The Option Investor Newsletter Sunday 08-04-2002 Copyright 2002, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment In Section One: Wrap: It’s the Economy Stupid! Index Trader Wrap: DOUBLE DIPPING. Editor’s Plays: Right on Schedule. Market Sentiment: And Finally the Dam Broke. Ask the Analyst: What Do the Charts Say? Coming Events: Earnings, Splits and Economic Reports Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 8-02 WE 7-26 WE 7-19 WE 7-12 DOW 8313.13 + 48.74 8264.39 +245.13 8019.26 -665.27 -694.97 Nasdaq 1247.92 - 14.20 1262.12 - 57.03 1319.15 - 54.35 - 74.86 S&P-100 434.05 + 7.12 426.93 + 3.83 423.10 - 35.81 - 33.75 S&P-500 864.24 + 11.40 852.84 + 5.09 847.75 - 73.64 - 67.64 W5000 8186.56 + 94.93 8091.63 + 8.63 8083.00 -628.50 -601.90 RUT 376.45 - 5.81 382.26 - 3.94 386.20 - 27.08 - 27.64 TRAN 2202.03 - 52.76 2254.79 - 77.39 2332.18 -147.96 -172.50 VIX 45.39 + 4.95 40.44 - 3.01 43.45 + 5.12 + 8.12 VXN 65.44 - 3.58 69.02 + 7.85 61.17 - 4.83 + 9.72 TRIN 1.47 1.21 1.44 0.89 Put/Call 0.93 0.70 1.14 0.64 ***************************************************************** It’s the Economy Stupid! by Jim Brown The Dow climbed back above 8300 at the close and managed to retain some of its gains for the week. The strength came in the techs at the close with the QQQ trading huge blocks as bulls/bears battled over direction. The Dow may have finished positive for the week but not without a black eye and bloody nose. The trend changed as blow after economic blow rained down on the markets. Chart of the Dow Chart of the Nasdaq Two dips please and I am not talking chocolate. That is the growing consensus of opinion after the barrage of bad economics reports this week. The Jobs Report was just another piece of the puzzle and it appears that the picture is turning ugly. The economy only created +6,000 jobs in July and that was far below estimates of 68,000-75,000 depending on who you asked. This was just a squeak above losing jobs and as some point out only a "revision" away from recessionary. Critical indications of weakness included a drop in the manufacturing work week, overtime hours and the average workweek. Without growth in these areas employers will not need to hire additional workers and a continued drop will prompt more layoffs. The unemployment rate remained at 5.9% as more unemployed workers dropped off the unemployment rolls after exhausting benefits while others simply got tired of looking and stayed home or retired early. The aggregate weekly hours, which is a proxy for GDP growth, declined by -0.6% with the largest decline since October. Construction lost the most jobs with a -30,000 cut as construction spending fell as we saw earlier in the week. Employers kept their checkbooks shut tight as worries about slower orders kept a lid on hiring. With hours worked and take home wages dropping the consumer is not likely going to be a big spender over the next quarter. The Factory Orders dropped in June by -2.4% which was the worst drop in the last seven months. Last months numbers were also revised down. With the economy apparently hitting a wall in July the trend here is very troubling. With the consumer going into hibernation it will require more business investment to jump start new orders and without sales it will not happen. Al this dire economic news has led to multiple projections of a dramatic Fed move in our future. Goldman cut their estimates of 2002 GDP to 2.0% from 2.5% and lowered 2003 as well. They projected a Fed rate cut of another 75 basis points between now and year end. This would be unprecedented in recent history and would put the Fed funds rate at 1.00%. This would prompt an entirely new round of refinancing and new home loans and make saving practically worthless. With money market accounts earning interest below the inflation rate consumers would be prodded to spend or invest the money instead of let is sit. The hope would be to stimulate another wave of consumers withdrawing equity from real estate and seeing that money begin to circulate instead of being tied up in property. There is a real move in progress to drastically cut rates and increase government spending to avoid a Japanese style deflation spiral. In a report that was glossed over in the media, semiconductor billings dropped for the first time in three months. The drop was only -0.2% but in a time when orders are supposed to be increasing the drop was troubling. Manufacturers have been plagued with order cancellations and delays as a lack of economic recovery delays plans to build inventory. Since computers account for about half of all chips made the slowing PC sales will continue to impact the actual delivery of current orders. You can order anything you want as long as you don't have to take delivery until you are ready. This puts a squeeze on manufacturers who want to use the slack time to build orders but not if those orders may be delayed or cancelled indefinitely. The SOX.X broke to a new low under 300 intraday. Adding to the cautious comments from Disney with their earnings on Thursday was the Four Seasons hotel chain. They said they were seeing no pickup in U.S. business travel and no pickup in global lodging. Hilton, Marriott and Starwood all posted lower lodging rates this week as well. There was some pre-Sept 9/11 anniversary worries. It appears nobody wants to be traveling anywhere around the anniversary of the attack. Whether the risk is real or imagined it could seriously hamper the fragile recovery if consumers and business travelers are already blacking out their calendars for that period. The already troubled travel/transportation industry took another hit when UAL disclosed they had contracted a bankruptcy attorney and would be in serious financial trouble if they could not get a Federal loan guarantee for nearly $2 billion. Stock news on Friday was basically a rehash of the weeks highlights. AOL disclosed on Friday that the SEC had broadened their probe of their accounting problems and were now looking at past dealings and acquisitions. AOL closed at $10.40 with a loss of -.71. Cisco traded down another 50 cents near 11.50 after more disclosures were made about the future resignation of the CFO. In an effort to blunt the selling the company said the CEO/CFO were planning to certify the financials but not with the current quarter. They would certify beginning in October. This brought increased selling as investors feared they would be flushing huge problems through this quarter to clean house. They also expect CSCO to report weak sales and flat guidance and possibly miss earnings. There is a fear that they will be pushed into expensing stock options along with the building tide to do so. Cisco currently has a PE of 23 based on 2003 estimated earnings but throwing options into the mix would push that forward PE to a whopping 39. Cisco announces earnings on Tuesday after the close and will be a drag on the tech sector until they do. Somebody is not very confident in our rally potential. They accumulated a 50,000 contract position in the Oct-80 DJX puts at around $5 today. This is a huge $25 million bet that the Dow will be below 8000 by expiration in October. This bet could just be that it will drop below 8000 sometime soon or at anytime between now and October 18th. I could not find any offsetting strikes so it does not appear to be a spread. Those contracts traded as high as $7 as recently as last week when the Dow dropped to 7532. A drop to retest those lows would be very profitable and with the negative sentiment from this week the odds are good we will see numbers lower than that before October. There is also the possibility this is a portfolio protection play where an institution/fund with hundreds of millions in market exposure is hedging their long bets. Probably Jeff Bailey expanding his trading horizons! (grin) The buyer above is not the only one who expects the market to drop. Morgan Stanley went on record as saying the economy was "on the brink" of a double dip. This puts current high valuations for stocks into question and suggests further market dips over the next quarter. Lipper said the value of U.S, equity funds dropped -9.3% in July and investor unrest was growing. AMG Data and TrimTabs.com were strangely silent on Friday and neither released any numbers for the week. Both indicated that the month of July accounted for something in the -$50 billion net outflow category. This was the worst monthly outflow ever. With the very negative economic news the odds of record withdrawals next week are good. There was a strong move to close the Dow over last Friday's close. A positive result for the week would be less damaging to investor sentiment and could convince some that the rebound was still underway. They fought it hard with huge block orders being triggered when the Dow dipped below the 8264 level. They were successful and while the Dow finished -193 for the day it was up +48 for the week. This fact will be highlighted in all the weekly news recaps for weekend consumption. Will it be successful in slowing the markets fall? We will not know until this time next week. The big money could be funds trying to stem withdrawals or defend portfolios already in danger of further losses. The Nasdaq was the weakest member of the group and despite block trades in million share lots in the QQQ they could not push it back over 1250 and it closed the week with a -14 point loss. The drop on Friday was on much lighter volume than the gains earlier in the week. The NYSE only traded 1.5 billion shares and the Nasdaq 1.4 billion. While this is small consolation to those that lost money on Friday it does mean there was no real conviction in the drop. That conviction could increase next week. The VIX has rebounded from its low of 33.35 on Monday to a high of 48.97 on Friday before falling back to close at 45.39. Many of the past VIX extremes were followed by repeats over the next 7-12 days. If this is going to repeat then next week could see another reading in the 50+ range. This spike could be matched with another drop in the major averages back to the Dow 7500 range again. I am not predicting it just suggesting the road map has been laid out in front of us with the various economic reports. We entered the week thinking that the recession had been very weak and lasting only one quarter and the recovery was well underway. It had been prompted in part by the 9/11 attacks. We exited the week knowing that the recession had lasted three quarters and was well under way before the attacks. We learned that the economy hit a wall in July and the current 3Q was not looking any better and could be the start of the feared double dip. Employment down, consumer spending down, business spending at a standstill, travel down and expectations down. This turn of events gave bullish investors a case of indigestion but they continued to try and buy the dips. This is exactly what prompted many analysts to predict lower lows ahead due to the lack of capitulation that many had thought was at hand. Buying in the face of bad news has long been seen as a prudent investor strategy. Buy stocks when nobody else wants them. This is not to be confused with the strategy of buying every bear market rally until you are broke. The +1200 point bounce between last week's lows and this week's highs was too good to be true. It was begging for some profit taking regardless of the economic news. The -430 point loss over the last two days equates to about one third of that bounce. The vigorous buying at Friday's close was due to shorts covering and bulls anticipating a rebound after a 30% retracement. I am amazed that anyone could buy anything except to cover on a Friday after the news week we had. Especially with the odds of several financial certifications blowing up over the next two weeks. Still, that is what makes a market. Bulls see the glass half full of a wine aged to perfection and bears see the same glass half empty of sour grape juice. Next week could see a positive follow though on Monday as bulls try to press their bets. They will be pinning their hopes on the non-manufacturing ISM report on Monday in hopes that it will show something entirely different than this weeks report. With Cisco earnings on Tuesday any positive news on Monday will be met with caution the next day. Wednesday has Wholesale Inventories, Thursday PPI and Friday Productivity. I would not be surprised to see that higher VIX number next week as economic worries hit home and the consumer hibernation process spreads to investments until the outlook is better. Even in good years August and September are not kind to investors and this year is not shaping up any better. The Dow just posted its first consecutive four month loss in 20 years. The Nasdaq has lost ground for 6 of the last 7 months. The yield on the two year note fell below 2% on Friday for the first time ever. Are we having fun yet? The "Guess the Dow" contest was won by Tom Million with a guess of 8311.10. He wins a high end dual monitor video card to aid in his trading. The average of all guesses, which ranged from 9999 to 6750, was 8291. This was only 20 points away from where the Dow closed! We could be on to something here! Maybe we can predict the Dow and trade accordingly based on the consensus of several thousand readers. (joke) Let's see how this week plays out. The contest has been reactivated and you can now enter your guess for the Dow close on Friday August 9th. We we will give you a dual monitor video card if you are the winner. Click here: http://www.OptionInvestor.com/game/dowtarget.asp Enter Very Passively, Exit Very Aggressively! Jim Brown Editor Was this commentary helpful to you? comments@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** DOUBLE DIPPING by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Focus in the last two days of last week, from employment data (only 6000 new jobs!), factory orders, GDP, purchasing managers, etc. now has the market abuzz with the idea the market - not the economists - has been "showing" us all along that the economy will be weaker in the second half. The market focuses on earnings that is the lens it uses into the economy, and it saw noting to get bullish about. Art Cashin said it best on Friday: first investors found that they couldn't trust the CEO's and the company numbers, then it found that it couldn't trust the auditors and finally, last week it found that it couldn't trust the government numbers either! GDP for last year had a big downward revision - what's to say that that the anemic Q2 GDP is not going to end up as a negative number?!! Certainly, almost no big company is saying that they are getting new orders such that would it cause them to hire even one more new warm body. On Friday, talk from Goldman, was that the Fed may (be forced to) cut interest rates later this year to boost economic growth. Meanwhile the new "talking head" mantra was "double dip", as in double dip recession or more the consensus, a double dip slow down. This is not a double dip ice cream cone. Tired of the bear market?! - sorry, no rest for the weary. Market volatility shot up again at week's end - BIG TIME! I got a note from someone asking me whether the CBOE Volatility Index ($VIX.X) in the past has been well above 100 and wouldn't it take a reading of say 90, to suggest this market has bottomed? I went back and checked historical VIX peak levels - The highest VIX reading was during the week of the 1987 crash - on that Monday. I remember it well - I was at the CBOE that day and I will never forget the palpable fear & panic that was in the air. That day VIX shot up to a peak of 152; "black Monday". The next day, VIX briefly went higher, to 172. At the end of that October week the volatility index went out at 98; the following week VIX closed at 61. However, SINCE 1987, the highest VIX peaks have been in the 50-60 range, not generally higher than about 55/57 (where we got to recently) - this was once in 89, once again in 1997 and 2-3 weeks in 1998; then, of course, in Sept. 2001 and again recently per the chart below. Mark Phillips sent me an interesting thought on this VIX peak in 1987, versus what we've seen since then: "I was aware that the VIX had hit levels in excess of 100 back in ’87, but I had assumed that those comparisons were invalid due to the fact that we now have the curbs/circuit breakers in place at the NYSE... Also, do you have any thoughts on the validity of the VIX calculation from ’87 vs. now due to the broader participation in the options markets? My gut feel is that it’s a bit like comparing apples to oranges....." Of course, volatility is now controlled to some extent! - AFTER 1987, when they put the NYSE program trading "circuit breakers" in effect and the VIX never hit levels above 100 again. Its peaks since then, as I noted earlier, have been in the 50-60 range. Do we now go back up the recent extremes in terms of volatility? Chart of the VIX (daily) Well if these were stock or index charts, I would say of the top one that it had a strong reversal and rebound from the area of its up trendline, suggesting that it was still in an uptrend and could now well challenge its prior high in the 57 area. My crystal ball doesn't suggest whether there will be a break out to a NEW high. Based on the past pattern of the VIX - once it has peaked above 50-55, there has not usually been a higher high. The structure of the pattern also suggests that this may be the last spike up. VIX could make a "double top" or go a bit higher even, but it'll likely come down after that. The CBOE Nasdaq 100 volatility index (VXN) is an interesting technical study also. It has rebounded to back above the uptrend it was in the week before last. It could challenge the highs made at its double top peak in the 71 area and maybe even register a bit higher. Stay tuned. A double top is often a pretty good sign that the highs are in already. It appears to me looking a at the key Nasdaq big cap stocks, that the Nasdaq has reached an area of some stability. S&P 500 (SPX) Index - WEEKLY/Hourly charts: Well we got a good rebound from the low end of the weekly downtrend channel two weeks ago, but that doesn't mean that SPX is headed right back to the upper end of it. SPX, with a weekly high at 885, couldn't even get back up to the last downswing low at 945. The index did fill it's upside hourly chart gap however at the low at 854. If there is bullish potential now in this market, this is the area from which SPX should rally. Next week is one important week - maybe with the government on holiday, we can escape any more of their "help" and the market may stabilize. Maybe its time for me to go on vacation and let the market soldier on without me! Support levels are 835-836, then the 820 area. Key resistance is at 885. S&P 100 (OEX) Index - Daily/Hourly charts: On a break of 443, my downside target was 427-428 and OEX got to 428.4 on Friday and rallied a bit off that low. Interestingly, the S&P 100 has not "filled in" its upside gap from last week, which would occur with a dip to 427 - it's not a big deal, but its little things like this that can be telling. Certainly, this market as we saw at the top, is not falling apart like it used to. The shorts are making out still, but they are having a wait a little longer to take smaller profits - and, if long puts, they are rewarded even less with the fat premiums with the VIX so high. Time will tell - OEX may yet retrace more of its last upswing, such as to 422, a 50% retracement and around the level of my lower envelope band. I suggest covering some shorts/long puts in this area, if reached. However, I would like to see the daily stochastic get down to a more neutral reading or oversold again before I suggest its time to buy calls again. 445-447 is overhead resistance - especially significant as the low end of a 2-day trading range. I highly doubt that we get through this area in the next 1-2 trading sessions. Dow Industrials (INDU)/Dow Index ($DJX.X) - WKLY/Hourly charts: The Industrials reversed right at its weekly chart down trendline. While the action is disappointing to the "public" perception of this market in terms of not holding much of last week's rally, the Dow is WELL off its lows AND the DJIA managed to close plus on the week which gives us two weeks in a row. What is significant about this is that it reverses the pattern that has been going on for weeks of successively lower weekly closes. DJX got down to support around 82.30 at the top end of the last consolidation at the mid point of last week's rally and looked like it was trying to rally from there. This is maybe a faint encouragement to the bullish case. The market is starting to find areas where somebody is buying stocks - and/or not pressing the short side so much. DJX hasn't even retraced half of its last advance - this would occur at 81.30. If DJX gets into the 81-81.30 area I'm a buyer as long as it’s a "dip" not a falling "knife". Another scenario - DJX goes no lower than Friday, setting up a potential Head & Shoulder's bottom. Stay tuned! Nasdaq 100 Index (NDX) WEEKLY/Hourly charts: Someone wrote me about including a look at the actual index once in a while as the there is less distortion due to buying/selling as there is in QQQ tracking stock. It is interesting to go to the "source" occasionally, so here it is - The thing I'm always struck by when I review the weekly chart is the well-defined down trendline - some would say the RELENTLESS downtrend. "Random walk" proponents would say that its just coincidence that this market turns down every time it "touches" its long-term down trendline. Some "coincidence"! From a trading perspective, what is of some interest is the upturn in the final hour AFTER the NDX had trended sideways for the afternoon on Friday right in the area of its prior lows. I think its time to cover shorts and look to buy the Nasdaq 100 - Of course, the index call premiums get very pricey in this high volatility environment - the Q's aren't too bad. Good time to sell puts too. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: We certainly more than filled the upside chart gap last week - sailed right through there! I got a few mails Friday about whether I would be a buyer in the 22 area. I was taking a wait and see attitude. Certainly, it looks like time to cover shorts and sell puts that you are long. However, am still a bit cautious with Intel and Cisco still looking so weak. Also, there can be tendency for a lift on short-covering and then a retest of lows one or more times. Nevertheless, further downside risk doesn't look huge - buying in the 22 area could be done with stop protection under the prior intraday low, maybe giving that some "room" by setting stop/exit points at 21.30. Resistance is now 22.75 - 23.10 at last week's gap - what was support "becomes" resistance. No Nasdaq bellwether, including Cisco, made a new closing low. The S&P may stabilize if there is no horrible news over the weekend and that will help Nasdaq too. Leading the way may be ORCL, which is holding it's up trendline nicely. I was looking to buy again at 9.00 - of course it got to 9.05 and reversed. 9.00 was too "obvious" and you got to be smarter than that to catch these trading stocks at their lows. 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 ************** Right on Schedule I am not going to recap the entire editors play scenario from the last two weeks again. Those of you who were in it know what happened and I will give a brief summary for those who were just observing. On the QQQ calls from two weeks ago they hit $1.50 again and our cost basis was $1.02. They did not do as well as we would have hoped due to the Nasdaq's failure to follow the Dow to stardom. The indexes made some major moves but the QQQ only retraced its steps to $24.69 before rolling over. This was still a successful play with low risk. The DJX play started off badly with a huge opening spike on Monday. The call opened at $2.80 instead of the $2.15 estimated which would have required slightly more capital on the insurance side. Chart of the DJX (30 minute interval) However the Puts were also significantly cheaper beginning at $1.75 instead of the $2.50 budgeted. This is how you would have been filled on the puts: qty 5 @ $83.00 (DOW 8300) $1.75 total invested $ 875 avg $1.75 qty 5 @ $83.50 (DOW 8350) $1.75 total invested $1750 avg $1.75 qty 5 @ $84.00 (DOW 8400) $1.75 total invested $2625 avg $1.75 qty 5 @ $84.50 (DOW 8450) $1.75 total invested $3475 avg $1.75 qty 5 @ $85.00 (DOW 8500) $1.50 total invested $4225 avg $1.69 qty 5 @ $85.50 (DOW 8550) $1.40 total invested $4925 avg $1.64 qty 10@ $86.00 (DOW 8600) $1.10 total invested $6025 avg $1.50 The spike open on Monday reduced the acquisition cost by -$950 over the estimates from last Sunday. Cost of calls @ $2.80 = $5600 + puts @ $6025 = $11,625 The calls were worth $4.50 ($9,000) at the top and there was plenty of time to sell them if that was your plan. That would have reduced your total investment to $2,625 or $65 per contract. The puts traded as high as $2.65 on Friday and closed at $2.00. Had you sold at the close your net profit would have been $5,375. (assuming you sold the calls when the market rolled over) Assuming you kept the calls as insurance until they triggered your stop loss at your entry price as suggested then they would have closed for no gain/loss on Thursday afternoon. You would be long 40 contracts of the Aug-82 puts at an average cost of $1.50 and they closed at $2.00. You would have a good chance of a further Dow drop next week and can set a stop loss on the position and get out at worst for a breakeven and at best with $4.00 puts like they were the prior week if the Dow retraces below 8000. $4.00 puts = $16,000 - $6025 cost or $9975 in profit. (As always, I am not claiming that anybody made this exact trade or could have achieved these exact fills. The prices quoted were the average price for the period when the trigger point was hit. This is an example of how it should have gone if the orders had been entered prior to the open on Monday.) I know many of you were caught off guard by the open and didn't know what to do and actually ended up not buying the insurance and simply bought the puts a cheaper prices than quoted above since you waited for a couple hours to see if it would stick. One person apologized for being late in the trade and bought most of the puts beginning on Monday afternoon and Tuesday for as low as $.75 cents. They sold them on Friday at 3:25 for $2.50. You can do the math. I wonder if they will be disappointed if they go to $5.00 next week? (grin) NEVER GO BROKE TAKING A PROFIT! *************************** New Play *************************** I wish I had something sexy to write for you this weekend. Unfortunately I only have one market view and that is a possible bounce at the open on Monday and then down again. The move up will not be dramatic enough (in my opinion) to launch a complicated play. The move down could be serious but it could take all week instead of a single major move. (emphasize could in both instances) I don't see a big Dow spike on Monday since resistance is scattered liberally above us. My best game plan is to target shoot some DJX puts on any bounce and ride them back down. It is not fancy but has the best chance for profit. Here is my best shot today. We will stage into a 30 contract position of the AUG $80 DJX puts by using three trigger points. Buy 10 @ DJX 83.50 est $1.40 Buy 10 @ DJX 82.25 est $1.60 Buy 10 @ DJX 81.00 est $2.00 Sell all 30 @ DJX $79.00 est $3.00 Chart of the DJX (30 minute interval) If we get a bounce the first set of contracts will be cheap due to premium decay and the Dow going in our favor at the time. The next set at 82.25 is just below the end of day support on the Dow on Friday. If that level breaks then we could see free fall to 81.25. Those contracts will be fairly valued. The third set at 81.00 are just icing on the cake. If we get a break below 81.00 then the first support is in the 78.75 range. This is where we could see an oversold bounce and why I want to close the trade at 79.00. Since the last set of contracts will go from OTM to ITM very quickly they should gain value quickly. Since options premiums are highest at the money we want to target our close very close to the money. If I estimated correctly the average cost will be somewhere in the $1.30-$1.50 range and the exit should be somewhere around $3.00. That looks like a double in my book. Of course as we have seen recently nothing ever goes according to plan. If the Dow does not bounce on Monday to 83.50 then your first order should be for 20 contracts at 82.25. Or, you can buy 10 a little higher, wherever you feel comfortable. ********************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown Was this article helpful to you? comments@OptionInvestor.com **************** MARKET SENTIMENT **************** And Finally the Dam Broke. by Steven Price The third day in a row of disappointing news seems to have finally broken the bulls. The unemployment rate remained unchanged in July, adding 6,000 new jobs. The expectation, however, was for between 60,000 and 68,000 new jobs to be added for the month. Factory orders were down 2.4%, versus expectations of a 1.7% decrease, which is the biggest drop in seven months. Total hours worked in the economy fell by 0.6%, reaching the lowest level in three years. The average workweek was 34 hours, which I'm sure makes everyone a little jealous (those with jobs and those without). A couple of less talked about statistics, which usually hold up in an improving economy, are overtime hours and temporary jobs, which both fell. The good news is in the June statistics, which showed personal income up 0.6%, more than the expected 0.4%, and the biggest gain since July 2000. Personal expenditures were up 0.5% and disposable personal income was also up, by 0.7%. Consumer spending was up 0.5%, just under expectations of 0.6%. Consumer spending, which accounts for two-thirds of the economy, may not be able to sustain growth, however, as hours worked go down and unemployment holds steady. This combination of the third day in a row of disappointing economic numbers drove the Dow down over 300 points intraday, and through support levels of 8500 and 8400. An end of day rally brought the Dow back to finish at 8313.13, down 193.49. After this week's earlier rally, investors appeared to be in a hurry to take profits, rather than wait to see if the Dow retests its recent lows in the 7500 range. While this double dip may provide evidence of a real bottom, if we rebound again, no investor wants to be around for the ride down. The interesting thing about the precipitous drops of the last two days are that, despite the feeling that the Dow has gone into the tank, we finished the week higher by 48.74. While this week's rally did not hold, last week's is still safe. At least until Monday morning. In late 1997, from October through the following January, the market reached into the 7400s, before rebounding to a level over 9000. It then double dipped back into the 7500s the following August, before beginning its rise to 11,500. So there is precedent for the double dip theory in this range. The semiconductor sector continues to drop, this time after a warning from National Semiconductor (NSM) last night, stating that revenues will remain flat in the fourth quarter due to weak demand in the personal computer market. NSM joined a host of other companies that supply the PC market and have lowered guidance due to weak demand. The Semiconductor Index (SOX.X) reached its third 52-week low in the last three days. This showed up in the Nasdaq Composite, which looks headed back to 1200. The Nasdaq rolled down from its 21-dma of 1346 on Wednesday. it traded as high as 1354.48, before giving up over 100 points from that level, in two days, to finish the week at 1247.92. However, as noted earlier with the Dow, it finished very close to where it began the week, off just 15 points. Disney reported a 7% decline in earnings and warned of worse conditions ahead. While the entertainment giant met earnings expectations, poor theme park attendance led to a corporate credit downgrade by Standard & Poor's. Disney's 9% drop to $15.31 weighed on other travel and leisure stocks as well. Next week may produce a "dead cat bounce" from Thursday's and Friday's sell-off. However, it is hard to imagine a continued rebound in the overall markets after the amount of disappointing economic news this week. A shrinking economy is not good news for stocks, and although the bulls were able to forge ahead earlier in the week, eventually the bad news overwhelmed. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8313 Moving Averages: (Simple) 10-dma: 8307 50-dma: 9125 200-dma: 9769 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 864 Moving Averages: (Simple) 10-dma: 861 50-dma: 967 200-dma: 1082 Nasdaq-100 ($NDX) 52-week High: 1766 52-week Low : 869 Current : 892 Moving Averages: (Simple) 10-dma: 931 50-dma: 1057 200-dma: 1366 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): This section of the newsletter has been dominated lately by news of the semiconductor index. While there are many other sectors worth reporting on, there has been a steady stream of news emanating from these companies which weighs on the overall market. As the tech sector led the bull market of the 90s, it has led the bear market of the last couple of years. National Semiconductor (NSM) issued a warning on Thursday, a month before its quarter ends, stating that it now expects sales to be flat for the quarter. It had previously predicted sales would rise 6%-8%. It blamed its lack of sales on weak order rates for personal computers, as other PC related chip companies have done in recent weeks. This led the SOX to another 52-week low. The index broke its 300 level of support, trading as low as 295.20, before rallying late to finish back over 300. Until there is good news from someone in the sector, we can expect to see this index continue its steady decline. If the tech sector continues to lead the overall market, this does not foreshadow a recovery anytime soon. 52-week High: 657 52-week Low : 301 Current : 301 Moving Averages: (Simple) 10-dma: 331 50-dma: 398 200-dma: 505 ----------------------------------------------------------------- Market Volatility The Market Volatility Index spiked back close to 50 intraday, reaching a high of 48.97. The drop in the Dow and S&P once again triggered a surge in premium, however the end of day rally brought it down a few points. There were also most likely sellers looking to capitalize on weekend time decay, selling options on Friday afternoon. As premiums increase, time decay does as well, so the bet some traders make is that the movement of the market on Monday will not be so great as to overwhelm the premium decay they gain over three days on short options. CBOE Market Volatility Index (VIX) = 45.39 +3.90 Nasdaq-100 Volatility Index (VXN) = 65.44 +5.09 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.93 561,537 524,267 Equity Only 0.67 436,492 294,358 OEX 1.27 36,024 45,741 QQQ 0.44 53,626 23,703 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 30 + 0 Bull Correction NASDAQ-100 28 - 3 Bull Confirmed DOW 20 - 3 Bull Alert S&P 500 26 - 2 Bull Alert S&P 100 25 - 2 Bull Alert 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 1.21 10-Day Arms Index 1.22 21-Day Arms Index 1.27 55-Day Arms Index 1.36 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 839 2289 NASDAQ 911 2236 New Highs New Lows NYSE 19 106 NASDAQ 61 218 Volume (in millions) NYSE 1,811 NASDAQ 1,405 ----------------------------------------------------------------- Commitments Of Traders Report: 07/30/02 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 added significantly to their long positions. While contracts were added on both sides, 25,000 were added to the longs, while only 11,000 were added to the short side. Small Traders reduced both positions, however reduced long positions by an additional 6,000 contracts. 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%) 07/30/02 430,833 482,957 (52,124) (5.7%) 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% 07/30/02 153,858 67,451 86,407 39.0% 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 4,000 short contracts to their positions, while adding only 1,000 long contracts. Small Traders reduced short positions by 2,000 contracts, while adding less than 500 to their long contracts, for a 2,000 long contract increase overall. 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%) 07/30/02 38,163 47,343 (9,180) (10.7%) 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% 07/30/02 13,159 9,237 3,922 17.5% 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 kept their long positions approximately the same, while reducing their short positions by almost 2,000 contracts. Small Traders reduced both long and short positions dramatically. They reduced their long position by 2400 contracts and short position by almost 4,000 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% 07/30/02 22,429 12,811 9,618 27.3% 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%) 07/30/02 6,778 8,999 (2,221) (14.1%) 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 ************************************************************** *************** ASK THE ANALYST *************** What Do the Charts Say? By James If you listen to the media these days, television, magazines, the Internet... all of them have been flooded with opinions regarding the future of the housing sector. Many proclaim that real estate is the last great bastion of strength and wealth for the consumer and how Americans are turning to their homes instead of their portfolios for wealth creation. Others cry out that this is a yet another bubble just waiting to burst upon unsuspecting investors who might be getting in at the top. I bet a few of you are probably wondering who's right and who's wrong. Unfortunately, the purpose of this article is not to argue the pro's and con's of the great housing bubble debate but I will touch on a few of the more popular thoughts on the subject. Investors who follow the industry already know that many of the widely followed companies posted very strong earnings and offer positive enthusiasm going forward. That's a positive. There aren't many companies now offering enthusiastic guidance going forward so score one for the bulls. However, this last week's construction spending report showed that residential spending had posted its third monthly decline, which might lead some investors to believe that America is slowly running out of its available cash to purchase that next new home. Let's not forget that the mortgage refinancing tide has started to ebb because most people who could refinance already have despite rates being at historic lows. What do you think fueled the massive 4Q and 1Q GDP rebound? It wasn't defense spending. Consider our current situation. If the economy is poised on the brink of a double dip recession, the average worker is probably thinking about self and job preservation not buying a bigger and better house. I'm not sure how many points to award for these ideas in this game but it looks like a score for the bears. Yet optimists will point to new speculation that the FOMC could lower rates again. As of this Friday, some analysts are speculating that the Fed could lower interest rates by another 75 basis points to 1%. Could this spark yet another round of home refinancing and new home constructions? If it comes to pass this could be another score for the bulls but let's hope consumer sentiment isn't destroyed with another quarter or two of massive layoffs, which could seriously put the brakes on consumer spending. Here's another thought on investor psychology. The average home- construction stock is still up over 40% from its September 2001 lows. If the stock markets continue to fall, how many investors will decide to take that money off the table before evaporates due to broader market weakness? I propose we see what the charts are telling us. First, we're going to look at the DJUSHB (Dow Jones U.S. Home Construction Index) and then we're going to compare a couple of similar home building stocks. The point-and-figure charts in this article were created using www.stockcharts.com For future articles Please send your questions and suggestions to: Contact Support ----------------------------------------------------------------- First we're going to look at a daily chart of the DJUSHB with the 200-dma. The housing sector had truly been an area of strength since the Dow Industrials topped out and began to slide in March of this year. The DJUSHB didn't give in to the selling frenzy until July 8th or so when the drop in the Dow began to pick up speed. The risk at this point definitely appears to be weighted towards the bulls with the construction index under both the 300 mark and the 50% retracement level. Will the 250 area hold the sector from further selling? Chart of the DJUSHB (daily with 200-dma) Just for kicks I threw up a chart of the DJUSHB on a weekly time frame. While the broader markets have been weak and the technology sector has been dying these last two years, the home construction sector has jumped from the 125 level to almost 400 during the same period. Again it looks like the 260 to 250 level might be the area to watch should the group continue to see selling. Chart of the DJUSHB (weekly scale) Whether you believe the home-builders are over-valued or under- valued it's not a stretch to see that the sector could still see additional profit taking. If you're bullish then you'll want to keep an eye for where the group builds support for its next leg up and if you're bearish you're probably looking for your next entry point. Since you can't trade options on the DJUSHB I've arbitrarily picked two homebuilders near the top of the list as far as market cap. They aren't the biggest but they both sport a market cap just over $1 billion, both enjoy a P/E close to 6.7 and both have about 27 million shares outstanding. I know technical traders don't care but those fundamental guys and gals might want to know. Besides, if the group continues to slide, those P/E's will just keep looking better and better. The two stocks are Ryland Group Inc (NYSE:RYL) and M D C Holdings (NYSE:MDC). I chose these two because a quick glance would show that they trade in very similar patterns. Which one, if any, would make a good trade for investors looking to capture a move in the sector? Let's check out weekly charts for each to give us a long-term perspective. Shares of RYL have had an incredible run up from January of 2000 lows near $7.75 up to almost the $60 level several weeks ago. If you had bought the stock in 2000 or 2001, where would your stop loss be? Chart of RYL (weekly interval) The chart of MDC looks pretty similar to RYL's. Shares have performed pretty well the last two years and longer-term shareholders might not want to suffer another dip similar to what occurred in the summer of 2001. Chart of MDC (weekly interval) Checking out the Daily charts for RYL and MDC also yield some interesting observations. Both RYL and MDC had a very tradeable ascending channel, which lasted from last fall through May of this year. When the channel broke, buyers stepped in to buy the dip but selling pressure by shorts or bulls not wanting to lose their profits from the ride up become to great. Fortunately for chart readers, both stocks tended to trade between psychological round-numbers for support and resistance. Check out the daily charts below for RYL and MDC. Do you notice the big drop in July, which occurred while the broader markets were in free fall and the Dow was plummeting? Did the fundamentals for RYL and MDC change during those three weeks? The answer is no. Fear in the markets had these stocks falling fast and they produced an oversold bounce just like everyone else. It is interesting to see that both have closed below what could have been potential support at the $40 mark and both are below their 200-dma. Chart of RYL (daily interval) Chart of MDC (daily interval) All right, we've looked at previous strength for both stocks and how they have traded closely together as their sector saw buyers. We've seen the breakdown, the oversold bounce at support and new weakness. Will the weakness continue and how can we gauge risk? To do this I've decided to apply a retracement tool to both charts just to see what has developed. Using the lows from September to the average high in May on RYL's chart we see that the selling stopped or buyers defended the stock at the 61.8% retracement, which happens to coincide closely with the $35 area. The drop under $40 looks bad and traders are ignoring the 50% retracement level. Aggressive traders could attempt bearish strategies now but they may encounter support again at the 61.8% level. More conservative traders might want to wait for RYL to drop below the 61.8% level (or the current relative low) before attempting bearish strategies. Using the retracement tool, one could attempt to target a move to the congestion under the $30 mark but it may be smarter to just take profits as shares approach $30, which could develop as more psychological support. Chart of RYL (retracement tool) You'll probably notice a difference in MDC's chart now. I've "fitted" the retracement tool - a trick that Jeff Bailey is known for. Instead of using the absolute lows and highs for the range I'm attempting to analyze I've adjusted the retracement tool to align the most number of support and resistance points to give it more credence. Now we see the 19.1% and 38.2% levels lining up but MDC has not yet hit its 61.8% retracement. Even if I had used the lows from September the 61.8% level would be even lower than it is now, which might indicate some relative strength in shares of MDC. With MDC now under $40 and the 50% level it looks like longs have risk to the 61.8% level, but remember the previous chart is still showing support (the current relative low) near $37.50. Chart of MDC (retracement tool) That's all fine and dandy but one thing we've learned is that the sector rotation caused by mutual funds shifting money from one group to another is a powerful event. A lot of "smart money" use supply and demand charts or point-and-figure charts to gauge their risk. Let's look at some PnF charts of RYL and MDC and maybe we can come up with a better picture that's not clouded by all the short-term support and resistance levels we see on the daily charts. The RYL point-and-figure chart was showing a bearish vertical count of $29.00 in early July. The same trend broke the bullish support line but the strong rebound produced a new buy signal killing the previous bear target. Now the stock has reversed again and is currently pointing to a bearish target of $28 but this could grow worse as RYL is still in a column of O's. Chart of RYL (point-and-figure) Moving on to MDC's PnF chart we finally see some stronger differences between the two equities. The supply and demand chart for MDC is showing that the stock was a long stronger up until July where the Dow Jones Industrials began their free fall. Chart readers already knew this since the MDC daily chart showed the rally back to its highs (the double top) while RYL was already experiencing profit taking. Looking at the PnF chart for MDC it now appears that the relative strength we saw on the retracement chart above may not be what it seems. RYL has a bearish target to $28 or 25% below current levels. MDC is showing a bearish vertical count to $23 or 40% below current levels. That would take it back towards its September lows. Obviously we don't expect MDC or RYL to trade straight to their bearish targets but it does give one a slightly better idea on which one might see more profit taking should the markets continue to fall. Chart of MDC (point-and-figure) While we've done a lot of the homework traders might do before initiating a bearish trade we're not done. If one was considering it, you should scan the news for any events that might influence the stock price. Next one should check out the options for each stock. Option volume for MDC is rather low and some traders might experience better fills or feel a bit more comfortable trading RYL due to the increased volume. Now remember, before you send me any emails about how I'm wrong about the housing sector and that there is no housing bubble and this is just an entry point to go long, this whole exercise was compare two similar home-builders and see what the charts are telling us. Believe me, I've already heard the argument that the selling in this group is just overdone and when the markets even out they'll shoot back to their former glory, etc. We'll be more than happy to consider some bullish strategies if the market will give us some positive entry points to go long. More often that not trading what you believe can be a lot more expensive than trading what you see. The one maxim that can be hardest to accept is this - the market is always right. Was this article beneficial to you? Let us know: comments@OptionInvestor.com ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ATH Anthem, Inc. Mon, Aug 05 Before the Bell 0.98 AIV Aptmt Invstmnt Mngmnt Mon, Aug 05 -----N/A----- 1.27 CEPH Cephalon Mon, Aug 05 After the Bell 0.21 CHD Church & Dwight Mon, Aug 05 Before the Bell 0.36 CUZ Cousins Properties Mon, Aug 05 After the Bell 0.54 CHD Church & Dwight Mon, Aug 05 Before the Bell 0.36 CUZ Cousins Properties Mon, Aug 05 After the Bell 0.54 IN Infonet Mon, Aug 05 After the Bell -0.01 MET MetLife Inc. Mon, Aug 05 After the Bell 0.64 OKE Oneok Mon, Aug 05 After the Bell 0.22 PRE PartnerRe Mon, Aug 05 After the Bell 1.38 PPS Post Properties Mon, Aug 05 After the Bell 0.64 PG Prctr & Gmble Company Mon, Aug 05 -----N/A----- 0.74 STO Statoil ASA Mon, Aug 05 Before the Bell N/A TLTOB Tele2 AB Mon, Aug 05 Before the Bell N/A TP TPG NV Mon, Aug 05 Before the Bell 0.29 TGH Trigon Healthcare Mon, Aug 05 Before the Bell 1.19 ------------------------- TUESDAY ------------------------------ ASX Adv. Semi. Eng. Tue, Aug 06 -----N/A----- 0.01 ACF AmeriCredit Tue, Aug 06 After the Bell 1.05 AMH AmerUs Group Tue, Aug 06 After the Bell 0.89 BOX BOC Group PLC Tue, Aug 06 -----N/A----- N/A CAH Cardinal Health Tue, Aug 06 Before the Bell 0.73 CSCO Cisco Systems Tue, Aug 06 After the Bell 0.12 EIX Edison International Tue, Aug 06 Before the Bell 0.39 EDMC Education Management Tue, Aug 06 Before the Bell 0.16 ETM Entercom Comm Tue, Aug 06 Before the Bell 0.35 EXPD Expeditors Intl WA Tue, Aug 06 Before the Bell 0.22 HSIC Henry Schein Tue, Aug 06 Before the Bell 0.59 HTG Hrtge Prprty Inv Trust Tue, Aug 06 After the Bell 0.64 HSP Hispanic Bradcstng Co Tue, Aug 06 Before the Bell 0.11 MXIM Maxim Integrated Pro Tue, Aug 06 After the Bell 0.21 MNY MONY Group Tue, Aug 06 Before the Bell 0.26 NVO Novo-Nordisk Tue, Aug 06 -----N/A----- N/A OMC Omnicom Group Tue, Aug 06 Before the Bell 1.00 PCO Premcor U.S.A. Tue, Aug 06 -----N/A----- -0.28 PRU Prudential Fncl, Inc. Tue, Aug 06 After the Bell 0.52 RA Reckson Ass Realty Tue, Aug 06 After the Bell 0.61 RYAAY Ryanair Holdings Tue, Aug 06 Before the Bell 0.23 SHU Shurgard Storage Tue, Aug 06 After the Bell 0.76 IPG The Interpublic Group Tue, Aug 06 After the Bell 0.39 TMPW TMP Worldwide Tue, Aug 06 After the Bell 0.14 UNM UnumProvident Tue, Aug 06 After the Bell 0.63 HLTH WebMD Tue, Aug 06 After the Bell 0.03 ----------------------- WEDNESDAY ----------------------------- AOC AON Corporation Wed, Aug 07 Before the Bell 0.50 ARI Arden Realty Wed, Aug 07 -----N/A----- 0.70 AVT Avnet Wed, Aug 07 After the Bell 0.00 BHP BHP Billiton Ltd Wed, Aug 07 -----N/A----- 0.02 EAT Brinker International Wed, Aug 07 Before the Bell 0.49 ETH Ethan Allen Interiors Wed, Aug 07 Before the Bell 0.60 FST Forest Oil Wed, Aug 07 After the Bell 0.17 HRC Healthsouth Wed, Aug 07 Before the Bell 0.28 HIW Highwoods Properties Wed, Aug 07 After the Bell 0.91 JS Jefferson Smurfit Grp Wed, Aug 07 Before the Bell 0.28 KCIN KPMG Consulting Wed, Aug 07 Before the Bell 0.15 LAMR Lamar Advertising Wed, Aug 07 After the Bell 0.00 MGA Magna International Wed, Aug 07 -----N/A----- 1.83 MME Mid Atlantic Mdcl Serv Wed, Aug 07 After the Bell 0.39 NBG Nat Bank of Greece Wed, Aug 07 Before the Bell N/A NEM Newmont Mining Wed, Aug 07 -----N/A----- 0.14 PB Pan American Beverages Wed, Aug 07 -----N/A----- 0.22 RL Polo Ralph Lauren Wed, Aug 07 Before the Bell 0.06 PFG Principal Finl Grp Wed, Aug 07 Before the Bell 0.53 PDLI Protein Design Wed, Aug 07 After the Bell -0.01 REG Regency Centers Corp Wed, Aug 07 After the Bell 0.69 SYT Syngenta AG Wed, Aug 07 Before the Bell N/A UVN Univision Comm Wed, Aug 07 After the Bell 0.10 WPI Watson Pharmaceutical Wed, Aug 07 -----N/A----- 0.39 WFMI Whole Foods Market Wed, Aug 07 -----N/A----- 0.34 ------------------------- THURSDAY ----------------------------- ABN ABN Amro Holdings Thu, Aug 08 -----N/A----- N/A AEG AEGON N.V. Thu, Aug 08 -----N/A----- 0.23 ATK Alliant Techsystems Thu, Aug 08 Before the Bell 0.70 ILA Aquila, Inc Thu, Aug 08 Before the Bell 0.18 ASN Archstone-Smith Trust Thu, Aug 08 Before the Bell 0.53 BF BASF Thu, Aug 08 -----N/A----- N/A BIO Bio-Rad Laboratories A Thu, Aug 08 -----N/A----- 0.64 CVC Cablevision Systems Thu, Aug 08 Before the Bell -1.09 FUN Cedar Fair LP Thu, Aug 08 After the Bell 0.18 CNA CNA Financial Corp Thu, Aug 08 Before the Bell 0.50 CXR Cox Radio Thu, Aug 08 Before the Bell 0.16 DF Dean Foods Company Thu, Aug 08 Before the Bell 0.68 EP El Paso Corp. Thu, Aug 08 -----N/A----- 0.42 ENL Elsevier NV ADS Thu, Aug 08 -----N/A----- N/A ELX Emulex Thu, Aug 08 -----N/A----- 0.16 EVC Entravisions Comm Corp Thu, Aug 08 After the Bell 0.01 HCC HCC Insurance Holdings Thu, Aug 08 After the Bell 0.42 HEW Hewitt Associates Inc. Thu, Aug 08 Before the Bell 0.29 HB Hillenbrand Industries Thu, Aug 08 Before the Bell 0.72 HEW Hewitt Associates Inc. Thu, Aug 08 Before the Bell 0.29 HB Hillenbrand Industries Thu, Aug 08 Before the Bell 0.72 NXL New Pln Excl Rlty Trst Thu, Aug 08 -----N/A----- 0.47 PIXR Pixar Thu, Aug 08 After the Bell 0.11 Q Qwest Communications Thu, Aug 08 -----N/A----- -0.07 RUK Reed Elsevier NV/Plc. Thu, Aug 08 -----N/A----- N/A RSA Ryl Sun Alnce Ins Grp Thu, Aug 08 Before the Bell N/A NZT Tele Corp New Zlnd Ltd Thu, Aug 08 After the Bell N/A PNX The Phoenix Companies Thu, Aug 08 Before the Bell -0.08 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable FVB First Virginia Banks 3:2 08/09 08/12 WSBK Wilshire State Bank 2:1 08/15 08/16 SSD Simpson Manufacturing 2:1 08/16 08/19 -------------------------- Economic Reports This Week -------------------------- The U.S. economy has come to the front of all investor's minds. Keeping a close eye on economics is a must for all traders who wish to limit their exposure to possible potholes in the current market. ============================================================== -For- Monday, 08/05/02 ---------------- ISM Services (DM) Jul Forecast: 57.0 Previous: 57.2 Tuesday, 08/06/02 ----------------- None Wednesday, 08/07/02 ------------------- Export Prices ex-ag.(BB)Jul Forecast: N/A Previous: -0.1% Import Prices ex-oil(BB)Jul Forecast: N/A Previous: 0.1% Wholesale Invntories(DM)Jun Forecast: 0.2% Previous: 0.1% Consumer Credit (AB) Jun Forecast: $8.0B Previous: $9.5B Thursday, 08/08/02 ------------------ Initial Claims (BB) 08/03 Forecast: N/A Previous: 387K PPI (BB) Jul Forecast: 0.1% Previous: 0.1% Core PPI (BB) Jul Forecast: 0.0% Previous: 0.2% Friday, 08/09/02 ---------------- Productivity-Prel (BB) Q2 Forecast: 2.3% Previous: 8.4% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 08-04-2002 Sunday 2 of 5 In Section Two: Index Trader GamePlans: THE SECTOR BEAT - 08/04/02 Daily Results Call Play of the Day: TXN - looking for a bounce Put Play of the Day: BBOX - still falling Dropped Calls: none Dropped Puts: MMM ************************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 - 8/4 by Leigh Stevens The sectors that were rallying into the middle of last week, retreated from that point, along with the market. The Biotech Index (BTK) had been the standout performer, but also reached the top end of its downtrend channel of the past few months. This is suggesting an exit in the Biotech HOLDR's (BBH) - the charts are highlighted below. The Bank Index (BKX) fell sharply by week's end - this had been a standout sector on the market rebound, but is still up sharply from its low at 604 (weekly close: 716.8). Speaking of retreats, where are all the analysts that were "touting" the small cap indices as a market refuge, now that they are acting like everything else and heading south? I thought I would revisit the charts of the S&P 600 Small Cap and the Russell 2000 iShares, also featured below. The Home Builder's Index (DJUSHB) has given back nearly all of its gains from the recent rally - indications of economic weakness and speculation about when the housing "bubble" is going to burst may be weighing on this group. The Forest Products sector (FPP) also fell sharply by week's end but has given back more like half of its rebound. Of course the Western fires are busy burning up a lot of supply! Gold stocks (XAU) continue to rebound toward my recovery objective in the 65 area. In a switch, the Healthcare Index (HMO) has not held its recent gains as much as the Health Providers (RXH), but the later retreated all the way back to its March low, whereas the HMO group did not, reversing at support implied by its 200-day moving average. Last but not least, the Semiconductor sector (SOX) continued to fall from midweek on, retreating further from its Sept. low at 344, briefly falling under the psychologically important 300 level (to 295), before rebounding to 301.4. The Chip HOLDR's (SMH) have not fallen as far below their Sept. low, but far enough to stop out a long position I had suggested. Sometimes you be on the wrong horse - I was bullish on Biotech but didn't get filled on my price before the sector rebound, but got "stuck" in the Semiconductor HOLDR's for a loss. Thank goodness for stops however. I would have lost my "shirt" had I stayed long in the Small Cap iShares, which I tried buying once well above where the S&P 600 small cap group is currently! UP on Friday - DOWN on Friday - SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW/OPEN TRADE RECOMMENDATIONS - NONE TRADE LIQUIDATIONS - Sold SMH at 24.50 sell stop, bought at 27.35 (Semiconductor HOLDR's) SECTOR HIGHLIGHT(S) - 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 Chart of the BTK.X (daily) The BTK index has reached to top end of its multimonth downtrend channel, which will likely be a stopping or reversal point for its first leg up. At this juncture, shorting further BBH HOLDR's rallies up toward its upper channel line should have a good risk to reward. Stops can be placed just above the down trendline which intersects at 85 currently. Downside potential is to 300 in the Index and to 73 in the BBH UPDATE: 8/4 S&P 600 Small Cap Index ($SML.X) The sharp reversal at the first trendline resistance shows the weakness of the rebound so far. A retest of the low may suggest buying, but not before. Conversely, a close above 75.00 would suggest a minor bullish breakout for a move to 80-81 only. Small is definitely not beautiful in this market! - the bear savages all!! Russell 2000 Index ($RUT.X) A close above 82 is needed to suggest that the Russell 2000 iShares was reversing its steep decline. The RUT fell under its Sept. low before seeing an oversold rebound and will likely do so again. Semiconductor Sector Index ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX Chart of the SOX (daily) How low do we go?! Perhaps to 290, the low end of the downtrend channel may be the worst we'll see for a while. I may attempt buying the HOLDR's again if 290 was seen on the SOX, or in SMH to 21-22, risking to 20, looking for a rally to 27 - a trade not a hold! Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week BAX 38.24 2.32 -0.66 1.67 -1.73 0.26 Holding ADP 36.20 1.40 0.22 -0.04 -0.98 0.35 Relative Strength LTR 45.81 2.14 0.45 -0.23 -0.63 0.61 Premium Increase MMM 119.87 5.81 -1.17 0.34 -3.70 -1.83 Drop, Market Casualty MSFT 44.41 2.90 -0.15 -0.15 -2.28 -2.44 Scooped at end TXN 19.97 0.15 0.45 -0.10 -1.89 -3.38 New, oversold PUTS BBOX 33.26 -0.02 -2.19 -1.02 0.39 -3.94 Still going JPM 23.85 1.77 -0.21 0.07 0.06 -0.52 Bad news DD 39.09 1.85 -1.85 -0.14 -0.38 -0.53 Gave in CCMP 38.21 -2.45 -1.34 -0.60 -2.48 -1.06 Rolling over DHR 58.96 3.07 -0.06 -0.45 -1.93 -1.16 Room to Drop KLAC 37.08 1.06 1.93 0.06 -2.11 -0.77 Short Circuit BBBY 27.99 1.69 -0.03 -1.31 -1.92 -3.82 New, Red Sale ************************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: ********************* TXN See details in play list Put Play of the Day: ******************** BBOX 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 ^^^^^ none PUTS ^^^^ MMM $119.87 -2.26 (-0.98 for the week) This stock found support above our stop of $118.50, rebounding after its intraday low of 117.89, to close just under $120. While our faith in the ability of the 200-dma of $118.57 to support this stock has been validated, our overall faith in the Dow is not as strong. This stock is the most heavily weighted Dow component, and with the recent stream of bad economic reports the last few days, a dead cat bounce may be all the Dow has left in the short term. Although this stock reached as high as $127.55, the weight of the overall market may be too much to overcome for this conglomerate. We are closing this play and will look for our next opportunity. Use a bounce in the overall market as an opportunity to exit open positions, however we will be closing it regardless of direction. *********** 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 08-04-2002 Sunday 3 of 5 In Section Three: New Calls: TXN Current Calls: ADP, BAX, LTR, MSFT New Puts: BBBY, SNE ************************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 ************** TXN $19.97 -1.14 (-2.37 for the week) Company Summary: Texas Instruments Incorporated provides innovative DSP and analog technologies to meet our customers' real world signal processing requirements. In addition to Semiconductor, the company's businesses include Sensors & Controls, and Educational & Productivity Solutions. TI is headquartered in Dallas, Texas, and has manufacturing, design or sales operations in more than 25 countries. Why We Like It: Texas Instruments has been unfairly persecuted, as it falls into the family of semiconductor chip stocks. After the market's overreaching effort to throw the baby out with the bathwater, this baby should have the ability to crawl back out of the trash can when investors realize what its business is all about. The Semiconductor Index (SOX.X) has been beaten severely in the last few weeks. It reached successive 52-week lows the last three days, after a failed rebound on Monday and Tuesday. The constant warnings about lack of PC demand, along with budget slashing by Taiwan Semiconductor (TSM), the world's largest chip foundry, have been like the smell of campground food to the bears in the tech sector. As a semiconductor stock, and part of the SOX, TXN was punished with the rest of the group. The difference for TXN is that their primary end users are not PCs. This is a company with strong fundamentals, whose chips find their way into telephones, toasters, and automobiles. Demand for PCs is not the same as demand for video and medical imaging, or security card readers. On July 22, the company released second quarter earnings, which doubled from the year before. While other semis have had only bad news on earnings day, TXN's CFO said "We think TI has been growing faster than our markets. We're gaining in DSP and analog, and we think we'll continue to do that." The company anticipates third quarter sales growth of 5%, driven by calculator sales during the back to school season. Semiconductor sales rose 6% in the second quarter, on wireless sales that surged 62% from the year before. This was mostly from sales of digital signal processors, which rose 41%. A semiconductor company with rising sales? Sounds too good to be true. We aren't saying the overall market for semiconductors is raging, as it is not. TXN, however, seems well positioned to watch its business grow, rather than shrink along with its brethren. For this reason, we feel this stock is oversold and ready for a rebound. Traders will want to be conscious of the September low of $20.10, through which this stock fell today. This could provide some resistance, and a trade above this level should be used as a trigger to go long. We are placing our stop loss at $18.50, below today's low of $19.10, as a trade in the low $18 range would be evidence of the bears' ability to maintain selling pressure. After all, we are concerned about making money in the short-term on this play, not being right in the end. BUY CALL AUG-17.5 TXN-HS OI= 1040 at $3.00 SL=2.00 BUY CALL AUG-20.0 TXN-HD OI= 741 at $1.35 SL=0.75 BUY CALL SEP-17.5 TXN-IS OI= 95 at $3.70 SL=2.00 BUY CALL SEP-20.0 TXN-HC OI= 2193 at $2.25 SL=1.25 Average Daily Volume = 10.7 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 ****************** ADP - Automatic Data Processing $36.20 (+0.49 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: While the broad markets are continuing to oscillate in volatile fashion, those pockets of relative strength are starting to bubble to the surface. ADP is one such pocket of strength, and after a couple of days of profit taking, it began flexing its muscles on Friday. Sure it ended the day with an 11-cent loss, but in light of the beating seen in the broad market, it was truly impressive. Another encouraging point is the fact that the stock managed to end the week with a gain, albeit a fractional one. After topping out last week near the $38 level, the bears used the 20-dma to pressure the stock lower, but then the bulls stepped in to support ADP near the $35.75 level, also the site of the 10-dma. Actual support resides a bit lower, near $35.25, and a rebound from that level would set us up for another attractive entry into the play. Remember that we have our stop set at $35, so clearly a close below that level would bring our play to an end. ADP needs to clear the $38 level if this rally is going to grow legs and challenge meaningful resistance near $40. Traders looking to enter on strength will want to wait for a volume-backed move through the $38 level before playing. Use a move to the $40-41 level as an opportunity to harvest gains. *** August contracts expire in 2 weeks *** BUY CALL AUG-35*ADP-HG OI=2263 at $2.20 SL=1.00 BUY CALL AUG-37 ADP-HU OI= 682 at $0.80 SL=0.25 BUY CALL SEP-35 ADP-IG OI= 144 at $3.30 SL=1.75 BUY CALL SEP-37 ADP-IU OI=1049 at $1.95 SL=1.00 BUY CALL SEP-40 ADP-IH OI=1227 at $1.10 SL=0.50 Average Daily Volume = 2.76 mln --- BAX - Baxter International $38.24 (+1.66 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: Relative strength is still the name of the game and apparently this attribute is returning to the Pharmaceutical index (DRG.X). On Friday, the DRG index was one of the few sectors to end in the green, which is impressive in light of another triple-digit loss on the DOW. Not only that, but the sector actually finished with a 4.6% gain for the week. Shares of BAX benefited from this movement early in the week, briefly cresting the $40 level on Wednesday, before succumbing to some profit taking. While the stock couldn't manage much of a rebound late in the week, it is notable that it held the $38 support level and even managed a slight gain on Friday. If the broad market (and especially the DRG index) can build on Friday's late-day rebound next week, then new entries look attractive near current levels. Risk is easy to manage in the play, as we have our stop set at $38. Traders looking to enter on strength will want to see BAX clear the $40.25 level before initiating new positions. *** August contracts expire in 2 weeks *** BUY CALL AUG-35*BAX-HG OI=6985 at $4.20 SL=2.50 BUY CALL AUG-40 BAX-HH OI=2872 at $1.30 SL=0.75 BUY CALL SEP-35 BAX-IG OI= 901 at $5.10 SL=3.00 BUY CALL SEP-40 BAX-IH OI= 622 at $2.45 SL=1.25 Average Daily Volume = 3.91 mln --- LTR - Loews Corp. $45.81 (+0.73 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: The persistent selling in the broad market finally took its toll on our LTR play on Friday, pressuring the stock back under the $46 intraday support level that had been holding over the past few days. Despite that technical victory for the bears, the stock is holding onto the lion's share of its gains after bottoming near $41. With the broad market looking like it wanted to bounce at the end of the day on Friday, we could be looking at an attractive entry point near current levels. It was interesting to note that LTR really didn't sell off in the afternoon with the rest of the market, indicating that there is some internal strength that wants to make its presence known. A renewal of the bullish action we saw off the lows could easily propel shares of LTR back up to near-term resistance at $48 and then up toward more significant resistance at $50. Use strength in the broad market as an indication to initiate new positions as LTR pushes back up through the $4 level. Those looking for some confirmation before playing may want to wait for a volume-backed move through the $48 resistance level before playing. Remember, LTR is set to report its earnings on August 8th, and that could provide an additional catalyst over the next week. Keep stops in place at $45. *** August contracts expire in 2 weeks *** BUY CALL AUG-45*LTR-HI OI=153 at $1.95 SL=1.00 BUY CALL AUG-50 LTR-HJ OI=223 at $0.20 SL=0.00 BUY CALL SEP-45 LTR-II OI= 2 at $3.20 SL=1.50 BUY CALL SEP-50 LTR-IJ OI=256 at $1.05 SL=0.50 Average Daily Volume = 573 K --- MSFT $44.41 -1.34 (-1.25 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: We lowered our stop on Microsoft last night to $44, where it showed amazing strength this afternoon. As a Dow component, this stock fell with the rest of the market, but finally found some legs late in the day. The bears attempted to force MSFT downward, but the stock formed an intraday double bottom, from which it bounced in the last hour of trading. Expect any bounce in the Dow to be led by a company with good fundamentals, boatloads of cash, an expanding business, and unrivaled market share. While it has been a rough couple of days for Microsoft, this company still has a lot of upside. It has dropped to within the middle of its flag formation from last week, the same point from which it exploded to almost $49. This show of support has been impressive on a down day for both the stock and the market. While reports of weakness in the PC market have affected many of the semiconductor stocks, Microsoft's implementation of their new licensing agreement will help derive ongoing income from software users, regardless of new PC purchases. Combined with their recent alliance with AT&T Wireless to provide wireless services to business customers, and expansion into the CRM field, the company continues to find new customers, rather than relying on previous business models. We will target $49 on the upside, while maintaining our $44 stop loss. The strength shown at this level should continue to act as a barometer for this play. If the bulls that currently see value at this level eventually give in on a continued market drop, we will close the play and wait for another opportunity to play this stock. While we believe in MSFT's future profit potential, we are concerned with the short-term trend. BUY CALL AUG-42.50 MQF-HV OI= 5363 at $3.30 SL=1.75 BUY CALL AUG-45.00 MQF-HI OI=15105 at $1.85 SL=1.00 BUY CALL SEP-42.50 MQF-IV OI= 1170 at $4.80 SL=2.40 BUY CALL SEP-45.00 MQF-II OI= 8860 at $3.40 SL=1.75 Average Daily Volume = 41.7 mln ************* NEW PUT PLAYS ************* BBBY - Bed Bath & Beyond $27.92 (-3.33 last week) Company Summary: Bed Bath & Beyond is an operator of stores selling predominantly better quality domestics merchandise and home furnishings typically found in better department stores. As of May, 2002, the company had stores in 44 states. Domestics merchandise includes bed linens and related items, bath items and kitchen textiles. Home Furnishings include kitchen and tabletop items, fine tabletop and giftware, basic housewares and general home furnishings. Why We Like It: Despite an impressive start to the week, Retail stocks lost a lot of their lustre as the week drew to a close. After rebounding as high as the $290 level in the middle of the week, the Retail index (RLX.X) really fell apart, not only losing all their intra-week gains, but also falling into negative territory on Friday. This is in contrast to the DOW, which actually managed to end the week with a gain. WMT is the poster child for the Retail sector, and even it was unable to close the week in the green. So with that bearish picture to start with, we are bringing shares of BBBY back onto the put list this weekend. As badly as the RLX performed, BBBY actually did worse by giving back even more ground and closing at its lowest level since early November of last year. One of the things that makes the play so attractive, is that it still has plenty of room to fall before testing its September lows down below $20. The PnF chimes in with its bearish voice after today's breakdown, as it puts the stock back on a fresh sell signal. Now we can focus on the bearish price target ($18), which happens to be awfully close to the September low at $18.70. A rebound on Monday would present a gift of an entry point into the play so long as that rebound fails below the $30 level. More realistically though, we'll be contemplating entries as BBBY falls below $27.25 (just below Friday's intraday low). There is some support near $26, and then BBBY looks to have downside to the $24 level before finding meaningful support. Place stops at $30. *** August contracts expire in 2 weeks *** BUY PUT AUG-30 BHQ-TF OI=2176 at $2.80 SL=1.50 BUY PUT AUG-27*BHQ-TY OI= 711 at $1.30 SL=0.75 Average Daily Volume = 3.88 mln --- SNE - Sony Corporation $42.71 (-1.99 last week) Company Summary: If you like to be entertained, Sony has your fix. Its PlayStation home video game system alone accounts for about 11% of the electronics and entertainment giant's worldwide sales. As the #2 consumer electronics firm, SNE makes a host of products including cameras, DVD players, MiniDisc and Walkman stereo systems, computers, TVs, and VCRs. Rounding out the company's assets are Columbia TriStar and record labels Columbia and Epic. Why We Like It: Consumer confidence was already starting to fray around the edges before the abysmal economic reports last week that started pointing the way to a double-dip recession. The effects of waning consumer confidence can be seen in the disappointing sales numbers from major discount retailers like WalMart. As if that isn't bad enough, media companies have been under renewed selling pressure recently, with Disney the latest to reveal that consumers just aren't spending on entertainment. That makes our new put play on SNE the perfect combination of these bearish factors. Its Playstation2 game system (along with other consumer electronics products) will see disappointing sales if the consumer is less willing to spend and the increasingly tight-fisted consumer will quite possibly shy away from supporting the company's media businesses as well. Investors seem to have already figured this out, as the stock has been in a persistent decline since late May. The bulls spent the past couple weeks defending the $44 support level, but that gave way on Friday, with SNE slipping lower to the tune of more than 4%. While there is some potential support near $42, there isn't anything that can be called strong support until the $40 level. And if the PnF chart is to be believed, SNE is headed down near the $35-36 level (price target of $36). A rally attempt early next week will provide for the best entries, as it will likely fail below the $45 level, which is now strong overhead resistance. Look to enter new positions as SNE rolls over in the $44-45 area. Otherwise, enter the play as SNE falls under $42, pressured by more weakness in the broad market. Stops are initially in place at $45.50. *** August contracts expire in 2 weeks *** BUY PUT AUG-45*SNE-TI OI=570 at $3.10 SL=1.50 BUY PUT AUG-40 SNE-TH OI= 80 at $0.80 SL=0.25 Average Daily Volume = 346 K ************************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 08-04-2002 Sunday 4 of 5 In Section Four: Current Put Plays: BBOX, CCMP, DHR, KLAC, JPM, DD Leaps: Stop The Market, I'm Dizzy. Traders Corner: Show Me The Money! ************************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 ***************** BBOX - Black Box Corporation $33.20 (-3.72 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: Renewed rumors about accounting problems at CSCO sent the Networking sector (NWX.X) tumbling more than 2% again on Friday, wiping out all the gains from earlier in the week. That was enough to derail the attempted bottom fishing in shares of BBOX, sending the stock down to a fresh multi-year closing low just above $33. With the tight trading range in the stock over the past few days, the logical course of action is to tighten the noose to prevent giving back our gains. Intraday resistance has been building near the $34.75 level, so we are lowering our stop to $35. The markets may try to bounce on Monday, but a failed rally below the $35 level can be used to initiate new positions in anticipation of a continued decline down towards our $30 price target. Alternatively, use a breakdown under the $33 level to enter the play, so long as the NWX index continues to be the playground for the bears. *** August contracts expire in 2 weeks *** BUY PUT AUG-35 QBX-TG OI=642 at $3.40 SL=1.75 BUY PUT SEP-35*QBX-UG OI=110 at $4.90 SL=3.00 Average Daily Volume = 485 K --- CCMP - Cabot Microelectronics $38.22 (-0.54 this week) Company Summary: Cabot Microelectronics is a supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. Why We Like It: The persistent weakness in the Semiconductor index (SOX.X) has been the key point of weakness in the Technology sector in recent weeks and Friday's plunge below the $300 level provided more conviction for the bears in this arena. While the SOX has now reached a major level of support near $290-300, the continuing deterioration in the fundamentals of this sector are showing no signs of turning around. Anticipation of continued sector weakness led us to add CCMP to the put list last Thursday due to our expectation that there should be some low hanging fruit to pick, since the stock had substantial room to fall before testing its recent lows. With the SOX continuing to fall on Friday, CCMP got moving in the right direction, shedding nearly 4%, and closing back under its 20-dma ($38.69). While we're looking for the stock to continue declining, there exists the outside chance of a rebound in the SOX next week, and we want to protect against that possibility by lowering our stop to $40 this weekend. A failed bounce below that level can still be used to initiate new positions, as can a solid drop under the $37.50 level (just below Friday's intraday lows). Consider harvesting gains on a dip near the $36 support level and continue to monitor the SOX for confirmation of strength/weakness. *** August contracts expire in 2 weeks *** BUY PUT AUG-40*UKR-TH OI= 746 at $3.70 SL=2.25 BUY PUT AUG-35 UKR-TG OI=1866 at $1.50 SL=0.75 Average Daily Volume = 1.44 mln --- DHR - Danaher Corp. $58.96 (+0.01 last week) Company Summary: Danaher Corporation operates in two business areas: Process/Environmental Controls and Tools and Components. The company's Tools and Components segment produces and distributes general purpose mechanics' hand tools and automotive specialty tools. Among the household names they are responsible for are Sears' Craftsman line, Allen wrenches, and NAPA hand tools. The Process Controls division, led by Veeder-Root, makes leak detection systems for underground storage tanks, as well as sensors, switches, measurement devices, and communications and power protection products. Why We Like It: Under pressure from the continuing broad market decline, DHR got moving in the right direction on Friday, giving up nearly 2%. When we added the play on Thursday, this looked like the high odds outcome given the fact that DHR had already pulled back to close below its 20-dma, dragging the daily Stochastics oscillator back into a bearish decline. While this is a good start to the play, we need to be careful here, as the stock managed to find support near the $58.50-59.00 level, the site of some price congestion from a week ago. A rebound next week is entirely possible and based on the strength of that rebound, we'll know whether it is an attractive entry point into the play or a warning that the decline is coming to an end. Use a failed rally near the $60 level or up near the $62 level to initiate new positions. Alternatively, a decline below the $58 support level can be used to initiate momentum-based positions so long as the broad market continues its decline. *** August contracts expire in 2 weeks *** BUY PUT AUG-60*DHR-TL OI=2057 at $2.70 SL=1.25 BUY PUT AUG-55 DHR-TK OI= 346 at $0.95 SL=0.50 Average Daily Volume = 1.08 mln --- KLAC $37.08 -0.20 (-0.21 for the week) Company Summary: KLA-Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. Headquartered in San Jose, Calif., with operations around the world, KLA-Tencor ranked #6 on S&P's 2002 index of the top 500 companies in the U.S. KLA-Tencor is traded on the Nasdaq National Market under the symbol KLAC. (Source: company release) Why We Like It: KLAC-Tencor drifted down today with the rest of the semiconductor-related stocks. It finished down only $0.20, however traded as low as $36.21. While KLAC does not produce the chips, the chip companies are their end users. A warning after yesterday's close from National Semiconductor (NSM) regarding revenue being flat in the next quarter, due to low personal computer demand, underscored the ongoing problem for the sector. Low demand equals low revenue, which equals lower profits, which equals less money to spend with KLAC. Taiwan Semiconductor, the world's largest semiconductor foundry, recently announced it was slashing its 2002 budget by $500 million. The ongoing warnings and disappointing revenues have driven the Semiconductor Index (SOX.X) below support at 300. While the index finished at 301.41, its intraday low was 295.20. At the risk of repeating ourselves with new data, the index set another 52-week low today. KLAC continues its walk down the plank. KLAC bottomed last October at $28.61. It is one of the few companies connected to this sector not to have reached these lows. While bulls will look at this as a sign of strength, we see it as having more room to fall. If KLAC's customers are doing poorly enough to see their stocks fall below those levels, then KLAC has a good chance of reaching these lows as well. This week's economic numbers, which show a slowing economy, do not figure to help the PC related industries. There were far fewer new jobs created than expected, and customers need income with which to buy computers. As noted in the original write-up on this play, KLAC is working on a bearish vertical count of $26 in the point and figure chart. Its recent four-box reversal up, ahead of earnings, cemented this count and the stock has reversed back down, a true sign of weakness. We will maintain our original goal of $30 for this stock. BUY PUT AUG-40 KCQ-TH OI=5214 at $4.10 SL=2.00 BUY PUT SEP-40*KCQ-UH OI=3741 at $5.60 SL=3.00 Average Daily Volume = 15.1 mil --- JPM $23.85 -1.17 (+1.60 for the week) Company Summary: JP Morgan Chase & Co. is a global financial services firm with operations in over 60 countries. The Company's principal bank subsidiaries are The Chase Manhattan Bank, Morgan Guaranty Trust Company and Chase Manhattan Bank USA, National Association. Its principal non-bank subsidiaries are its investment bank subsidiaries, Chase Securities Inc. (CSI) and J.P. Morgan Securities Inc. (JPMSI). The bank and non-bank subsidiaries of JP Morgan Chase operate nationally, as well as through overseas branches and subsidiaries, representative offices and affiliated banks Why We Like It: J.P. Morgan finally gave in along with the rest of the market. Its fall today was not only due to market weakness, however. Apparently, there may be more problems related to JPM's Enron involvement. The Federal Energy Regulatory Commission (FERC) is now looking into loans obtained by two Enron pipeline subsidiaries totaling $1 billion, just prior to Enron's bankruptcy filing. The banks that provided these loans were none other than J.P. Morgan and Citibank. J.P. Morgan provided $450 million to the pipelines. The FERC order directed the companies to explain why the loans "were not imprudently incurred and therefore unrecoverable by the pipelines in any future rate proceedings before this commission." FERC is suggesting the loans may have milked the federally regulated pipeline subsidiaries and shifted the cash illegally to the parent company. In our last update, we suggested JPM may have more issues that the public has not yet been made aware of, and apparently this was true. In addition to the problems with Enron, and a weakening Dow, there is concern over JPM's derivatives portfolio. JPM is by far the nation's largest holder of derivatives. The company currently has about $51 billion in exposure to these instruments. JPM is a dominant player in the market for selling these products, which are used to hedge risk in currencies, commodities and interest rates. At the end of 2001, JPM reported $170 million in non-performing derivative contracts, compared to $37 million in 2000. At the end of last month, JPM reported $4.38 billion in non-performing loans, investments and other assets, which was a 75% increase over the previous year. As a result, investors are nervous about JPM's ability to manage its risk, and the derivatives position seems like a potential time bomb. While we certainly cannot tell in advance if these positions will cost the bank, this company seems to have established a pattern of making bad bets. We are holding this position, and maintain our price target of $20. We will leave our current stop at $25, as the Dow may experience a bounce on Monday and we do not want to be stopped out early. *** August contracts expire in 2 weeks *** BUY PUT AUG-25*JPM-TE OI=9126 at $2.30 SL=1.00 BUY PUT AUG-22 JPM-TX OI=7253 at $1.15 SL=0.50 Average Daily Volume = 10.5 mln --- DD $39.09 -2.44 (-2.79 for the week) Company Summary: DuPont - the oldest industrial company listed on the Fortune 500 was founded on July 19, 1802, by French immigrant Eleuthere Irenee du Pont as a small family operation which manufactured black powder for guns and blasting. Entering its third century today with 79,000 employees and operations in 70 nations, DuPont invented some of the world's best-known innovations and technologies. These include household names as nylon, Teflon® non-stick coating, Stainmaster® carpet, Lycra® brand elastane, Kevlar® fiber, Corian® solid surfaces, Tyvek® protective materials and Solae(TM) soy protein. (Source: company release) Why We Like It: DD's recent statements about the unsure outlook for the company for the rest of 2002 finally caught up with them on a day when the broader market took a dive. As a Dow stock with exposure to many areas of the economy, this stock was down over $2, losing almost 6% on the day. DD's products are found in sectors ranging from transportation and agriculture, to home furnishings and nutrition. As the economy weakens, this stock will continue to weaken with it. This week's economic data got worse each day. On Wednesday we received bad news when GDP came in lower than expected, showing just a 1.1% gain in the economy this quarter, down significantly from the previous quarter. Thursday brought ISM numbers that were below expectations, along with high initial unemployment claims. Friday revealed just 6,000 new jobs created, versus expectations of 68,000 and incomes rising at a slower rate than hoped. The economy appears to be shrinking, and this is bad news for a company with its fingers in so many sectors of the economy. The semiconductor index also sank to another new 52-week low, casting a longer shadow on DD's purchase of Chemfirst, which makes chemical products for that sector. DD's role as a Dow component will also create some jitters among investors watching the index give back its recent gains. If the market re-tests its lows in the 7500 range, this stock is sure to be riding shotgun. We are lowering our stop loss from $44.00 to $42.00 in order to lock in a profit in the event of a rebound by the Dow. We are maintaining our target price of $36.75, at the low end of its range on July 22, which coincides with the point and figure bearish vertical count of $36. BUY PUT AUG-45 DD-TI OI=297 at $6.40 SL=3.20 BUY PUT SEP-45*DD-UI OI= 45 at $6.70 SL=3.50 Average Daily Volume = 3.02 mil ************************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 ***** Stop The Market, I'm Dizzy By Mark Phillips mphillips@OptionInvestor.com Remember the bumper sticker, "Stop the World, I Want to Get Off"? With slight modifications, I think that is an apt description of how I view the current market. Does anyone else feel like they've been on a roller coaster for the past 2 weeks? Just to recap, over the past 2 weeks, the DOW has plunged from 8100 to 7500, rocketed northward to the 8700 level and plunged back to end at roughly 8300 on Friday. Volatile markets like this provide ample opportunity for high-adrenaline day traders to either get rich or get broke. And I think I can truthfully say that I have never traded a market that was quite so volatile and treacherous. Speaking of volatility, the VIX has really been on a roller-coaster ride. Just two short weeks ago, the VIX was sitting at 43 and since then it has risen to above 56, fallen back to 33 and then launched back to 49, before settling in around 45 Friday afternoon. Are you dizzy yet? Aren't you glad we have a longer-term focus here in the world of LEAPS? So let's see if we can clear away the near-term haze and try to divine where things may be headed from here. Jim mentioned in the Market Monitor on Friday that when the VIX moves to panic levels (above 50) it frequently creates a double-top formation, as the initial decline off the highs needs to be confirmed. That would be analogous to the familiar double-bottom formation that we would so desperately like to see in our poor bedraggled markets. While this double-top formation doesn't always make its appearance, with the sharp market decline over the past few weeks and the renewal of fear, it is looking increasingly likely that it will come to pass this time, and soon. As I see it, there are two possible outcomes for the current market. The first possibility is that we will continue downwards until we near the recent lows, bounce again to confirm support and then begin some healthy base-building before gradually beginning the march back northwards. The other possibility is that as we continue towards the lows, some other negative event or development rears its ugly head and really spooks investors, driving the markets well below the recent lows. That would start this process of searching for a tradable bottom all over again. Let me be the first to say that I really hope it is the first scenario that plays out, because the latter is not a pleasant prospect. The problem is that there are so many possible developments that could cause the latter one to develop. A surprise related to the August 14th CEO certification of corporate financials, a new requirement to expense options, a new corporate scandal, war with Iraq, failure of a major financial institution; each of these have the potential to send the markets spiraling lower. I don't know what the likelihood is of any of them, but they are risks and I think fear of these myriad possibilities is a big part of the market weakness we are still mired in. Last weekend I got a bit hyperactive with new plays and to be honest I think I may have acted a bit too soon. Looking at the market action, particularly in the latter part of the week, I am hesitant to add a lot of new plays again this week, so we're going to keep it pretty light until we see some more constructive market action. In fact, I'm not going to add a single play. As recently as the close on Wednesday, I had 7 different bullish plays that I was seriously considering as new Watch List plays. Every single one of them either took out major support or traded poorly relative to the broad market. And with the VIX hovering near 45, the risk is too great to consider fresh long-term bearish plays. Prudence demands that I sit on my hands here until we see how the next week plays out. Trust me when I say I don't like doing that, but I take my responsibility in this forum VERY seriously. And that responsibility is first to help you protect your capital and then to help grow it. I believe we are still very much in the protection phase of that relationship right now. Although we had some impressive price action early in the week in several of our Watch List plays, we didn't initiate any new positions this week for a variety of reasons, as detailed below. Portfolio: BRCM - How very disappointing the action in the Semiconductor index has been over the past couple weeks. Contrary to its behavior in past market bottoms, the SOX just continues to drift lower with very little in the way of bullish interest. Friday's intraday violation of the $300 level was very disconcerting and was likely a big part of the reason for BRCM's continued slide towards support. Our $16 stop is the line in the sand. If it holds as support, then that rebound can be used for initiating new positions. If not, then we'll jettison the play post-haste. INTC - Same picture here. INTC has been trying to get some positive action going, but Friday's poor action in the SOX finally dragged shares of the Pentium-producer back under the $17 support level. That leaves very little room between INTC and its stop. A volume-backed bounce (not a gap) from above that level can be used for new positions. Otherwise we'll want to steer clear. The action in the overall SOX is critical here. Until the bulls show some interest and start posting higher lows, INTC is likely to be on the ropes. GD - I really gave serious thought to dropping GD this weekend to simply lock in the gain. But rather than cut it off prematurely (I still see the potential for a breakdown under the $80 level), I'm just going to continue to ratchet our stop lower. Intraday resistance last week was just below $84, so that becomes the new level of our stop. A breakdown under the $80 level will likely take us into the mid-$70s, and we want to use that sort of move to lock in gains and exit the play. Please do not enter the play at current levels -- it does not present a favorable risk to reward ratio. And of course with a more than 30% gain in the play right here, nervous investors may just want to harvest that gain near current levels. Watch List: BA - Many would say that BA's recent price action is poor, and I would agree. But what I do like is that we appear to be setting up for an attractive entry where risk is easier to manage. Breaking back below $40 on Friday, BA appears to be headed back towards its recent lows, which are also the site of solid support and the 62% retracement. A rebound from the vicinity of $37-38 looks like a very nice entry, as we can follow it up with a tight stop at $36.50. That's right, in this bottoming formation (hopefully), a print below $37 will generate a fresh PnF sell signal, even if only on an intraday basis. That will give me a clear signal that bottom-fishing in this arena was a bad idea. That's why I'd really prefer to see a print of $44 before taking a position on the next pullback. But we'll take what we can get. WMT - While it didn't put in a gap move like so many of our other plays last week, I stayed away from a fresh entry. I really detest taking long-term entries on strength, preferring to catch them on a pullback. Well that looks like what is shaping up for shares of WMT. We have a fresh Buy signal generated on the PnF chart after last week's rally and now we're pulling back to confirm support. Look for new entries in the $45-46 area on a rebound. Just keep in mind that a trade below $44 will negate the recent buy signal and put this retailer back into bear territory. GE - GE was definitely one of the stronger stocks in this market last week, owing in part to the fact the company has stated it will certify its financials AND begin expensing its options. That propelled the stock as high as $32 last week, before the bears let some air out of the balloon. Look for support in the vicinity of last week's gap, as it should provide support if this rebound is for real. If the bottom of the gap holds as support, then we can consider new entries in the $28-29 area. MSFT - That wasn't exactly what I had in mind, but I think it was constructive nonetheless. We were looking for a breakout of the inside day to give us an entry into the MSFT play, and Monday's wild ramp provided one heck of a breakout. Fortunately, it was a big euphoric gap, which was almost certain to get filled. As I've pointed out numerous times before, we don't want to enter new LEAPS positions on gap moves, due to their propensity to fill in. Use a rebound in the $42-44 area to initiate new positions. QQQ - Another gap move here, that kept us out of the play last week. See how those gaps can keep us out of trouble. Now that the gap has filled, we could very well be looking at a decent entry next week near the $22 level. I think we'll need to see the Semiconductor index (SOX.X) halt its decline before we'll have a solid bottom under the QQQ, so keep an eye on that symbol if contemplating an entry. DJX - You know, we really couldn't ask for more. Clearly that euphoric move on Monday was not the time to enter new LEAPS positions, but it was really encouraging to see support hold and the DOW close back over the 8300 level on Friday. We could rebound from this level, but I still see the high odds entry as a successful retest of the $80-81 level. If the DOW falls back under 8000 on a closing basis, then stay out. The August 14th deadline really isn't a deadline, so much as a starting line for CEOs to either profess the cleanliness of their books or to reveal what problems actually exist. Depending on what skeletons are or are not revealed, it could either unleash a huge bloodbath unlike anything we have seen over the past 2 years or it could cause the investing public to breath a collective sigh of relief. If I knew which way it was likely to go, I'd certainly be positioned to profit from it. But I don't know, and I really don't think anyone does. Did you catch the news item from Goldman Sachs last week, where they are expecting the Fed Funds rate to drop to 1.00% before the end of the year? That means a reduction of 75 basis points! Given the lack of response to the previous interest rate cuts, I really don't think an additional 75 basis points would have much of an effect on the economy. But I do believe it would have a devastating effect on investors' confidence, as they would wonder, "Oh my God, what is it that the Fed sees that we haven't seen yet?" Here is the dilemma as I see it. We may be in the process of putting in a solid bottom that could last for several months. That is the picture that I am hoping for and I believe the trading pattern in the major indices (DOW and S&Ps) and the fresh spike in the VIX is pointing in that direction. But we could be on the cusp of a fresh wave of selling that takes the market to fresh lows. The August 14th date looms as the most likely catalyst to usher in that less-than-favorable scenario. So I am doing with my money, exactly what I suggest you do -- be very careful. That isn't to say that there aren't some winning trades that we can take advantage of. But until we start to see some clarity, position sizes should be small (no greater than 1/2 positions) and stops should be kept tight. If we do get a successful test of support in the broad market, there will be plenty of time to jump on the bullish bandwagon and build some solid gains as we head into the end of the year. But in order to do that, we need to effectively protect our capital in this uncertain market, so that we have a pile of cash available to invest after the smoke begins to clear. Tread Carefully! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: BRCM 07/10/02 '03 $ 20 RCQ-AD $ 3.10 $ 3.00 - 3.22% $16 '04 $ 20 LGJ-AD $ 6.00 $ 5.80 - 3.33% $16 INTC 07/26/02 '03 $ 20 NQ -AD $ 2.00 $ 1.65 -17.50% $15.50 '04 $ 20 LNL-AD $ 4.10 $ 3.60 -12.20% $15.50 Puts: None GD 07/17/02 '03 $ 95 GD -MS $11.70 $16.20 +38.46% $84 '04 $ 90 KJD-MR $13.50 $18.10 +34.07% $84 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: WMT 03/31/02 $45-46 JAN-2003 $ 50 WMT-AJ CC JAN-2003 $ 45 WMT-AI JAN-2004 $ 50 LWT-AJ CC JAN-2004 $ 45 LWT-AI BA 06/30/02 $37-38 JAN-2003 $ 45 BA -AI CC JAN-2003 $ 40 BA -AH JAN-2004 $ 45 LBO-AI CC JAN-2004 $ 40 LBO-AH JAN-2005 $ 50 ZBO-AJ CC JAN-2005 $ 40 ZBO-AH GE 07/14/02 $28.50 JAN-2003 $ 30 VGE-AF CC JAN-2003 $ 27 VGE-AY JAN-2004 $ 30 LGR-AF CC JAN-2004 $ 25 LGR-AE DJX.X 07/28/02 $80-81 DEC-2002 $ 86 DJX-LH $83 CC DEC-2002 $ 78 DJX-LZ DEC-2003 $ 88 ZDJ-LJ CC DEC-2003 $ 80 ZDJ-LB MSFT 07/28/02 $42-44 JAN-2003 $ 45 MQF-AI CC JAN-2003 $ 40 MQF-AH JAN-2004 $ 50 LMF-AJ CC JAN-2004 $ 45 LMF-AI JAN-2005 $ 50 ZMF-AJ CC JAN-2005 $ 40 ZMF-AH QQQ 07/28/02 $22 JAN-2003 $ 25 OZC-AY CC JAN-2003 $ 20 OZC-AS JAN-2004 $ 25 LRI-AY CC JAN-2004 $ 20 LRI-AE PUTS: None New Portfolio Plays None New Watchlist Plays None Drops None ************** TRADERS CORNER ************** Show Me The Money!! By Mike Parnos, Trading With Attitude It’s said that, in the market, money isn’t made or lost, it just changes pockets. In Jerry McGuire, Cuba Gooding shouted, "Show me the money!!!" Today I’m going to show you the money, but it’s going to take some work on your part to get it into your pocket. Are you ready for this? We’ll find out soon enough. Get ready for some mental exercise. Physical exercise, as you must know by now, is out of the question for the Couch Potato Trading Institute student. It’s not part of the curriculum. Every seven minutes of every day, someone in an aerobics class pulls a hamstring. The risk-reward is simply unacceptable. Remember mental exercise is fine as long as you have beer, a Quarter-Pounder with cheese and a bottle of Extra-Strength Tylenol within arm’s reach. This may be a little complicated, but CPTI students, if nothing else, are well rested. So, damn the torpedoes and full speed ahead. Put down your remote and pay attention. Pretend it’s Sunday morning, the stock market is closed, and there’s nothing on TV but The Brady Bunch and Reverend Ike. We’re going to need your undivided attention. You're going to like this one. The In-The-Money Strangle The Couch Potato Trading Institute’s "Strategy Du Jour" at was originally perfected by veteran option strategist Albert DeSalvo. He took minimal risk, knew his entry and exits, and kept a low profile as he executed many successful strangles in his illustrious career. The ITM (In-The-Money) Strangle consists of the purchase of an in-the-money LEAP put and an in-the-money LEAP call with the same expiration. For example: Micron Technology (MU) is trading at $20.65. We know that, in two weeks MU, can trade at $15 or at $30, but it’s more likely to stay between $17.50 and $25. These are the strikes we’ll use to establish the ITM Strangle position. Let’s take it step by step. For our example we’ll use a 10-contract position. Ideally, we would like to put on the ITM Strangle when volatility is low and there is an expected increase in volatility. 1. Buy 10 contracts of Jan 04 $25 puts @ $8.90 x 1K = $8,900 2. Buy 10 contracts of Jan 04 $17.50 calls @ $8.20 x 1K = $8,200 3. Total amount of money out of pocket $17.10 x 1K = $17,100 Here’s the tricky part. We just spent $17,100. Sounds like a lot, doesn’t it? However, our actual risk is substantially less. By buying this ITM Strangle, we’ve established a position that, regardless of where MU goes, there will be a minimum intrinsic value of $7.50 - the difference between the strike prices ($25 - $17.50 = $7.50). Try it. If, at expiration, MU is at $24, the $17.50 call is worth $6.50 and the $25 put is worth $1.00, totaling $7.50. If MU is at $15, the $25 put is worth $10 and the $17.50 call expires worthless. But, it’s not likely we will hold this position to expiration. So our actual risk in this position is the initial out of pocket ($17,100) less the minimum intrinsic value ($7,500) -- $9,600. Now, we have 18 months to make money. Let’s get started. 1. Sell 10 cont. of the Sept 02 $25 calls @ $1.10 x 1K = $1,100 2. Sell 10 cont. of the Sept 02 $17.50 puts @ $1.35 x 1K = $1,350 We’ve just taken in a total of $2,450. A 25% return on a risk of $9,600 for about six weeks. Our risk is now only $7,150. That was so much fun we may do it again for the next option expiration - and reduce our risk even further. After we sell the fourth time, our risk is gone and it’s all gravy the rest of the way. Think about it. If we can do that 12 times during the 18-month life of the position, we would take in $29,400 on our original risk of $9,600. It doesn’t get any better than that. OK, it’s time for a break. That’s a lot to absorb in one sitting. Make sure you are clear on this before we move on to the "What would happen if . . ." section. Take a few deep breaths, a trip to the fridge, the bathroom, pet your dog, give your wife a good listening to (or listen to your dog and pet your wife), remind your husband to put the seat down, caress the TV Guide, and daydream about what you’re going to do with all the money you’re going to make if you can master this strategy. What would happen if . . . Since we don’t live in a perfect world, there will be complications - count on it. Into each life some rain must fall. But if you have an umbrella, a little rain "ain’t no big deal." We never trade unless we have a plan, right? Q: MU threatens to break upper resistance and is at $25 with two weeks to go before option expiration and the cost to buy it back is $1.25? A: You would do nothing. (CPTI students love that answer) Remember, you are covered by the long Jan. 04 $17.50 call that is now $7.50 in the money. That means you have a high delta that will continue to be higher than the delta of the short option up to the last few days prior to expiration. It makes no sense to buy back a short option (especially one that’s covered by a long position) while there is still time value. Why pay $1.25 to buy back an option when it will cost you nothing to buy back that same option in two weeks? The same logic applies if MU would go down to $15. The long Jan. 04 $25 put would be increasing in value faster than the short Sept. 02 $17.50 put. Not to worry, it’s entirely possible the stock will retrace and return to the trading range. Remember, the $25 and $17.50 strikes were chosen because they represent approximate resistance and support levels. If, at an expiration, MU has gone too far in a particular direction, you can always unwind the position and you should still show a profit. The risk is minimal. As you become more sophisticated option traders, there are ways you can play the bounces by repurchasing and reselling the short options at appropriate times to take in additional premium. It’s not the CPTI way, but for you "players" out there, it’s a way to do some wheeling and dealing within the parameters of a basically conservative trade. We still need to be cautious in position selection. That is true in many areas of life. Although Albert DeSalvo never met a strangle he didn’t like, he eventually met his match. He didn’t execute his last strangle properly and he paid the price. It’s a lesson from which we can all learn. The point is, take your time, evaluate everything before you put on a trade. Remember, the early bird may get the worm, but it’s the second mouse that usually gets the cheese. I showed you the money. It’s there for the taking. The money can be transferred into your pockets, but only if you take your hands out and learn to use them efficiently and productively. Happy trading. Make profits, not stress. Wake me when it’s over. Mike Parnos Your questions and comments are always welcome. mparnos@OptionInvestor.com P.S. Here is an email that has been circulating. Thought you might enjoy it. Investment Counselors claim to always be looking out for their clients. They’ve done intensive research, consulted with countless analysts and have come to a conclusion. They are now advocating the following strategy: If you had bought $1000.00 worth of Nortel stock one year ago, it would now be worth $49.00. Had you bought Enron, you would have $16.50 of your original $1,000.00. With WorldCom, you would have less than $5.00 left. However, if you had bought $1,000.00 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, then turned in the cans for the 10-cent deposit, you would have $214.00. Based on the above, the current investment recommendation is to drink heavily and recycle. ************************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 08-04-2002 Sunday 5 of 5 In Section Five: Covered Calls: Understanding The Buy-Write Order Naked Puts: Investing 101: Buying "Valuable" Stocks Spreads/Straddles/Combos: Stocks Retreat Amid Renewed Concerns Updated In The Site Tonight: Market Watch Market Posture ************************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: Understanding The Buy-Write Order By Mark Wnetrzak One of our readers asked for an explanation of the "Buy-Write" order, which is a common method of initiating a covered-call position. In simple terms, a buy-write order involves buying a stock and selling its option simultaneously. When placing an order for a buy-write, you are requesting to purchase the shares and sell the (call) options for a specific "net" price, with both transactions occurring at the same time. Since the cost basis is established prior to the trade, a buy-write order can be a useful method to initiate a new covered-call position. The exact phraseology is not important but a specific "net-debit" must be given when the trade instructions are delivered to the agent. The floor broker or clearing-house will fill the order if the specified net-debit can be achieved through any combination of stock and call-option prices. One of the advantages of this technique is that it prevents the possibility of "slippage" during the position entry process when the premium in the call option declines. This problem happens frequently in the plays we list as many are opened in the first hour of trading on the Monday after the newsletter is published. If too many calls are sold without any buying pressure, the bid premium drops quickly towards intrinsic value and the (ITM) play becomes unfavorable. Traders who attempt to "leg-in" to these positions (buying the stock with plans to sell the call later) are often surprised to see the previously overvalued premiums disappear before they can write the options that complete the play. The majority of covered-call positions we recommend in the OI newsletter are "in-the-money" plays. We favor this conservative strategy as it provides new investors with a relatively stable, annualized return even in a neutral market. We try to construct positions that utilize over-valued option premiums to provide a reasonable profit potential with adequate downside protection. Our extensive research exposes issues that have a higher than average probability of finishing above the sold strike price at expiration, and whose option premium provides a final cost-basis near a recent technical support level or trading range bottom. This conservative approach compliments the buy-write technique because the risk/reward ratio in the covered-write position can be positively established without the risk of transaction losses during the opening trades. The stock and options prices do not have to be monitored during the day's activity, as the order will be executed only when the appropriate net-debit is achieved. In addition, this type of trading works very well with low volume issues and provides the market-maker with an opportunity to fill the request based on other orders in the pits. The buy-write can also be used with unusually volatile stocks that novice investors might otherwise avoid when choosing candidates for a conservative covered-write position. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield LVLT 5.75 6.98 AUG 5.00 1.20 *$ 0.45 10.7% ICOS 19.01 23.73 AUG 17.50 2.55 *$ 1.04 9.2% AMLN 10.00 11.95 AUG 10.00 0.90 *$ 0.90 8.6% CREE 13.98 14.11 AUG 12.50 2.30 *$ 0.82 7.6% WEBX 13.88 13.61 AUG 12.50 2.20 *$ 0.82 7.6% NPSP 17.11 20.26 AUG 12.50 5.60 *$ 0.99 7.5% SNDK 14.40 13.18 AUG 12.50 2.85 *$ 0.95 7.1% TRLY 6.31 5.86 AUG 5.00 1.60 *$ 0.29 6.7% SBL 8.58 9.20 AUG 7.50 1.50 *$ 0.42 6.4% FTI 17.40 17.38 AUG 15.00 3.00 *$ 0.60 6.0% HYSL 17.85 21.20 AUG 17.50 1.05 *$ 0.70 6.0% BRCD 18.50 16.68 AUG 15.00 4.40 *$ 0.90 5.5% NPSP 20.89 20.26 AUG 17.50 4.00 *$ 0.61 5.2% HGSI 14.98 16.02 AUG 12.50 2.90 *$ 0.42 5.0% IMDC 16.00 15.99 AUG 12.50 3.90 *$ 0.40 4.8% IVGN 30.88 35.13 AUG 25.00 6.90 *$ 1.02 4.6% IVGN 32.68 35.13 AUG 27.50 6.00 *$ 0.82 4.5% EXTR 10.67 9.40 AUG 10.00 1.70 $ 0.43 4.2% BRCM 20.39 16.85 AUG 17.50 3.90 $ 0.36 1.9% JNPR 8.90 7.23 AUG 7.50 1.75 $ 0.08 1.2% DRIV 9.19 6.95 AUG 7.50 2.25 $ 0.01 0.1% *$ = Stock price is above the sold striking price. Comments: Here we go again - back on the Roller-Coaster! Will the current move down by the major averages end with a successful test of the July low? As always, time will tell. The key is to have a plan to protect your capital in case the test is unsuccessful. I still believe the best case scenario would for a lateral move and the creation of a Stage I base. Stocks that are on the early exit watch list for this week include: Sandisk (NASDAQ:SNDK) - below 30-dma; FMC Technologies (NYSE:FTI) - monitor closely; Brocade Communications (NASDAQ:BRCD) and Broadcom (NASDAQ:BRCM) - both back to where they were last week; and Extreme Networks (NASDAQ: EXTR) - at a key moment. Juniper Networks (NASDAQ:JNPR) and Digital River (NASDAQ:DRIV) both appear headed lower and exiting now may be prudent, depending on your outlook. Positions Previously 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 ALXN 13.73 AUG 12.50 XQN HV 1.55 62 12.18 14 5.7% ENDP 8.58 AUG 7.50 IUK HU 1.45 26 7.13 14 11.3% FDRY 7.50 AUG 7.50 OUJ HU 0.45 1878 7.05 14 13.9% GCOR 10.16 AUG 10.00 UGO HB 0.70 155 9.46 14 12.4% ISRG 7.52 AUG 7.50 AXQ HU 0.35 28 7.17 14 10.0% OTEX 20.41 AUG 17.50 QFT HW 3.40 77 17.01 14 6.3% ULGX 5.32 AUG 5.00 OZU HA 0.70 25 4.62 14 17.9% 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 ULGX 5.32 AUG 5.00 OZU HA 0.70 25 4.62 14 17.9% FDRY 7.50 AUG 7.50 OUJ HU 0.45 1878 7.05 14 13.9% GCOR 10.16 AUG 10.00 UGO HB 0.70 155 9.46 14 12.4% ENDP 8.58 AUG 7.50 IUK HU 1.45 26 7.13 14 11.3% ISRG 7.52 AUG 7.50 AXQ HU 0.35 28 7.17 14 10.0% OTEX 20.41 AUG 17.50 QFT HW 3.40 77 17.01 14 6.3% ALXN 13.73 AUG 12.50 XQN HV 1.55 62 12.18 14 5.7% 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). ***** ALXN - Alexion $13.73 *** Technical Speculation *** Alexion Pharmaceuticals (NASDAQ:ALXN) develops pharmaceutical products for the treatment of heart disease, inflammation, cancer and diseases of the immune system. The company's two lead product candidates are genetically altered antibodies that target specific diseases that arise when the human immune system induces undesired 1inflammation in the human body. Alexion's product candidates are designed to block components of the human immune system that cause undesired inflammation while allowing beneficial components of the immune system to remain functional. Not much news on Alexion but this position is based on the formation of a short-term head-n- shoulders bottom in the company's stock and signs of increased accumulation. Short-term speculation with a relatively low-risk cost basis. AUG 12.50 XQN HV LB=1.55 OI=62 CB=12.18 DE=14 TY=5.7% ***** ENDP - Endo Pharmaceuticals $8.58 *** Bottom Fishing! *** Endo Pharmaceuticals (NASDAQ:ENDP) is a specialty pharmaceutical company specializing in pain management. The company is engaged in the research, development, sale and marketing of branded and generic prescription pharmaceuticals used primarily to treat and manage pain. The company's primary area of focus is analgesics, with a portfolio of branded products that includes Percocet, Lidoderm, Percodan and Zydone. Endo's generic portfolio is comprised of products that cover a broad range of indications, most of which are focused in pain management. Endo had a bad June after reporting disappointing clinical trial results. More recently, Endo reported a strong second quarter on continued growth of its lead products and even raised guidance for the rest of 2002. This week, Endo received tentative approval from the FDA for an abbreviated new drug application for Oxycodone. Endo believes that once final FDA approval is granted, it will have 180 days of marketing exclusivity of the tablets. The current technical outlook is recovering and our position offers good profit potential at the risk of owning Endo at a favorable cost basis. AUG 7.50 IUK HU LB=1.45 OI=26 CB=7.13 DE=14 TY=11.3% ***** FDRY - Foundry Networks $7.50 *** Earnings Rally *** Foundry Networks (NASDAQ:FDRY) is a provider of next-generation networking products. The company provides high-performance, end- to-end switching and routing devices for enterprises and service providers. Foundry designs, develops, manufactures and markets solutions to meet the needs of high-performance network infra- structures for Layer 2-7 switching and routing and for LANs, Metropolitan Area Networks (MAN), Wide Area Networks (WAN) and the Web. Foundry offers global end-to-end solutions within and throughout a customer's networking infrastructure. Last week, Foundry Networks reported better-than-expected second-quarter results. Several analysts were impressed with the company's new products and have raised their revenue and earnings estimates on the issue. We simply favor the bullish technical indications and our conservative position offers a method to participate in the future movement of the stock with relatively low risk. AUG 7.50 OUJ HU LB=0.45 OI=1878 CB=7.05 DE=14 TY=13.9% ***** GCOR - Genencor $10.16 *** On The Rebound *** Genencor (NASDAQ:GCOR) is a diversified biotechnology company that develops and delivers products and/or services to the industrial, consumer, agri-processing and healthcare markets. The company develops products that deliver sustainable solutions to the problems of everyday life. Genencor groups its existing products into three general functional categories: enzymes that break down protein, enzymes that break down starch; and enzymes that break down cellulose. Industrial and consumer market applications include fabric care, cleaning and textile processing, as well as the emerging market of personal care. The agri-processing market applications include classes of enzymes utilized in the grain processing, animal feed and specialties areas. Genencor reported earnings on Thursday and said its second-quarter profit rose, partly as a result of more revenue from its acquisition of Enzyme BioSystems. More importantly, the company expects to report 2002 results between break-even and a 7 cent loss per diluted share. Previous guidance was for a loss between 11 cents and 18 cents. We favor the bullish move above the mid-July high on heavy volume, which suggests further upside potential. Favorable short-term speculation on a rebounding stock. AUG 10.00 UGO HB LB=0.70 OI=155 CB=9.46 DE=14 TY=12.4% ***** ISRG - Intuitive Surgical $7.52 *** Morning Star Pattern *** Intuitive Surgical (NASDAQ:ISRG) designs and manufactures the da Vinci Surgical System. The da Vinci System consists of a surgeon's console, a patient-side cart, a high performance vision system and its proprietary instruments. Intuitive's da Vinci Surgical System is a commercially available technology that can provide the surgeon with the intuitive control, range of motion, fine tissue manipulation capability and 3-D visual- ization characteristic of open surgery, while simultaneously allowing the surgeon to work through the small ports of minimally invasive surgery. This week, Intuitive Surgical reported sales of $19.4 million in the second quarter, up 52%, driven by higher da Vinci(TM) Surgical System placements and continued growth of recurring revenue. We noticed the "Morning Star" formation on a two-year chart, which suggests a bullish change-of-character for the stock. Traders who agree with our assessment can speculate on the near-term performance of the issue with this conservative position. AUG 7.50 AXQ HU LB=0.35 OI=28 CB=7.17 DE=14 TY=10.0% ***** OTEX - Open Text $20.41 *** Earnings Beat Expectations! *** Open Text (NASDAQ:OTEX) develops, markets, licenses and supports collaborative knowledge management application software for use on intranets, extranets and the Internet, enabling users to find electronically stored information, work together in creative and collaborative processes, do group calendaring and scheduling and distribute or make available to users the resulting work product and other information. The company's principal product line, Livelink, is a scaleable collaborative network application that integrates several modular engines including, but not limited to, search, collaboration, workflow, group calendaring and scheduling, and document management. Open Text reported better than expected fourth-quarter profit this week on higher sales of license and networking products. The company reported net income of $7.26 million on record revenues of $41.2 million. Open Text said it was comfortable in meeting its guidance for next year and expects to record stronger sales going forward. Our outlook is also bullish, due to the recent technical strength and this position offers a low risk cost basis in the issue. AUG 17.50 QFT HW LB=3.40 OI=77 CB=17.01 DE=14 TY=6.3% ***** ULGX - Urologix $5.32 *** Takeover-Target Speculation *** Urologix (NASDAQ:ULGX) has developed and offers non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide by causing adverse changes in urinary voiding patterns. Urologix markets its products under the Targis and Prostatron names. Both systems utilize Cooled ThermoTherapy, a targeted microwave energy combined with a cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Urologix crashed in early July after the company said quarterly sales were hurt by lower-than- expected sales of its systems for treating enlargement of the prostate. This week, shares of Urologix spiked on rumors that the company could be a takeover target. Of course, the company refused to comment. The tape suggests that somebody is interested in this stock. Earnings are due in the coming week. AUG 5.00 OZU HA LB=0.70 OI=25 CB=4.62 DE=14 TY=17.9% ***** ***************** 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 EXEL 5.30 AUG 5.00 XQT HA 0.75 79 4.55 14 21.5% CRGN 5.56 AUG 5.00 CQX HA 0.90 74 4.66 14 15.9% NBTY 15.31 AUG 15.00 NBQ HC 0.85 1395 14.46 14 8.1% CSTR 30.36 AUG 30.00 QLR HF 1.30 63 29.06 14 7.0% INCY 5.85 AUG 5.00 IPQ HA 1.00 192 4.85 14 6.7% MLNM 11.52 SEP 10.00 QMN IB 2.40 1580 9.12 49 6.0% ENZN 21.18 AUG 17.50 QYZ HW 4.10 370 17.08 14 5.3% TKLC 8.48 SEP 7.50 KQ IU 1.55 40 6.93 49 5.1% CVTX 23.01 SEP 20.00 UXC ID 4.50 15 18.51 49 5.0% ***************** NAKED PUT SECTION ***************** Investing 101: Buying "Valuable" Stocks By Ray Cummins One of our new readers asked for help in choosing fundamentally sound stocks for naked-put candidates. While our selection process focuses primarily on technical analysis, a value-based approach is certainly appropriate in the current market. Attn: Naked Puts Editor Subject: Fundamental analysis of naked put candidates Hi Ray, I just became a subscriber to the Option Investor Newsletter and I have been reading some of the older articles on covered calls and naked puts. I plan to use the naked put strategy to purchase stocks at a discount" but since they are going to be in my long term portfolio, I think it is important to choose companies with good fundamentals. I know you concentrate on charting to find your weekly plays but can you suggest some guidelines for picking stocks with better than average value. Thanks in advance for any help! DT Hello DT, Indeed, there has been lots of discussion recently about stock valuation and the need for fundamental analysis in investing. Warren Buffett of Berkshire Hathaway explains the concept best: Evaluating securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors. At one extreme, the analyst exclusively oriented to qualitative factors would say, "Buy the right company (with the right prospects, inherent industry conditions, management, etc.) and the price will take care of itself". On the other hand, the quantitative spokesman would say, "Buy at the right price, and the company (and stock) will take care of itself". In the world of the stock market, money can be made with either approach and a combination of both may offer the best balance in a long-term portfolio. The first step in examining the fundamental factors in a company (net asset value, working capital, price-to-earnings ration, debt to equity ratio etc..) is to identify the minimum criteria that determines a favorable characteristic in each specific category. A well-known expert on fundamental analysis, Benjamin Graham, made the following list of attributes of an undervalued stock. In his list, criteria 1 through 5 measure risk; while 6 and 7 establish financial soundness; and 8 through 10 show a history of stable earnings. Any company that meets 7 out of the 10 criteria is considered undervalued with regard to its fundamental condition. Keep in mind, some of the valuation criteria in Benjamin Graham's list are more important to certain types of investors than others. Depending on a person's risk/reward outlook and investing goals; income, safety, or growth, he or she can focus on those elements that best achieve future objectives and give heavier weighting to the valuation attributes that fit their personal investing style. 1. An earnings-to-price yield (reverse of P/E ratio) double the current AAA bond yield. If the AAA bond yield is 6%, the earnings yield should be 12%. 2. A price-to-earnings ratio that is 40% of the highest average P/E ratio achieved by the shares in the most recent 5 years. 3. A dividend yield of 2/3 the AAA bond yield. Stocks that lack either a dividend or current profits are eliminated here. 4. A stock price that is 2/3 the tangible book value per share. 5. A stock price that is 2/3 the net current asset value or the net quick liquidation value. 6. Total debt that is lower than the tangible book value. 7. A current ratio of 2 or more. This is a measure of liquidity, or a company's ability to pay its debts from income. 8. Total debt of no more than the net quick liquidation value. 9. Earnings that have doubled in the most recent 10 years. 10. Earnings that have declined no more than 5% in 2 of the past 10 years. For definitions of any terms above, refer to: http://biz.yahoo.com/f/g/http://biz.yahoo.com/f/g/ Every investor knows that fundamental factors play a major role in determining a company's share value however, if you form your price expectations based on those factors, it is important to also study the issue's price history or you may end up owning an undervalued stock that remains undervalued for a long time. 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 NXTL 6.64 5.31 AUG 5.00 0.25 *$ 0.25 17.2% SNDK 15.08 13.18 AUG 12.50 0.55 *$ 0.55 14.9% DCTM 14.86 13.73 AUG 12.50 0.40 *$ 0.40 14.6% PDLI 13.02 13.32 AUG 10.00 0.25 *$ 0.25 12.7% MCDTA 9.70 10.30 AUG 7.50 0.25 *$ 0.25 12.4% ISSX 15.45 15.45 AUG 12.50 0.30 *$ 0.30 12.3% DCTM 12.90 13.73 AUG 10.00 0.30 *$ 0.30 11.3% BCGI 8.90 9.46 AUG 7.50 0.25 *$ 0.25 11.3% CHKP 15.69 16.01 AUG 12.50 0.25 *$ 0.25 10.7% BRCM 19.86 16.85 AUG 15.00 0.40 *$ 0.40 9.9% FCN 40.00 39.05 AUG 35.00 0.80 *$ 0.80 9.8% MU 23.39 18.18 AUG 17.50 0.45 *$ 0.45 7.6% OSIP 26.79 29.01 AUG 22.50 0.35 *$ 0.35 7.5% PDLI 10.95 13.32 AUG 7.50 0.20 *$ 0.20 7.3% RIMM 13.82 10.45 AUG 10.00 0.25 *$ 0.25 7.2% DT 12.00 10.89 AUG 10.00 0.25 *$ 0.25 7.1% QCOM 28.11 25.55 AUG 20.00 0.40 *$ 0.40 5.8% QLGC 40.69 37.39 AUG 25.00 0.45 *$ 0.45 5.7% SANG 23.35 18.90 AUG 20.00 0.35 $ -0.75 0.0% *$ = Stock price is above the sold striking price. Comments: Just when you thought it might be safe to get back into stocks, the market tumbles amid a slew of bearish economic data. Based on this week's employment and manufacturing reports, the outlook remains uncertain and some analysts believe we may be in for a "double-dip" recession. That kind of speculation will certainly have a negative affect equity values in the near-term, so keep your stops tight and your attitude cautiously optimistic until a solid bottom is established. The continued declines in Applied Materials (NASDAQ:AMAT) and Cisco Systems (NASDAQ:CSCO) were no surprise and as mentioned last week, both positions were closed to limit losses. However, unexpected news was the culprit in our Sangstat (NASDAQ:SANG) play and the bearish activity forced an early exit in the Aug-$20 Put. Other issues on the watch-list include: Broadcom (NASDAQ:BRCM), Sandisk (NASDAQ:SNDK), Deutsche Telecom (NYSE:DT), Micron Technology (NYSE:MU), and Research In Motion (NASDAQ:RIMM). Positions Previously Closed: Royal Gold (NASDAQ:RGLD), Motorola (NYSE:MOT), 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 AMGN 43.51 AUG 37.50 AMQ TU 0.30 1318 37.20 14 5.6% ICOS 23.73 AUG 20.00 IIQ TD 0.45 266 19.55 14 15.7% IVGN 35.13 AUG 30.00 IUV TF 0.30 1336 29.70 14 7.1% LNCR 31.50 AUG 30.00 LQN TF 0.50 3228 29.50 14 9.4% NBIX 36.24 AUG 30.00 UOT TF 0.25 189 29.75 14 6.4% PLMD 29.95 AUG 25.00 PM TE 0.40 322 24.60 14 11.7% SYY 27.20 AUG 25.00 SYY TE 0.30 2042 24.70 14 7.3% TRMS 46.62 AUG 40.00 RQM TH 0.60 159 39.40 14 10.3% VMSI 22.35 AUG 20.00 QMP TD 0.25 10 19.75 14 7.9% 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 23.73 AUG 20.00 IIQ TD 0.45 266 19.55 14 15.7% PLMD 29.95 AUG 25.00 PM TE 0.40 322 24.60 14 11.7% TRMS 46.62 AUG 40.00 RQM TH 0.60 159 39.40 14 10.3% LNCR 31.50 AUG 30.00 LQN TF 0.50 3228 29.50 14 9.4% VMSI 22.35 AUG 20.00 QMP TD 0.25 10 19.75 14 7.9% SYY 27.20 AUG 25.00 SYY TE 0.30 2042 24.70 14 7.3% IVGN 35.13 AUG 30.00 IUV TF 0.30 1336 29.70 14 7.1% NBIX 36.24 AUG 30.00 UOT TF 0.25 189 29.75 14 6.4% AMGN 43.51 AUG 37.50 AMQ TU 0.30 1318 37.20 14 5.6% 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). ***** AMGN - Amgen $43.51 *** Entry Point! *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and sells human therapeutic products including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. The company has research facilities in the United States and has clinical development staff in the United States, the European Union, Canada, Australia and Japan. Amgen has acquired Immunex, a biopharmaceutical firm dedicated to developing immune system science to protect human health. Immunex has developed two major products, Enbrel and Leukine, and has two other products, Novantrone and Thioplex, which can be used in treating multiple indications. Amgen's shares rebounded this week in conjunction with the biotechnology sector and investors who want a low risk cost basis in the issue should consider this position. AUG 37.50 AMQ TU LB=0.30 OI=1318 CB=37.20 DE=14 TY=5.6% ***** ICOS - ICOS Corporation $23.73 *** New Drug Developments! *** ICOS Corporation (NASDAQ:ICOS) develops pharmaceutical products with significant commercial potential by combining its unique capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and gene expression profiling. ICOS applies its integrated approach to erectile dysfunction and urologic disorders, sepsis, pulmonary arterial hypertension and other cardiovascular diseases, as well as inflammatory diseases. ICOS has established collaborations with pharmaceutical and biotechnology companies to enhance its internal development capabilities and to offset a substantial portion of the financial risk of developing its drug candidates. Biotechnology stocks have performed well recently with shares of Icos in the news after a positive announcement on the company's anti-impotence drug. Icos and pharmaceutical partner Eli Lilly said their anti-impotence drug, Cialis, had received a favorable review from European regulators. The companies hope to receive final European clearance later this year and win U.S. approval in the second half of next year. Traders who want to speculate on the company's new drug developments can do in a conservative manner with this position. AUG 20.00 IIQ TD LB=0.45 OI=266 CB=19.55 DE=14 TY=15.7% ***** IVGN - Invitrogen $35.13 *** 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. Invitrogen recently announced it achieved a second-quarter profit 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, compared with a loss of $35.1 million, or $0.67, a year ago. The company also announced Thursday that its board authorized the repurchase of up to $300 million of the company's common stock over the next three years. IVGN enjoys a well established trading range near $30-$35 and this play allows investors to speculate on the company near-term share value with relatively low risk. AUG 30.00 IUV TF LB=0.30 OI=1336 CB=29.70 DE=14 TY=7.1% ***** LNCR - Lincare Holdings $31.50 *** Health Services Sector! *** Lincare Holdings (NASDAQ:LNCR) is a provider of oxygen and other respiratory therapy services to patients in the home. Lincare also provides a variety of home infusion therapies in certain geographic markets. The company's customers typically suffer from chronic obstructive pulmonary disease, such as emphysema, chronic bronchitis or asthma, and require supplemental oxygen or respiratory therapy services in order to alleviate the symptoms and discomfort of respiratory dysfunction. Lincare currently serves over 320,000 customers in 44 states through 564 operating centers. Lincare Holdings recently joined the NASDAQ 100 Index and the company is very popular among analysts who follow the specialized health services industry. Consistent growth as well as solid finances are often listed as factors that should boost Lincare's share value (the company has achieved long-term growth of more than 20% per year) and their stock price will benefit as baby boomers head into their golden years needing home health care. Investors who favor health services stocks can establish a conservative entry point in the issue with this position. AUG 30.00 LQN TF LB=0.50 OI=3228 CB=29.50 DE=14 TY=9.4% ***** NBIX - Neurocrine Biosciences $36.24 *** On The Rebound! *** Neurocrine Biosciences (NASDAQ:NBIX) develops and intends to commercialize drugs for the treatment of neurologic and endocrine system-related diseases and disorders. The company's product candidates address many worldwide pharmaceutical markets such as insomnia, anxiety, depression, cancer, diabetes and multiple sclerosis. The company has almost 20 programs in various stages of research and development, including seven programs in clinical development. The company's lead clinical development program is a drug for the treatment of insomnia that is being evaluated in Phase III clinical trials. Last week, Neurocrine Biosciences posted a narrower second quarter loss than analysts projected. The company also reported revenue growth of 27%, which came mainly from revenue received from GlaxoSmithKline. A large part of the losses were due to increased spending on pivotal-stage trials of its experimental insomnia drug Indiplon but the company said it is on track and on schedule to meet its goal of filing U.S. FDA applications for the drug at the end of 2003. A recent technical support area exists near the cost basis in this play, providing favorable speculation for traders who wouldn't mind owning the issue. AUG 30.00 UOT TF LB=0.25 OI=189 CB=29.75 DE=14 TY=6.4% ***** PLMD - PolyMedica $29.95 *** 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. PolyMedica recently estimated that fiscal-year revenue would increase by at least 20%, boosted by the growing number of Americans developing diabetes. The company also posted a 7% revenue increase in first-quarter profit and said the fiscal second quarter, ending in September, would see another rise with projected revenue between $84 million and $85 million. Investors were happy with the news but PLMD's stock price went too far, too fast, and now it is in the midst of a necessary consolidation. A conservative cost basis can be achieved with this position. AUG 25.00 PM TE LB=0.40 OI=322 CB=24.60 DE=14 TY=11.7% ***** SYY - Sysco Corporation $27.20 *** Record Earnings! *** Sysco (NASDAQ:SYY) is a North American distributor of food and food related products to the foodservice or food prepared away from home industry. The company provides products and services to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Sysco provides food and other products through its 124 operating companies. Each of Sysco's many operating companies represents a separate operating segment. The company has aggregated its operating companies into five segments, of which only Broadline and Sygma are reportable segments. Broadline operating companies offer a full line of food products and a variety of non-food products to both the Company's traditional and chain restaurant customers. Sygma operating companies distribute a line of food products and a variety of non-food products to some of the company's chain restaurant customer locations. Sysco recently announced record results for its fourth quarter of fiscal year 2002, its 105th consecutive quarter of sales and earnings increases, and the event also marked the 26th year in a row that the company has achieved sales and earnings increases. Fourth quarter EPS rose 19% on stronger real sales growth and the company also announced a 20-million-share repurchase program. Investors showed their appreciation by boosting the company's share value over 20% in one week and this position offers a conservative way to profit from continued upside activity. AUG 25.00 SYY TE LB=0.30 OI=2042 CB=24.70 DE=14 TY=7.3% ***** TRMS - Trimeris $46.62 *** 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. Trimeris has recently been in the news as investors learn about its revolutionary product, T-20, the first in a novel class known as fusion inhibitors that work in a unique way, by preventing HIV virus from entering cells. Patient groups and AIDS activists have been clamoring for access to the new drug, which will be sold under the brand name Fuzeon, as an alternative treatment for thousands of people who are resistant to existing medicines. T-20 is now undergoing a fast-track review at the U.S. Food and Drug Administration, and there is an increased likelihood of a speedy approval in Europe as well. Investors who wouldn't mind owning this speculative issue can establish a cost basis near $40 with this position. AUG 40.00 RQM TH LB=0.60 OI=159 CB=39.40 DE=14 TY=10.3% ***** VMSI - Ventana Medical Systems $22.35 *** Trading Range! *** Ventana Medical Systems (NASDAQ:VMSI) develops, manufactures and markets instruments and consumables that are used to automate diagnostic and drug discovery procedures in clinical histology laboratories and drug discovery laboratories worldwide. Ventana's product offerings comprise Tissue Processors and Staining Systems and Associated Reagents. Its products are used in many centers for cancer research and treatment including Johns Hopkins Hospital, the Mayo Clinic and Memorial Sloan-Kettering Cancer Center. The company reported in mid July that profits and sales rose during the second quarter and Ventana also raised its earnings forecast for 2003, saying that sales of products used to automate tissue preparation improved. The company expects to see sales growth of about 20% from 2001 and net income at around 5% to 7% percent of sales. Investors who like the outlook for the company can use the solid technical support near $19 to justify this speculative play. AUG 20.00 QMP TD LB=0.25 OI=10 CB=19.75 DE=14 TY=7.9% ***** ***************** 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 NPSP 20.26 AUG 17.50 QKK TW 0.70 123 16.80 14 25.2% MLNM 11.52 AUG 10.00 QMN TB 0.30 1596 9.70 14 19.2% CVTX 23.01 AUG 20.00 UXC TD 0.40 761 19.60 14 13.2% ABI 17.98 AUG 15.00 ABI TC 0.25 95 14.75 14 12.2% IDPH 41.75 AUG 35.00 IDK TG 0.45 1530 34.55 14 9.4% ABT 40.12 AUG 37.50 ABT TU 0.55 1397 36.95 14 8.5% BLL 42.70 AUG 37.50 BLL TU 0.45 476 37.05 14 7.9% VAR 40.08 AUG 37.50 VAR TU 0.50 20 37.00 14 7.8% CHIR 33.62 AUG 30.00 CIQ TF 0.30 325 29.70 14 6.4% ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Retreat Amid Renewed Economic Concerns By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** August 2, 2002 The onslaught of gloomy news continued Friday with the employment report providing further evidence of a stalled recovery in the U.S. economy. A dour outlook from Walt Disney (NYSE:DIS) weighed heavily on the Dow, which plummeted 193 points to 8,313 in a second consecutive session of triple-digit losses. Bankruptcy concerns for United Airlines' (NYSE:UAL) parent UAL also affected blue-chip shares after the nation's second-largest airline announced it had hired bankruptcy lawyers following the 9/11 terrorist attacks and may yet file for Chapter 11 protection if it doesn't receive a $1.8 billion federal loan. Shares of the world's largest airline fell to historic lows near $4. Technology stocks fared no better after a warning from National Semiconductor (NYSE:NSM) of tepid sales sent semiconductor stocks into a downward spiral. The composite index of high-tech shares retreated 32 points to 1,247. In the broader market, almost every sector endured selling pressure and the Standard & Poor's 500-stock index finished down 20 points at 864. Market breadth was ragged on the NYSE, where 2,369 stocks fell and only 884 rose on trading volume of 1.54 billion shares. On the NASDAQ, 2,294 shares declined and 1,018 advanced with 1.42 billion shares changing hands. The treasury market soared in the wake of falling equity values with the 10-year note adding 27/32 while its yield fell to 4.29%. The 30-year bond was up 1 1/8 to yield 5.21%. Last week's new plays (positions/opening prices/strategy): Dupont (NYSE:DD) JAN45C/AUG45C $1.90 debit calendar Kraft (NYSE:K) JAN35C/AUG35C $1.80 debit calendar Pharmacia (NYSE:PHA) JAN45C/AUG45C $2.50 debit calendar Stericycle (NSDQ:SRCL) AUG40C/AUG27P $1.00 credit strangle Deutsche (NYSE:DB) AUG70C/AUG65C $0.60 credit bear-call Intl. Game (NYSE:IGT) AUG65C/AUG60C $0.50 credit bear-call Cognizant (NSDQ:CTSH) AUG45P/AUG50P $0.50 credit bull-put Despite the initial bullish trend early in the week, there was little favorable activity in our new time selling plays. The only standout was the Pharmacia position, which yielded a small, short-term profit as the stock rallied to $44.75 on Wednesday. A favorable entry opportunity was available in the Stericycle credit strangle and the target premiums were achieved in both bearish spreads. Traders in the Cognizant position had to wait until Thursday for an acceptable entry credit. Portfolio Activity: The market enjoyed a brisk recovery with Monday's rally but the optimism soon faded as investors came to grips with the reality of a potential "double-dip" recession in our economy. Despite signs of a technical bottom, the selling pressure returned with a vengeance Thursday after news of a drop in construction spending and a weak reading of national business activity. Friday's report of weaker than expected factory orders offered little consolation and disappointing employment data helped bearish traders achieve firm control of the primary trend. Analysts commented about the broken support levels on two of the major equity averages (NASDAQ and S&P 500) and most experts are convinced the market will test its recent lows. That outlook bodes well for a number of spreads in our portfolio, however it is not the direction favored by most investors. Among the bullish positions, Amphenol (NYSE:APH) and International Business Machines (NYSE:IBM), are candidates for early exit on any further downward movement. United Parcel Service (NYSE:UPS) and eBay (NASDAQ:EBAY) are on the watch-list as well, although their respective support areas should limit any downside activity in the near term. The neutral credit-strangle in Symantec (NASDAQ:SYMC) is holding up nicely, in spite of the recent technology sell-off and speculative plays in Oracle (NASDAQ:ORCL) and Protein Design Labs (NASDAQ:PDLI) have yielded small gains. Ciena (NASDAQ:CIEN) and Sepracor (NASDAQ:SEPR) have retreated sharply after showing brief signs of life, but both of these positions are long-term with plenty of time to recover. The most active issue in our calendar spread section continues to be Nextel Communications (NASDAQ:NXTL) and although the stock has experienced some extreme volatility, Friday's close at $5.70 offered another viable exit or adjustment opportunity. Traders who believe the issue will consolidate in the $5-$6 range can wait for a significant change in character before taking profits or transitioning to a future expiration date in the short option. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** MXIM - Maxim Integrated Products $29.96 *** Multi-Year Low! *** Maxim Integrated Products (NASDAQ:MXIM) designs, develops, makes and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. Maxim also provides a range of high-frequency design processes and unique capabilities that can be used in custom design. The analog IC market is highly fragmented and characterized by many diverse applications, a great number of product variations and, as to many circuit types, relatively long product life cycles. The company's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Last week's time-selling plays generated a worthy suggestion from one of our long-time readers. He recommended that we offer some bearish calendar spreads, to take advantage of the downside potential in technology companies that have yet to announce quarterly earnings. Maxim Integrated Products fits that request perfectly as the company is expected to report earnings next week and its share value is at a multi-year low. Traders who want to speculate on the outcome of the report in a conservative manner should consider this position. PLAY (speculative - bearish/calendar spread): BUY PUT SEP-25 XIQ-UE OI=511 A=$1.85 SELL PUT AUG-25 XIQ-TE OI=1336 B=$0.65 INITIAL NET DEBIT TARGET=$1.00-$1.10 TARGET PROFIT=25-40% ****************************************************************** SPW - SPX Corporation $98.50 *** Disparity Play! *** SPX Corporation (NYSE:SPW) is a worldwide provider of technical products and systems, industrial products and services, flow technology and service solutions. SPX offers networking and switching products, fire detection and building life-safety products, television and radio broadcast antennas and towers, life science products and services, transformers, compaction equipment, high-integrity castings, dock products and systems, cooling towers, air filtration products, valves, back-flow protection and fluid handling devices, and metering and mixing solutions. The company's products and services also include specialty service tools, diagnostic systems, service equipment and technical information services. The company's products are used by a broad array of customers in many industries including chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecom, transportation, financial services and power generation. SPW Corporation is not really a technology issue, but the stock emerged near the top of the list in a scan/sort for potentially bearish issues with large premium disparities in the front-month options. In addition, the automotive parts segment (which the stock is grouped in) has struggled recently and future declines in the sector will likely affect SPX's share value. Traders who employ speculative, time-selling plays can use the disparities in the August options to establish a bearish position with low risk and potentially high reward. Target a lower overall debit in the position as the bid/ask spreads are inflated and plan to exit the play prior to the September expiration. PLAY (very speculative - bearish/calendar spread): BUY PUT SEP-80 SPW-UP OI=183 A=$2.80 SELL PUT AUG-80 SPW-TP OI=62 B=$0.85 INITIAL NET DEBIT TARGET=$1.50-$1.75 TARGET PROFIT=25-40% ****************************************************************** AMLN - Amylin Pharmaceuticals $11.95 *** A Bullish Play! *** Amylin (NASDAQ:AMLN) is a biopharmaceutical company engaged in the discovery, development and commercialization of drug candidates for the treatment of diabetes and other metabolic disorders. The company has exclusive rights to two drug candidates that are in late-stage development for the treatment of diabetes, SYMLIN and AC2993. The company has a third drug candidate, AC3056, in early stage clinical trials, and maintains a very focused research and development program to discover and in-license additional drug candidates for metabolic diseases. Amylin shares have been in a bullish trend since mid-June, when the company presented favorable SYMLIN and AC2993 results at the annual scientific sessions of the American Diabetes Association. Amylin's CEO has also commented that the company is currently in discussions with a potential partner for AC2993 development and the upcoming earnings report has simply added to the volatility. From a technical viewpoint, the issue traded at a 52-week high on Friday but it has significant long-term resistance above the current price and will likely consolidate near $14. Traders who want to speculate on the near-term share value of this unique biopharmaceutical company should consider this position. PLAY (very speculative - bullish/calendar spread): BUY CALL OCT-12.50 AQM-JV OI=770 A=$1.40 SELL CALL AUG-12.50 AQM-HV OI=134 B=$0.45 INITIAL NET DEBIT TARGET=$0.85-$0.90 TARGET PROFIT=30-50% ****************************************************************** MYL - Mylan Laboratories $32.45 *** Rising Profits! *** Mylan Laboratories (NYSE:MYL) is engaged in developing, licensing, manufacturing, marketing and distributing generic and brand name pharmaceutical products. The company conducts business through a generic pharmaceutical segment and a brand pharmaceutical segment. The company markets its generic products directly to wholesalers, distributors, retail pharmacy chains, mail order pharmacies and group purchasing organizations within the United States. Mylan also markets its many generic products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and pharmacy benefit management companies. Indirect customers purchase Mylan's products mainly through its wholesale customers. Last week, the Pittsburgh-based drug-maker posted solid quarterly profits, boosted by sales of drugs that have recently lost patent protection and the company's generic version of anxiety medicine BuSpar. Mylan reported earnings of $61.8 million, or $0.49 per share, compared with $50.6 million, or $0.40 per share last year, with revenues of $275 million versus $237 million in the previous period. Sales of Mylan's emerging branded drugs were outstanding with a 42% increase to $39.8 million. The company has recently capitalized on patent expirations for hypertension drugs Prinivil and Zestril, painkiller Ultram and ulcer treatment Axid by making copycat versions of the drugs. Investors appear to be pleased with the company's results and traders who expect additional upside activity from Mylan's stock in the near-term can profit from that outcome with this position. PLAY (speculative - bullish/synthetic position): BUY CALL SEP-35 MYL-IG OI=194 A=$0.95 SELL PUT SEP-30 MYL-UF OI=33 B=$0.95 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $1,150 per contract. ****************************************************************** SNE - Sony Corporation $42.71 *** Next Leg Down? *** Sony Corporation (NYSE:SNE) and its consolidated subsidiaries develop, design, manufacture and market electronic equipment, instruments and devices for consumer and industrial segments. It also develops, produces, manufactures and markets home-use game consoles and software, and develops, produces, makes and distributes recorded music in a variety of commercial formats and musical genres. It is also engaged in the development, production, manufacture, marketing, distribution as well as broadcasting of image-based software, including film, video and television, and in various financial service businesses, including insurance operations through insurance subsidiaries, banking operations through a Japanese Internet-based banking subsidiary and leasing and credit financing operations in the Far East. Sony also has Internet-related businesses, as well as an advertising agency business in Japan and location-based entertainment businesses in Japan and the United States. Shares of Sony tumbled to a 5-month low Friday in conjunction with a slump in Asian stock markets as the latest economic data from the United States jolted investors' waning confidence in the condition of the world's biggest economy. Companies like Sony, which generate a significant part of their revenues in the U.S. market, were pummeled as a result of renewed weakness in the dollar, which fueled selling among Japanese exporters. Traders who believe there is additional downside potential in the issue can profit from that outcome with this position. PLAY (speculative - bearish/synthetic position): BUY PUT AUG-40 SNE-TH OI=80 A=$0.80 SELL CALL AUG-45 SNE-HI OI=26 B=$0.65 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being short the stock. The initial collateral requirement for the sold (short) call is approximately $1,550 per contract. ****************************************************************** - TECHNICALS ONLY - These spreads are based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these spreads may also be higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these positions, so review each play individually and make your own decision about its future outcome. ****************************************************************** BZH - Beazer Homes $57.14 *** Construction Sector Slump! *** Beazer Homes (NYSE:BZH) designs, builds and sells single family homes in various locations within the United States: Florida, Georgia, North Carolina, South Carolina, Tennessee, Arizona, California, Colorado, Nevada, Texas, Maryland, Pennsylvania, New Jersey and Virginia. The company designs its homes to appeal primarily to entry-level and first time move-up homebuyers. The company's objective is to provide its customers with homes that incorporate quality and value while seeking to maximize its gain on invested capital. The company's homebuilding and marketing activities are conducted under the name of Beazer Homes in each of its markets except in Colorado (Sanford Homes) and Tennessee (Phillips Builders). PLAY (conservative - bearish/credit spread): BUY CALL AUG-70 BZH-HN OI=718 A=$0.20 SELL CALL AUG-65 BZH-HM OI=375 B=$0.75 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ****************************************************************** SNPS - Synopsys $40.24 *** 10-month Low! *** Synopsys (NASDAQ:SNPS) is a global supplier of electronic design automation software to the electronics industry. The company's many products are used by designers of integrated circuits (ICs), including system-on-a-chip ICs, and the electronic products such as computers, cellular phones and Internet routers that use ICs to automate significant portions of their chip design process. ICs are distinguished by the speed at which they run, their area, the amount of power they consume and the cost of production. The company's products offer its customers the opportunity to design ICs that are optimized for speed, area, power consumption and production cost, while reducing overall design time. Synopsys also provides consulting services to assist customers with their IC designs, as well as training and support services. PLAY (conservative - bearish/credit spread): BUY CALL AUG-50 YPQ-HJ OI=552 A=$0.10 SELL CALL AUG-45 YPQ-HI OI=2380 B=$0.60 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** MUR - Murphy Oil $77.64 *** Premium Selling! *** Murphy Oil Corporation (NYSE:MUR) is a worldwide oil and gas exploration and production company with refining and marketing operations in the United States and the United Kingdom. The company's operations are classified into two primary businesses: Exploration and Production; and Refining and Marketing. The company's principal exploration and production activities are conducted in the United States, Ecuador and Malaysia by wholly owned Murphy Exploration & Production and its subsidiaries; in western Canada and offshore eastern Canada by Murphy Oil Ltd. and its subsidiaries; and in the U.K. North Sea/Atlantic Margin by wholly owned Murphy Petroleum Limited. Murphy Oil USA, a wholly owned subsidiary, owns and operates two refineries in the United States. MOUSA markets refined products through a network of retail gasoline stations and branded and unbranded wholesale customers in a 23-state area of the southern and Midwestern United States. Murphy's recent earnings report was less than stellar but last week, the company made a significant offshore oil discovery on the Kikeh prospect near Malaysia and investors flocked to the stock on the news. The bullish activity suggests a technical change in character may be underway and the extreme volatility has produced some robust premiums in its options. In addition, MUR spent much of 2002 in a well-defined trading range between $70 and $85 and the stock will likely remain in that area for the next few weeks. Traders with a neutral outlook for the issue can profit from that type of activity with this position. PLAY (conservative - neutral/credit strangle): SELL CALL AUG-85 MUR-HQ OI=243 B=$0.70 SELL PUT AUG-70 MUR-TN OI=40 B=$0.55 INITIAL NET CREDIT TARGET=$1.25-$1.30 MONTHLY PROFIT(max)=14% UPSIDE B/E=$86.25 DOWNSIDE B/E=$68.75 ************************Advertisement************************* ”If you haven’t traded options online - you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success - Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ The shorts are still working with two more triggered Friday. We’re trying it again with this Nasdaq favorite. To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/080402.asp ************** MARKET POSTURE ************** More movement to report from Friday’s session. Unfortunately, most of it was to the downside. 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