in-law, is a partner of the firm, and has been the Director of Research since 1981. L. Roy Papp and Rosellen Papp have managed the portfolios of each Papp mutual fund since its inception. L. Roy Papp, founder of the firm, holds an undergraduate degree in Economics from Brown University and an MBA degree in Finance and Banking from the Wharton School, University of Pennsylvania. He joined the investment advisory firm of Stein Roe and Farnham, Chicago, Illinois, in 1955. During his 20 years at Stein Roe, L. Roy Papp rose to the level of senior partner. He was also on the firm's Investment Policy Committee. Roy Papp served on a number of boards and trusts in the Chicago area when he was a resident there. In 1969, he was appointed to the board of directors of Federal National Mortgage Association (FNMA). In 1975, Roy Papp accepted a presidential appointment as the U.S. Director and Ambassador to the Asian Development Bank in Manila, Philippines. Following U.S. Senate confirmation, he served two years in Manila. Returning to the U.S. in 1977, he established his investment advisory firm in Phoenix, Arizona, and served on the board of directors of four NYSE-listed companies. According to L. Roy Papp's biography, he has 41 years experience in the investment management field, and he provides the policy guidance for the firm's 9 additional professional staff members. Rosellen C. Papp is a partner of L. Roy Papp & Associates, LLP, and has been associated with the firm since 1981. She has over 18 years experience in security and financial analysis and is a Certified Financial Analyst (CFA). She is also a member of the International Society of Financial Analysts. Rosellen Papp has a Master of Management degree in Finance from the esteemed Kellogg Graduate School of Management, Northwestern University to compliment her Bachelor of Business Administration degree from the University of Michigan. Investment Style/Strategy As stated earlier, L. Roy Papp & Associates are equity-oriented investors. When buying stock, they look for long-term and very consistent earnings, dividend and cash flow growth. They focus on companies with low debt and uniquely strong market positions, paying an average price for these growth companies. Some would call this a growth-at-a-reasonable (GARP) approach to investing. The underlying rationale for Papp's investment approach is the belief that equities provide a greater long-term rate of return than fixed-income securities and that the return on stocks will exceed inflation; thus, maintaining the purchasing power of the assets available for investment. L. Roy and Rosellen C. Papp don't attempt short-term judgements regarding the direction of the equity markets or interest rates. Rather, they look at long-term trends in the economy or markets, calling changes in their funds "evolutionary." They don't make sudden shifts, suffice to say. Their equity approach is based on the conclusion that enhanced portfolio value is obtained through ownership of above-average companies purchased at prices that don't reflect their superior long-term earnings growth which. In most instances, they favor companies with at least 10 years of consistent earnings growth. The fund co-managers also require a similar history of dividend increases, since dividends are the stockholder's current return they say. Further, they look for companies expected to produce above-average profitability, as measured by return on equity or ROE with such profitability resulting from operating efficiency rather than financial leverage. Cash flows too are examined to ascertain the sustainability of growth. Companies meeting these criteria are eligible for purchase only when their current price relative to the market as a whole does not fully reflect its perceived superiority. Once bought, such shares are ordinarily retained as long as the fund co-managers believe that the prospects for capital appreciation continue to be favorable and that the securities are not greatly overvalued in the marketplace. The website states that the Papp Mutual Funds don't utilize Wall Street research as the background for its buy and sell decisions. Instead, Papp managers independently pursue areas that have been overlooked by the Street or are currently out of favor. Further, the site states that the fund managers do not typically purchase cyclical companies, because they are not willing to make guesses about the overall economy (which they feel increases the risk of error without a corresponding increase in prospective return). While the portfolio's strategies vary, each Papp mutual fund is invested with the objective of long-term capital growth. The 5 mutual funds currently available are the L. Roy Papp Stock Fund (LRPSX), Papp America-Abroad Fund (PAAFX), Papp America-Pacific Rim Fund (PAPRX), Papp Small & Mid-Cap Growth Fund (PAPPX), and Papp Focus Fund (F000GV in Morningstar's system). Papp's Focus Fund has only $2 million in net assets according to Morningstar. Our Favorite Funds Our favorite funds are Papp Small & Mid-Cap Growth Fund (PAPPX) and Papp America-Pacific Rim Fund (PAPRX). Both funds sport a Morningstar 5-star highest overall rating for fund performance, as adjusted for risk, in relation to their respective category. All of Papp's mutual funds are graded by Morningstar as having "below average" risk when compared to their category peers, so it's more a question of the strength of portfolio returns that has driven Morningstar's overall risk-adjusted return ratings. Papp Small & Mid-Cap Growth Fund (PAPPX) has had high returns, with below average risk, relative to other midcap growth funds since inception on December 15, 1998, according to Morningstar. It seeks growth by normally investing at least 65% of assets in stocks and convertibles of small-cap and mid-cap companies (the stocks in the S&P Smallcap 600 index and S&P Midcap 400 Index). Here the fund managers may invest up to 20% of stock assets in foreign companies traded in the United States. According to Morningstar, PAPPX has produced a 8.6% annualized total return over the trailing 3-year period through July 30th, ranking in the top 4% of the mid-cap growth category. The S&P 500 index lost an average of 11% a year during the same period, while the average mid-cap growth fund lost around 8% a year on average, to put Papp's performance into perspective. With its expense ratio capped at 1.25%, the fund enjoys a small expense advantage versus other mid-cap growth offerings. Since it invests in the extended market and limits holdings to around 40 securities, Papp Small & Mid-Cap Fund will likely be more volatile than the average diversified equity fund, but at the same time will likely be less volatile than the mid-growth fund. It's suitable for investors looking to increase (or add) exposure to small-cap and mid-cap growth stocks. In up-market cycles, this area of the market tends to do particularly well. Papp America-Pacific Rim Fund (PAPRX) is another fund we favor, especially if you are looking to add exposure to Asian markets without committing 100% of assets. It usually invests at least 65% of assets in large-cap U.S. companies, 50% or more of whose earnings or sales can be attributed to (or corporate assets are situated in) Pacific Rim countries including the United States. The fund managers may also invest assets so that 15% or more of such U.S. companies' earnings or sales can be attributed to, or assets are situated in, Pacific Rim countries outside the U.S. The fund may invest up to 30% of assets in the common stock of foreign-domiciled companies traded in the form of ADRs (American Depository Receipts). Like other Papp mutual funds, this fund maintains a growth (GARP) style bias, which has produced below average volatility in comparison to its pure growth fund peers. According to Morningstar, PAPRX has an average 5-year return of 0.7% as of July 30, 2002, ranking it in the top quartile of the large-cap growth category. Considering that the average large- growth fund lost an average of 1.9% a year over the same 5-year period, Papp America-Pacific Fund outperformed its large-growth peers by a wide margin using Morningstar's numbers. During the same period, the S&P 500 large-cap index rose by 0.4% a year on average. Because the bulk of fund investments are U.S. companies, PAPRX doesn't offer much diversification to U.S. investors, but those wanting to dip their toes in Pacific Rim waters have a suitable choice here. Summary Papp America-Abroad Fund (PAAFX) is similar to the Papp America- Pacific Fund in that they invest in multinational U.S. companies which derive portions of their earnings from foreign operations. This strategy allows investors to participate in foreign markets without having direct currency exposures (investments are traded in U.S. markets and denominated in U.S. currency). Since the Papp Mutual Funds have very low turnover (10% or less), fund returns may be more volatile than other equity mutual funds. On the other hand, Papp does a good job of tempering some of the risk associated with growth investing by investing only in stock securities at an average price. This GARP-like approach doesn't allow the fund managers to pay up too much for earnings growth. The result is below average risk growth portfolios, which have produced competitive total returns for shareholders. *********** OPTIONS 101 *********** Where Does The Buck Stop? by Mark Phillips mphillips@OptionInvestor.com Today's topic may seem a bit arcane to many of you, as it doesn't deal with any specific trading strategy. It is the outgrowth of a discussion I had with a reader a couple weeks ago, where he was basically asking who was on the other side of a given options transaction. That may seem like a really simplistic question to you, just as it did to me, but I think the process of discovery I went through is worth understanding for any serious options trader. The genesis of my reader's question (we'll call him Phil) had to do with LEAPS (particularly LEAP Puts) on the major indices. I mistakenly assumed that he just wanted to know who was on the other side of the trade to have some sort of assurance that if he bought an index LEAP Put and rode it down to significant gains, that he would be able to harvest those gains. In other words, how do we know that a market will continue to be available for us to sell into in the future? Well, let's just say I had it partially correct. I believe what got Phil started down this path was that he actually took the time to read the myriad disclaimers in the OCC booklet that we all got when we opened an options trading account. Granted there is a lot of legalese in those booklets, but there are a lot of statements in that booklet about the potential for a market to become (at least temporarily) unavailable. We all saw those effects last September, but I digress. Rather than rehashing my conversation with Phil, I thought it would be instructive to take you through the process of discovery, blow by blow. Below you'll find my email discussion with Phil, as it developed, with a few editorial comments thrown in for clarity. Phil With your giving so much advice on LEAPS, you have never explained who are writing LEAPS options? It seems an especially interesting question in the case of index options. For example, many recommend LEAPS puts/calls on market indexes, but no one ever says who is the counterparty or what is its investment strategy? If I were to buy a LEAPS put on QQQ or OEX, I would like to know who is (in theory, i.e., not the name, just the status, etc. of the entity) writing the put I would be buying. Me If you understand the way options can be written, you understand how LEAPS can be written and who can write them. It may be an institution, market maker or another individual trader. As to the reason why they would be willing to write the option, the answer varies from pure speculation to a hedge of an existing position. While the knowledge about the intentions of the party on the other end of the transaction may be interesting, that knowledge is not available, and even if it was, I don't believe it would have a material impact on our trading decisions. It is the same with most transactions in the equity and derivative markets. For instance, when you see a surge of buying in the S&P futures, you don't know if it is the opening of a new long position, closing a short position, or part of a hedged position. As you are about to find out, I completely underestimated the depth of Phil's understanding of these basics, but fortunately he took the time to steer me back on course. Phil Now, I understand the role of the OCC, as to trading of options. However, there is still the matter of the option contract being traded. If it is unknowable just who, or what entity, is writing LEAPS puts, there should still be some trade organization or agency, like the OCC, determining the qualifications or status of the writer of LEAPS options? With mendacity running rampant in the world, as your newsletter loudly decries, would not the bona fides of the option writer have a material impact on your trading decisions? Maybe, a simpler case would bring this out: what happens if the writer of any naked put option cannot buy the underlying asset when it is put at the end of the option term? Surely, a broker would not stand behind it. If the answer is a law suit, then should not the prospects for default by a large option writer, especially of index options, scare the bejesus out of you? I could imagine some industry standard practice such as the requirement for an irrevocable letter of credit from a large money center bank for all options the OCC handles. Might the answer lie in that area? As you can see, Phil is making a very good point. But I've never been the brightest bulb in the chandelier, so it took me a bit longer to really catch on. By the way, for those of you that are still wondering what OCC stands for, it is The Options Clearing Corporation. But more on that in a bit. Back to our discussion. Me Here is my rudimentary explanation of how it works. I don't know if you have ever written naked options, but from my experience, people like you and I can't do it without substantial cash in our account to cover the initial margin. That is the broker's initial insurance. If the position goes against us to too great a degree (and we're too stupid to close the position) we get a margin call, where we have the option to liquidate the position or add cash to the account to keep the position open. It has always been my understanding (although I could be wrong) that anyone that is writing options (market-maker, fund or institution) that they are subject to similar rules. All of the floor traders I have ever talked with have indicated that they strive to never have directional risk, hedging long positions with short positions to control their risk. But I'm not sure that it is a requirement so much as an intelligent way of doing business. I continue to believe that the answer to the question should be the same whether we are talking about indices or individual equities, near-term options or LEAPS. There again, I'll allow that I could be in error. Astute readers will note that I still haven't really answered Phil's underlying question. Sure I've provided some basics as to the mechanisms by which the risks in the option market are controlled, but I still haven't peeled away that last layer of the onion. Fortunately, I managed to figure out what Phil was REALLY after without any further prompting, as you can see from the final installment (below) of our discussion. Me Phil, I found the answer! As it turns out, the OCC is the responsible party for all option transactions in the U.S. They effectively break the link between buyer and seller at the end of each business day and take responsibility for all the risk in all the trades. The OCC is the one responsible for maintaining all the pertinent margin rules of all the involved parties. According to the person I spoke to, the OCC makes sure that all positions for which it is responsible are fully hedged at the end of each day. WOW! Sounds like a lot of work to me, but they must be doing something right, because S&P has given them a AAA credit rating. Sounds pretty good to me! I know I took the long way around to give you this information, but hopefully the journey has left you all with an understanding both of the merits of the question Phil raised, as well as a better understanding of who manages the non-trivial risks inherent to the options market. By the way, if you want to do some further digging yourself, here's the phone number (1-800-678-4667) and website http://www.optionsclearing.com/default.jsp for the OCC. A good place to start is under the "About OCC" link at the left of the page. Put your mouse over that link and you'll get a menu expansion. Then select "Financial Guarantee". That should at least get you started in your exploration of this important organization. Then just let your imagination and curiosity take you on your own process of discovery. Hoping this has been useful! Mark ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 7/31 by Leigh Stevens A lot more red ink today was seen today in the sectors than green - surprising given the way that the S&P and the Dow popped back up from their lows today. Well, sectors tend to reflect particular investment "themes" reflected over the long haul versus some of the shorter-term trading swings of the broad averages. Banks continued to rebound, as did Heath Care, Oils - especially so given the war talk about Iraq as the Senate took up the topic in the Foreign Relations committee - Natural Gas, Drugs and Telecoms. The sectors down on the day were off more than the rebounding sectors were up on a percentage basis. Conclusion: the bear trend in the market may appear to moderating, with a significant short-covering element, but no one is completely sure where to place bullish bets in terms of industries. There is however, a tendency to buy the oversold groups that were doing well before the last big market down leg - gold, being an exception. The Biotech sector index (BTK) and the Biotech HOLDR's are holding up very well, with another small gain today. Proving the point that "'limit' orders 'limit' your profits"! Well, that's what we used to say when I was a stockbroker. My conservative limit order under the market in the Biotech HOLDR's when they started rallying again strong recently, kept me out of what has been a decent trading bounce in biotech. However, the sector index is approaching the top end of its uptrend channel, which may offer tough resistance again. So, is the Pharmaceutical index (DRG) - approaching the top end of its downtrend channel that is. I'll feature these two sectors soon in this column, as there may be a shorting opportunity coming up in the HOLDR's. UP on Wednesday - DOWN (the most) on Wednesday - SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW/OPEN TRADE RECOMMENDATIONS - Long SMH at 27.35 (Semiconductor HOLDR's) Stop at 24.50 Upside potential is back up to the prior recent rally high in the 32 area in my estimation TRADE LIQUIDATIONS - NONE Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Wednesday 07-31-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: BBOX, BAX Dropped Calls: None Dropped Puts: CBE Play of the Day: Call - BAX Big Cap Covered Calls & Naked Puts: Industrial Stocks Lead The Recovery! Updated on the site tonight: Market Watch Market Posture ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** BBOX - put Adjust from $37.75 down to $36.50 BAX - call Adjust from $35.00 up to $38.00 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ CBE $31.14 +1.76 (+3.19 for the week) Cooper Industries has rebounded from its low of $27.14 and managed to break through the $30 resistance line. The stock has made the list of companies that California will not do business with, as it is incorporated offshore. The U.S. Senate also voted on Wednesday to deny defense contracts to such companies, as well. In light of the stock's strength under such scrutiny, and its violation of our stop loss, we are closing this play. ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** BAX – Baxter International $35.89 +1.24 (+4.14 last week) Company Info: 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. Most Recent Write-Up: Relative strength is still the name of the game in this market, and it is interesting to note that a few stocks actually bottomed and began showing bullish signs before yesterday's amazing recovery. Dueling analysts provided plenty of volatility in shares of BAX last Thursday after the company reported an earnings shortfall. Merrill Lynch downgraded the stock and it quickly fell to the $30 level. But UBS went against the grain, upgrading to Strong Buy. That seemed to be the catalyst necessary for a near-term bottom and by Tuesday, BAX was starting to show some bullish divergence from the overall market by posting a gain for the day and dragging the daily Stochastics into a bullish reversal. Yesterday's morning dip hardly caused a ripple in the stock and it then proceeded to rally strongly with the remainder of the market, gaining nearly 10% on the day. Flexing its relative strength muscles again on Thursday, the stock opened at its low and closed at its high, largely ignoring the broad market instability enroute to tacking on more than a 3.5% gain. Based on the intraday action, a dip and bounce from the $34 level would make for a solid entry into the play, as would trading a breakout over the $36 level. The first major obstacle is $38.75, the bottom of the gap from last Thursday. Should BAX reach that level in the near-term, it would be advisable to harvest some near-term gains, as a brief pullback will likely follow. We are initially setting our stop at $32, as a close below that level would indicate that the fledgling rally had failed. Why this is our Play of the Day: Baxter defied the down and up jitters of today's overall market and has been on a slow steady climb all day. Baxter has reached our initial target, and conservative traders may want to take profits here. However, it broke the $40 resistance level, was turned back, and found legs again as it continues its series of higher highs and higher lows. A trade of $40.50 looks like a point for additional long entries, as the stock now looks capable of achieving its 50-dma of $44.63 on a breakout above $40. For new entries at the $40.50 level, we will use a stop loss of $39.00 to balance the risk reward at this higher level. As we look for a new breakout above our target, we are also raising our stop on the initial play to $38.00, below today's low of $38.05. BUY CALL AUG-35*BAX-HG OI=5901 at $5.60 SL=3.00 BUY CALL AUG-40 BAX-HH OI=2636 at $2.10 SL=1.20 BUY CALL SEP-35 BAX-IG OI= 877 at $6.40 SL=3.20 BUY CALL SEP-40 BAX-IH OI= 481 at $3.30 SL=1.80 Average Daily Volume = 3.76 mln ************************************************ BIG-CAP COVERED CALLS, NAKED PUTS & COMBINATIONS ************************************************ Industrial Stocks Lead The Recovery! By Ray Cummins Blue-chip shares rallied late in the session today despite weaker than expected GDP data and discouraging numbers from the Chicago Purchasing Managers Index. The Dow finished 56 points higher at 8,736 after an earlier slump in response to gloomy evidence about the U.S. economic recovery. Topping the list of bullish issues were shares of Alcoa (NYSE:AA), American Express (NYSE:AXP), Johnson & Johnson (NYSE:JNJ), SBC Communications (NYSE:SBC) and Coca-Cola (NYSE:KO). A rebound in technology stocks was limited due to losses in the chip sector and Internet issues struggled as AOL Time Warner (NYSE:AOL) slid lower on news of a government probe into its accounting practices. The NASDAQ Composite closed 15 points lower at 1,328 after a 36 point deficit earlier in the day. The broader Standard & Poor's 500-stock Index finished up 8 points at 911 on strength in drug, oil, banking and consumer shares while brokerage, gold and retail issues continued to slump. Winners edged past losers 16 to 15 on the New York Stock Exchange but declining stocks led advancers 4 to 3 on the NASDAQ. Trading was active with 1.93 billion shares exchanged on the Big Board and 1.62 billion shares trading hands in the technology market. Treasury issues reacted positively to the economic news but bond investors also had to contend with a large refunding package (the government will auction $22 billion in five-year notes and $18 billion in 10-year notes next week). The 10-year Treasury note jumped 1 point to yield 4.46% while the 30-year government bond gained 1 10/32 to yield 5.30%. *************** Summary of Current Open Positions *************** (As of 07-30-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield CBK AUG 35 34.30 35.00 $0.70 5.63% *** EBAY AUG 45 44.15 58.30 $0.85 5.54% LEN AUG 50 49.05 52.51 $0.95 5.20% *** EBAY AUG 50 48.95 58.30 $1.05 7.56% FRX AUG 60 59.20 75.39 $0.80 5.03% IDPH AUG 30 29.40 44.00 $0.60 6.83% QLGC AUG 30 29.20 41.95 $0.80 8.67% CTSH AUG 45 44.00 59.64 $1.00 10.61% EBAY AUG 45 44.20 58.30 $0.80 8.71% ERTS AUG 45 43.90 61.56 $1.10 11.60% IDPH AUG 30 29.35 44.00 $0.65 9.94% QLGC AUG 25 24.65 41.95 $0.35 5.38% SLAB AUG 23 21.80 28.45 $0.70 14.40% UNH AUG 75 74.15 85.35 $0.85 4.97% WLP AUG 65 63.95 70.00 $1.05 6.74% Although our positions in Christopher & Banks (NYSE:CBK) and Lennar (NYSE:LEN) are positive, both plays have been closed to limit losses and/or protect profits. Naked Calls Stock Strike Strike Break Current Gain Potential Symbol Month Price Even Price (Loss) Mo. Yield ABC AUG 75 75.85 69.55 $0.85 4.99% BRL AUG 65 65.75 59.45 $0.75 5.51% DGX AUG 85 86.10 56.83 $1.10 5.35% BZH AUG 75 75.80 65.44 $0.80 6.20% EXPE AUG 70 71.00 50.01 $1.00 7.69% SPW AUG 115 116.45 106.42 $1.45 5.95% *** GD AUG 95 93.75 82.85 $1.25 6.34% LMT AUG 65 66.05 63.17 $1.05 8.05% *** NOC AUG 120 121.10 107.42 $1.10 5.02% Lockheed Martin (NYSE:LMT) and SPX Corp (NYSE:SPW) are on the watch-list for potential (bullish) trend reversals. A move through the sold strike in either position would indicate an early exit or adjustment in their respective positions. Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status TKTX 40.15 38.90 AUG 30 35 0.75 34.25 $0.75 Open TRMS 43.25 47.30 AUG 30 35 0.55 34.45 $0.55 Open Transkaryotic Therapies (NASDAQ:TKTX) has recovered from recent selling pressure but the issue should be monitored closely for future downside activity. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status AGN 58.30 58.55 AUG 70 65 0.60 65.60 $0.60 Open CI 89.83 85.88 AUG 105 100 0.55 100.55 $0.55 Open COF 51.41 29.93 AUG 65 60 0.65 60.65 $0.65 Open UN 60.97 53.50 AUG 70 65 0.80 65.80 $0.80 Open ABC 64.50 69.55 AUG 80 75 0.50 75.50 $0.50 Open BRL 56.45 59.45 AUG 70 65 0.65 65.65 $0.65 Open SLM 86.05 90.01 AUG 100 95 0.60 95.60 $0.60 Open BA 41.19 41.65 AUG 48 45 0.35 45.35 $0.35 Open EASI 42.90 48.45 AUG 55 50 0.45 50.45 $0.45 Open *** Engineered Support Systems (NASDAQ:EASI) has rebounded to a recent trading range near $46-50 and any close above overhead supply near $51 would signal a potential exit in the position. Credit Strangles: Stock Pick Last Position Credit G/L Yield Status ERTS 63.00 61.60 AUG70C/50P 2.75 2.75 18% Open Questions & comments on spreads/combos to Contact Support *************** BULLISH PLAYS - Naked Puts We received some positive comments on last week's selection of premium-selling candidates and with the market showing signs of resilience, it may be a good time to speculate on a few bullish issues. All of these plays are based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit in these plays may also be higher than other positions in the same strategy, based on small disparities in option pricing. However, current news and market sentiment will have an effect on these issues so review each play individually and make your own decision about its outcome. *************** CEPH - Cephalon $48.00 *** On The Rebound! *** Cephalon (NASDAQ:CEPH) is a worldwide biopharmaceutical company dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products are comprised of Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management, and Gabitril, for the treatment of partial seizures associated with epilepsy. The company's quarterly earnings are due August 5. CEPH - Cephalon $48.00 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 35 CQE TG 941 0.30 34.70 5.8% *** SELL PUT AUG 40 CQE TH 2,219 0.65 39.35 10.4% SELL PUT AUG 45 CQE TI 2,842 1.70 43.30 18.1% *************** FRX - Forest Laboratories $77.47 *** Moving On Up! *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Therapeutics and Specialty sales forces. The company's many products include those developed by Forest and those acquired from other pharmaceutical companies and integrated into Forest's marketing and distribution systems. Principal products include Celexa, an SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, a once-daily diltiazem for the treatment of hypertension and angina; and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Laboratories $77.47 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 70 FRX TN 3,362 0.65 69.35 5.1% *** SELL PUT AUG 75 FRX TO 1,581 1.55 73.45 9.8% SELL PUT SEP 65 FRX UM 38 1.25 63.75 3.8% "TS" SELL PUT SEP 70 FRX UN 85 1.90 68.10 4.5% *************** IDPH - IDEC Pharmaceuticals $44.59 *** Recovery In Progress! *** IDEC Pharmaceuticals (NASDAQ:IDPH) is a biopharmaceutical company engaged primarily in the research, development, manufacture and commercialization of targeted therapies for the treatment of many cancer and autoimmune and inflammatory diseases. The company's two primary commercial products, Rituxan and Zevalin (ibritumomab tiuxetan), are for use in the treatment of B-cell non-Hodgkin's lymphomas. The company is also developing new products for the treatment of cancer and various other autoimmune diseases such as rheumatoid arthritis, psoriasis, allergic asthma and allergic rhinitis. Rituxan, the company's first product, and Zevalin, its second product approved for marketing in the United States, as well as its other primary products under development, address immune system disorders such as lymphomas, autoimmune and many inflammatory diseases. In addition, the company has discovered other product candidates through the application of its unique technology platform. IDPH - IDEC Pharmaceuticals $44.59 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 35 IDK TG 1,865 0.30 34.70 6.2% *** SELL PUT AUG 40 IDK TH 2,369 0.75 39.25 10.2% SELL PUT SEP 35 IDK UG 238 1.10 33.90 6.5% *************** IVGN - Invitrogen $34.85 *** A Profitable Quarter! *** Invitrogen (NASDAQ:IVGN) develops, manufactures and markets more than 10,000 products for the life sciences markets. Invitrogen's products are principally research tools in reagent and kit form, biochemicals, sera, media, and other products and services, which the company sells to corporate, academic and government entities. The company focuses its core business on two principal segments, Molecular Biology Products and Cell Culture Products. IVGN - Invitrogen $34.85 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 30 IUV TF 1,336 0.30 29.70 6.1% *** SELL PUT AUG 32.5 IUV TZ 129 0.75 31.75 11.6% SELL PUT SEP 30 IUV UF 60 1.15 28.85 6.7% *************** PLMD - PolyMedica $32.72 *** Bullish Revenue Outlook! *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-user medical products and services, conducting business through its Chronic Care, Professional Products and Consumer Healthcare segments. The company sells diabetes supplies and related products, and provides services to Medicare-eligible seniors suffering from diabetes and related chronic diseases through its Chronic Care segment. Through its Professional Products segment, it provides direct-to-consumer prescription respiratory supplies and services to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease. It also sells, manufactures and distributes a broad line of prescription urological and suppository products. PolyMedica sells prescription oral medications not covered by Medicare to its existing customers through its Professional Products segment. PLMD - PolyMedica $32.72 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 25 PM TE 322 0.20 24.80 5.6% *** SELL PUT AUG 30 PM TF 66 0.95 29.05 16.0% SELL PUT SEP 22.5 PM UX 2,850 0.65 21.85 5.4% *** SELL PUT SEP 25 PM UE 878 1.00 24.00 7.9% *************** TRMS - Trimeris $46.73 *** Aids Drug Has Potential! *** Trimeris (NASDAQ:TRMS) is engaged in the discovery and development of fusion inhibitors, a new class of antiviral drug treatments. Fusion inhibitors impair viral fusion, a complex process by which viruses attach to and penetrate host cells. If a virus cannot enter a host cell, the virus cannot replicate. By inhibiting the fusion process of particular types of viruses, the company's drug candidates under development offer a novel mechanism of action with the potential to treat a variety of medically important viral diseases. Trimeris is a company in the development stages and has invested a significant portion of its time and financial resources in researching T-20, its lead drug candidate, thus is dependent on that product for its overall success. TRMS - Trimeris $46.73 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 40 RQM TH 157 0.55 39.45 8.4% *** SELL PUT SEP 35 RQM UG 59 1.00 34.00 5.8% SELL PUT SEP 40 RQM UH 24 1.65 38.35 7.2% *************** UNH - UnitedHealth $87.66 *** Safe-Haven Sector! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The company's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes UnitedHealthcare and Ovations; Specialized Care Services, and Ingenix. UNH - UnitedHealth $87.66 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 75 UHB TO 452 0.55 74.45 4.6% *** SELL PUT AUG 80 UHB TP 2,429 1.10 78.90 7.3% SELL PUT SEP 70 UHB UN 1,962 1.05 68.95 3.4% "TS" SELL PUT SEP 75 UHB UO 3,411 1.75 73.25 4.3% *************** WLP - WellPoint Health Networks $71.50 *** Entry Point! *** WellPoint Health Networks (NYSE:WLP) is a managed healthcare company. As a result of the recent completion of its merger with RightCHOICE Managed Care, the company has over 12 million members. The company offers a broad spectrum of network-based managed care plans, including preferred provider organizations, and health maintenance organizations, as well as point-of-service and other hybrid plans and traditional indemnity plans. In addition, the company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The company also provides a broad array of specialty and other products, including pharmacy, dental, workers' compensation managed care services, utilization management, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. WLP - WellPoint Health Networks $71.50 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 60 WLP TL 380 0.60 59.40 6.4% *** SELL PUT AUG 65 WLP TM 2,109 1.35 63.65 10.9% SELL PUT SEP 55 WLP UK 78 0.95 54.05 3.7% "TS" SELL PUT SEP 60 WLP UL 242 1.80 58.20 5.7% *************** BULLISH PLAYS - Credit Spreads *************** CTSH - Cognizant Technology $58.52 *** Bullish Trend Intact! *** 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. Despite today's small consolidation, the share price of Cognizant Technology Solutions is firmly entrenched in a solid up-trend and the activity should continue in the coming sessions. The rally began when CTSH 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. CTSH - Cognizant Technology $58.52 PLAY (conservative - bullish/credit spread): BUY PUT AUG-45 UPU-TI OI=116 A=$0.55 SELL PUT AUG-50 UPU-TJ OI=410 B=$0.95 INITIAL NET CREDIT TARGET=$0.50-$0.60 PROFIT(max)=11% *************** BULLISH PLAYS - Synthetic Positions Stocks in the finance sector rallied today as analysts touted the bullish outlook for the industry amid the lowest interest rates in 40 years. Obviously, low borrowing costs generate loans, bringing companies fees but the discounted rate environment has also made it cheaper for financial companies themselves to acquire new funding, thus improving their profit margins. Here are two popular issues in the banking and credit services group that have benefited from recent buying pressure. Traders who believe the bullish activity will continue can speculate on that outcome with these positions. *************** AXP - American Express $35.26 *** Analyst Upgrade! *** American Express (NYSE:AXP) is engaged primarily in the business of providing travel-related services, financial advisory services and international banking services throughout the world. American Express provides charge and credit cards, travelers checks, travel services, financial planning, investment products, insurance and international banking. American Express Travel Related Services Company provides a global card network, issuing and processing services, the American Express Card, the Optima Card, a number of co-brand Cards, other consumer and corporate lending and banking products, a network of automated teller machines, the American Express Travelers Cheque, stored value products, business expense management products and services, corporate and consumer travel products and services, tax, accounting and business consulting services, magazine publishing, merchant transaction processing and point of sale and back office products and services. AXP - American Express $35.26 PLAY (speculative - bullish/synthetic position): BUY CALL SEP-40 AXP-IH OI=32 A=$0.50 SELL PUT SEP-30 AXP-UF OI=605 B=$0.50 INITIAL NET CREDIT TARGET=$0.10-$0.l5 TARGET PROFIT=$0.60-$0.75 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $935 per contract. *************** CCR - Countrywide Credit $50.81 *** Momentum Play! *** Countrywide Credit Industries (NYSE:CCR) is a holding company that originates, purchases, sells and services mortgage loans through its principal subsidiary, Countrywide Home Loans. The company's mortgage loans are principally prime credit first-lien mortgage loans secured by single family residences (prime credit first mortgages). Countrywide Credit also offers home equity loans and sub-prime credit loans. Countrywide, through its other wholly owned subsidiaries, offers products and services that are largely complementary to its mortgage banking business, including primary underwriting of lender-placed mortgage insurance, insurance policy brokerage, mortgage-backed securities brokerage and underwriting, brokerage of bulk servicing transactions, loan processing and also servicing in foreign countries, and retail banking. The company conducts its business through four segments: Insurance Segment, Capital Markets Segment, Global Segment and Banking Segment. CCR - Countrywide Credit $50.81 PLAY (speculative - bullish/synthetic position): BUY CALL SEP-55 CCR-IK OI=100 A=$1.25 SELL PUT SEP-45 CCR-UI OI=134 B=$1.20 INITIAL NET CREDIT TARGET=$0.15-$0.25 TARGET PROFIT=$1.00-$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,575 per contract. *************** BEARISH PLAYS - Naked Calls & Combinations *************** AET - Aetna $43.68 *** Earnings Play! *** Aetna is a health benefits company whose business operations are conducted in the Health Care, Group Insurance and Large Case Pensions segments. The Health Care segment consists of health and dental benefit products including primary health maintenance organization, point-of-service, preferred provider organization and indemnity products, and group insurance products including life, disability and long-term care insurance products. The Group Life Insurance segment consists mainly of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. Large Case Pensions manages a variety of retirement products, including pension and annuity products, that are offered to qualified defined benefit and contribution plans. Shares of health insurers moved higher today in conjunction with optimistic results from some popular companies in the industry. Humana, one of the biggest U.S. managed care companies, posted a 19% rise in second-quarter earnings earlier this week, boosted by strong revenue from higher insurance premiums and increased HMO membership. Many of the major health maintenance organizations have achieved double-digit profit growth for the current quarter and traders are speculating on the results of Aetna's upcoming report. The increased interest has generated robust premiums in the "out-of-the-money" call options and traders who believe the bullish outlook is already "priced-in" to Aetna's share value can profit from that limited upside activity in the issue with this position. AET - Aetna $43.68 PLAY (conservative - bearish/credit spread): BUY CALL AUG-55 AET-HK OI=447 A=$0.15 SELL CALL AUG-50 AET-HJ OI=1613 B=$0.60 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% *************** JCI - Johnson Controls $81.02 *** Technicals Only! *** Johnson Controls (NYSE:JCI) is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems, and batteries. For non-residential facilities, Johnson Controls also provides building control systems and services, energy management and integrated facility management. Johnson Controls conducts its business in two operating segments: Controls Group and Automotive Systems Group. The Controls Group is a global supplier of control systems, services and unique integrated facility management to the non-residential buildings market. The Automotive Systems Group makes automotive interior systems for OEMs (original equipment manufacturers) and automotive batteries for the replacement and original equipment markets. This position was discovered with one of our primary scan/sort techniques; identifying primarily bearish trends on issues with speculative (call) 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. JCI - Johnson Controls $81.02 PLAY (conservative - bearish/credit spread): BUY CALL AUG-90 JCI-HR OI=19 A=$0.20 SELL CALL AUG-85 JCI-HQ OI=59 B=$0.65 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** MARKET POSTURE ************** Ready to breakout, but where? 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