The Option Investor Newsletter Wednesday 08-07-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Extreme Volatility Index Trader Wrap: Whippy Weekly Fund Family Profile: The Timothy Plan Options 101: By Popular Request, A Greek Review Index Trader Game Plans: THE SECTOR BEAT - 8/7 Updated on the Site Tonight: Swing Trader Game Plan Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 08-07-2002 High Low Volume Advance/Decline DJIA 8456.15 + 182.02 8460.17 8214.62 1739 mln 1980/1128 NASDAQ 1280.90 + 21.35 1298.12 1243.49 1567 mln 1704/1530 S&P 100 441.46 + 10.29 442.39 429.15 totals 3684/2658 S&P 500 876.77 + 17.20 878.74 854.15 RUS 2000 383.47 + 2.68 385.21 376.56 DJ TRANS 2271.38 + 35.88 2277.96 2214.87 VIX 43.07 - 2.66 47.01 42.07 VIXN 68.84 + 4.66 69.26 63.91 Put/Call Ratio 0.76 ******************************************************************* Extreme Volatility By Steve Price This morning's market reaction to Cisco's earnings release didn't last long. A 180-point gain in the Dow was erased and sent into negative territory. This seemed to make sense, given the recent economic news indicating a shrinking economy, and the German fund equity buy program having been placed in the rear-view mirror. But the end of the day found buyers again, rallying the Dow 230 points to finish up 182.06 on the day. There are several factors hanging over the market that may be contributing to the recent volatility. A look at the rally of the last couple of days can possibly be attributed to a simple retracement of the plunge of the previous three days. The close of 8456.15 (and high of 8460.17) is awfully close to the 61.8% retracement level of 8467. This is based on Wednesday's high of 8736.72, just before the 700-point drop to Monday's low of 8030.82. Chart of Dow Retracement Although the market is looking strong after this retracement, it still has not made up the recent loss. A look at the longer term shows two points that are more significant. Monday's low of 8030.82 presented what could be evidence, in hindsight, of a bottoming process. We won't know for some time if this is the case. However, if we were to break below 8000 again, it would be significant in the longer-term picture. A continued rally above the Wednesday high would also look bullish. The hold at 8000, combined with a trade above Wednesday's high would look more bullish with a series of higher highs and higher lows. Chart of Dow Trend As of right now, however, the long-term trend is still down. As we get closer to Tuesday's Fed meeting, we may see a continued rally in anticipation of a rate cut. This is the first time in quite a while that the action the Fed will take has been greatly debated. In the past, most changes have been widely anticipated, and although they have been either bearish or bullish for the market, the volatility has not been as high due to the fact that most investors felt that they knew what would happen. A look back at the Market Volatility Index (VIX.X) shows that during the 11 cuts the Fed made in 2001, the only time market volatility was over 35 was following the September 11 attacks. Leading up to six of these changes, market volatility was in the 20s. The VIX has traded over 40 intraday in 17 out of last 20 trading sessions. It closed today at 43.07. Chart of the VIX So the question on most readers' minds is undoubtedly "Where are we going next?" If the Fed aggressively cuts rates again by the end of the year, the effect on the economy may eventually be great. However, there is usually a time lag, and this will not necessarily help companies now. In addition, with the current rate at 1.75%, the Fed must be careful about how it uses its remaining bullets. As we approach the anniversary of 9/11, there is concern over an anniversary attack. For this reason, they may want to wait until the following meeting on September 24th before using up 25 basis points, or more. Although the bond market has a more direct effect on mortgages, lower rates do trickle down and recent activity suggests that current low rates are having an effect. This morning, mortgage applications for both new homes and re-financing came in at record highs. This week showed an increase from 1055.5 to 1066.9. This is one area that pumps money directly into the economy and may lead to a more immediate economic impact. When homeowners have lower monthly payments, they have more disposable income to spend in all sectors. In addition, home equity loans used for home improvement could give both retailers and contractors a boost. The housing "bubble," therefore, may get a little more air pumped into it. These mortgage numbers are in contrast to the Cambridge Consumer Credit Index, which showed that Americans are less willing to take on debt, because of the falling stock market. With less money in their portfolios, the prospect of paying off their credit cards seems more daunting. The index dropped from a reading of 63 in July to 56 for August, as 33 percent of consumers in August said they are willing to take on more debt, compared to 36 percent in July. This indication of reluctance to spend does not bode well for the economy. Total consumer credit, excluding mortgages, rose $8.4 billion in June to $1.173 trillion. This was slightly above expectations of $7.9 billion. Vice President Dick Cheney took on the role of cheerleader today, in trumpeting the basic strength of the economy. Actually it sounded more like a veiled version of "it wasn't us." He said the economy was getting better, as a result of tax and interest-rate cuts that had taken place since Bush took office. He placed blame for the country's economic problems squarely at the Bill Clinton's door, saying that the Bush administration had inherited a country that had slid into a full-blown recession. In the department of investor trust, there were three new developments today. First, insurance brokerage AON Corp. (AOC) released worse than expected earnings, with CEO Patrick Ryan claiming "Second quarter bottom line results were the worst in Aon's history due to certain unusual items, compressed operating margins, and lower investment income." That was only part of the story, however, as the company said it might have to restate earnings from both 1999 and 2000, after consulting with the SEC about its consulting practices. The stock was subsequently downgraded by Salomon Smith Barney and UBS Warburg, and lost $6.43, or 30.33% of its value. Next in the mug shot line was Tyco, whose former chief Dennis Kozlowski apparently received $135 million in loans from the company, over a five-year period, which were either interest free or completely forgiven. This included a $19 million gift to help him purchase a 15,000 square foot estate in Boca Raton, Florida. As a former Tyco stockholder, I'm still waiting for my housewarming invitation. Apparently, one of the items deemed necessary for the health of the company was a $6,000.00 shower curtain for Kozlowski's New York residence. Last in today's line was Sam Waksal, former CEO of ImClone Systems, who was indicted today on charges of securities fraud, bank fraud, and obstruction of justice. Waksal is accused of tipping off relatives that ImClone's application to market the anti-cancer drug Erbitux would not be approved by the FDA. The rejection sent the stock plummeting, from a high of more than $70, to an eventual low under $7. In related news, apparently there are more conflicting stories about Waksal acquaintance Martha Stewart's own dumping of the stock. The House Energy and Commerce Committee is apparently widening its probe into Stewart's activities in an attempt to clear up conflicts between the stories of Stewart, her broker, and his assistant. Of course, prison decorations and hot-plate recipes could be an untapped area of expansion for the home economics queen. Citigroup has announced they will join the ranks of companies that will expense employee stock options. While they have continuing exposure to the Enron probe, this should give investors something positive to look at. While some companies, such as Cisco, have refused to do so, this practice may eventually become the norm, as more large companies are stepping forward to volunteer the new accounting practice. With only 7 days left until the August 14 deadline for CEOs to certify their companies' financial results, only 60 companies have done so. This leaves 887 more, or 94%, which have not yet certified. It is hard to imagine that all 887 of these companies will certify without any problems. This week should be interesting in this regard. The Fed meeting coincides with the last day before certifications are due, so a cut in rates could play tug-of-war with any bad news that may come out in the final days before CEOs have to commit. We will probably continue to see increased volatility heading into next Tuesday. Keep an eye on key resistance levels in the big picture, and don't be surprised by any whipsaw in the market. There is much news to come in the next seven days, so don't be stubborn and respect your stops. ******************** INDEX TRADER SUMMARY ******************** WHIPPY by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - The floor brokers I've heard from recently say that they would like to take a vacation. The market is, as they say, "whippy", as in whip-saw. You pick a direction and follow momentum or price direction for a while, then the index of choice reverses on you. Fundamentally, Cisco's earnings gives some glimmer of hope that maybe earnings will start to pick up. And, the market horses have the got the "rate-cut" bit in their teeth and are running for the barn. Whether this happens is VERY uncertain from what I know of how Chairman Greenspan works. He has never been one to try to help out the market certainly - and, he doesn't try to micro manage the economy. Tomorrow, we have retail sales which I think is important - PPI and productivity are not unimportant, but retail sales gives us a look into the mood of the consumer and the consumer is propping up the economy. I'm not going to try to wear out my brain - and, yours - by trying to gaze into the Fed crystal ball. The technical pattern is my focus as I think the MARKET knows where it wants to go next and the chart patterns are shaping up in a way that will tell us the next direction, so I'll get right into my particular crystal ball and eye on the index patterns that are shaping up - and, which got clearer today. This has been a difficult market to figure - myself, I started the week "sure" that the market is bottomed, then sure it was going to new lows and I feel pretty "whip sawed" myself. Sometimes resolution becomes very simple when there is a series of declining highs and rising highs - and a line connecting these points CONVERGE. Then, in one of the few times this happens, you simply wait for the market to break out above one of the lines and go in that direction, with stop points above/below (as the case may be) the "breakout" point. I'll start with a look at the hourly chart of the Dow, or rather the Dow Index, DJX - this chart demonstrates the pattern for the NYSE-related indices. The Nasdaq has a similar pattern, in terms of a possible upside breakout, but its chart formation does not make a triangle, although QQQ has put in a double bottom (another well known chart pattern). And, lastly, a tip of the hat to John Seckinger for getting me thinking about "triangles". DJ Industrial Index (1/100 - $DJX.X) - Hourly charts: A "symmetrical" triangle outlined above is where prices trend down, forming lower highs and also trend up, forming higher lows. This signals a trend "change" - either a reversal up or another downswing - the dynamics of this pattern is "compression". Compression in an index or stock is where the distance between highs and lows NARROWS in. The market (that is the sum of traders and investors) is "making up its mind" so to speak. There is a change in outlook or conviction coming. The "most likely" decline on a break of the up sloping trendline is for a further 10% move, but it can be up to 20%. The "most likely" rise on a breakout to the upside is 20%, but can be up to 40% from the breakout point. The "breakout" points are noted above at each trendline, but keep in mind that over several more hours the downside breakout point will rise some and the upside breakout point will be at a somewhat lower point. Also, there is often a tendency for prices to come back to the trendline that is pierced. So, for example, assume a breakout above 85.4 (Dow 8540), and watch that same trendline - the next reaction low will often come back it the line. Basically, the pattern here is suggesting to us to look a good- sized advance if DJX achieves a decisive upside penetration of 85.4. Conversely, look to trade the other way and play the 85.5. downside if the break is below 81.5. Simple, yes! In all seriousness, there are not many such technical patterns that give a fairly predictable resolution. Also, the stop points are clear. If long for example, use a stop point 2-3% under the trendline; e.g., at 82.8. S&P 100 (OEX) Index - Daily/Hourly charts: The OEX has broken out above the 440 level that I suggested would "signal" a next move higher IF the rally didn't immediately fall apart the next day and there was good upside follow through. Moreover, this move has put the S&P 100 index above the upper line of its possible triangle. The higher (down-sloping) trendline is where the longer-term hourly channel line intersects at 455, so a move above this level would tend to "confirm" the bullish potential of the triangle breakout that happened at the close today. My suggestion is to establish a long call position on the opening if its not a huge jump - if it is, it would be worth waiting for a dip to buy. Risk to 435 initially. If there is a downswing that develops instead of upside follow through such that there's a move below 425, that would be a bearish break of the lower trendline and a signal to go into puts. S&P 500 (SPX) Index - Hourly chart: As with the OEX, the S&P 500, SPX, has achieved an initial bullish breakout of a symmetrical triangle. Confirmation of further upside potential comes with a second breakout above the long-standing upper end of the hourly downtrend price channel, currently intersecting at 890 - eventual upside potential is to as high as 950 in that event. The strategy is the same in terms of establishing an initial long position, with a suggested stop/exit point at 853 initially. Conversely, a downside reversal is signaled on a move to below 845, which would then also warrant a bearish put play on the SPX. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: The break out points on QQQ are 23.2, then 23.6, which is the area of both the hourly upper channel line AND the "pivotal" 21- day moving average. The pattern with the Q's is different from the S&P in that a likely double bottom is in place here. "Confirmation" of a double bottom occurs with a breakout above the prior rally high that PRECEDED the second low (forming the double bottom) - this means that confirmation of a bottom is suggested if and when 24.7 is exceeded to the upside. So, there are two dynamics going on - one are the possibility of bullish trendline breakouts and the second is indicated on a move that exceeds the prior 24.7 peak. This is true in general, as an uptrend emerges when there is a pattern of higher rally highs and higher reaction lows - something to look at with the S&P and DJX charts as well. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** The Timothy Plan Long-term investors concerned with the moral issues of today may be interested in this week's profile of The Timothy Plan, a fund family offering retail investors a biblical choice when it comes to investing. The Timothy Plan's website states that their goal is to recapture traditional American values, avoiding investment in companies involved in practices contrary to "Judeo-Christian" principles. Judeo-Christian principles have historical roots in both Judaism and Christianity (Old Testament and New Testament). The Timothy Plan screens companies based on certain biblical criteria and if the company's involved in one or more of the following practices they're prohibited from investment in the mutual fund portfolios: * Abortion * Pornography * Anti-family entertainment * Non-married lifestyles * Alcohol * Tobacco * Gambling Should you consider investing in one of The Timothy Plan mutual funds, you should read the prospectus carefully and ensure that you understand and agree with the various screens being used to weed out the bad apples. If you don't believe these things are destroying children and families then you may not want to limit your investment universe to traditional values-based companies only. That's a personal choice and one that only you can make. The Timothy Plan, as such, represents America's first pro-life, pro-family, and biblically based mutual fund group. They offer investors a variety of products and services, and help personal investors to locate Christian financial planners in their area. For more information regarding The Timothy Plan, you can either call the toll-free number at 800-846-7526 or logon to their web site at www.timothyplan.com. The site lets you download a fund prospectus if you want, and contains detailed information about the firm's principals and objectives and fund products/services. Per the website, The Timothy Plan currently offers eight separate and distinct investment portfolios, with each portfolio employing what they believe to be a highly respected money management firm that possesses specific expertise unique to that particular fund. These eight Timothy Plan open-end, mutual funds are listed below. * Timothy Plan Aggressive Growth Fund * Timothy Plan Large/Mid-Cap Growth Fund * Timothy Plan Small-Cap Value Fund (TPLNX and TIMBX) * Timothy Plan Large/Mid-Cap Value Fund * Strategic Growth Fund * Conservative Growth Fund * Fixed Income Fund * Money Market Fund Note that The Timothy Plan mutual funds are available in Class A and Class B shares. A Shares have a front-end load of 5.50% and the B Shares have deferred fees. The two class shares hold the same investment portfolio and vary only in their surrounding fee structure. For our purposes, we will use the Class A shares for fund comparison purposes. The minimum initial purchase required is only $1,000 for regular accounts ($0 for IRA accounts). Fund brokerage availability is good, with the Timothy funds available at more than two-dozen fund networks (note, Schwab is not one of them). Because of their limited asset sizes, 7 of 8 Timothy Plan mutual funds do not currently have a ticker symbol. Only the company's original fund product, Small-Cap Value Fund has more than just a Cusip number. If you want the Cusip numbers, they are presented on the Welcome page of The Timothy Plan website. Note the funds are in Morningstar's system. If you type in the name Timothy in the Morningstar Quicktake Report field online, it'll list all of the Timothy Plan funds and assign its own unique ticker to those lacking an official ticker symbol. Additional Background According to the Timothy website, the firm was founded in early 1992 by Arthur Ally, who at the time was challenged to design a specialized retirement plan for pastors of independent churches and to offer it on a national scale. This challenge, the story goes, forced Ally to search the entire investment industry for any professionally managed investment program that would screen out companies involved in practices offensive to an evangelical pastor's Christian world-view. He found that one didn't exist. Ally's research team reportedly identified only a small handful of ethical mutual funds, but on closer scrutiny discovered that nearly all these funds were really just "fronts" for promoting some "New Age" agenda, as they put it. These social funds were attracting Christian investment dollars, due to their screening out of companies involved in alcohol and tobacco, but they felt that wasn't enough. Their research found that these same funds were unknowingly channeling dollars into areas very contrary in their opinion to Christian values and principles. Mr. Ally and his research team decided to move forward in 1992, and "The Timothy Plan" was established, based on the scriptural principles contained in I Timothy 5:8,22; 6:10; and Ephesians 5. In addition to serving as Timothy's president, Ally also serves as president of Covenant Financial Management Inc., a financial planning firm he founded in 1990 (prior to establishing Timothy Plan). Covenant specializes in tax and investment planning for high net worth individuals and small business clients - with an emphasis on "planned giving." Covenant has since spun off its financial planning practice, and now acts as national marketing agent for the Timothy Plan. Mr. Ally is a Certified Financial Planner (CFP) and former CPA who joined the investment industry more than 23 years ago, per the Timothy Plan website. Investment Style/Strategy The Timothy Plan funds are based on the "biblical stewardship" principles of I Timothy 5:8, 22 and screen out companies which are contributing to the moral decline in America. They screen out firms involved either directly or indirectly in pornography or abortion as well as those companies directly involved in the production of alcohol, tobacco or gambling. Their funds don't invest in either the common stock or fixed-income securities of those companies. The Timothy website goes into more detail about the 8 practices that are contrary to "Judeo-Christian" principles and result in prohibition. Each practice in their worldview hurts as well as destroys children and families. For each practice contributing to moral decline, the website provides scriptural references to support the prohibition on investment. For more information on their biblical screening guidelines, you can go online. As stated earlier, only one mutual fund, Timothy Plan Small-Cap Value Fund currently owns a ticker symbol and is tracked by the Morningstar's of the industry. It is classified as a small-cap blend fund by Morningstar, and during its history has generally maintained its small-blend bias. In 2000, it drifted over into the Morningstar small-cap growth style box. Timothy Plan Small-Cap Value Fund (TPLNX and TIMBX) seeks long- term capital growth (income secondary) by investing principally in stock securities of companies with market capitalizations in excess of $200 million. Its portfolio holdings consist chiefly of common stocks and American depositary receipts (ADRs) and it may invest up to 30% of assets in fixed income securities. Per Morningstar, 95.3% of fund assets were invested in stocks as of April 30, 2002, with 4.7% of assets held in cash. That's fully invested by mutual fund industry standards. Since January 1, 1997 the fund's portfolio has been managed by a team of investment professionals including James Awad/Awad Asset Management, Carol Egan and Dan Veru. Morningstar's style box details as of July 31, 2002 indicate an average market capitalization of $611 million (small-cap) along with low average price valuations (P/E, P/B, P/C) compared with the S&P 500 large-cap index. Relative to other small-cap funds, the Timothy Plan Small-Cap Value Fund's average prices are more down the middle, resulting in its "blend" style classification. In the next section, we'll take a look at how well Timothy Plan Small-Cap Value Fund and other Timothy offerings have performed compared to their respective category peers using data provided by Morningstar. Fund Performance Below is a quick synopsis of relative fund performance for the Timothy Plan mutual funds as best I can derive it from limited performance information available online (data through July 31, 2002 unless otherwise stated, per Morningstar, Class A shares). Small-Cap Value Fund (3-Yr and 5-Yr as of 8-6-2002): 3-Year Annualized (+5.2%); % Rank in Category (38th) 5-Year Annualized (+1.2%); % Rank in Category (54th) YTD 2002 Return (-14.0%); % Rank in Category (66th) Morningstar Category: Small-Cap Blend Aggressive Growth Fund: 2001 Return (-20.8%); % Rank in Category (50th) YTD 2002 Return (-26.0%); % Rank in Category (58th) Morningstar Category: Mid-Cap Growth Large/Mid-Cap Growth Fund: 2001 Return (-22.7%); % Rank in Category (52nd) YTD 2002 Return (-28.4%); % Rank in Category (80th) Morningstar Category: Large-Cap Growth Large/Mid-Cap Value Fund: 2000 Return (+13.0%); % Rank in Category (70th) 2001 Return (-0.1%); % Rank in Category (74th) YTD 2002 Return (-12.6%); % Rank in Category (66th) Morningstar Category: Mid-Cap Value Strategic Growth Fund: 2001 Return (-11.9%); % Rank in Category (7th) YTD 2002 Return (-21.8%); % Rank in Category (27th) Morningstar Category: Large-Cap Growth Conservative Growth Fund: 2001 Return (-5.6%); % Rank in Category (63rd) YTD 2002 Return (-12.2%); % Rank in Category (71st) Morningstar Category: Domestic Hybrid Fixed Income Fund: 2000 Return (+2.4%); % Rank in Category (43rd) 2001 Return (+6.0%); % Rank in Category (30th) YTD 2002 Return (+1.7%); % Rank in Category (30th) Morningstar Category: Multi-Sector Bond The relative performance of the Timothy Plan Fixed Income Fund has been average/above average relative to its category peers. Its trailing 3-year annualized return of 4.6% through August 6, 2002 ranks in the category's 27th percentile, near top quartile. Compared to other multi-sector funds, the Fixed Income Fund has below-average risk and average return, according to Morningstar, for a risk-adjusted, performance rating of 3 stars ("average"). An upgrade to four stars isn't out of the question considering the fund's strong showing since December 31, 2001. The fund's YTD return as of August 6, 2002 was 4.0%, ranking it in the top 7% of the multi-sector bond fund category. Timothy Plan Small-Cap Value Fund's 3-year returns and rankings are better than its trailing 5-year returns and rankings. Over the last five years, the co-managed fund has returned just 1.1% per year on average, ranking in the category's 54th percentile. When compared to its small-cap blend peers, the fund has put up average returns with below average risk, for a 3-star rating by Morningstar. Sibling Large/Mid-Cap Value Fund sports a 3-year average annual total return of -3.2%, ranking it in the 80th percentile of the mid-cap value fund category, per Morningstar. Year-to-date and 1-year numbers are similarly ranked within the category. Below average return and average risk get this portfolio only 2 stars by Morningstar, signifying below average, risk-adjusted returns relative to the category. The other Timothy Plan mutual funds lack sufficient information and history to perform meaningful comparisons or to derive long- term outlooks. Summary With all the moral and ethical issues of the day, we thought it might be appropriate to profile a mutual fund organization that has taken socially responsible investing to a new level. Since none of the Timothy Plan funds may invest in so-called excluded securities, the pool of securities they each select from may be limited to a certain degree. The fund prospectus says that although the firm believes it can achieve the investment objective of its mutual funds within the parameters of ethical investing, screening out certain excluded investments could have a material adverse effect on performance. Again, the decision of whether to screen out companies that are morally or ethically challenged is a personal one. For us, the jury is still out on this one. For further information, log on to www.timothyplan.com. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** By Popular Request, A Greek Review By Mark Phillips mphillips@OptionInvestor.com When trading options, there are a lot more factors to pay attention to, when compared to just trading stocks. Several months ago, I wrote a series of articles on all these factors that we need to pay attention to. Lately, I've had a veritable flood of email requesting detailed information on how to pick the right option strike, gauge what to expect in terms of option appreciation from a given move in the underlying stock, along with a host of other questions that are best answered by a detailed treatment of the myriad factors that determine option pricing. Rather than just send curious readers digging through the archives in search of the appropriate articles, I thought it would make sense to re-issue this introductory article tonight. This way, we can bring the new readers up to speed, starting at the beginning. Due to the plethora of additional factors that influence option pricing, most notably "the Greeks", it is possible to enter an option trade that produces a loss, even when a corresponding trade in the underlying equity or index would have produced a profit. Understanding these factors and their influence on option pricing is essential to profitable option trading, especially in the volatile market we currently have at our disposal. So what are the Greeks? In order to answer that question, we need to say a few words about how option prices are calculated. Option prices are determined by applying the standard Black-Scholes pricing model, which uses 5 inputs to create the theoretical price of the option. They are as follows: 1. Time to expiration 2. Strike price 3. Value of the underlying equity or index 4. Implied volatility of the underlying equity or index 5. The risk-free interest rate Discussion of the inner workings of the Black-Scholes model is far beyond the scope of this article, and there have been numerous books written on the subject for the inquisitive student. Rather than delving into theory, I thought it would be far more productive to deal with the practical measures of option pricing and strike selection that can aid us in our pursuit of profits. These measures are commonly referred to as the Greeks and the four most important Greeks, in my opinion, are Delta, Gamma, Theta and Vega. Delta measures the amount that a given option will move with respect to the underlying security and is stated in terms of percentage from 0 to 100. If a stock moves $1 and the option in question increases in value by $0.40, we know that the option had a Delta of 40. At-the-money (ATM) options typically have a delta of 50, while out-of-the-money (OTM) options have a Delta less than 50 and in-the-money (ITM) have a Delta greater than 50. As we move further out-of-the-money, Delta approaches zero, while it approaches 100 as we move deeper in-the-money. Neither of these extremes are met in practical application, but the basic relationship should give us a useful working understanding. Gamma is used to describe the rate-of-change of an option's Delta, and those that understand the relationship can use their knowledge to give their trading profits an extra boost. Putting the relationship in physics terms, Delta is the equivalent of velocity, while Gamma can be equated to acceleration. If you recall your high school physics, you'll remember that acceleration can really boost velocity over time. The same is true of the Delta-Gamma relationship. I'll leave you to ponder that concept and we'll revisit it in exacting detail on our next visit. The one constant in the universe (aside from taxes) is the passage of time, and Theta is the Greek that measures the impact of Father Time on option prices. Options are, by definition, a wasting asset, meaning that the portion of the option premium that is attributable to time, declines day after day. Adding insult to injury, the rate of decay of the time-related portion of an option's value increases as expiration Friday draws near. The majority of an option's time value disappears in the final 30 days of its life and most of that evaporates in the final 2 weeks. During expiration week, an equity must move in your favor substantially, just to offset the loss in value due to Theta-decay in an OTM or ATM option. Volatility is perhaps the most apparent determinant of option pricing; at least it has seemed that way during recent months as we have watched the VIX race from 35 to 57 and then back down to the low 20's. While normal trending markets don't have nearly that kind of volatility movement, when it does occur, it can yield outsized returns for appropriately positioned traders, and exact staggering losses from those unaware of its potential effects. Last week, I highlighted the perils of trading in a high-volatility environment. Traders that sell options in such an environment can reap substantial rewards, but need to be cognizant of the inherent risks that come with the territory. One interesting point about time-value in options is that on a percentage basis, ATM options are the most expensive in terms of time value. So when we buy ATM options, we need to understand that we are buying the most time-value possible for that expiration month, and every last shred of that time-value will melt away by expiration Friday. By expiration, either all the time value will have melted away leaving a worthless option (great for option sellers, but unpleasant for option buyers), or the stock will have appreciated so that the option is ITM, now possessing intrinsic value equivalent to how far in the money the option is. As a simple example, let's take a $50 OCT Call on stock XYZ which is trading for $3.00 one month before expiration. If on expiration Friday, the price of the stock is $48 (even if that is above the price of the stock one month earlier), the option will expire worthless, with no time value and no intrinsic value. On the other hand, if XYZ appreciates to $54 by expiration Friday, the option will be worth $4.00 ($4 intrinsic value, and no time value). In both cases, the time value of the option fades away to nothing by expiration, but if the stock moves sufficiently so that our option is in the money, we have real, as opposed to anticipated value. Delta and Vega are fairly easy to quantify, and there are a number of websites that provide this data for those interested in learning the inter-relationships and how they influence the potential success of option trading. One of my favorite sites is www.ivolatility.com, which provides detailed analysis of option Greeks, as well as historical volatility charts. While this site also provides an option calculator to determine Theta and Gamma for specific options, I think these two Greeks are more important to understand from a qualitative sense, so I tend to focus less on the actual numbers and more on their general influence on option prices. One interesting trend I have noticed in recent months is that online brokers are doing a better job of catering to option traders. All 3 of the brokers that I currently use, have recently added options analysis tools to their trading sites. This provides me with the ability to research the various Greeks on a prospective option trade without ever leaving the trading screen. In addition to basic option calculators that provide the ability to check Delta, Gamma, Vega and Theta for any option, these sites now provide charts of both historical and implied volatility. Using this latter tool, I can see where a stock's volatility is in relation to its historical range, helping me to make sure I am buying low volatility and selling high volatility. We'll devote a future article to just talking about volatility and how to use it to our advantage. When properly understood, the inter-relationship of the Greeks on option pricing can be very useful to option traders (both buyers and sellers) who understand how to capitalize on the opportunities provided. Now that we've covered the basics, we're ready to dig into all the details you can stand. Fortunately, I don't have to write the whole series of articles again, as they are archived in the Options 101 section on the website. If this article whetted your appetite for more details, then feel free to peruse the list of articles below. The Greeks, Part 1 - Delta and Gamma Application of Gamma and Delta to Strike Selection Back to the Olympians of Old Oh, That Vexing Volatility Volatility - Part Deux The Greeks - Putting It All Together A Greek Encore Varying Views on Volatility A Primer on Online Volatility Tools - Part I Happy Reading! Mark ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 8/7 by Leigh Stevens Another up and down session - another seesaw session - but one that wound up with most of the sectors higher on the day, although most of these were up only modestly on a percentage basis, as you can see below. Price action today was constructive in terms of further upside potential in Defense (DFI), Pharmaceuticals (DRG), the Russell 2000 (RUT), Semiconductors (SOX), and the Brokers (XBD) Helping DRG was Watson Pharmaceuticals (WPI) rallied over 9% after it reported its Q2 earnings above expectations. Support in biotech was seen when Gilead Sciences (GILD) ran up 3% after an FDA advisory panel recommended late yesterday that the company's experimental treatment for hepatitis be cleared for marketing. UP on Wednesday - DOWN on Wednesday - SECTOR TRADE RECOMMENDATIONS - NEW/OPEN TRADE RECOMMENDATIONS - Buy SMH at 23.75 (Semiconductor HOLDR stock) Stop at 22.75 TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT(S) - 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 The Semiconductor Index (SOX) is rebounding from the low end of its downtrend channel, suggesting that the SOX could possibly rebound to the area of significant overhead resistance at 350 again. Enough for a trade, even if the chip sector does not make it though this key level again. The past pattern for the SOX has been for a good-sized rebound on the second bounce from its lower trendline. UPDATE: 8/7 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************** SWING TRADER GAME PLANS *********************** Swing Trade Game Plan Jim Brown What? A Rally? After two days of gap openings following very negative closes the market pulled off a reversal on the strength of some huge futures related buy programs. The close over resistance at OEX 440 was positive but the margin at the close was very tenuous at only $.50 cents. The stage is set for a continued rally but also poised on the cliff for a possible drop. The key appears to be the coming Fed meeting and the growing possibility of a rate cut. To View the Swing Trader Game Plan Page Click Here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Wednesday 08-07-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: BBOX, CCMP, JPM Play of the Day: Put - QCOM Big Cap Covered Calls & Naked Puts: The Base-Building Process Begins! Updated on the site tonight: Market Watch Market Posture ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ BBOX $34.20 +0.24 (+1.00 for the week) BBOX has had a nice roll down hill. It has rebounded with the rally in the overall markets the last two days, and has violated our stop. This stop was lowered to lock in a profit on this play and has done so, as we originally entered the play at $36.92. Use a market pullback to take additional profits in exiting this play on Thursday. CCMP $40.07 +0.83 (+1.85 for the week) CCMP suffered a technical breakdown under $40 last Thursday. It found support, however, down at $36.60. This support coincided with the broader market rally, and although it has not rallied past its previous high, it has violated the trend we attempted to capture. CCMP violated our stop of $39.25 and we will to close this play on Thursday. JPM $24.04 +0.39 (+0.19 for the week) JPM has continued to tow with it a black cloud of bad news. Exposure to large derivatives positions, South American economies, and Enron have kept the stock below $25. In a classic case of the rising tide lifting all boats, this sinking ship has benefited from the recent market rally. We lowered our stop loss on this play from $25 to $24, and the stock has violated this level by $0.04. Although sometimes hard, in a market with the current levels of volatility, we will respect our stop loss and close this play ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* QCOM – Qualcomm $25.18 +1.43 (-0.37 for the week) Company Summary: QUALCOMM Incorporated (www.qualcomm.com) is a leader in developing and delivering innovative digital wireless communications products and services based on the Company's CDMA digital technology. The Company's business areas include CDMA chipsets and system software; technology licensing; the Binary Runtime Environment for Wireless(TM) (BREW(TM)) applications platform; QChat(TM) push-to-talk technology; Eudora® e-mail software; digital cinema systems; and satellite-based systems including portions of the Globalstar(TM) system and wireless fleet management systems, OmniTRACS® and OmniExpress®. QUALCOMM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by standards-setting bodies worldwide. QUALCOMM has licensed its essential CDMA patent portfolio to more than 100 telecommunications equipment manufacturers worldwide. Headquartered in San Diego, Calif., QUALCOMM is included in the S&P 500 Index and traded on The Nasdaq Stock Market® under the ticker symbol QCOM. (source: company release) Why We Like It: Qualcomm has suffered along with the rest of the tech sector. The stock had found support at $25 going back to the beginning of May. Although QCOM finished the day above $25, yesterday's drop through this level is a bearish sign for the stock. This reinforces last Thursday's downgrade by Credit Suisse First Boston (CSFB). The firm cut its rating on QCOM from a "buy" to a "hold." There are very few sell ratings issued, and "hold" is generally considered to be one of the most bearish ratings a stock can receive. CSFB also lowered its price target on the stock a stunning 44%, from $45 to $25. It said it expected slow growth for 2003 lowered its earnings per share estimate to $1, 10% below the current consensus. Qualcomm beat earnings forecasts on July 25, and expects revenue to be at the high end of previous forecasts. Many analysts, however, have expressed doubts about QCOM's sales expectations for its mobile phone chips. The research note from CSFB stated, "We think it will be difficult for (Qualcomm) to show upside in the next few quarters without a rebound in the end market... Until there is better visibility into 3G or significant ramps in new markets like China or India, we think growth will be limited." A look at Qualcomm's point and figure chart shows a triple-bottom breakdown, established with yesterday's trade of $24, before closing at $23.78. QCOM is working on a bearish vertical count of $16, although this may be an aggressive target, as a reversal at some point would be needed to cement this number. However, each trade of a round number below $24 extends this count downward by $2. One note about this chart. A single "O" on a triple bottom breakdown can lead to a "bear trap." A bear trap forms when the last holder of stock finally gives in, and is followed by a quick reversal up afterward. The triple bottom breakdown is still bearish, but shorts may want to put on half a position here and half after the stock forms another "O" at $23. We like this position for short entries under $25, as this will avoid the continuation of today's rally in the Nasdaq and broader markets. QCOM's current downward trendline, begun July 17, provides resistance just over $25, and this entry will avoid violation of this trendline, as well. Our initial target will be $20. Why this is our Play of the Day: QCOM triggered our short entry below $25 this morning, and although it attempted a rally with the rest of the market, the stock was barely able to make it back over the $25 mark. The stock's intraday low of $23.36 showed continuing weakness, and it is our belief that if not for the end of day rally, this stock could have traded much lower. The triple bottom formation came close to adding another "O" which would be confirmation of this breakdown. On a market pullback, a trade under $25 is anadditional short entry point on this play. The market may continue its wild swings ahead of next Tuesday's interest rate announcement, and next Wednesday's accounting certification deadline. Therefore, stops must be observed with added caution. These announcements, however, don't change the weak technicals on QCOM. BUY PUT AUG-25 AAW-TE OI=12552 at $1.45 SL=0.75 BUY PUT SEP-25*AAW-UE OI= 3252 at $2.80 SL=1.30 Average Daily Volume = 16.5 mil ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** The Base-Building Process Begins! By Ray Cummins Stocks climbed higher Wednesday after a strong rally early in the session gave investors new hope that the market may finally be showing signs of a bottom. Building on favorable earnings from Cisco Systems (NASDAQ:CSCO), equities followed through on the morning's brisk upside activity despite worries about the health of the U.S. economy. A report showing consumer credit expanded in June eased concerns, helping the Dow Industrial Average finish the day 182 points higher at 8,456. The strongest blue-chip shares were Honeywell (NYSE:HON), Merck (NYSE-HON), Boeing (NYSE:BA) and General Electric (NYSE:GE). The technology-laced NASDAQ Composite Index closed up 21 points at 1,280 on strength in telecommunications and networking issues. The broader Standard & Poor's 500 Index ended up 17 points at 876 with advances recorded by pharmaceutical, health care, chemical and computer technology stocks. Oil services and Internet issues were the only losing groups. Advancing stocks led decliners by a ratio of 2 to 1 on the New York Stock Exchange while breadth was barely positive on the NASDAQ. Over 1.48 billion shares changed hands on the Big Board and more than 1.56 billion on technology exchange. In the bond market, Treasuries remained on firm footing even as stocks pushed higher. The 10-year Treasury note rose 1/8 to reach 104 10/32, a yield of 4.31%, while the 30-year government bond gained 3/32 to 102 7/32, yielding 5.22%. *************** Summary of Current Open Positions *************** (As of 08-06-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield EBAY AUG 45 44.15 55.27 $0.85 5.54% EBAY AUG 50 48.95 55.27 $1.05 7.56% FRX AUG 60 59.20 69.14 $0.80 5.03% IDPH AUG 30 29.40 41.63 $0.60 6.83% QLGC AUG 30 29.20 38.00 $0.80 8.67% CTSH AUG 45 44.00 51.19 $1.00 10.61% *** EBAY AUG 45 44.20 55.27 $0.80 8.71% ERTS AUG 45 43.90 58.64 $1.10 11.60% IDPH AUG 30 29.35 41.63 $0.65 9.94% QLGC AUG 25 24.65 38.00 $0.35 5.38% SLAB AUG 23 21.80 22.95 $0.70 14.40% UNH AUG 75 74.15 84.30 $0.85 4.97% WLP AUG 65 63.95 68.87 $1.05 6.74% CEPH AUG 35 34.70 44.07 $0.30 5.76% FRX AUG 70 69.35 69.14 ($0.21) 0.00% *** IDPH AUG 35 34.70 41.63 $0.30 6.19% IVGN AUG 30 29.70 34.50 $0.30 6.07% PLMD AUG 25 24.80 25.08 $0.20 5.64% *** TRMS AUG 40 39.45 46.69 $0.55 8.36% UNH AUG 75 75.45 84.30 $0.55 4.56% WLP AUG 60 59.40 68.87 $0.60 6.44% Cognizant (NASDAQ:CTSH), Forest Labs (NYSE:FRX); $70 strike, and Polymedica (NASDAQ:PLMD) are currently on the "early exit" watch-list. Silicon Laboratories (NASDAQ:SLAB) closed below a recent support area, thus traders should consider exiting the play to limit future losses. Positions previously closed include Christopher & Banks (NYSE:CBK) and Lennar (NYSE:LEN). Naked Calls Stock Strike Strike Break Current Gain Potential Symbol Month Price Even Price (Loss) Mo. Yield ABC AUG 75 75.85 63.64 $0.85 4.99% BRL AUG 65 65.75 58.50 $0.75 5.51% DGX AUG 85 86.10 57.40 $1.10 5.35% BZH AUG 75 75.80 60.10 $0.80 6.20% EXPE AUG 70 71.00 44.36 $1.00 7.69% SPW AUG 115 116.45 97.90 $1.45 5.95% GD AUG 95 93.75 80.51 $1.25 6.34% LMT AUG 65 66.05 62.80 $1.05 8.05% NOC AUG 120 121.10 106.25 $1.10 5.02% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status TKTX 40.15 35.15 AUG 30 35 0.75 34.25 $0.75 Open? TRMS 43.25 46.69 AUG 30 35 0.55 34.45 $0.55 Open CTSH 58.52 51.19 AUG 45 50 0.55 49.45 $0.55 Open? Transkaryotic Therapies (NASDAQ:TKTX) and Cognizant (NASDAQ:CTSH) have moved below near-term technical support areas and traders should consider closing those positions to limit potential losses. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status AGN 58.30 56.01 AUG 70 65 0.60 65.60 $0.60 Open CI 89.83 79.65 AUG 105 100 0.55 100.55 $0.55 Open COF 51.41 26.71 AUG 65 60 0.65 60.65 $0.65 Open UN 60.97 57.25 AUG 70 65 0.80 65.80 $0.80 Open ABC 64.50 63.64 AUG 80 75 0.50 75.50 $0.50 Open BRL 56.45 58.50 AUG 70 65 0.65 65.65 $0.65 Open SLM 86.05 89.45 AUG 100 95 0.60 95.60 $0.60 Open BA 41.19 39.41 AUG 48 45 0.35 45.35 $0.35 Open EASI 42.90 47.22 AUG 55 50 0.45 50.45 $0.45 Open AET 43.68 41.98 AUG 55 50 0.50 50.50 $0.50 Open JCI 81.02 76.75 AUG 90 85 0.50 85.50 $0.50 Open Engineered Support Systems (NASDAQ:EASI) remains in a recent trading range near $46-50 and any close above overhead supply near $51 would signal a potential exit in the position. Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status AXP 35.26 32.00 SEP40C/30P 0.10 29.90 0.10 Open CCR 50.81 50.25 SEP55C/45P 0.20 44.80 0.20 Open Credit Strangles: Stock Pick Last Position Credit G/L Yield Status ERTS 63.00 58.64 AUG70C/50P 2.75 2.75 18% Open Questions & comments on spreads/combos to Contact Support *************** BULLISH PLAYS - More Naked Puts! Yesterday, I received a request for "new" naked-put candidates but the list of favorable stocks in this group has not changed much over the past week (despite the market's volatility) and some of today's candidates are already posted in our portfolio. However, investors with a bullish outlook on the underlying issues, who believe the market is establishing a bottom near the current levels, may find the risk-reward outlook in these plays attractive. As always, current news and market sentiment will have an effect on these positions so review each one thoroughly and make your own decision about its future outcome. *************** AMGN - Amgen $45.72 *** Medicare Likes Their Products! *** 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 as well as clinical development staff in the United States, the European Union, Canada, Australia and Japan. The company recently bought Immunex, a biopharmaceutical company dedicated to developing new immune system sciences to protect human health. Immunex had successfully developed two products, Enbrel and Leukine, and was marketing four products treating multiple indications, Enbrel, Leukine, Novantrone and Thioplex. AMGN - Amgen $45.72 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 42.5 AMQ TV 4,205 0.45 42.05 9.8% SELL PUT SEP 35 AMQ UG 1,795 0.60 34.40 4.3% "TS" SELL PUT SEP 37.5 AMQ UU 1,287 0.95 36.55 6.0% *** SELL PUT SEP 40 AMQ UH 2,078 1.35 38.65 6.7% *************** ATK - Alliant Techsystems $65.97 *** Rally Mode! *** Alliant Techsystems (NYSE:ATK) is a supplier of aerospace and defense products to the U.S. government, America's allies and major prime contractors. ATK also is a supplier of ammunition to federal and local law enforcement agencies and commercial markets. ATK also designs, develops and produces solid rocket propulsion systems for a variety of government and commercial applications. The company is the sole supplier of the reusable solid rocket motors used on NASA's Civil Manned Space Launch Vehicles. ATK designs, develops and builds small, medium and large caliber conventional munitions for the U.S. and allied governments as well as for commercial applications. The company manufactures and develops small-caliber ammunition for the U.S. military, U.S. allies, federal and local law enforcement agencies, and commercial markets. ATK - Alliant Techsystems $65.97 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 60 ATK TL 444 0.40 59.60 6.5% *** SELL PUT SEP 55 ATK UK 0.70 54.30 3.0% "TS" SELL PUT SEP 60 ATK UL 1 1.70 58.30 5.3% *************** CCMP - Cabot Microelectronics $40.07 *** Building A Base? *** Cabot Microelectronics is a supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit devices, within a process called chemical mechanical planarization. CMP is a polishing process used by integrated circuit (IC) device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is the polishing process that levels and smooths, and removes the excess material from the surfaces of these layers. CMP slurries are unique liquid formulations that facilitate and enhance this polishing process and usually contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $40.07 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 35 UKR TG 2,005 0.55 34.45 16.2% SELL PUT SEP 25 UKR UE 2,676 0.45 24.55 3.7% "TS" SELL PUT SEP 30 UKR UF 161 1.25 28.75 9.3% *** *************** CEPH - Cephalon $44.63 *** Solid Earnings! *** Cephalon (NASDAQ:CEPH) is a worldwide biopharmaceutical company dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products are comprised of Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management, and Gabitril, for the treatment of partial seizures associated with epilepsy. The company's quarterly earnings are due August 5. CEPH - Cephalon $44.63 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 35 CQE TG 1,233 0.20 34.80 7.4% *** SELL PUT AUG 40 CQE TH 2,499 0.75 39.25 18.1% SELL PUT SEP 35 CQE UG 467 1.60 33.40 10.5% *************** GDT - Guidant $34.90 *** New FDA Approval! *** Guidant Corporation (NYSE:GDT) pioneers lifesaving technology for cardiac and vascular patients. The company develops, makes, and markets a broad array of products and services that enable less invasive care for some of the most threatening medical conditions. Guidant offers stent systems, implantable defibrillator systems, implantable pacemakers, implantable cardiac resynchronization therapy, products for use in less-invasive endovascular procedures, including the treatment of abdominal aortic aneurysms, products to perform unique cardiac surgery procedures such as Off-Pump Coronary Revascularization with EndoScopic vessel harvesting, as well as intravascular radiotherapy systems for artery disease. GDT - Guidant $34.90 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 30 GDT TF 4,764 0.25 29.75 9.1% *** SELL PUT AUG 35 GDT TG 1,140 1.30 33.70 28.6% SELL PUT SEP 30 GDT UF 2,017 0.80 29.20 5.6% *************** IDPH - IDEC Pharmaceuticals $42.61 *** Entry Point! *** IDEC Pharmaceuticals (NASDAQ:IDPH) is a biopharmaceutical company engaged primarily in the research, development, manufacture and commercialization of targeted therapies for the treatment of many cancer and autoimmune and inflammatory diseases. The company's two primary commercial products, Rituxan and Zevalin (ibritumomab tiuxetan), are for use in the treatment of B-cell non-Hodgkin's lymphomas. The company is also developing new products for the treatment of cancer and various other autoimmune diseases such as rheumatoid arthritis, psoriasis, allergic asthma and allergic rhinitis. Rituxan, the company's first product, and Zevalin, its second product approved for marketing in the United States, as well as its other primary products under development, address immune system disorders such as lymphomas, autoimmune and many inflammatory diseases. In addition, the company has discovered other product candidates through the application of its unique technology platform. IDPH - IDEC Pharmaceuticals $42.61 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 35 IDK TG 1,565 0.25 34.75 8.7% *** SELL PUT AUG 40 IDK TH 2,197 0.85 39.15 18.8% SELL PUT SEP 30 IDK UF 119 0.75 29.25 5.6% SELL PUT SEP 35 IDK UG 289 1.50 33.50 9.5% *************** OSIP - OSI Pharmaceuticals $29.35 *** Recovery Underway! *** OSI Pharmaceuticals (NASDAQ:OSIP) is a biopharmaceutical company focused on the discovery, development and commercialization of products for the treatment of cancer. The company has built a pipeline of programs and drug candidates addressing major, unmet needs in cancer and selected opportunities arising from OSI's new drug discovery research programs that represent commercial opportunities outside of cancer. The company has three primary candidates in clinical trials and seven projects with candidates in late stage pre-clinical development. OSI's most advanced drug candidate is Tarceva, which has demonstrated various indications of anti-cancer activity. The company expects to focus its future efforts primarily in the areas of diabetes. OSIP - OSI Pharmaceuticals $29.35 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 25 GHU TE 78 0.35 24.65 15.3% SELL PUT SEP 22.5 GHU UX 276 0.85 21.65 8.7% *** SELL PUT SEP 25 GHU UE 2,854 1.40 23.60 11.0% *************** TRMS - Trimeris $46.50 *** Aids Drug In Demand! *** Trimeris (NASDAQ:TRMS) is engaged in the discovery and development of fusion inhibitors, a new class of antiviral drug treatments. Fusion inhibitors impair viral fusion, a complex process by which viruses attach to and penetrate host cells. If a virus cannot enter a host cell, the virus cannot replicate. By inhibiting the fusion process of particular types of viruses, the company's drug candidates under development offer a novel mechanism of action with the potential to treat a variety of medically important viral diseases. Trimeris is a company in the development stages and has invested a significant portion of its time and financial resources in researching T-20, its lead drug candidate, thus is dependent on that product for its overall success. TRMS - Trimeris $46.50 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT AUG 40 RQM TH 174 0.30 39.70 8.2% *** SELL PUT SEP 35 RQM UG 50 0.85 34.15 5.8% SELL PUT SEP 40 RQM UH 69 1.45 38.55 7.4% *************** BULLISH PLAYS - Credit Spreads *************** PII - Polaris Industries $67.90 *** Another Solid Quarter! *** Polaris Industries (NYSE:SII) designs, engineers and manufactures all-terrain vehicles, snowmobiles, personal watercraft and sells them, together with related replacement parts, garments and other accessories, through dealers and distributors principally located in the United States, Canada and Europe. All-terrain vehicles are four-wheel vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland. In the early 1950s, a predecessor to the company produced a gas-powered sled that became the forerunner of the Polaris snowmobile and they have been manufactured under the Polaris name since 1954. Polaris entered the worldwide motorcycle market in 1998, with an initial entry product in the cruiser segment. Personal watercraft are sit-down versions of water scooter vehicles, and designed for use on lakes, rivers, oceans and bays. Despite the recent slump in the economy, people continue to buy recreational vehicles and Polaris' quarterly results reflect that trend. The snowmobile and motorcycle maker said last month that net income rose 16% in the second quarter, boosted by sales of all-terrain vehicles as well as parts and clothing. A redesign at the company's main facility, new products, lower costs and an increase in the number of engines the company built itself all helped drive earnings growth, with gross margins rising to 20.5% in the quarter from 17.9% in the 2001 second quarter. Regardless of the outlook for stocks, recreational vehicles are always in demand and investors who believe Polaris' will continue to prosper can speculate conservatively on the company's share value with this position. PII - Polaris Industries $67.90 PLAY (conservative - bullish/credit spread): BUY PUT SEP-50 PII-UJ OI=24 A=$0.50 SELL PUT SEP-55 PII-UK OI=128 B=$1.00 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% *************** BULLISH PLAYS - Synthetic Positions *************** BLL - Ball Corporation $45.60 *** On The Rebound! *** Ball Corporation (NYSE:BLL) is a global manufacturer of metal and plastic packaging for beverages and foods and the company is also a supplier of aerospace and other technologies and services to commercial and governmental customers. Ball's principal business is the manufacture and sale of rigid packaging products, primarily for beverages and foods. Polyethylene terephthalate packaging is Ball's newest product line in this area. The technologies segment includes civil space systems, defense operations and commercial space operations. The defense operations business unit includes defense systems, systems engineering services and advanced antenna and video systems, as well as electro-optics and cryogenic systems and components. Civil space systems and defense operations include hardware, software and services to both domestic and international customers, with emphases on space science, environmental and Earth sciences, defense and intelligence, manned space missions and also exploration. Ball Corporation's quarterly earnings were very favorable, despite the weak economy, and the company said profits in the second half of 2002 would be similar to the year's healthy first half profits with a record performance forecasted for its aerospace unit and improvements predicted in its beverage can and plastic container production unit. The company's cost-cutting campaign produced higher overall margins and an aggressive restructuring at its Chinese packaging operations boosted earnings in that segment. Ball also recently received an upgrade from Salomon Smith Barney and today the company's share value closed near a 3-month high. Based on the technical indications, BLL will likely test recent highs near $50, and traders who agree with that outlook can use this position to attempt to profit from future upside activity in the issue. With this type of speculative play, a closing order should be in place (after the position is initiated) to profit from any favorable "early-exit" opportunities. BLL - Ball Corporation $45.60 PLAY (very speculative - bullish/synthetic position): BUY CALL NOV-55 BLL-KK OI=107 A=$1.20 SELL PUT NOV-35 BLL-WG OI=63 B=$1.00 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$1.25 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $1,015 per contract. *************** INVN - InVision Technologies $27.25 *** Bomb Detection *** InVision Technologies (NASDAQ:INVN) is a provider of Federal Aviation Administration certified explosives detection systems used at airports for screening checked passenger baggage. The company's EDS products are based on complex computer tomography, which is the only technology for explosives detection that has met the FAA certification standards. InVision was the first manufacturer, and is one of only two manufacturers, whose EDS products have been certified by the FAA for screening checked baggage. In July, InVision Technologies reported that quarterly profits rose as the company's revenues from governments increased on concerns about national security. The company also promised continued growth with larger airports moving toward automated bomb-detection baggage systems that can take a year to plan and construct. The company said it expects third-quarter revenues of at least $110 million and earnings of at least $1 per share. Investors apparently agree with the company's optimistic outlook as the issue has climbed steadily since the 2002 low in mid-May. Traders who think the bullish trend will continue can speculate conservatively on the future share price of InVision with this position. INVN - InVision Technologies $27.25 PLAY (very speculative - bullish/synthetic position): BUY CALL SEP-35 FQQ-IG OI=153 A=$0.75 SELL PUT SEP-20 FQQ-UD OI=148 B=$0.60 INITIAL NET CREDIT TARGET=$0.00-$0.l0 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $615 per contract. *************** BEARISH PLAYS - Credit Spreads These issues are excellent candidates in the "premium-selling" category of options trading. However, we have decided to limit the potential upside risk by utilizing bearish spreads. Based on analysis of historical option pricing and the underlying stock's technical background, these plays meet our fundamental criteria for profitable "bear-call" credit spreads. Each issue has robust option premiums, a well defined resistance area and a high probability of remaining below the short strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** AAP - Advance Auto Parts $45.95 *** Earnings Play! *** Advance Auto Parts (NYSE:AAP) is a retailer of automotive parts and related accessories and maintenance items. The company, which caters to do-it-yourself customers, operates approximately 2,400 stores. The original company was formed in 1929 and was operated as a retailer of general merchandise until the 1980s. In the 1980s, Advance sharpened its marketing focus to target sales of automotive parts and accessories to "do-it-yourself" customers. In 1996, Advance began to aggressively expand its sales to do-it-for-me customers. Discount Auto Parts, which operated in the Southeast, was a specialty retailer and supplier of automotive replacement parts, maintenance items and general accessories to both DIY consumers and DIFM consumers, as well as professional mechanics and service technicians. The new Advance Auto Parts was formed in November 2001 via a reverse merger with Discount Auto Parts. The company's quarterly earnings are due on August 14. AAP - Advance Auto Parts $45.95 PLAY (conservative - bearish/credit spread): BUY CALL SEP-60 AAP-IL OI=470 A=$0.65 SELL CALL SEP-55 AAP-IK OI=66 B=$1.20 INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=15% *************** AIG - American International $62.08 *** Downtrend Intact! *** American International Group (NYSE:AIG) is a holding company that, through its many subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. AIG's primary activities include general and life insurance operations. Its other significant activities include financial services, and retirement savings and asset management. AIG's general insurance subsidiaries are multiple line companies writing substantially all common lines of property and casualty insurance. One or more of these companies is licensed to write substantially all of these lines in the United States and also in approximately 70 foreign countries. AIG - American International $62.08 PLAY (conservative - bearish/credit spread): BUY CALL SEP-75 AIG-IO OI=83 A=$0.25 SELL CALL SEP-70 AIG-IN OI=2544 B=$0.75 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% *************** INTU - Intuit $41.04 *** Pure Premium Selling! *** Intuit (NASDAQ:INTU) is a provider of unique small business, tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions including Small Business, Tax, Personal Finance, Quicken Loans and Global Business. INTU - Intuit $41.04 PLAY (conservative - bearish/credit spread): BUY CALL SEP-55 IQU-IK OI=159 A=$0.35 SELL CALL SEP-50 IQU-IJ OI=356 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** MARKET POSTURE ************** Wild Ride To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/080702.asp ************ MARKET WATCH ************ Ripe Action points To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/080702.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. 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