The Option Investor Newsletter Sunday 08-11-2002 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: Trend Change? Index Trader Wrap: WHAT A WEEK! Editor’s Plays: Back to Stock Picking Market Sentiment: Not Just Yet Ask the Analyst: Another (small) Way to Play the Rate Game 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 8-09 WE 8-02 WE 7-26 WE 7-19 DOW 8745.45 +432.32 8313.13 + 48.74 8264.39 +245.13 -665.27 Nasdaq 1306.12 + 58.20 1247.92 - 14.20 1262.12 - 57.03 - 54.35 S&P-100 458.82 + 24.77 434.05 + 7.12 426.93 + 3.83 - 35.81 S&P-500 908.64 + 44.40 864.24 + 11.40 852.84 + 5.09 - 73.64 W5000 8571.87 +385.31 8186.56 + 94.93 8091.63 + 8.63 -628.50 RUT 388.45 + 12.00 376.45 - 5.81 382.26 - 3.94 - 27.08 TRAN 2351.65 +149.62 2202.03 - 52.76 2254.79 - 77.39 -147.96 VIX 39.36 - 6.03 45.39 + 4.95 40.44 - 3.01 + 5.12 VXN 58.70 - 6.74 65.44 - 3.58 69.02 + 7.85 - 4.83 TRIN 0.90 1.47 1.21 1.44 Put/Call 0.69 0.93 0.70 1.14 ***************************************************************** Trend Change? by Jim Brown The Dow made it three in a row. Three weeks of positive gains for +725 points. Sounds very bullish if you don't count the -930, +1070, -730 and +765 swings on the way to those gains. The Nasdaq has not fared so well but posted its first positive week in the last five. However, any good news is still good news. The bulls have their hopes up and those hopes are based on the Fed cutting rates and the concept that the bottom is behind us. Three positive weeks are a nice improvement but did the trend really change? Leading the economic hit parade on Friday was the Productivity Report. The productivity growth came in at +1.1% and surprised analysts who were expecting only +0.6% growth. While the number may have surprised analysts expecting the worst it was still significantly down from the +8.6% growth in the first quarter. Obviously you can see the dramatic rate of drop but this was still bullish for the economy. Productivity soared in the manufacturing industry with a +4.9% gain with output up +4.1% while hours worked dropped by -0.8%. This is exactly what the Fed will be looking at to gauge the need for another rate cut. According to the productivity report the economy is doing fine, slow but fine. The ECRI Weekly Leading Indicator posted a small gain at 121.7 compared to 120.0 last week. This was the first gain after three weeks of losses but the six month projected economic growth rate fell to 2.6% from 3.3% last week. This indicator was projecting a 6.0% growth rate as recently as July-12th. This is the slowest growth projection since March. The slight blip in the headline number was due to the gains in the S&P and drop in the Jobless claims. Stocks continued to be the highlight with Emulex getting a -32% haircut to $15.36 after warning that their full year sales would fall below analyst's estimates. This took the entire sector for a ride to lower ranges. New comments from Banc America about the chip sector stopped the SOX rebound off five year lows dead in its tracks. They said it was too early to pick a bottom in chips as demand was still falling creating much more excess capacity. Intel lost ground on rumors they were going to cut capital expenditure spending and outsource more manufacturing when a recovery appears. While this makes business sense it caused a drag on chips due to demand implications. Ironically, coincidentally or on purpose, Intel did not update or provide guidance for capex spending on their July 16th conference call. BAC thought Intel could announce capex of only $4 billion, down from estimates of $5-$5.3 billion. The common thread among most of the analysts is that 2003 sales estimates are too high and actual growth could be flat to low single digits in 2003. This is substantially below the current expectations. In Barrons this weekend their headline story recommends selling Intel and Applied Materials due to excessive valuations and falling sales and budgets. Intel and AMD both gave indications that the typical back to school buying season was not seeing a surge in orders. There is a strong sense of urgency to make something happen quickly and slashing prices soon is expected. Hewlett-Packard-Compaq is said to have a backlog of chips exceeding a six week supply when normal is only two weeks. Bottom line, computers are not selling and this will be evident in the coming earnings. Financials have been making decent gains even when more bad news hit the wires about Citigroup and Merrill. Investigators are now hot on the trail of possible IPO favoritism for clients. House Committee Chairman Oxley said he was going to subpoena documents from Citigroup about shares of IPOs that were bought and sold by WCOM executives. They want to know if Jack Grubman traded favors with WCOM execs in exchange for hiring SSB to provide investment banking services. Originally Citigroup refused to turn over the documents claiming privacy protection. With a subpoena they will be forced to disclose the records. According to Citigroup they had identified 800 accounts which would fall into the category under question. The committee has requested info on about 170 companies Citigroup handled and Citigroup said the numbers of accounts could run into the tens of thousands. On Friday stocks were up, bonds were up and gold was up. What's up? We were in the twilight zone of indecision. Gold bugs are still seeing inflation, war, financial collapse behind every bush. Bond buyers are betting on interest rates falling again before year end with possibly a strong Fed cut. Stock buyers are convinced the bottom is behind them and Alan won't let them down. Even oil was up Friday. It appears the indecision is complete. Everyone is convinced their scenario is the right one and are voting with their cash. I will be brief on the Fed story since you are probably numb to it already. The WSJ and Washington Post both had headline stories that rejected the concept of a rate cut. Both have been known to be a pipeline to the Fed and one way the Fed can telegraph intentions ahead of meetings to avoid announcement shock. I was going to mention the lack of any indications from the Fed in my wrap on Thursday but overlooked the notes. Normally the Fed will telegraph for several weeks in advance their intentions to make a change. They do this with carefully worded references in speeches and carefully placed articles. There had been no telegraphing of any intent to cut rates. Poole said last Sunday that the economy was on track and recovering on schedule and the odds of it falling back into a double dip recession were "very, very small". "Markets are going through a period of fundamental adjustment that is not related to monetary policy and not something monetary policy can fix." This was a clear effort to squash rumors. The Fed watches many things but most key to the overall economy are auto sales, housing and jobless claims. All are doing well and showing no signs of implosion. Shrinking margins in auto sales will slow profits for car companies but every industry that feeds off autos will do well. Bottom line, no rate cut in my opinion. Despite the fact that I went short in the market monitor at the close on Friday I actually think the bottom may be closer than I recently thought. I would not now be surprised if the lows were not behind us. What heresy is this? The market is a living organism with millions of cells. Quite a few of those cells have decided to call it a bottom and buy stocks. Not in volume but they are still buying. These are long-term buyers not traders. They are looking at the market 2-5 years from now and saying these are levels today I can live with despite the possibility of another dip. I personally don't feel the economy is recovering yet based on my PC comments above but I don't think it will be much worse. The 9/11 anniversary problem is something we cannot avoid but after that I think the consumer will start spending again. Sorry, I strayed. The market has put in what I have been hearing as a parabolic bottom. It is simply another term for "it went down for a long time, bounced twice and is taking off again". Not very scientific but you get the picture. Chart of the Dow I would be glad to buy it as long as everybody else did also. My challenge with this is the PC correction in progress, the August 14th certifications, the 9/11 slowdown and the fact that the last four days of rally was solely on the prospects of the Fed rate cut. I could easily agree that manufacturing has run its course. I could agree that low interest rates with another Fed cut in Sept. will spark another wave of refinancing with much of the equity money being poured into the consumer market and even the stock market. I just see some major potholes in the immediate future and wonder how the market will deal with them. Maybe, the August certifications are going to be a nonevent. With only three days to go there are 584 companies that have not filed the certification. While it would amaze me if there were not going to be some skeletons appear it also amazes me that WCOM could hide $8 billion. So, maybe there are no big guys left to confess and the WCOM, GLBX, Q, ENE scams are the only shell games in action. I just find it hard to believe. I also find it hard to believe the economy is not going to seriously suffer over the next 30 days with consumers afraid to venture outside their block until after 9/11. Maybe the numerous patriotic efforts to overcome that concern will make it a nonevent also. I find it hard to believe that Brazil is over. The two most market friendly candidates in their October elections sank in the polls this week and candidate Lula of the leftist Workers Party is leading with 33% of the vote. The Brazilian market dropped -330 points Friday on fears that Lula would win and he would adopt unorthodox policies and default on the existing $350 billion in debt. The second place candidate is critical of the IMF and would likely not commit to the deals of the IMF loan and institute capital controls if elected, which would doom the country. Sounds exciting and I doubt we have heard the last of Brazil. While I would like to believe the market is looking forward to climbing this wall of worry there is another way to look at the Dow chart. Dow Chart 2 As in any chart pattern the analysis is in the eye of the beholder. If you look at any symbol/index long enough you can likely find a timeframe and setup that fits your interpretation of the market. I will leave it up to the readers to decide it this glass is half full or half empty. Dow Chart 3 Anyone watching the market intently on Thursday and Friday afternoon saw some serious resistance battles taking place. Dow 8750 as you can see above, OEX 459 and SPX 911 proved too strong for several repeated attempts to break. We have to give the bulls credit, they tried really hard. Unfortunately the bears just kept selling into the rally and try as they might the bulls just could not breakout. It may have just been lack of volume on the buy side on a Friday afternoon. Just as interesting was the lack of aggressive selling by the bears. They kept the lid on but they did not press the advantage and try to go for the kill. They were content to hold the line. To me this means the bears have lost conviction. They look at the chart above and see a possible breakout ahead on a surprise move by the Fed and they don't want to get caught holding big short positions. This sets up for an interesting week. With the market dead on strong resistance we have a Fed meeting on Tuesday along with Retail Sales. Corporate certifications on Wednesday and Industrial Production, Philly Fed and June FOMC minutes on Thursday. Friday is the killer with the Consumer Sentiment again, Housing starts and the CPI. Ironically, Monday, the day most analysts expect accounting problems to appear if there are any, has no major reports. To top it all off this is options expiration week. Are we having fun yet? I can't tell you which way the market is going to go but as a betting man I am betting against the Fed cutting rates and that there is at least one more corporate confessor in the wings. The good news is that the market has been ignoring bad news. We sure had a busy week for negative events but the Dow gained +432 points. This represents a real trend change but that trend has hit a wall. Whether it is a brick wall or wall of worry remains to be seen. This week will be the key. For a list of the 534 companies that have to certify their financials by Wednesday click here: http://www.OptionInvestor.com/CEO_Certification.asp The winning entry on the Guess the Dow contest was 8745.85. They missed it by .40 cents. I do not have a name but the email address was tlent3192@..... Don't hesitate to click below and enter the contest for next week. Click here: http://www.OptionInvestor.com/game/dowtarget.asp The prize is a $150 dual monitor video card and very handy for setting up your trading system across two monitors on one PC. This is the last week and your last chance to win. The average guess was 8237.20 and over 500 points below the Dow's close. Obviously there was a lot of negative sentiment going into this week. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor Was this commentary helpful to you? comments@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** WHAT A WEEK! By Leigh Stevens TRADING ACTIVITY AND OUTLOOK - The market was up 5% this week in terms of the Dow Industrials and up almost as much (4.7%) in the Nasdaq Composite. Given that we may be going back to a more "normal" historic return in the market averages of 10-12% per annum, this kind of weekly move is impressive! Key influences this past week have been the dollar rebounding - and, I see this continuing on balance, given the bearish top pattern on the Euro charts - AND the relief that half of South America's economy was not going to go down the drain, if Brazil were to have followed Argentina into similar economic and political turmoil (or the Argentines might say, economic hell). The Bush administration to its credit talked tough but acted in what I think is our definite economic self-interest - the administration did not withhold help, which is what their prior rhetoric suggested they wanted to do which is why the banking sector has been in free fall. The main short-term stock market effect was to arrest and sharply turn around the falling stock prices for our biggest banks, which have huge loan (and loan default) exposure in Brazil. And it is well known truism that the market doesn't do well when the financial sector is being dragged lower. Rallies led by the financial sector are perceived to have more solid prospects of continuing to go higher. By the way, the reason we could have stopped IMF action is that we can veto IMF bailouts. We're the only International Monetary Fund member that has this kind of veto power. If you are a CNBC watcher you may have felt that kind of background is never very well explained. Well, change may be coming - the relatively new general manager has been wanting to move more toward providing more background stories of this type and move away from the financial day as "sporting event" and breathless reports on every up and down market move. Bruno Cohen, who I've spent time with, resigned this past week as CNBC general manager - Bruno is an old news hound. Out with old and in with the new! We'll see what the station looks like a year from now. Stay tuned. Change does seem needed - I'm ready! S&P 100 Index (OEX) - Daily/Hourly charts: The OEX has broken out above resistance in the 440 area in a decisive manner and in terms of what I am seeing on the daily chart, could move up toward the 480 next, although the overbought near-term condition its in is acting against that. So, does a correction develop first? The market we've been in for weeks, would say yes. The question is also do they squeeze the shorts up into the expiration next week? If so, we may see 480 before we see 440 again. If a correction occurs first, which would be the more "normal" unfolding of a trend like this, then calls are suggested if 440 develops as support. 420 was the last swing low and a retest of this level can't be ruled out either. We need to see what Monday brings to better see what comes next, especially with the weekend possibility that we get some unsettling news or the dollar sells down. S&P 500 Index (SPX) - Hourly chart: There is a "line" of resistance in the 912 area currently - the overbought condition near term may be telling us why the up trend has slowed and sideways action seen. The emerging uptrend channel basis the hourly chart intersects at 883 currently. If a decline takes SPX below this trendline, then the key technical will be whether the S&P 500 makes a new low that is at or above 855. If 855 is pierced, we are back to viewing SPX as forming a bottom as this would break the recent uptrend pattern of higher (down) swing lows. I'm cautious while this situation I describe resolves itself and until the hourly stochastic is not showing the extreme it is registering currently. Put purchases are suggested if the rally extends itself here and the index gets up to 932-935. DJ Industrial Index (1/100 of INDU) - $DJX - Daily/Hourly charts: After a run like this, encountering resistance at a "line" of prior highs in the 87.60 area is not surprising - especially since the index is overbought on at least a short-term basis. The longer that a resistance is not broken of course, the more it can "cap" a rally and act as a reversal point. However, the consolidation in this area looks like that - a consolidation - and, so far, not a top formation in terms of price action. Bearish Price/Stochastic divergence is setting up however on the hourly Dow - minor up trendline is broken on a move below 87.0; Support is at 85.75, then in the 85-84.75 area, at the low end of the emerging uptrend channel. In the short-term, my guess is that a move to the 89 area is the best upside potential for the current move, before some corrective action sets in. 90 (9000 in the Dow) is another area talked about as a resistance. Assuming the correction comes first, purchases are suggested in the 85 area, especially if the accompanied by an oversold reading in the longer stochastic model. DJ Industrial Index (INDU) - Weekly chart: The weekly chart presents a quite bullish picture and this past week's close has achieved an upside penetration of the internal down trendline relative to the late-May price peak. An "internal" trendline connects the greatest number of highs (or lows) and so may "cut through" one of more extremes - one weekly high in this case. Note the position of the weekly stochastic oscillator as it just in the beginning stages of an uptrend. This helps keep in perspective the "overbought" extreme showing on the short-term hourly stochastic and the approaching extreme on the daily model. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: The Nasdaq 100 in terms of the QQQ tracking stock has been struggling to break out above the top of its hourly downtrend channel. Resistance is apparent at recent highs in the 23.60- 23.70 area. Support is 22.60-22.80; more major support is in the 22 area. I suggest buying pullbacks into 22-22.60 support. A next rally must exceed 24.70 to reverse the downtrend. Given the bullish potential apparent in key Nasdaq stock charts, I think this is just a matter of time rather than if (it'll occur). The Nasdaq 100 Index itself (NDX) must exceed 992 (wkly close: 937), and the Composite, 1354 (wkly close: 1306), to exceed the prior price peaks. On NDX, resistance between the week's close and the prior highs is around 960 in NDX, and 1330 in COMP however. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** Editor's Plays ************** Back to Stock Picking After three weeks of complicated index plays let's go back to some simple directional plays on stocks. These three are all news events or story stocks. ASH - Ashland Inc. Ashland filed forms with the SEC on Thursday claiming it had 155,000 continuing asbestos claims from a subsidiary it sold in 1990. The number so shocked the street that the stock dropped from $36 to $28 and knocked -$420 million off its market cap. The company held a conference call on Friday and updated investors on the progress of the problem. Of the 95,000 claims already resolved more than half were settled without payment. Of the 47,000 resolved over the last nine months 68% were dismissed without payment and the remaining resulted in an average payment of $1,014. Using the average of the settled claims the company estimated the cost of settling the remaining claims at a discounted, tax adjusted $11 million. The company also revealed that insurance would cover all the estimated $6 million in settlements for 2002. Where's the beef? They have paid $71 million over the last four years to settle claims and defend themselves. With only $11 million in claims remaining and most awards covered by insurance the sell off appears too much, too late. Ashland has about $300 million in short term debt, all of which it expects to pay off in the next twelve months. It has a $425 million line of credit that has nothing drawn against it. They have been aggressively pursuing a share buyback program and have bought back 10 million shares in the past four years and 3.6 million in the last three quarters. They have 65 million shares outstanding. Their revenue for the nine months ended June-30th was $5.5 billion. They are best known for their Valvoline Motor Oil product. It is trading at a PE of 10 based on 2003 earnings estimates. You have to go back to July 1993 to see it trade at $28 again. The question: Does $11 million in claims covered by insurance warrant an $8 drop in the stock? I think this is an excellent opportunity for a dead cat bounce play. Unfortunately so do the market makers because the calls are expensive. Chart of Ashland There are four ways to play. Buy the Sept-$30 call, at the money, for $2.50. You only have six weeks for the stock to pass breakeven at $32.50 but a rebound back to $35 would produce a double. Buy the Jan-$35 call, out of the money, for $2.10. You have five months for it to recover to $37.10 and your breakeven point. Of course any quick move between now and then could spike the volatility of the option and produce a profit well before January. Sell the Jan-$40 put, deep in the money, for $10.40. You are profitable at anything over $30.08 and get $1 profit for every $1 move. The risk is that you can be put the stock anytime between now and January. Once the stock moves up slightly, even $1, that risk diminishes. Set a stop at $29 and you limit your risk to any further drop in the stock. Buy the stock at $30 and write the Jan-$35 covered call for $1.30. If the stock is over $35 by January you receive $6.30 for your efforts and a 21% profit. New symbols for the $25 calls and puts were added on the drop but there are no quoted prices yet. ********************** TSM - Taiwan Semiconductor TSM warned recently that they were reducing capex spending for 2002 to $2 billion and had a weaker sales outlook. They are the biggest contract manufacturer in the world. The shares took another hit on Monday when Tokyo Electron, the second largest, issued the same type of warning. Still analysts are united that when the recovery appears TSM will be in the right place at the right time. There was a rumor on Friday that Intel was about to announce it was going to outsource manufacturing to TSM to reduce plant costs. This is the trend as plants cost more money and there is not enough capacity to fill them. Barrons, in their headline story this weekend, is recommending buying TSM as one of the top ten tech stocks and right behind CSCO and MSFT. Pretty good company! Chart of TSM TSM does not have leaps but it does have a lot of option strikes because it is cheap. I really believe in this one but the only unknown is the time frame. If the PC correction drags out another quarter it could be mid 2003 before TSM reaches its former glory in the $18-$20 range. I would buy the Jan-2003 $10 call now for $1.45. A couple weeks after the next series of month/strikes comes out, I would take my profit in this position and roll out to the farthest strike I could buy on TSM. I can see this being $20 again early next year. (Just my opinion) ********************** Covered call = 24% return? Invision Technologies The company has one of the better charts for the last six months. This is reflected in the call premiums. Buying the stock for $28.30 on Monday and writing the Jan $30 covered call for $5.10 represents an opportunity to receive $6.80 in premium and stock appreciation for a $28 investment. That represents a 24% return without using margin. The high call premiums reduce your risk in holding the stock to $23.20 which is your breakeven point in case of a meltdown. With INVN winning new defense contracts daily the odds of a meltdown are slim. I am not normally a covered call fan but this was too good an opportunity not to pass on. ******************** 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 **************** Not Just Yet by Steve Price The Dow finally made up the losses it endured at the end of last week and beginning of this one. A $30 billion bailout of Brazil's economy helped the U.S. bank stocks lead the Dow higher, but the big story is the anticipation of next week's FOMC meeting. The market has been extremely volatile as investors try to guess whether or not the FOMC will lower the Fed Funds Rate below the current level of 1.75%. What once looked like a remote possibility before the September 24th meeting has now been tossed around as a distinct possibility for August 13th. Several large institutions have called for a cut of up to 50 basis points at next Tuesday's meeting, and up to 75 basis points by the end of the year. While this would boost the stock market temporarily, it may leave the Fed with only blanks in its arsenal as the year goes on. The anniversary of the September 11th attacks is right around the corner, and happens to fall in between the August and September FOMC meetings. If the rate were not already under 2%, a cut on Tuesday would seem to be a healthy move toward stimulating both the stock market and the economy. However, the Fed must consider the possibility of terrorist activity on, or sometime around, September 11th. Last year, after the attacks they instituted two quick rate cuts in order to prop up the plummeting stock market. The same tactic would most likely be used again this year. Adjusting for inflation, there is only so far the Fed can lower rates, before money is, in effect, free. A rate under 1% could be dangerous to inflation, and most likely will not be instituted. That leaves about 75 basis points in the Fed's arsenal. If they were to lower the rate by 25 points next week, and something were to happen around the 11th, they would be left with only 50 points to play with. If the economy slipped back into recession, that doesn't leave a lot that they can do. Last year they cut rates 11 times, with some of those cuts by 50 basis points. They now have about 3 cuts, of 25 points each, realistically left with which to stimulate the economy. There are some institutions calling for a 50 point cut on Tuesday and then 25 more by the end of the year. This would be dangerous, as well, because if the market were to continue tumbling, panic could set in, knowing there is very little the Fed could do afterwards. The Fed does have another alternative that may not keep the markets from pulling back from the current level, but could save their bullets, while letting investors know help is on the way. This seems to be the most likely scenario and would involve the Fed leaving rates where they are, but announcing a bias toward lowering them in the future. There is some talk that Japan could have averted the economic crisis of 1998 if they had been more aggressive in lowering interest rates, and that the risk of not lowering rates in the U.S. is greater than lowering them now. If the Fed waits just six weeks, until the meeting of September 24th, they will put off the effect of any rate cut by only six weeks, while retaining an important weapon against another possible attack next month. The effects of any cut are said to take between six and twelve months, so any cut instituted now may not be felt for some time. Another six weeks allows far greater flexibility in dealing with the unknown. If the rate is not cut next week, look for the market to experience a pullback from this week's rally. Be careful on Monday about buying into any continued rally. Many times, when the Fed gives the market what it is looking for and has already expected, in this case a 25 point rate cut, there is an initial surge, and then a pullback when the euphoria wears off. In either case, a 50-point basis cut may be all that will keep the market rolling at this incredible pace. But the long term cost may be too great ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8745 Moving Averages: (Simple) 10-dma: 8517 50-dma: 8967 200-dma: 9748 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 908 Moving Averages: (Simple) 10-dma: 884 50-dma: 947 200-dma: 1077 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 892 Current : 937 Moving Averages: (Simple) 10-dma: 928 50-dma: 1023 200-dma: 1355 ----------------------------------------------------------------- The Retail Index (RLX.X): The retail index hung on to its gains, and the effect of a rate cut next week could be extremely positive for these stocks. If it trickles down to allow more homeowners to refinance their mortgages, there is extra disposable income in consumers' pockets. The record mortgage application numbers released early in the week suggest the effect is already taking place, and this may have contributed to investors renewed confidence in this sector. The RLX has rebounded decisively, forming a double bottom just below 260. The textbook pattern, with the second dip higher than the first, is not quite the same as looking at an individual stock, as it is hard to measure volume, however it still looks bullish for the group. 52-week High: 366 52-week Low : 254 Current : 272 Moving Averages: (Simple) 10-dma: 273 50-dma: 305 200-dma: 331 ----------------------------------------------------------------- Market Volatility Heading into the weekend, after a day in which the market fights off a loss to rally past the recent high, we would expect to see a VIX quite a bit below 40. Not with next week's FOMC meeting coming up. Until there is an announcement on whether or not the Fed will lower the Fed Funds Rate, expect volatility to remain high. CBOE Market Volatility Index (VIX) = 39.36 -0.44 Nasdaq-100 Volatility Index (VXN) = 58.70 -0.65 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.69 554,586 383,686 Equity Only 0.55 411,789 224,452 OEX 0.82 41,312 34,034 QQQ 0.30 62,748 19,041 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 32 + 1 Bull Correction NASDAQ-100 28 + 2 Bull Correction DOW 37 + 4 Bull Confirmed S&P 500 33 + 3 Bull Alert S&P 100 34 + 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 1.06 10-Day Arms Index 1.14 21-Day Arms Index 1.21 55-Day Arms Index 1.37 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1708 1379 NASDAQ 1382 1842 New Highs New Lows NYSE 35 65 NASDAQ 37 134 Volume (in millions) NYSE 1,486 NASDAQ 1,322 ----------------------------------------------------------------- Commitments Of Traders Report: 08/06/02 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 The commercials reduced their short contracts position by 4,000, while increasing their long contracts slightly. Small traders, increased their long contracts by nearly 6,000, while leaving their short positions virtually unchanged. Commercials Long Short Net % Of OI 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%) 08/06/02 431,590 478,879 (47,289) (5.2%) 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 07/16/02 157,370 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% 08/06/02 159,561 67,434 92,127 40.5% 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 increased both long and short contract positions equally, by just less than 3,000 contracts on each side. Small traders reduced both positions, taking 1600 contracts from the long side, and 450 from their shorts. Commercials Long Short Net % of OI 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%) 08/06/02 41,014 50,025 (9,011) ( 9.9%) 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 07/16/02 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% 08/06/02 11,547 8,782 2,765 13.6% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials added to both long and short contract totals. They added 1,000 long contracts and about 1400 shorts. Small Traders also added to both sides, increasing their long contracts by 1200, while adding 250 to the short side. Commercials Long Short Net % of OI 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% 08/06/02 23,491 14,290 9,201 24.4% 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 07/16/02 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%) 08/06/02 7,981 9,258 (1,277) ( 7.4%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *************** ASK THE ANALYST *************** Another (small) Way to Play the Rate Game By James Before we begin with this week's Ask the Analyst article, let me say thank you for the positive emails I received about last week's post on the housing sector. I do want to add one more, okay, make that two more comments on the topic this week. Last Tuesday, just three days after the housing article was written, both myself and another analyst in the OptionInvestor.com office independently came across some interesting evidence regarding new mortgage applications and refinancing. Last week, in the commentary about the bulls and bears arguments on the housing group I said that the refinancing boom of the last couple of years was starting to ebb. That comment is incorrect. New mortgage applications and refinancing activity is growing. According to one person I spoke with in the industry, it is reaching an incredible pace. There was a mortgage applications survey results that came out last week that confirmed this data as well. If home sales are so great, why did the housing sector "appear" to under perform the DJIA on week with the market up 5%. Please make a note that I said "appear" to under perform. While the DJIA was up 5% last week, the DJUSHB (US Home Construction Index) was actually 8% last week. My bearish bias is based on the chart of the DJIA, which closed above its recent highs; compared to the DJUSHB (and shares of RYL and MDC, the two stocks we compared last week) which did not even come close to the recent late July highs. Incidentally, neither PnF chart of RYL or MDC have produced a bullish buy signal yet but they are in a column of X's. Chart of Dow Jones over Chart of DJUSHB Okay, I can already see some of you about to email me concerning the second half the equation - the refinancing part. Let me touch on this quickly. Normally when someone starts thinking about home loans and stocks they look at Freddie Mac (FRE) and Fannie Mae (FNM). Both stocks have been doing well the last couple of weeks and they almost look bullish. Yet one stock you may not think of is Countrywide Credit (CCR). This issue has been on FIRE! Shorts have got to be hurting as this mortgage company has been on non-stop climb since the DJIA bottomed on July 24th last month. I can tell you we looked at shorting it multiple times but the thought of lower interest rates combined with a rising pace of mortgages and refinances will probably have this company turning in stellar earnings numbers. Their last earnings report on July 24th, 2002 showed EPS at $1.48, or 13 cents above consensus estimates. The FOMC may not cut rates next week but there does seem to be a growing expectation they could cut rates by the end of the year. This would act as another shot of adrenaline for the U.S. economy potentially in time for the Christmas shopping season! Would I buy this stock now? Honestly, I don't know. Shares look extremely overbought but with America's focus on real estate (instead of the stock market), interest rates at 40 year lows and the potential for lower rates ahead, I don't see a lot of fundamental reasons that will slow them down. The stock held up pretty well despite a multi-week decline in the DJIA (from May) and really didn't see serious selling until the market's fall reached a fevered pitch in the last few days. Check out the chart: Daily Chart of CCR Those traders interesting in following CCR could try the "inside day" technique given Friday's close. Personally, I think I'd like to see a pull back to the $50 to $51 levels before considering a bullish position. Odds are good that we could see a pull back in the markets this coming week with new expectations for the Fed to not lower rates at this time. Curious traders could watch the stock for a few days and witness shareholder reaction to the news after the FOMC meeting on Tuesday. You may also want to check out a weekly chart of CCR. Shares approached the $55 level several times back in early 1998 and traded as high as $56.25 before following the markets down to the October '98 bottom. The question investors will be asking is "will current positive fundamentals for the industry give CCR enough fuel to power to new highs?" Positions in CCR and other stocks in the group are just one more way for investors to play the game when it comes to moves and expectations in interest rates. All right, everyone raise your hands if you would like to discuss a different sector next week. Great, now please email those ideas and suggestions to us at: Contact Support We look forward to hearing from you! P.S. For all you CCR bulls out there, check out the point-and- figure chart. Now calculate the vertical count (currently bullish). I'll give you a hint. It's above $70. ---------------------------- 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 ------------------------------- ABV AmBev - Companhia Mon, Aug 12 07:00 am ET 0.18 AMLN Amylin Pharmaceuticals Mon, Aug 12 Before the Bell -0.30 CPG Chelsea Prop Grp, Inc. Mon, Aug 12 After the Bell 0.66 FRT Federal Rlty Ivstmt Trst Mon, Aug 12 After the Bell 0.65 MAC Macerich Company Mon, Aug 12 Before the Bell 0.68 MAY May Department Store Mon, Aug 12 -----N/A----- 0.34 MLS Mills Mon, Aug 12 Before the Bell 0.71 PUB PUBLICIS Groupe SA Mon, Aug 12 -----N/A----- N/A PKS Six Flags, Inc. Mon, Aug 12 After the Bell 0.16 VAL Valspar Mon, Aug 12 Before the Bell 0.73 WTW Weight Watchers Intl Mon, Aug 12 After the Bell 0.37 WMC WMC Limited Mon, Aug 12 -----N/A----- N/A ------------------------- TUESDAY ------------------------------ ANF Abercrombie&Fitch Tue, Aug 13 4:30 pm ET 0.26 AMAT Applied Materials Tue, Aug 13 After the Bell 0.05 ATTC AT&T Canada Tue, Aug 13 -----N/A----- N/A DE Deere & Company Tue, Aug 13 Before the Bell 0.35 ENZN Enzon Tue, Aug 13 Before the Bell 0.24 EOG EOG Resources Tue, Aug 13 -----N/A----- 0.17 HPC Hercules Tue, Aug 13 Before the Bell 0.17 JCP JC Penney Tue, Aug 13 -----N/A----- -0.10 NTAP Network Appliance Tue, Aug 13 After the Bell 0.04 STOSY Santos Ltd. Tue, Aug 13 After the Bell N/A TRK Speedway Motorsports Tue, Aug 13 Before the Bell 0.80 TECH Techne Tue, Aug 13 Before the Bell 0.25 IPG The Interpublic Group Tue, Aug 13 After the Bell 0.39 TIF Tiffany Co Tue, Aug 13 Before the Bell 0.22 TJX TJX Companies Tue, Aug 13 Before the Bell 0.23 UBS UBS AG Tue, Aug 13 -----N/A----- N/A WMT Wal-Mart Tue, Aug 13 Before the Bell 0.45 WGR Western Gas Resources Tue, Aug 13 Before the Bell 0.30 ----------------------- WEDNESDAY ----------------------------- AAP Advance Auto Parts Wed, Aug 14 After the Bell 0.72 AZ ALLIANZ AG Wed, Aug 14 Before the Bell N/A ANN AnnTaylor Stores Wed, Aug 14 After the Bell 0.32 BRL Barr Laboratories Wed, Aug 14 -----N/A----- 0.85 BEAS BEA Systems Wed, Aug 14 After the Bell 0.06 BRCD Brocade Comm Systems Wed, Aug 14 After the Bell 0.08 RIO Companhia Vale RioDoce Wed, Aug 14 -----N/A----- -0.33 CSR Credit Suisse Group Wed, Aug 14 Before the Bell N/A EON E.ON AG Wed, Aug 14 -----N/A----- N/A ERJ Embraer-Emp Bras Aero Wed, Aug 14 -----N/A----- 0.32 FD Federated Dprtmnt Strs Wed, Aug 14 -----N/A----- 0.61 FOX Fox Entertainment Wed, Aug 14 07:30 am ET 0.06 INTU Intuit Wed, Aug 14 After the Bell -0.12 JHX James Hardie Inds Wed, Aug 14 -----N/A----- N/A LZB La-Z-Boy Wed, Aug 14 Before the Bell 0.26 NWS News Corporation Wed, Aug 14 07:30 am ET 0.15 JWN Nordstrom Wed, Aug 14 After the Bell 0.37 PSS Payless ShoeSources Wed, Aug 14 Before the Bell 1.85 UBB Unibanco-UniaoBancBras Wed, Aug 14 -----N/A----- 0.62 V Vivendi Universal Wed, Aug 14 -----N/A----- N/A ------------------------- THURSDAY ----------------------------- AMCR Amcor Limited Thu, Aug 15 -----N/A----- N/A AEOS American Eagle Outfit Thu, Aug 15 -----N/A----- 0.15 ADI Analog Devices Thu, Aug 15 After the Bell 0.15 ADSK Autodesk Thu, Aug 15 -----N/A----- 0.11 DELL Dell Thu, Aug 15 After the Bell 0.19 DV DeVry Thu, Aug 15 -----N/A----- 0.22 DISH EchoStar Comm Thu, Aug 15 06:00 am ET 0.06 EL Estee Lauder Thu, Aug 15 Before the Bell 0.18 GPS Gap Inc. Thu, Aug 15 After the Bell 0.03 HRL Hormel Foods Thu, Aug 15 Before the Bell 0.27 SJM J. M. Smucker Company Thu, Aug 15 -----N/A----- 0.42 KSS Kohl`s Thu, Aug 15 After the Bell 0.34 NVDA NVIDIA Thu, Aug 15 After the Bell 0.13 NVDA NVIDIA Thu, Aug 15 After the Bell 0.13 NVDA NVIDIA Thu, Aug 15 After the Bell 0.13 TGT Target Corporation Thu, Aug 15 -----N/A----- 0.37 ------------------------- FRIDAY ------------------------------- NAV Navistar International Fri, Aug 16 Before the Bell -0.28 ---------------------------------------------- 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 week of August 12th is going to be a wild one with the FOMC meeting on Tuesday. This list should help to identify other important events to watch for! ============================================================== -For- Monday, 08/12/02 ---------------- Tuesday, 08/13/02 ----------------- Retail Sales (BB) Jul Forecast: 1.2% Previous: 1.1% Retail Sales ex-auto(BB)Jul Forecast: 0.3% Previous: 0.4% FOMC Meeting (AB) Wednesday, 08/14/02 ------------------- Business Inventories(BB)Jun Forecast: 0.2% Previous: 0.2% Thursday, 08/15/02 ------------------ Initial Claims (BB) 08/10 Forecast: N/A Previous: 376K Industrial Prduction(DM)Jul Forecast: 0.2% Previous: 0.8% Capacity Utilization(BB)Jul Forecast: 76.2% Previous: 76.1% Philadelphia Fed (DM) Aug Forecast: 8.5 Previous: 6.6 FOMC Minutes Friday, 08/16/02 ---------------- CPI (BB) Jul Forecast: 0.2% Previous: 0.1% Core CPI (BB) Jul Forecast: 0.2% Previous: 0.1% Housing Starts (BB) Jul Forecast: 1.670M Previous: 1.672M Building Permits (BB) Jul Forecast: 1.680M Previous: 1.700M Mich Sentiment-Prel.(DM)Aug Forecast: 89.0 Previous: 88.1 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! 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The Option Investor Newsletter Sunday 08-11-2002 Sunday 2 of 5 In Section Two: Index Trader GamePlans: THE SECTOR BEAT - 8/11 Daily Results Call Play of the Day: ABGX - Another Bouncing Biotech Put Play of the Day: NKE - Consumer Weakness Dropped Calls: none Dropped Puts: BBBY, SNE ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************** INDEX TRADER GAMEPLANS ********************** THE SECTOR BEAT - 8/11 by Leigh Stevens The Bank Index (BKX) ended the week with very strong gains, as did Biotech (BTK), Cyclicals (CYC), Defense (DFI), NYSE Financials (NF), Forest products (FPP), Home Builders (DJUSHB), Healthcare (HMO), Pharmaceuticals (DRG), Oil Services (OSX), Securities brokers (XBD), and Transportation stocks (INDU). Featured below are charts and analysis of the Broker-dealers, Gold stocks - hope springs eternal with the gold bugs! - and, Healthcare. The Bank Index broke out above its down trendline and Biotech continued to rise above its prior downtrend channel, both sectors that I featured as bullish potential plays last week. UP on Friday - DOWN on Friday - SECTOR TRADE RECOMMENDATIONS - NEW/OPEN TRADE RECOMMENDATIONS - NONE TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT(S) - Broker Dealer Index ($XBD.X) STOCKS: AGE; AMTD; BSC; ET; GS; JEF; LEH; LM; MER; MWD; NITE; RJF; SCH The Broker-dealer index is rebounding from the low end of its owntrend channel in a resurging financial sector that got very oversold. This index has retested its recent high today in the 391-392 area. It remains to be seen whether XBD can get above this prior high, but it appears that it can and will run up higher - next resistance in the 403 area at the 50-day moving average, but more major resistance comes in around 430-432. Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL The Gold & Silver Sector traded up over 7% on Friday, continuing its rebound from the 55 area and from an oversold level. My initial upside objective for Gold stock sector was 65 - with he possibility that the sector would have another leg higher and climb back up to its "breakdown" point in 70 area. Friday, XAU traded right to its 200-day moving average, but then broke out above it. Clearing the 200-day MA suggests that the sector could now move up to a retest of its 50-day average at 72. This average is of course falling - at the beginning of week the 50-day MA was 73.6. My estimate remains that the 70 area, or 1-2 points higher (71- 72) is the best I could see XAU doing on a rebound for a while - I would turn seller in this area. XAU 14-day stochastic is pointing higher reflecting current upside momentum and is still under 50 - typical overbought reading for XAU is above 80, although rallies can end above 60. Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP The Healthcare Index broke out to the upside, above resistance implied by its (daily chart) down trendline and looks like it can advance further - its retracement has been far less than the Provider's Index - HMO hits more significant resistance around 586. Health Providers index (RXH.X) - unlike the HMO group, already retraced a little over 62% of its steep June-July decline, or a substantial part of the prior decline. This rebound also occurred in a very short time span. The Providers such as LPNT, TRI, THC, and HCA are just now hitting resistance and got overbought - so the sector is correcting now. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week ABGX 10.04 -0.93 0.23 0.41 0.80 1.29 New AMGN 47.73 -0.98 1.31 0.59 2.19 4.53 Leading Bios CHIR 37.90 -0.71 1.57 1.48 1.57 4.66 Cleared resistance IDPH 45.89 -1.35 1.28 0.98 2.24 4.19 Higher highs JNJ 54.51 -2.40 0.18 1.01 2.06 2.01 New support NOC 116.57 -5.12 1.25 3.62 5.18 8.22 New Good Defense PUTS AZO 67.28 -1.70 1.47 -0.45 -2.10 0.28 Better entry BBBY 28.62 -0.96 1.26 0.83 -1.30 0.66 Drop DIA 87.60 -2.43 0.95 2.17 1.05 4.70 New, What cut? HD 28.29 -0.95 0.55 0.23 -1.12 -0.14 Rebound not enough NKE 43.92 -1.32 0.30 -0.54 0.68 -1.31 New, Don't Do It QCOM 25.92 -1.51 1.43 -0.17 0.97 0.66 Can't stay up SNE 44.44 -0.70 0.49 1.35 0.15 1.71 Drop, misbehaved TMX 28.40 -0.60 0.90 0.10 0.65 1.10 New, Disconnected ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* ABGX - Abgenix Inc. $10.04 (+1.25 last week) See details in play list Put Play of the Day: ******************** NKE - Nike, Inc. $43.92 (-1.56 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ none PUTS ^^^^ BBBY $28.62 (+0.71) Despite the less than favorable news out of the Retail sector last week, we're starting to see an underlying bid in Retail stocks. BBBY is a perfect example, as it has reversed its recent trend and may have just completed a successful double-bottom near the $27 level. Friday's session saw the stock tack on better than 3%, far outperforming both the RLX index and the broad market. So despite the fact that our $29.50 stop has not been violated, we think the renewed strength in BBBY is an early sign that the bearish party is over. We're dropping the play this weekend, and would suggest looking to exit open positions on any early weakness on Monday. SNE $44.44 +0.44 (+1.73 for the week) The long-term chart on SNE continues to look bearish and a rollover from $45 would be bearish as well. In spite of Best Buy's pre-release of earnings yesterday, which took more than 30% off of the value of the stock, SNE still found buyers today. The stock has not yet violated our stop loss, however it has not performed to our expectations, and has broken its descending channel from the start of July. The current rally into next Tuesday's interest rate announcement could possibly take this stock higher, and we see no point in wasting any more time decay with an under performing play. We will close this play on Monday, and look for better opportunities. *********** 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. ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** 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 08-11-2002 Sunday 3 of 5 In Section Three: New Calls: NOC, ABGX Current Calls: AMGN, CHIR, IDPH, JNJ New Puts: DIA, NKE, TMX ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** NEW CALL PLAYS ************** NOC - Northrop Grummon $116.57 +0.76 (+8.72 for the week) Company Summary: Northrop Grumman Corporation is an $18 billion, global defense company with its worldwide headquarters in Los Angeles. Northrop Grumman provides technologically advanced, innovative products, services and solutions in defense and commercial electronics, systems integration, information technology and nuclear and non- nuclear shipbuilding and systems. With nearly 100,000 employees and operations in 44 states and 25 countries, Northrop Grumman serves U.S. and international military, government and commercial customers. (source: company release) Why we like it: NOC appears to be on the verge of closing its deal to acquire fellow defense company TRW. The U.S. under-secretary in charge of acquisitions, Edward Aldridge, said the deal posed no "showstoppers" that might get in the way of Northrop becoming the second largest defense contractor. Northrop first proposed the hostile takeover at the end of February. It hoped to acquire defense and auto parts maker TRW and then spin off the auto parts division of TRW. The hostile takeover bid was resolved in July, and the combined company is expected to generate 2003 sales of between $26 and $27 billion. Under the terms of the agreement, Northrop will acquire TRW for $60 per share in common stock, for a total value of $7.8 billion, plus assumption of TRW's net debt at the time of closing. According to Northrop, "The exact exchange ratio will be determined by dividing $60 by the average of the reported closing sale prices per share of Northrop Grumman common stock on the New York Stock Exchange for the five consecutive trading days ending on and including the second trading day prior to the closing of the merger. The exchange ratio will not be less than 0.4348 or more than 0.5357 of a Northrop Grumman share." The antitrust unit of the Department of Justice will make the final decision, but with advice from the Defense Department. Most analysts, as well as company officials say they expect no significant merger approval problems. The stock has been on a slow steady climb, and although it experienced a pull back with last week's drop in the Dow, NOC found support and has established a pattern of higher highs and higher lows. Today's intraday high of $188.20 broke through bearish resistance on the PnF chart. NOC is currently working on a bullish vertical count of $150. While this may seem like a big move, NOC has been able to achieve its counts in the past. We are targeting a more "reasonable" $130 on the play, as this stock traded as high as $135 as recently as June 19. A look at the daily chart shows the stock has recently broken out above its 10, 50 and 200-dmas. $120 could provide round number resistance overhead, and the next level of resistance after that looks to be $124. The market could be looking at a pullback following next Tuesday's interest rate announcement, however, with talk of the U.S. attacking Iraq picking up steam with Dick Cheney's recent comments, interest in NOC should remain high. Conservative traders may want to look for a pullback toward today's low of $113.60 before initiating new positions, as the stock has posted impressive gains the last couple of days, and may be in for some consolidation. We see today's small gain as evidence of some consolidation at the current level. We will use a stop loss of $110.00, as a stock priced over $100 can experience significant dollar moves, while the percentage of the move remains low. BUY CALL AUG-110*NOC-HB OI=4913 at $7.70 SL=3.00 BUY CALL AUG-115 NOC-HC OI=1917 at $3.60 SL=1.00 BUY CALL SEP-110 NOC-IB OI=1489 at $10.10 SL=5.00 BUY CALL SEP-115 NOC-IC OI= 672 at $2.45 SL=1.20 Average Daily Volume = 1.73 mil --- ABGX - Abgenix Inc. $10.04 (+1.25 last week) Company Summary: Operating in the biopharmaceutical field, Abgenix develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions including transplant related diseases, inflammatory and autoimmune disorders, and cancer. Harnessing the power of the mouse, ABGX has developed XenoMouse technology, a proprietary technology which the company believes enables quick generation of fully human antibody product candidates using mice. Current internal product development programs have yielded four antibody product candidates, with ABX-CBL being the current front runner. Why We Like It: So many Biotech breakouts, so little time! Unless you've been living under a rock, you by now are aware that the Biotechnology index (BTK.X) has been the linchpin in the Technology sector allowing the NASDAQ to possibly put in a near-term bottom. Our call list is well populated with Biotech stocks that have been breaking out, and it is our pleasure to add ABGX to the list with its breakout over the $9.50 resistance level on Friday. The stock has posted a series of higher lows since mid-July, and that pattern (along with the persistent rise in the BTK index) provided the springboard for Friday's breakout. With the likelihood of a pullback in the market ahead of the FOMC meeting on Tuesday, odds favor ABGX pulling back to support in the $9.00-9.50 range before continuing higher. We want to look to initiate new positions on a rebound from that support level, or even down near $8.50. Note that the trade above $10 on Friday generated a new PnF Buy signal, with the initial bullish price target of $15.50. Isn't it interesting that that is the site of the May highs? In order for this target to be achieved, we're going to need to see continued bullish action from the BTK index, but so far all signs are encouraging, with the BTK continuing to trade in the upper half of its ascending channel. On a near-term basis, ABGX looks a bit overextended after closing well above its upper Bollinger band on Friday, so we don't want to take on new positions without seeing the requisite pullback first. Initial stops are set at $8, which is where last week's rally got started *** August contracts expire next week *** BUY CALL AUG- 7 AZG-HU OI=2090 at $2.90 SL=1.50 BUY CALL AUG-10 AZG-HB OI= 813 at $0.85 SL=0.25 BUY CALL SEP- 7 AZG-IU OI= 21 at $3.20 SL=1.50 BUY CALL SEP-10*AZG-IB OI= 166 at $1.65 SL=0.75 BUY CALL SEP-12 AZG-IV OI= 34 at $0.60 SL=0.25 Average Daily Volume = 2.00 mln ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** AMGN - Amgen, Inc. $47.73 (+4.22 last week) Company Summary: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why We Like It: Even with the indecisive action in the broad markets as another volatile week drew to a close, Biotechnology shares were largely in the green with the BTK index posting another 1.7% gain. Our new play on AMGN spent the day in a rather narrow range, but in the end, the push through the $48 resistance level failed to stick. Given the strong gains last week, it was impressive that the stock didn't experience heavier profit taking ahead of the weekend. While much of the discussion in the media over the past couple days centers around whether the Fed will lower interest rates next week, the Biotechs seem to be shrugging off this speculation due to their relative insensitivity to the state of the economy. Barring a negative sector-related news event over the weekend, we're looking for the Biotechs to continue pushing higher, and as one of the biggest, we're expecting AMGN to lead the charge. There is some decent intraday support near $47 and another rebound from this level can be used to initiate new positions. Should the sector drift down for some more meaningful profit taking on Monday, we'll want to keep our eye on the $45.50-46.00 area. This was the site of the stock's breakout last week and a dip and bounce there should provide for a solid entry point. Despite the strength in AMGN as well as the BTK, we're hesitant to recommend new positions on a breakout over the $48 level, precisely because of the way AMGN pulled back after briefly cresting this level on Friday. There is some decent resistance in the $49-50 area, and AMGN will likely need one more dip towards support before taking a serious run at this resistance. We're keeping our stop set at $45. *** August contracts expire next week *** BUY CALL AUG-47 AMQ-HW OI=5675 at $1.35 SL=0.75 BUY CALL AUG-50 AMQ-HJ OI=3582 at $0.35 SL=0.00 BUY CALL SEP-47*AMQ-IW OI=2814 at $3.20 SL=1.50 BUY CALL SEP-50 AMQ-IJ OI=4008 at $1.95 SL=1.00 Average Daily Volume = 17.8 mln --- CHIR - Chiron Corporation $37.90 (+4.28 last week) Company Summary: Chiron Corporation is a global pharmaceutical company that is focus on developing products for cancer and infectious disease. The company continues to build upon its cancer franchise, which has three dimensions; immune system modulators, monoclonal antibodies and novel anti-cancer agents. In the infectious disease area, the CHIR has a broad range of products. The company commercializes its products through three business units, which include biopharmaceuticals, vaccines and blood testing. The Vaccines unit offers more than 30 vaccines for adults and children. Why We Like It: Given its extreme weakness over the past several months, the Biotechnology sector's (BTK.X) outperformance to the upside in recent weeks has been truly impressive. Following the lows set on July 24th, the BTK has been working its way higher in a nice little ascending channel. Apparently that rate of ascent wasn't good enough for CHIR, as this stock has been a real champ over the past four days. In that short span of time, the stock vaulted from the bottom of its own channel ($32.50) to as high as $38.79 on Friday afternoon before the profit taking began. Given that that move represented a 19% rally, it should have come as no surprise that there was some weakness into the close. In fact, we pointed out on Thursday, that with the heavy congestion in the $37-39 area, that would make for a logical point to harvest gains. So where do we go from here? The bullish trend is still very much intact and after this bout of profit taking has run its course, we'll have another dip that we can buy. Look to buy a mild dip near $37 (the center of CHIR's ascending channel) or a more sizable pullback near intraday support ($35.50-36.00). We're raising our stop this weekend to $35. That is just below the lower edge of the ascending channel and a close below there would be a strong indication that the trend is coming to an end. Traders looking to enter on strength can consider buying a rally through the $39 level, but need to be careful due to the overhead congestion that is spread between $39 and $41. If trading strength, make sure the BTK index is confirming that strength by continuing to trade up towards the top of its own channel, currently $395. *** August contracts expire next week *** BUY CALL AUG-35 CIQ-HG OI=509 at $3.30 SL=1.75 BUY CALL AUG-37 CIQ-HU OI=275 at $1.35 SL=0.75 BUY CALL SEP-37*CIQ-IU OI=140 at $2.90 SL=1.50 BUY CALL SEP-40 CIQ-IH OI=192 at $1.75 SL=0.75 Average Daily Volume = 2.69 mln --- IDPH - IDEC Pharmaceuticals $45.89 (+4.14 last week) Company Summary: IDEC Pharmaceuticals is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer, autoimmune and inflammatory diseases. IDPH's first commercial product, Rituxan, and its most advanced product candidate, Zevalin (formerly Y2B8), are for use in the treatment of certain B-cell non-Hodgkin's lymphomas. The company is also developing products for the treatment of various autoimmune diseases such as psoriasis, rheumatoid arthritis and lupus. Why We Like It: After the initial dip on Friday, the broad market staged a bold rally attempt, with the Biotechs leading the charge, up more than 3% at one point. But fear of darkness weighed heavily on the sector along with the rest of the market, causing a pullback in the late afternoon. Despite the afternoon pullback, the BTK index continued working its way higher in its ascending channel, coming to rest at $375, well above the midline of that channel ($368). That seems to indicate that the BTK will continue its winning ways next week, opening the door for a run at the top of the channel, currently near $395. IDPH is trading in its own channel, although it isn't quite as far along as the BTK. The stock really had a good run going early in the day, trading as high as $47.40 before gravity took over. IDPH proceeded to fall back to the center of its channel ($46.25), where it spent the remainder of the day before some late-day weakness dragged it down to close just fractionally below $46. The pattern of higher lows and higher highs is solidly intact and if Friday's pullback runs its course on Monday, we should see a tradable bottom put in near the $43-44 support level. A brief dip as low as $42.50 (the bottom of the channel) is possible, but a lower odds setup. Take advantage of weakness ahead of the FOMC meeting to initiate new positions on a dip and rebound from support, or else wait for a renewed surge above the midline of the channel to enter on strength. Regardless of your chosen entry strategy, confirm strength by looking for positive corresponding strength in the BTK index. Raise stops to $42.50. *** August contracts expire next week *** BUY CALL AUG-45 IDK-HI OI=5137 at $2.25 SL=1.00 BUY CALL SEP-45*IDK-II OI=1738 at $4.50 SL=2.75 BUY CALL SEP-50 IDK-IJ OI=1075 at $2.10 SL=1.00 BUY CALL OCT-50 IDK-JJ OI=1918 at $3.30 SL=1.75 Average Daily Volume = 5.94 mln --- JNJ - Johnson & Johnson $54.51 -0.06 (+2.26 for the week) Company Summary: Johnson & Johnson, with approximately 106,100 employees, is the world's most comprehensive and broadly based manufacturer of health care products, as well as a provider of related services, for the consumer, pharmaceutical and medical devices and diagnostics markets. Johnson & Johnson has 197 operating companies in 54 countries around the world, selling products in more than 175 countries. Why we like it: Johnson and Johnson held steady today, after testing support with a morning trade down to $53.40. It rebounded back over $54 and continued to cement its base above recent congestion between $50- $52. $54 established a buy signal on the PnF chart and this appears to now serve as support. there may be some consolidation in this area before taking off toward JNJ's bullish vertical count of $56. JNJ previously pulled back to support of $50 after trading as high as $53.49 last week. The stock then advanced higher with a trade of $54.78. Today's activity provides shows a pattern of higher highs and higher support. The pull back to $53.40 and high of $54.98 shows that the pullbacks, which most stocks experience on their way up, are getting successively higher. This is supported by a look at JNJ's PnF chart as well. A look at the pattern there shows an upward sloping support line, with the exception of JNJ's big drop after the announcement of manufacturing irregularities probe. The company quickly recovered from this drop and added back 13 points in 3 weeks, after investors realized the probe had no effect on the bottom line. With a host of new products in the pipeline, including the iBot wheelchair, a $25,000 product that climbs stairs, balances on 2 wheels and elevates to eye level, Johnson and Johnson's near term prospects look promising. We see the current level as an entry point, underscored by today's demonstration of higher support. BUY CALL AUG-50*JNJ-HJ OI=14212 at $4.80 SL=2.50 BUY CALL AUG-55 JNJ-HK OI=10083 at $0.85 SL=0.00 BUY CALL SEP-50 JNJ-IJ OI= 5709 at $5.90 SL=3.00 BUY CALL SEP-55 JNJ-IK OI= 8172 at $2.45 SL=1.20 Average Daily Volume = 10.8 mil ************* NEW PUT PLAYS ************* DIA - Diamonds Trust - $87.60 +0.35 (+4.40 for the week) Company Summary: The Diamonds Trust is the Dow Tracking Stock, which mirrors the Dow Industrial Average with a divisor of 100. Why We Like It: The DIA, which is the Dow tracking stock, has been on quite a run the last few days, as the market has made up its recent 700 point loss over the last four days. The euphoria that has taken hold of the market the last few days in anticipation of next week's FOMC meeting, seems overextended. If the Fed does not lower rates, look out for a significant pullback after the rally of the last three days, which may continue through Monday. There are several reasons the rate cut may not happen, the primary reasons being the upcoming anniversary of the September 11 attacks, and the already low Fed Funds rate of 1.75%. If Chairman Alan Greenspan and the FOMC lower rates on Tuesday, they will have already used up a significant bullet in their arsenal. The September 24 meeting seems a more likely target for lowering the rate. If there were to be any type of terrorist activity on or around September 11, the Fed would most likely step in and lower rates as they did last year, in an attempt to support the market. With an already low rate of 1.75%, which many analysts and large institutions are calling for to be lowered by 75 basis points by the end of the year, the FOMC must be careful when it uses up the possible rate cuts. By waiting until the end of September, they delay the effect of the cut by only six weeks, while still retaining the ability to state a "bias" toward lowering rates. This bias is generally used to let the investing public know what they will most likely be doing in the near future, without having to do so at the present time. If this were to occur, the market would most likely fade over the lack of lower rates that it has been anticipating. The alternative of a 25 basis point cut may also leave the market gasping for air. In the past, when the Fed has given the public what they expected, the novelty generally wears off rather quickly and the rally fades. If the rate is lowered by 50 basis points, as some institutions are predicting, then the rally will most likely continue, and our short play will be stopped out. It is unlikely that the Fed will do this, and leave themselves very little wiggle room for the rest of the year. A look at the PnF chart for the DIA shows a triple top buy signal at $88.00. However, it is right up against the triple bottom sell signal from July. This pattern, combined with extensive buying in the treasuries, may indicate there has been some short covering ahead of next week's announcement. We will use a trade below $87 as a short entry point. This would indicate the short covering has been completed and the market is ready to give back its gains, or the euphoria has worn off regarding the rate cut. In either case, a trade below this level could set the index rolling downhill. We will place our stop loss at $88.50, as a continued rally, 100 points higher than we currently stand in the Dow, could eventually end over 9000. BUY PUT AUG-87*DAV-TI OI=16472 at $1.60 SL=1.00 BUY PUT SEP-87 DAV-UI OI= 755 at $3.70 SL=2.00 Average Daily Volume = N/A --- NKE - Nike, Inc. $43.92 (-1.56 last week) Company Summary: Principally engaged in the design, development, and worldwide marketing of footwear, apparel, equipment and accessory products, Nike sells its products to approximately 17,000 retail accounts in the United States and through a mix of independent distributors, licensees and subsidiaries in approximately 140 countries. Virtually all of the company's products are manufactured by independent contractors. Footwear products are produced outside the United States, with apparel products are produced both in the United States and abroad. Why We Like It: Judging by the lack of strength in Retail Sales trends, consumers are pulling in their horns, even in the normally strong back-to-school season. Apparel manufacturers are feeling the pinch as well, as the lack of consumer spending at Retail outlets is reflecting back to the source. This trend has clearly been building for awhile, judging by the recent price action in shares of NKE. Despite its trendy appeal, and a recent Strong Buy rating from Merrill Lynch, the stock can't seem to break out of its persistent downtrend. The stock rebounded sharply off its lows (near $45) on July 24th with the rest of the market, but when the buying ran out of steam near the $51 level, the return of the sellers was fast and furious. Not only did the stock fall back to its late-July lows, but it actually continued to decline. Even the broad market rally of the past 4 days barely caused a blip in the stock's price, and it is right back at its lowest level since September 21st. This relative weakness is a big neon sign that if the broad market falls back, stocks like NKE are probably going to be leading the pack to the downside. The month-long descending trendline currently rests at $46, and right now that looks wholly unachievable by the bulls. NKE has been finding eager sellers at the $45 level over the past several days, and if we should get so lucky as to see a rebound back to that level next week, the subsequent rollover will be a high-odds entry point. Barring such a gift, we'll have to content ourselves with entering on a breakdown under $43.25, the site of last week's intraday lows. The PnF chart confirms the grim picture, as it is currently on a sell signal, with a bearish price target of $35. Set stops at $46. *** August contracts expire next week *** BUY PUT AUG-45 NKE-TI OI=454 at $2.00 SL=1.00 BUY PUT SEP-45 NKE-UI OI= 80 at $3.90 SL=2.50 BUY PUT SEP-42*NKE-UV OI= 30 at $2.65 SL=1.25 Average Daily Volume = 1.70 mln --- TMX - Telefonos de Mexico, S.A. $28.40 (+0.91 last week) Company Summary: TMX is a telecommunications company that provides telecommunications solutions including local and long-distance wire services, wireless communications and multimedia networks for video, audio and data. Additionally, the company provides network engineering, digital wireless network access and Internet. Located in Mexico City, Mexico, TMX also operates in the United States, Puerto Rico and Brazil and has strategic alliances with France Telecom, Carso Global Telecom, SBC Communications and Williams Communications. Why We Like It: There hasn't been much in the way of good news in the Telecommunications sector in recent months, with the bankruptcy and accounting scandal at Worldcom being the most notable recent bad news story. So it should come as no surprise that this group has lagged so much in the recent market rebound. Along with the bearish pressure in the sector, TMX has been additionally pressured due to its exposure to the Latin American market. So when new of the Brazilian bailout hit, it was only natural to see a bit of a lift in the stock. That short-covering rebound seems to have already run its course, as the stock once again reversed at its 4-month descending trendline ($29.50) on Friday. The fundamental picture hasn't changed, and if this rebound appears to be providing us with a high-odds bearish entry point. In addition to historical resistance (broken support) at the $30 level and the descending trendline, we have the 20-dma ($29.36) working in our favor. Another pop up near this level will likely have the bears piling in with fresh short positions and we want to throw our hat in the ring. Use a failed rally below resistance to enter the play or else wait for a renewed decline under the $27.75 support level. We're initiating the play with a tight stop at $30, as a close above that level would prove the bulls are gaining strength. *** August contracts expire next week *** BUY PUT AUG-30 TMX-TF OI=2084 at $1.85 SL=1.00 BUY PUT SEP-30*TMX-UF OI= 140 at $2.80 SL=1.50 BUY PUT SEP-27 TMX-UY OI= 301 at $1.50 SL=0.75 Average Daily Volume = 1.86 mln ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. 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The Option Investor Newsletter Sunday 08-11-2002 Sunday 4 of 5 In Section Four: Current Put Plays: AZO, HD, QCOM Leaps: Who Let The Bulls Out? ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** AZO - AutoZone $67.28 +1.32 (-0.24 for the week) Company Summary: AutoZone is a Memphis-based auto parts chain that opened its first store in Forrest City, AR, on July 4, 1979. A public company listed on the New York Stock Exchange (AZO), AutoZone had sales of more than $4.5 billion in fiscal 2000. The nearly 3,000 stores in 42 U.S. states and Mexico are all company-operated - there are no franchises. AutoZone, a Fortune 500 company, is opening more stores per year than any other retail auto parts chain in the nation. Why we like it: AZO enjoyed a bit of a rally today. However, it was not able to reach yesterday's high and looks to have given us a better short entry point. We continue to see the interest rate debate ahead of next Tuesday's rate announcement as a negative for AZO. If rates are lowered, consumers will possibly have more disposable income from re-financing and be able to better afford new cars. This is in addition to already low financing on new vehicles, as evidenced by Ford and GM's recent increases in U.S. sales. If the Fed does not lower rates, we expect the market to give back some of its gains of the last three days. It is doubtful a stock with such recent weakness would be able to hold up in such an environment. With the exception of AZO's rally at the end of July, along with the rest of the market, the long-term trend has been down. The recent rally, making up all of the Dow's 700-point loss from the end of last week and beginning of this week, failed to lift AZO, which is a sign of poor relative strength. The PnF target of $60 remains our target on this play. While we will need a 3-box reversal before this count is certain, the recent weakness in the stock confirms the current PnF sell signal. This is our initial target, however, once this has been breached $55 looks like the next possibility. We are leaving our stop loss at $70 as this would signal a reversal of the current pattern and would also register a new buy signal on the PnF chart. BUY PUT AUG-70*AZO-TN OI=501 at $3.70 SL=2.00 BUY PUT SEP-65 AZO-UM OI=622 at $3.80 SL=2.00 Average Daily Volume = 1.29 mil --- HD - Home Depot $28.29 +1.15 (-0.14 this week) Company Summary: Founded in 1978, The Home Depot® is the world's largest home improvement specialty retailer and the second largest retailer in the United States, with fiscal 2001 sales of $53.6 billion. The company employs more than 296,000 associates and has 1,437 stores in 49 states, Puerto Rico, seven Canadian provinces, and Mexico. Its stock is traded on the New York Stock Exchange and is included in the Dow Jones Industrial Average and Standard & Poor's 500 Index. (source: company release) Why we like it: Home Depot rebounded slightly today, however not yet convincingly enough to reverse the current trend. The stock remains in its descending channel, which was begun at the beginning of May, long before its gap down on July 12. An interest rate drop next week may provide extra disposable income from refinancing, which consumers may use to remodel homes. However, Home Depot is losing market share to Lowe's and does not appear capable of a strong rebound from its current trend. The current triple bottom breakdown on HD's PnF chart is bearish. Home Depot's rebound to yesterday's high still shows a continuing downward trend. The stock is now toward the top of its channel and the next roll down would plant the stock below $25. There appears to be some consolidation going on right now, however the trend is still clearly negative. The inability of this stock to benefit from the Dow's recent 700-point rally demonstrates very poor relative strength, and we will continue to hold this short position with a target in the low 20s. BUY PUT AUG-30 HD-TF OI=6724 at $2.20 SL=1.25 BUY PUT SEP-30*HD-UF OI= 598 at $3.20 SL=1.75 Average Daily Volume = 12.3 mln --- QCOM - Qualcomm $25.92 -0.12 (+0.37 for the week) Company Summary: QUALCOMM Incorporated 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 made its best effort to recover from its recent down trend, however failed once again to hold a close over $26. We like this stock short under $25, and will continue to hold the play. The stock topped out at $26.60 intraday, however fell back into the close. This action indicates there are sellers who feel the stock is overvalued, as the pattern suggests a lid at $26, with plenty of room below $25. Looking ahead to next week, it is hard to imagine a continued rally in the broad markets past Tuesday. If the Fed does cut rates, it will satisfy the appetite of those expecting the cut, but with a 6-9 month lag before the cut filters through the economy, it will do little to help the tech sector in the meantime. If the rate cut does not take place, expect a market pullback and the crutch that has held Qualcomm upright the last couple of days will be gone. The low option premium and low time decay makes this play worth holding in spite of the lack of movement the last couple of days. We can certainly wait until Tuesday, as long as a Monday rally ahead of the FOMC meeting doesn't take us out of our stop of a closing price over $26.50. This level would also be a little too close to the PnF reversal at $27. Look for QCOM's descending channel from the beginning of the year to continue. This channel has been amazingly consistent, and the stock's foray into the upper half should not be considered much more than a temporary diversion, as it is still holding the trend. BUY PUT AUG-25 AAW-TE OI= 1765 at $0.75 SL=0.00 BUY PUT SEP-25*AAW-UE OI= 3560 at $2.15 SL=1.00 Average Daily Volume = 16.5 mil ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***** LEAPS ***** Who Let The Bulls Out? By Mark Phillips mphillips@OptionInvestor.com The situation in the broad markets was looking mighty grim again last Monday as the closing bell rang, but amazingly on Tuesday the sun came out and bulls frolicked for the remainder of the week. Helping the bovine party along were decent results from CSCO Tuesday night, a bailout package for Brazil and hopes for a Fed rate cut next Tuesday. CSCO's earnings were nothing impressive. In fact the only reason they were received so well is that investors were relieved to hear nothing worse than demand is still weak. No accounting worries, no skeletons, just high hopes from John Chambers, the company's CEO. Brazil is an interesting situation, as the bailout package is little more than a short-term band-aid for a systemic problem. No matter. Investors still liked the message that was sent, as it will give big banks like JPM and C a chance to gracefully reduce their exposure in the region. And Fed rate cut hopes? Fogeddaboudit! Oh sure they could do it, but my guess is that they aren't going to want to use one of only 3 remaining bullets (25 bp cuts) just because a few Brokerage firms say it is a good idea. With the 9/11 anniversary only a month away, look for the Fed to keep their weapon holstered next week. The markets resumed their rally basically out of relief that they weren't going to fall off the edge of the earth and we're still in the oversold rebound area. Volume has been notably weak and most stocks and sectors (Biotechs are a big exception) are still trading below their multi-month descending trendlines. Oh sure they are close to breaking out and very well could next week, but let's remember that close only counts in horseshoes and hand grenades. But I'm not going to argue with the markets. In fact, with the changes to the playlists as detailed below, I think you can see that I'm hoping this rally has some legs. Every one of our Watch List plays except for BA jumped over to the Portfolio with the resumption of the rally that got going on Tuesday. I think it is interesting to note that they each pulled back into the consolidation zones dictated by our entry strategy. Who says Technical Analysis doesn't work? GRIN Chief among the factors influencing my opinion that we've seen a successful market bottom (at least for a couple months) is the nice double-top in the VIX and double bottom in the broad market indices. It looks to me like we're heading up over the near term, although I expect to still see a fair amount of volatility along the way. Aside from INTC and BA, all of our plays have an extensive writeup down below, so my comments here will be rather brief. Portfolio: ------------------- INTC - We dropped BRCM this week and given the weak action in the SOX, I was VERY tempted to do the same thing with INTC. Note that despite several broad market attempts to get moving to the upside, INTC continues to post lower highs. And Monday's close at $15.88 (a new multi-year low) certainly wasn't encouraging. While we aren't dropping the play yet, I will likely do so if the current upward move is unable to crest the $19 level. Clearly, I do NOT recommend initiating new plays on another dip towards $16. For those nervous about the position, consider closing on strength ahead of the FOMC meeting. Watch List: ------------------- BA - I really wanted to take an entry on Tuesday, as BA rebounded from roughly the $38.50 level, but memories of buying too early and being stopped out kept me on the sidelines. I think BA is being pushed around by the action in the Dow Transports ($TRAN), and I'm not convinced of the strength there quite yet. So let's keep that entry target in place and hope for one more dip to give us a better entry. The PnF chart still says $32 is going to be the downside target, so I don't want to be over eager to get into the play until either that target is achieved or we get a fresh buy signal with a trade over $43. Patience is key! My poor little fingers are about to revolt after writing all those play descriptions and drops, so I'm going to keep the commentary brief this weekend. I like the action we've seen up to this point, but please don't accuse me of turning long-term bullish. This is a trading rally within an overall bear market. Treat it as such. We can buy the dips for a rally that may last 2 weeks and it may last 6 months. At this juncture, nobody knows. We've done the part of entering wisely quite well. Now all we have to do is make sure we exit just as wisely when the time comes. While there are several plays that I think might make good additions to the Watch List, I want to wait until next week. With 5 new Portfolio plays, I think you'll have plenty to keep you busy until next week. My view of the market says we'll get another pullback, which should provide secondary entries into several of our new Portfolio plays. And with another week of trading under our belts, it will be much easier to gauge intelligent entry points for the new Watch List plays I've got my eye on. Buy the Dips With Caution! Mark ------------------- LEAPS Portfolio ------------------- Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: INTC 07/26/02 '03 $ 20 NQ -AD $ 2.00 $ 1.95 - 2.50% $15.50 '04 $ 20 LNL-AD $ 4.10 $ 4.00 - 2.43% $15.50 DJX.X 08/06/02 '03 $ 86 DJX-LH $ 4.80 $ 6.90 +43.75% $80 '04 $ 88 ZDJ-LJ $ 7.50 $10.00 +33.33% $80 GE 08/06/02 '03 $ 30 GE -AF $ 3.50 $ 4.60 +31.43% $28 '04 $ 30 LGR-AF $ 4.80 $ 6.50 +35.42% $28 MSFT 08/06/02 '03 $ 45 MQF-AI $ 7.60 $ 8.20 + 7.89% $43 '04 $ 50 LMF-AJ $10.10 $11.10 + 9.90% $43 '05 $ 50 ZMF-AJ $13.70 $14.60 + 6.57% $43 QQQ 08/06/02 '03 $ 25 OZC-AY $ 1.70 $ 2.10 +23.53% $21 '04 $ 25 KLF-AY $ 3.40 $ 3.70 + 8.82% $21 WMT 08/06/02 '03 $ 50 WMT-AJ $ 3.80 $ 4.70 +23.68% $44 '04 $ 50 LWT-AI $ 7.30 $ 8.30 +13.70% $44 Puts: None ------------------- LEAPS Watchlist ------------------- Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: 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 PUTS: None ------------------- New Portfolio Plays ------------------- DJX - Dow Jones Industrials $82.74 **Call Play** Despite my skepticism on Monday night, the bulls managed to pull it together and rally off the $80 level on Tuesday. With the dual benefits of the Brazilian bailout (which helped Financial stocks like C and JPM) and hopes for a Fed rate cut next Tuesday, the DOW just kept on rising right into the weekend. The rebound on Tuesday gave us our successful test of the $80 level and I can honestly say I was amazed by the positive action that prevailed. But our job is to trade what we see, not what we believe. Clearly, the $87.50 level is a line in the sand, with the bulls and bears both unable to secure an advantage going into the weekend. The bulls can claim victory due to the fact that closed the DOW right at resistance, while the bears can point to the fact that the bulls didn't have enough horse (or bull) power to break through that resistance. Next week will definitely be exciting, as volatility is still likely to be extreme. But I think we nabbed a first-rate entry point into the play. Those still sitting on the sidelines will want to look for a pullback into the $83-84 level (perhaps on disappointment following a lack of a rate cut on Tuesday) to allow them to enter the play at a viable point. The Bullish Percent for the DOW is now Bull Confirmed, and the weekly Stochastics are in bullish mode as well, clearing the way for a continuation of this rally to perhaps the $94 level over the intermediate term. Due to my expectation for further volatility and the fact that we have some gains under our belt already, I'm initially placing our stop rather wide at $80. If we get a breakout over $88 on a closing basis next week, we'll look to raise that to $82. BUY LEAP JAN-2003 $ 86 DJX-LH $4.80 BUY LEAP JAN-2004 $ 88 ZDJ-LJ $7.50 --- GE - General Electric $29.65 **Call Play** As though I had scripted the move, GE cooperated last week by falling right into the middle of our desired entry range on Monday before rebounding with the remainder of the broad market on Tuesday. That triggered our entry, and to be honest, I was amazed at how far the stock ran by the end of the week. Perhaps it has something to do with the fact that there isn't an issue with the August 14th certification, or that the company has announced that they will expense options. More likely, I think GE is just participating in the broad market rebound in anticipation of a Fed ease on Tuesday. I think that event is rather unlikely, so disappointment is likely to be the name of the game after the meeting, resulting in another pullback. But that pullback will likely just provide one more opportunity for late-comers to enter the play on a dip near the $30 level. It is interesting to note, that although GE managed to close out the week at its highest level since the end of May, buyers were unable to clear the $33 level, which would have generated a fresh PnF Buy signal. That likely sets the stage for more weakness next week after the FOMC meeting -- that likelihood is borne out by the daily Stochastics, which are nearing overbought. But the longer term picture shows the weekly on a nice steep ascent, which ought to give us a run into the mid-$30s before it has run its course. While that may not seem like much, look at the %gain in just the past few days, and you can see that a few dollars in GE can translate into sizable gains in an options trade. Take note of the fact that I have changed the symbol of the 2003 LEAP to reflect a symbol change at the CBOE. BUY LEAP JAN-2003 $ 30 GE -AF $3.50 BUY LEAP JAN-2004 $ 30 LGR-AF $4.80 --- MSFT - Microsoft Corp. $45.66 **Call Play** If there's a big-cap stock in the Technology arena that we should monitor for indications of whether the NASDAQ has any hopes of recovery, MSFT would be it. Despite the attrition that has taken place in the PC arena over the past couple years, Mr. Softee just refuses to give up the ghost. I know it was a bit unusual to throw it back onto the Watch List right after being stopped out recently, but I think it is a move that is going to pay off. The first bounce off the bottom was a bit too violent to trade, but last week's drop back to support near the $44 level was just what we were looking for. With the broad market recovering, MSFT went along for the ride, pushing as high as $49 before pulling back near the end of the day on Friday. While there will likely be some volatility surrounding next Tuesday's FOMC meeting, I think we grabbed a solid entry into the play this time around. Note that the PnF chart is currently on a buy signal, and we don't get into trouble from the long side until a trade at $43, just below last week's lows. Use a dip and bounce above this level (ideally in the $45-46 area) to initiate new positions if you missed your chance last week. We'll initially place our stop at $43, but will look to raise it as soon as MSFT pushes its way through the $50 level on a closing basis. BUY LEAP JAN-2003 $ 45 MQF-AI $ 7.60 BUY LEAP JAN-2004 $ 50 LMF-AJ $10.10 BUY LEAP JAN-2005 $ 50 ZMF-AJ $13.70 --- QQQ - NASDAQ-100 Trust $22.50 **Call Play** Continuing with the theme of the week, even the NASDAQ got into the act, rebounding from its fresh lows on Monday. We were looking to re-enter the play on a rebound from the $22 level, and while we didn't get in at the low, we certainly got what I think is a solid entry as the Technology market works on putting in a decent tradable bottom. Demonstrating the fact that it is still the laggard of the indices, the QQQ came to rest just below its 3-month descending trendline ($23.70) on Friday. We definitely need to see a breakout over this level and more importantly $24.50 to convince us that there is some room to run on this fledgling recovery. But the early signs are encouraging, with the weekly Stochastics starting to poke out of oversold territory (again!) and the Bullish Percent chart trying to transition from Bull Correction into Bull Confirmed. I feel we got a great entry into the play, and now we just need to manage our risk as the QQQ works up the chart, most likely in a 2 steps forward, 1 step back manner. Another pullback and bounce from the $22.00-22.50 area should provide late entries into the play before the bulls finally break that descending trendline. Place stops at $21, just below last week's low. Take note of the fact that I have changed the symbol of the 2003 LEAP to reflect a symbol change at the CBOE. BUY LEAP JAN-2003 $ 25 OZC-AY $1.70 BUY LEAP JAN-2004 $ 25 KLF-AY $3.40 --- WMT - WalMart Stores $47.28 **Call Play** Even with lackluster data related to Retail Sales, and the huge warning from BBY on Thursday, the Retail index is trying to put in a bottom. And as the undisputed leader in the Discount Retail arena, WMT is still kicking tail and taking names. Oh, I don't expect the stock to post new highs any time soon, but I certainly like the action on the PnF chart. The rebound off the lows a couple weeks ago put the stock back in a column of X's and since then we've gotten a fresh PnF Buy signal that indicates WMT should run up near the $58 level over the intermediate term. But we aren't likely to go there in one straight shot, especially with the bearish resistance line looming at $52. Dips are definitely buyable though, and we took advantage of the one last week to get us into the play after the rebound off the $46 level. The next hurdle for WMT to clear is $50 resistance, which will give us another double top PnF Buy signal. If not in the play though, we would recommend waiting until after the post-FOMC dust settles. WMT announces earnings Tuesday morning and then we'll have the (likely) disappointment of no interest rate cut. Depending on the outcome of (and investor response to) those two events, we could very easily see another dip into the $46-47 area, which would give us another attractive entry setup. Initial stops are in place at $44. BUY LEAP JAN-2003 $ 50 WMT-AJ $3.80 BUY LEAP JAN-2004 $ 50 LWT-AI $7.30 ------------------- New Watchlist Plays ------------------- None ------------------- Drops ------------------- BRCM $17.63 Hoping for BRCM to continue its upward trek proved to be an exercise in futility, as the stock's strength early in our play quickly faded. While I was looking for the $16 level to provide support for the next leg up, there was just no way for BRCM to avoid the double onslaught of another breakdown in the SOX, along with nervousness about CSCO's earnings report, resulting in a trade below our $16 stop on Monday. I actually violated my rule on this one, as I was unwilling to take an exit on Monday, knowing (alright, believing) that there would be a bounce back from that level, providing us with a more favorable exit. Sure enough we got it. Whew! But while the stock has recovered somewhat off the lows, there is no conviction in the buying. We're closing this position as of Friday's closing price. Take advantage of any price strength on Monday as an opportunity to exit open positions at a more favorable price. GD $17.63 Well, that was nicely scripted. I said to take advantage of any drop below $80 as an opportunity to close our GD play and harvest those gains. Monday's broad market decline gave us just what we were looking for as the stock fell to close at $78.81. Note the resilience that has kept GD from breaking below $78 over the past 3 weeks and I think you can see the merit of taking our exit on weakness. While I think there may still be a couple more $$ of downside action, the bulk of the gains to be had in this play have already accrued. We exited the play as of Monday's close. ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. 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The Option Investor Newsletter Sunday 08-11-2002 Sunday 5 of 5 In Section Five: Covered Calls: Using LEAPS With Covered-Calls Naked Puts: Selling Puts...And Surviving The Aftermath! Spreads/Straddles/Combos: Echoes Of Optimism... Updated In The Site Tonight: Market Watch Market Posture Swing Trader Game Plan ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************* COVERED CALLS ************* Option Trading Basics: Using LEAPS With Covered-Calls By Mark Wnetrzak The are many ways to be successful with covered-calls and using LEAPS can add versatility to your long-term stock portfolio. Attn: Covered-Calls Editor Subject: Selling Covered-Call LEAPS Hi Mark, I have question regarding selling covered-calls: Instead of selling short-term covered-calls, I would like to sell LEAPS options as the "covered" calls. For example, if I sell "at-the-money" 2004 LEAPS calls on a stock, I will receive a large premium...plus I do not have to check on my position every day. While selling monthly covered-calls, if the stock price goes down substantially, I will lose a lot of money -- besides the worries it creates, and the (multiple) trade commissions. Do I understand correctly or am I making the wrong decision? Thank you. RP Hello RP, With the substantial decline in stock prices, we have received a number of E-mails about selling LEAPS in covered-call positions to recover value in long-term portfolio issues. The strategy of writing LEAPS against portfolio stock can be a great way to offset potential losses in downtrodden equities because the time value premium in LEAPS is less affected by market downturns and sharp declines in the underlying issue can increase the implied volatility (providing additional premium) of the sold options. In most cases, positions involving LEAPS do not differ much from those using shorter-term options. LEAPS can be sold against the stock in the same manner as near-term call options. The covered write position with LEAPS will have limited profit potential when compared to outright stock ownership, but will outperform that strategy if the stock declines in value or remains relatively unchanged. At the same time, a trader who sells LEAPS will earn a substantial credit when compared to a near-term covered write and since he is selling a more expensive option, the initial cash investment in new positions will be smaller. The LEAPS writer also has a higher net return if assigned early, because the cost basis in the underlying issue was reduced through the sale of additional premium. For long-term investors, writing covered LEAPS can provide additional insurance against bearish market activity while retaining the potential for stock splits and spin-offs, dividends and other benefits of stock ownership. The most significant difference in LEAPS is their slow rate of time-value decay. While this effect is initially beneficial to option writers, it can be a major obstacle in future position adjustments. The premiums (due to future potential) inherent in LEAPS prices can be very large even when they are substantially in- or out-of-the-money. This characteristic will significantly affect a trader's ability to roll-out of a position because the sold (short) call option is relatively expensive to repurchase. However, a short-term covered-call writer who is faced with the task of rolling down - buying back a current short position and selling another with a lower strike price - may transition to LEAPS as a simple means of reducing the overall basis in the underlying issue, even though he may be moving to a potentially less profitable position. The large absolute premiums available in LEAPS make them an attractive tool in hedging against future downside activity, but selling long-term options to salvage lost share value is not always the most efficient technique. The key to a correct assessment of this popular strategy, whether used for new positions or in an attempt to recover from falling stock prices, lies in comparing the difference in annualized returns from the sale of LEAPS versus those that can be achieved from repeatedly writing shorter-term options. Attn: questions@OptionInvestor.com Subject: Covered Calls on LEAPS Hello OIN, I thought I had read somewhere that covered calls can be written against leaps. Can you comment on this technique? Thanks JC Hello JC, Covered-call writing is a stock options trading strategy that some investors use when they are looking for a conservative risk/return profile, while maintaining a meaningful profit potential in either bullish or neutral market environments. An investor will usually want to write a covered call to generate income, collecting the premium for the sale of the option against a stock in his or her portfolio. This strategy can also be used with LEAPS however it differs because it does not involve the ownership of shares of the underlying stock; LEAPS are substituted for the long position. The strategy is basically a calendar spread. Calendar (or time) spreads involve the sale of one option and the purchase of a more distant option, generally both with the same strike price. The basic strategy implies a neutral-outlook philosophy, based on the fact that time will erode the value of the near-term option at a faster rate than it will the longer-term option. An additional benefit comes from writing calls against the long position each month, thus lowering the overall cost basis of the position. After the initial position is in place, LEAPS with covered-calls require little maintenance unless there is a large change in the price of the underlying issue. Ideally, the investor would like the stock to trade in a relatively small price range and finish just below the sold strike price when the near-term call expires. However, if the short-term position is "in-the-money" on the last day of the expiration period, you simply buy it back so that you don't have to exercise the LEAPS to cover your obligation -- that would defeat the purpose of the strategy. At the beginning of each new strike period, you sell the next month's call to further reduce your overall cost basis in the LEAPS. There are other, more complex, issues involved in trading calendar spreads and McMillan's book, "Options as a Strategic Investment" has some excellent information on the subject. 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 FDRY 7.50 8.99 AUG 7.50 0.45 *$ 0.45 13.9% GCOR 10.16 11.66 AUG 10.00 0.70 *$ 0.54 12.4% ENDP 8.58 8.17 AUG 7.50 1.45 *$ 0.37 11.3% LVLT 5.75 5.95 AUG 5.00 1.20 *$ 0.45 10.7% ISRG 7.52 7.95 AUG 7.50 0.35 *$ 0.33 10.0% ICOS 19.01 27.49 AUG 17.50 2.55 *$ 1.04 9.2% AMLN 10.00 13.00 AUG 10.00 0.90 *$ 0.90 8.6% CREE 13.98 14.45 AUG 12.50 2.30 *$ 0.82 7.6% NPSP 17.11 23.06 AUG 12.50 5.60 *$ 0.99 7.5% SNDK 14.40 13.11 AUG 12.50 2.85 *$ 0.95 7.1% TRLY 6.31 5.67 AUG 5.00 1.60 *$ 0.29 6.7% SBL 8.58 9.00 AUG 7.50 1.50 *$ 0.42 6.4% OTEX 20.41 20.78 AUG 17.50 3.40 *$ 0.49 6.3% FTI 17.40 18.68 AUG 15.00 3.00 *$ 0.60 6.0% HYSL 17.85 23.04 AUG 17.50 1.05 *$ 0.70 6.0% ALXN 13.73 13.53 AUG 12.50 1.55 *$ 0.32 5.7% BRCD 18.50 15.36 AUG 15.00 4.40 *$ 0.90 5.5% BRCM 20.39 17.63 AUG 17.50 3.90 *$ 1.01 5.3% NPSP 20.89 23.06 AUG 17.50 4.00 *$ 0.61 5.2% HGSI 14.98 17.87 AUG 12.50 2.90 *$ 0.42 5.0% IMDC 16.00 18.30 AUG 12.50 3.90 *$ 0.40 4.8% IVGN 30.88 36.46 AUG 25.00 6.90 *$ 1.02 4.6% IVGN 32.68 36.46 AUG 27.50 6.00 *$ 0.82 4.5% EXTR 10.67 9.29 AUG 10.00 1.70 $ 0.32 3.1% WEBX 13.88 11.91 AUG 12.50 2.20 $ 0.23 2.1% ULGX 5.32 4.32 AUG 5.00 0.70 $ -0.30 0.0% *$ = Stock price is above the sold striking price. Comments: Well, the major averages are at a key moment as they finished (stalled) at the end-of-July high. Next week will either be a drop from resistance (failed rally) or break-out city. Simple enough, just vote with your cash and remember, it is also expiration week. Time to re-evaluate any issues that are acting weaker than expected (failed to rally with the market) and act accordingly. Two issues to consider closing in the name of capital preservation are WebEx Communications (NASDAQ:WEBX) and Urologix (NASDAQ:ULGX). Some other stocks on our early exit watch list include: Level 3 Communications (NASDAQ:LVLT), Sandisk (NASDAQ:SNDK), Open Text (NASDAQ:OTEX), Broadcom (NASDAQ:BRCM), Brocade Communications (NASDAQ:BRCD), and Extreme Networks (NASDAQ:EXTR). Positions Previously Closed: Zixit (NASDAQ:ZIXI), Sprint PCS (NYSE:PCS), Juniper Networks (NASDAQ:JNPR) and Digital River (NASDAQ:DRIV). 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 AFFX 18.51 SEP 15.00 FIQ IC 4.40 140 14.11 42 4.6% ALKS 7.70 SEP 7.50 QAL IU 1.25 30 6.45 42 11.8% MDR 6.00 SEP 5.00 MDR IA 1.50 69 4.50 42 8.0% MLNM 14.16 SEP 12.50 QMN IV 2.45 2731 11.71 42 4.9% MRCY 24.79 SEP 22.50 QYR IX 3.60 7 21.19 42 4.5% MYGN 24.96 SEP 22.50 GSQ IX 4.10 28 20.86 42 5.7% NXTL 5.49 SEP 5.00 FQC IQ 1.10 1187 4.39 42 10.1% 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 ALKS 7.70 SEP 7.50 QAL IU 1.25 30 6.45 42 11.8% NXTL 5.49 SEP 5.00 FQC IQ 1.10 1187 4.39 42 10.1% MDR 6.00 SEP 5.00 MDR IA 1.50 69 4.50 42 8.0% MYGN 24.96 SEP 22.50 GSQ IX 4.10 28 20.86 42 5.7% MLNM 14.16 SEP 12.50 QMN IV 2.45 2731 11.71 42 4.9% AFFX 18.51 SEP 15.00 FIQ IC 4.40 140 14.11 42 4.6% MRCY 24.79 SEP 22.50 QYR IX 3.60 7 21.19 42 4.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AFFX - Affymetrix $18.51 *** Long-Term Technical Support *** Affymetrix (NASDAQ:AFFX) develops and commercializes systems that help scientists alleviate human suffering and improve the quality of life by applying the principles of semiconductor technology to the life sciences. The company's integrated GeneChip platform consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with the probe arrays, a scanner and other instruments to process the probe arrays and software to analyze and manage genetic information from the probe arrays. Related microarray technology includes instrumentation, software and licenses for fabricating, scanning and collecting and analyzing results from low-density microarrays. Affymetrix sells its products directly to pharmaceutical, biotechnology, agrochemical, diagnostics and consumer products companies, as well as academic research centers, government research laboratories, private foundations and clinical reference laboratories in the United States and Europe and Asia Pacific. In July, Affymetrix narrowed its loss in the second quarter due to rising demand for the chips it makes for genetic research. We simply favor a cost basis below the long-term support area (two-year chart) near $15 and the recent move above the 30-dma. SEP 15.00 FIQ IC LB=4.40 OI=140 CB=14.11 DE=42 TY=4.6% ***** ALKS - Alkermes $7.70 *** Germany and U.K. Approvals *** Alkermes (NASDAQ:ALKS) develops products that are based on sophisticated drug delivery technologies. The company has several areas of focus, including controlled, sustained- release of injectable drugs, lasting several days to several weeks, utilizing its ProLease and Medisorb technologies, and the development of pharmaceutical products based on its proprietary Advanced Inhalation Research (AIR) pulmonary technology. The company's current focus is on the development of broadly applicable drug delivery technologies that include injectable sustained-release of proteins, peptides and small molecule pharmaceutical compounds, the pulmonary delivery of both small molecules and proteins and peptides and drug delivery to the brain across the blood-brain barrier. ALKS surged this month after its partner, Johnson & Johnson (NYSE: JNJ), received approval in Germany to market a long-acting, injectable form of J&J's schizophrenia drug Risperdal. The approval comes a month after the U.S. FDA rejected the drug for the U.S. market, which dropped Alkermes' stock down 68%. On Friday, Alkermes and Johnson and Johnson's also received approval from the national regulatory agency in the U.K. to market Risperdal Consta, or risperidone. The stock rallied on heavy volume and traders can speculate on the near-term performance of the issue with this conservative position. SEP 7.50 QAL IU LB=1.25 OI=30 CB=6.45 DE=42 TY=11.8% ***** MDR - McDermott $6.00 *** Asbestos Agreement *** McDermott International (NYSE:MDR) is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. and its consolidated subsidiaries; McDermott Incorporated and its consolidated subsidiaries; Babcock & Wilcox Investment Company and its consolidated subsidiaries; BWX Technologies, Inc. and its consolidated subsidiaries; and The Babcock & Wilcox Company. MDR operates in four business segments: namely Marine Construction, Government Operations, Industrial Operations and Power Generation Systems. Shares of McDermott jumped this week on news the company reached a preliminary agreement with asbestos claimants against its bankrupt Babcock & Wilcox Co. unit. We like the technical reversal and our conservative position offers a method to speculate on the future movement of the issue with relatively low risk. SEP 5.00 MDR IA LB=1.50 OI=69 CB=4.50 DE=42 TY=8.0% ***** MLNM - Millennium $14.16 *** Biotech Rally *** Millennium Pharmaceuticals (NASDAQ:MLNM) is a biopharmaceutical company focused on applying its comprehensive and integrated science and technology platform to discover and accelerate the development of drugs and predictive medicine products. These drugs and products may enable physicians to more closely customize medical treatment by combining knowledge of the genetic basis for disease and the genetic characteristics of a patient. MLNM primarily focuses its research and development and commercialization activities in four key disease areas: cardiovascular, oncology, inflammatory and metabolic. In July, Millennium reported a wider second-quarter loss, due to higher research and promotional expenses, but also reported a more than 50% increase in revenue. The stock has recently gained strength and the move above the June-July consolidation area bodes well for the future. This position offers an excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. SEP 12.50 QMN IV LB=2.45 OI=2731 CB=11.71 DE=42 TY=4.9% ***** MRCY - Mercury $24.79 *** Defense Segment Strong *** Mercury Computer Systems (NASDAQ:MRCY) designs, manufactures and markets high performance, real-time digital signal and image processing systems that transform sensor generated data into information that can be displayed as images. The company's products are divided into two categories: Hardware Products, which include High Performance Class, VME Class and Industrial PC Class; and Software Products, which include MC/OS Run-Time Environment, Scientific Algorithm Library, Vector Signal and Image Processing Library, Parallel Application System, RACE++ Series MULTI Integrated Development Environment, and TATL Trace Analysis Tool and Library. Shares of Mercury surged this week after the company reported fiscal 4th-quarter earnings that topped Wall Street expectations. The company also received several upgrades as increased military spending should help future quarters. Our outlook is also bullish, due to the recent technical reversal on heavy volume, and this position offers a favorable cost basis in the issue. SEP 22.50 QYR IX LB=3.60 OI=7 CB=21.19 DE=42 TY=4.5% ***** MYGN - Myriad Genetics $24.96 *** On The Mend *** Myriad Genetics (NASDAQ:MYGN) is a biopharmaceutical company focused on the development and marketing of novel therapeutic and predictive medicine products. The company has developed a number of proprietary proteomic technologies that permit it to identify genes, their related proteins and the biological path- ways they form. The company operates two subsidiaries, Myriad Pharmaceuticals, which develops and intends to market novel therapeutic products; and Myriad Genetic Laboratories, which focuses on the development and marketing of predictive medicine products that assess an individual's risk of developing a specific disease. There's not much news on Myriad but the technical indications suggest the issue has successfully completed its recent consolidation and is poised for future gains. With the drug sector gaining favor, this position offers a reasonable entry point from which to speculate on the company's future. SEP 22.50 GSQ IX LB=4.10 OI=28 CB=20.86 DE=42 TY=5.7% ***** NXTL - Nextel Communications $5.49 *** Forging A Base *** Nextel Communications (NASDAQ:NXTL) provides digital, mobile communications across the United States by offering integrated wireless services under the Nextel brand name, primarily to business users. The company's digital network constitutes an integrated wireless communications system utilizing a single transmission technology: integrated Digital Enhanced Network technology, which was developed by Motorola. Nextel shares soared last month amid rumors of consolidation among the nation's major wireless carriers and a solid 2nd-quarter earnings report. Nextel's sales in the U.S. increased 25% to $2.2 billion, and management raised its forecast for 2002. The company also reduced its debt load ahead of schedule and its credit profile improved. The stock has now pulled back to technical support near $5 after its recent "rocket" advance. This position offers a favorable cost basis for investors who believe the wireless sector has finally found a bottom. SEP 5.00 FQC IQ LB=1.10 OI=1187 CB=4.39 DE=42 TY=10.1% ***** ***************** 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 IMMU 6.03 SEP 5.00 QUI IA 1.55 111 4.48 42 8.4% WGRD 5.21 SEP 5.00 RUH IA 0.70 111 4.51 42 7.9% EXTR 9.29 SEP 7.50 EXJ IU 2.40 290 6.89 42 6.4% PRSE 12.45 SEP 10.00 PUI IB 3.20 10 9.25 42 5.9% ICST 18.92 SEP 15.00 IUY IC 4.80 32 14.12 42 4.5% TARO 31.06 SEP 30.00 QTT IF 2.80 461 28.26 42 4.5% CCMP 41.35 SEP 35.00 UKR IG 8.30 123 33.05 42 4.3% ***************** NAKED PUT SECTION ***************** Option Trading 101: Selling Puts...And Surviving The Aftermath! By Ray Cummins One of our readers asked about the most common methods used to recover from bearish activity in the stock market. Attn: OIN - Trading 101 Editor Subject: Recovery Strategies Greetings, I've been trading options for about a year and although I have been successful on a few occasions, my account balance has suffered the consequences of a far too optimistic outlook. My main strategy of late has been selling puts and now I own some stocks at prices much higher than their current values. If I am going to be in this for the long haul, is there a preferred way to recover the losses in these issues? Should I be buying more of the stocks I own (averaging) and if so, should I sell calls against them. Also, I read about using a combination of stocks and sold options with a debit spread. Is this a viable strategy? Any help to repair my ailing portfolio would be much appreciated! Thanks, SD Regarding Recovery Strategies: Lets start with the first approach you mentioned, which involves buying more of the same stock, or "averaging." By definition, averaging is the practice of purchasing the same stock at various price levels, thereby arriving at a higher or lower average cost. For long-term investors, averaging down is a very popular tactic as it is an easy way to lower the overall cost basis in an issue. Likewise, professional fund managers also utilize the technique to reduce the cost-per-share of the stocks in their portfolio in a bearish market. In most cases, the strategy of averaging down is a practical and successful method of recovering share value losses however, the purchase of additional stock should never considered if the added exposure is not justified by the current technical or fundamental outlook for the issue. Increasing one's capital commitment in a previously losing position requires strong will and deep pockets, and financial self-destruction is a common outcome for those who possess both attributes. At the same time, there are many savvy market players who buy and hold, then add-to, and finally, sell for a profit. This class of investors is schooled in the science of systematic investing and the art of accumulation of wealth over time. They understand the virtue of patience, entering the market prudently with a long-term outlook that is unconcerned about the ongoing cycles and fluctuations. The difficult part of this strategy -- adding to an already sagging portfolio -- is most pronounced when market conditions seem to be going from bad to worse and many investors are reluctant to spend money on stocks when it really counts. They fail to realize that the fundamental goal of this approach is to buy in depressed times with the idea of profiting through a widespread recovery in the economy, which eventually leads to higher equity values. One must understand that from a strategic viewpoint, those who participate in this manner are simply contrarians who have decided to use the infrequent lulls as an opportunity to increase their holdings at attractive prices. They will achieve success by purchasing issues that have the potential to grow exponentially when the market turns upward and they can add to their positions at regular intervals to even out the troughs and peaks, accruing investment gains over time in a methodical, organized manner. Although averaging down is a popular technique, most professionals say it is also important to average up when the trend is bullish. That opinion is certainly supported by mutual fund managers, who add to their stock holdings on a regular basis in rising markets. However, this activity can be challenging for novice players because it is complete contrast to the approach ordinarily recommended in investing manuals; that being the practice to "buy and hold," and then buy more on a decline. From an emotional standpoint, it is natural to rationalize this strategy as it offers a more favorable entry opportunity than that of the original position. But, it is far more productive to consider that any increase in exposure to a specific market is similar to entering the initial position; thus it must be assessed based on its current merits. The question to ask before adding to a losing position is whether the recent price action warrants additional portfolio capital. That question can only be answered after careful study of the prevailing conditions, both technical and fundamental. Of course, the notion that buying additional stock at a lower price in a long position improves the overall cost basis often overshadows the fact that this benefit is at the expense of the new shares. In simple terms, the existing position cannot be averaged without producing a similar effect on the more recent purchase and the end result has a relative benefit only when viewed with regard to the original position. Regardless of the manner in which you approach the stock market, it is important to devote only the amount of capital that is within the proper limits of your investing portfolio. When in doubt, limit the size of the initial position until a favorable trend is well established. After the position is in place, have the courage to accept a loss and act promptly at the first sign of danger. The most important lesson to learn is that each issue should be constantly evaluated both fundamentally and technically to determine if it merits your investment capital. You have to ask, "If I were considering this stock for the first time today, would I buy it?" If not, sell it and move your assets to a more favorable investment. Learning to manage the situation at hand (keeping the losses to a minimum) is one of the most important aspects of profitable investing and it must become second nature to ensure long-term success. Editor's Note: This narrative will be continued in next Sunday's edition of the OIN. *** 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 5.49 AUG 5.00 0.25 *$ 0.25 17.2% ICOS 23.73 27.49 AUG 20.00 0.45 *$ 0.45 15.7% SNDK 15.08 13.11 AUG 12.50 0.55 *$ 0.55 14.9% DCTM 14.86 14.40 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 9.90 AUG 7.50 0.25 *$ 0.25 12.4% ISSX 15.45 15.84 AUG 12.50 0.30 *$ 0.30 12.3% PLMD 29.95 25.93 AUG 25.00 0.40 *$ 0.40 11.7% DCTM 12.90 14.40 AUG 10.00 0.30 *$ 0.30 11.3% BCGI 8.90 9.26 AUG 7.50 0.25 *$ 0.25 11.3% CHKP 15.69 16.90 AUG 12.50 0.25 *$ 0.25 10.7% TRMS 46.62 48.18 AUG 40.00 0.60 *$ 0.60 10.3% BRCM 19.86 17.63 AUG 15.00 0.40 *$ 0.40 9.9% FCN 40.00 41.00 AUG 35.00 0.80 *$ 0.80 9.8% LNCR 31.50 31.13 AUG 30.00 0.50 *$ 0.50 9.4% VMSI 22.35 21.02 AUG 20.00 0.25 *$ 0.25 7.9% MU 23.39 18.90 AUG 17.50 0.45 *$ 0.45 7.6% OSIP 26.79 32.58 AUG 22.50 0.35 *$ 0.35 7.5% PDLI 10.95 13.32 AUG 7.50 0.20 *$ 0.20 7.3% SYY 27.20 28.97 AUG 25.00 0.30 *$ 0.30 7.3% RIMM 13.82 10.45 AUG 10.00 0.25 *$ 0.25 7.2% DT 12.00 10.92 AUG 10.00 0.25 *$ 0.25 7.1% IVGN 35.13 36.46 AUG 30.00 0.30 *$ 0.30 7.1% NBIX 36.24 39.00 AUG 30.00 0.25 *$ 0.25 6.4% QCOM 28.11 25.90 AUG 20.00 0.40 *$ 0.40 5.8% QLGC 40.69 35.90 AUG 25.00 0.45 *$ 0.45 5.7% AMGN 43.51 47.73 AUG 37.50 0.30 *$ 0.30 5.6% *$ = Stock price is above the sold striking price. Comments: Despite the bullish activity in equities, traders should remain vigilant in their position management as a retest of the recent lows is likely in the coming weeks. Issues on the watch-list include: Sandisk (NASDAQ:SNDK), Deutsche, Telecom (NYSE:DT), Micron Technology (NYSE:MU), Research In Motion (NASDAQ:RIMM), Polymedica (NASDAQ:PLMD) and Ventana Medical (NASDAQ:VMSI). Positions Previously Closed: Applied Materials (NASDAQ:AMAT), Cisco Systems (NASDAQ:CSCO), Royal Gold (NASDAQ:RGLD), Sangstat (NASDAQ:SANG), 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 AMLN 13.00 SEP 10.00 AQM UB 0.40 50 9.60 42 9.7% CVTX 26.01 SEP 20.00 UXC UD 0.70 37 19.30 42 8.6% ENZN 24.13 SEP 17.50 QYZ UW 0.60 546 16.90 42 8.0% FDRY 8.99 SEP 7.50 OUJ UU 0.35 1604 7.15 42 10.3% HGSI 17.87 SEP 12.50 HQI UV 0.30 95 12.20 42 5.6% ICOS 27.49 SEP 20.00 IIQ UD 0.75 162 19.25 42 8.7% INVN 28.36 SEP 22.50 FQQ UX 0.85 102 21.65 42 9.4% NPSP 23.06 SEP 15.00 QKK UC 0.45 2 14.55 42 6.4% OSIP 32.58 SEP 22.50 GHU UX 0.70 1253 21.80 42 7.0% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield FDRY 8.99 SEP 7.50 OUJ UU 0.35 1604 7.15 42 10.3% AMLN 13.00 SEP 10.00 AQM UB 0.40 50 9.60 42 9.7% INVN 28.36 SEP 22.50 FQQ UX 0.85 102 21.65 42 9.4% ICOS 27.49 SEP 20.00 IIQ UD 0.75 162 19.25 42 8.7% CVTX 26.01 SEP 20.00 UXC UD 0.70 37 19.30 42 8.6% ENZN 24.13 SEP 17.50 QYZ UW 0.60 546 16.90 42 8.0% OSIP 32.58 SEP 22.50 GHU UX 0.70 1253 21.80 42 7.0% NPSP 23.06 SEP 15.00 QKK UC 0.45 2 14.55 42 6.4% HGSI 17.87 SEP 12.50 HQI UV 0.30 95 12.20 42 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). ***** AMLN - Amylin Pharmaceuticals $13.00 *** Speculation 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 also commented that the company is currently in discussions with a potential partner for AC2993 development and the company's upcoming earnings report has simply added to the volatility. Traders who want to speculate on the near-term share value of this unique biopharmaceutical firm should consider this position. SEP 10.00 AQM UB LB=0.40 OI=50 CB=9.60 DE=42 TY=9.7% ***** CVTX - CV Therapeutics $26.01 *** New Heart Drugs *** CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical firm focused on applying molecular cardiology to the discovery, development and commercialization of novel, small molecule drugs for the treatment of cardiovascular diseases. The company has four new compounds in clinical trials including Ranolazine, the first in a new class of compounds known as partial fatty acid oxidation inhibitors, which is being developed for the potential treatment of chronic angina. Shares of CVTX rose this week after the biotechnology company said it will start next year a pivotal-stage trial of its experimental drug for diagnosing heart disease. The firm said a mid-stage trial of the compound, called CVT-3146, showed that it increased coronary blood flow velocity and met the requirements for a cardiac imaging agent. Another important catalyst for CVTX is the successful, on time application for the ranolazine NDA and the company's product pipeline continues to improve. SEP 20.00 UXC UD LB=0.70 OI=37 CB=19.30 DE=42 TY=8.6% ***** ENZN - Enzon $24.13 *** Biotech Binge! *** Enzon (NASDAQ:ENZN) is a biopharmaceutical company that develops and commercializes enhanced therapeutics for life-threatening diseases through the application of its two proprietary platform technologies: polyethylene glycol and single-chain antibodies. The company applies their PEG technology to improve the delivery, safety and efficacy of proteins and small molecules with known therapeutic efficacy. Enzon utilizes its single-chain antibody technology to discover and produce antibody-like molecules that offer many of the therapeutic benefits of monoclonal antibodies while addressing some of their limitations. Enzon is another biotech issue in the early stages of recovery mode and traders who like the outlook for the company can use this position to establish a low risk cost basis in the issue. SEP 17.50 QYZ UW LB=0.60 OI=546 CB=16.90 DE=42 TY=8.0% ***** FDRY - Foundry Networks $8.99 *** Post-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. In late July, 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. The bullish technical indications are favorable and this conservative position offers a method to participate in the future movement of the stock with relatively low risk. SEP 7.50 OUJ UU LB=0.35 OI=1604 CB=7.15 DE=42 TY=10.3% ***** HGSI - Human Genome Sciences $17.87 *** New Drug Speculation *** Human Genome Sciences (NASDAQ:HGSI) is a biopharmaceutical and genomics company focused on therapeutic product development and functional analysis of genes using its proprietary technology platform. HGSI discovers, develops and intends to commercialize novel compounds for treating and diagnosing human disease based on the identification and study of genes. HGSI reported earnings recently, which reflected the loss of expired relationships (for exclusive access to its genetic database) with several big drug companies. HGSI is now free to pursue more lucrative deals as well as further develop its own product pipeline. Human Genome has recently received a milestone payment from GlaxoSmithKline (NYSE:GSK) and they also granted Schering-Plough (NYSE:SGP) the exclusive rights to develop and commercialize human antibodies. We like the recent technical trend and this position offers an easy way to speculate on the future movement of the issue in a conservative manner. SEP 12.50 HQI UV LB=0.30 OI=95 CB=12.20 DE=42 TY=5.6% ***** ICOS - ICOS Corporation $27.49 *** More 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. SEP 20.00 IIQ UD LB=0.75 OI=162 CB=19.25 DE=42 TY=8.7% ***** INVN - InVision Technologies $28.36 *** 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 said that quarterly profits rose as revenues from governments increased on concerns about national security. The company also promised continued growth with airports moving toward new 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 $1.00 per share. Investors must agree with the optimistic outlook as INVN shares have recovered from the 2002 low in mid-May. Traders who believe the bullish trend will continue can speculate conservatively on the future price of InVision with this position. SEP 22.50 FQQ UX LB=0.85 OI=102 CB=21.65 DE=42 TY=9.4% ***** NPSP - NPS Pharmaceuticals $23.06 *** On The Move! *** NPS Pharmaceuticals (NASDAQ:NPSP) is a biopharmaceutical company engaged in discovering, developing and commercializing small molecule drugs and recombinant proteins. The company's product candidates are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders. NPS Pharmaceuticals has three product candidates in active clinical development and several pre-clinical product candidates. Two of these product candidates, Preos and AMG 073, are in Phase III clinical trials. The company's third product candidate, ALX-0600, is in a pilot Phase II clinical trial. NPSP rallied in early July after a favorable Salomon Smith Barney report noted that the company has been making solid progress in resolving the manufacturing issues with its lead drug candidate Preos. Recently, NPS reported that it has successfully produced additional supplies of the drug and it now can supply patients in all of its current clinical trials into the first quarter of 2003. Traders can speculate on the near-term performance of the issue with this conservative position. SEP 15.00 QKK UC LB=0.45 OI=2 CB=14.55 DE=42 TY=6.4% ***** OSIP - OSI Pharmaceuticals $32.58 *** 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. The recent rally to a 3-month high suggests that buyers are support the issue at the current prices and out position allows for a profitable outcome even with a considerable consolidation. SEP 22.50 GHU UX LB=0.70 OI=1253 CB=21.80 DE=42 TY=7.0% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ENDO 14.56 SEP 12.50 PFU UV 0.70 35 11.80 42 11.4% PDLI 13.32 SEP 10.00 PQI UB 0.45 0 9.55 42 10.5% SY 13.63 SEP 12.50 SY UV 0.65 57 11.85 42 9.5% SIE 23.05 SEP 20.00 SIE UD 0.90 50 19.10 42 9.2% FBF 24.19 SEP 20.00 FBF UD 0.75 719 19.25 42 8.7% HYSL 23.04 SEP 20.00 WQE UD 0.75 212 19.25 42 7.8% FCN 41.00 SEP 35.00 FCN UG 1.25 528 33.75 42 7.8% CYBX 16.55 SEP 15.00 QAJ UC 0.60 0 14.40 42 7.7% SHPGY 27.67 SEP 25.00 UGH UE 0.95 25 24.05 42 7.4% IVGN 36.46 SEP 30.00 IUV UF 0.75 70 29.25 42 6.1% AMGN 47.73 SEP 40.00 AMQ UH 0.85 3188 39.15 42 5.0% ************************ SPREADS/STRADDLES/COMBOS ************************ Echoes Of Optimism... By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** August 9, 2002 The major equity averages ended mixed Friday after a strong week that saw investors begin to put money back into the stock market. Blue-chip shares were among the day's best performers, extending the Dow's gains for a fourth consecutive session and propelling the world's best known stock average 33 points higher to 8,745. Despite the bullish activity in old economy issues, the NASDAQ retreated 10 points to 1,306 amid a deep decline in the hardware sector. The broader Standard & Poor's 500-stock index climbed 3 points higher to 908 with banking shares among the most popular issues. Oil service, biotechnology, brokerage, gold and airline shares also attracted eager buyers. Trading volume ended at 1.2 billion on the NYSE and at 1.3 billion on the technology exchange. Market breadth was mixed with advancers pacing decliners 17 to 14 on the NYSE while losers overcame winners 19 to 14 on the NASDAQ. On the fund flow front, Trim Tabs reported that all equity funds had outflows of $3.5 billion over the week ending 8/7 as compared with inflows of $1.5 billion during the prior week. Equity funds that invest primarily in U.S. stocks had outflows of $2.3 billion compared with outflows of $900 million in the prior week. In the bond market, the 10-year Treasury note rose 1 1/8 to yield 4.26% while the 30-year government bond surged 1 22/32 to yield 5.11%. Last week's new plays (positions/opening prices/strategy): Maxim (NSDQ:MXIM) SEP25P/AUG25P $1.10 debit calendar SPX Corp. (NYSE:SPW) SEP80P/AUG80P $2.00 debit calendar Amylin (NSDQ:AMLN) OCT12C/AUG12C $0.90 debit calendar Sony (NYSE:SNE) AUG40P/AUG45C $0.10 credit synthetic Mylan Labs (NYSE:MYL) SEP35C/SEP30P $0.20 credit synthetic Murphy Oil (NYSE:MUR) AUG85C/SEP70P $1.00 credit strangle Beazer (NYSE:BZH) AUG70C/AUG65C $0.60 credit bear-call Synopsis (NSDQ:SNPS) AUG50C/AUG45C $0.50 credit bear-call The bearish market activity early in the week did little to help the entry prices in our new "Reader's Request" calendar spreads but that was fortunate as the trend eventually reversed, pushing both SPX Corporation and Maxim Integrated Products higher during the ensuing recovery rally. In contrast, the Amylin position performed very well, allowing a favorable entry opportunity on Monday and then rebounding to close $0.50 above the sold strike on Friday. The spread is currently trading at a small profit but with the issue at recent high, the position will have to be monitored daily for potential adjustments. The synthetic plays experienced mixed results with Mylan Labs providing an excellent short-term gain while Sony moved in opposition of the prevailing trend. The neutral-outlook short strangle in Murphy Oil offered an acceptable entry credit but with the broad market rally, the issue is nearing the sold call and diligent position management may be necessary to maintain a positive outcome. Credit spreads in Beazer Homes and Synopsis are both profitable but again, any further upside movement may require an early exit or adjustment in the bearish positions. Portfolio Activity: The recent volatility in equities reached a climax this week as the market experienced extreme moves amid new economic reports and speculation on another interest rate cut, worries about the value of the dollar abroad, as well as concerns over fraudulent corporate accounting and the potential for war with Iraq. These are but a sampling of the issues that combined to make the past month the most active period since the terrorist attacks of 9/11 and with the unpredictable gyrations, it's been difficult for traders to profit consistently. In this type of environment, a limited-risk approach is generally best and the Spreads/Combos portfolio has enjoyed considerable success despite the volatile activity during the past few sessions. Among the bullish credit spreads, only Fomento Economico (NYSE:FMX) remains unprofitable and the issue is showing some new signs of a potential recovery. On the bearish side, only 3M Corporation (NYSE:MMM) required an adjustment and since we are quite used to the "ebb and flow" in that stock, a transition to the SEP-$135 call (short) was almost second nature. The calendar spreads group was active this week with Pharmacia (NYSE:PHA) rallying to a recent high. The upside movement produced an excellent early-exit profit in the long-term position. Kellogg (NYSE:K) also returned to a bullish trend but the issue should eventually stall (near our sold call) at $35, providing a favorable adjustment opportunity as we move to the September option's expiration. Another position worth noting is Dupont (NYSE:DD), which has reversed its recent slide and is now moving back to a previous range between $42-$48. The speculation play in Nextel (NASDAQ:NXTL) continues to perform well with the issue only $0.49 from the point of maximum gain. The sole debit straddle, Sei Investments (NYSE:SEI) easily achieved our target price in mid-July and credit strangles in Symantec (NASDAQ:SYMC) and Stericycle (NASDAQ:SRCL) are comfortably inside the profit range. The neutral-outlook position in Centex (NYSE:CTX), which was closed early to limit potential losses, has also recovered in recent sessions. The last category, Synthetic Positions, is also the most speculative and the big winner in this group is Protein Design Labs (NASDAQ:PDLI). Honorable mention goes to KLA-Tencor (NASDAQ:KLAC) and Alliant Technystems (NYSE:ATK), two successful bearish plays that were offered in early July. Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRADDLES AND STRANGLES - One of our readers asked for some speculative "Expiration Week" straddles on stocks with earnings due. Unfortunately, the recent market volatile activity has pushed options premiums to historic levels so there are relatively few favorable candidates for this neutral-outlook strategy. However, we have identified a small group of viable candidates, based on option pricing and technical background. These stocks have reasonably priced options and the potential to move high or low enough to make their respective positions profitable. The underlying issues also have a history of price activity through a sufficient range, in the required amount of time, to justify the overall risk-reward of the play. As with any other position, each straddle should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** ADI - Analog Devices $22.92 Analog Devices (NYSE:ADI) is engaged in the design, manufac- ture and marketing of high-performance analog, mixed-signal and digital signal processing integrated circuits (ICs) used in signal processing applications. The company produces a wide range of products that meet the technology needs of a broad base of customers and markets. The company's products also include multi-function mixed-signal devices that incorporate combinations of analog and digital technology. Analog Devices also designs, manufactures and markets a limited range of assembled products. PLAY (speculative - neutral/debit straddle): BUY CALL AUG-22.50 ADI-HX OI=909 A=$1.35 BUY PUT AUG-22.50 ADI-TX OI=1149 A=$0.95 INITIAL NET DEBIT TARGET=$2.20-$2.25 TARGET PROFIT=15-25% ****************************************************************** AEOS - American Eagle Outfitters $15.96 American Eagle Outfitters (NASDAQ:AEOS) is a specialty retailer of casual apparel, accessories, and footwear for men and women between the ages of 16 and 34. Their lifestyle collection includes casual basics like khakis, cargos and jeans; fashion tops like rugbys, polos and graphic T's; and functional items like swimwear, outerwear, footwear and accessories under its American Eagle Outfitters and AE brand names. The company also operates the Bluenotes/Thriftys specialty apparel chain in Canada. The company also operates via the Internet at www.ae.com. As of February 2, 2002, AEOS operated 678 American Eagle Outfitters stores in the U.S. and Canada, and 112 Bluenotes/Thriftys stores in Canada. PLAY (very speculative - neutral/debit strangle): BUY CALL AUG-17.50 AQU-HW OI=936 A=$0.45 BUY PUT AUG-15.00 AQU-TC OI=2811 A=$0.65 INITIAL NET DEBIT TARGET=$1.00 TARGET PROFIT=20-25% ****************************************************************** AMAT - Applied Materials $13.86 Applied Materials (NASDAQ:AMAT) develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Many of Applied's products are single-wafer systems designed with two or more process chambers attached to a base platform. The unique platform feeds a wafer to each chamber, allowing the simultaneous processing of several wafers to enable very high manufacturing productivity and precise control of the process. AMAT builds systems that perform: chemical vapor deposition, physical vapor deposition, electroplating, etch, implantation, rapid thermal processing, chemical mechanical polishing, as well as metrology and wafer/reticle inspection. AMAT sells most of its single-wafer, multi-chamber systems based on four platforms: the Centura, the Endura, the Endura SL and the Producer. PLAY (very speculative - neutral/debit strangle): BUY CALL AUG-15.00 ANQ-HC OI=17833 A=$0.35 BUY PUT AUG-12.50 ANQ-TV OI=9984 A=$0.35 INITIAL NET DEBIT TARGET=$0.55-$0.60 TARGET PROFIT=20-25% ****************************************************************** BRCD - Brocade Communications Systems $15.36 Brocade Communications Systems (NASDAQ:BRCD) is a provider of infrastructure for storage area networks (SANs), offering a product family of Fibre Channel fabric switches that provide an intelligent networking foundation for SANs. The company delivers and enables hardware and software products, education and services that allow companies to implement highly available, scalable, manageable and secure environments for critical sto- rage applications. Companies can leverage the Company's SAN infrastructure solutions to connect servers with storage devices and scale them independently, consolidate and share servers and storage resources, centralize data management, share valuable backup resources across the enterprise, and provision and manage more storage without increasing personnel resources. PLAY (speculative - neutral/debit straddle): BUY CALL AUG-15.00 BQB-HC OI=2665 A=$1.40 BUY PUT AUG-15.00 BQB-TC OI=4788 A=$1.00 INITIAL NET DEBIT TARGET=$2.20-$2.25 TARGET PROFIT=15-25% ****************************************************************** NTAP - Network Appliance $7.41 Network Appliance (NASDAQ:NTAP) is a provider of enterprise network storage and data management solutions. NetApp network storage solutions and service offerings provide data-intensive enterprises with consolidated storage, improved data center operations, economical business continuance and efficient remote data access across the distributed enterprise. NetApp products consist of filer storage appliances, NearStore appliances, NetCache content delivery appliances, data management and also content delivery software and support services. All NetApp systems come packaged in rack-mountable enclosures that can be installed in a customer's existing server racks or installed and configured in cabinets at the factory. PLAY (very speculative - neutral/debit straddle): BUY CALL AUG-7.50 NUL-HU OI=829 A=$0.55 BUY PUT AUG-7.50 NUL-TU OI=1037 A=$0.65 INITIAL NET DEBIT TARGET=$1.05-$1.10 TARGET PROFIT=20-25% ****************************************************************** NVDA - Nvidia Corporation $9.20 Nvidia Corporation (NASDAQ:NVDA) designs, develops and markets graphics and media communication processors and related software for personal computers, workstations and digital entertainment platforms. The company provides an architecturally compatible top-to-bottom family of performance 3-D graphics processors and graphics processing units that set the standard for performance, quality and features for a broad range of desktop PCs. These range from professional workstations to low-cost PCs and mobile PCs, and from performance laptops to thin-and-light notebooks. Nvidia's 3-D graphics processors are used for a wide variety of applications, including games, digital image editing, business productivity, the Internet and industrial design. Its graphics processors are designed to be architecturally compatible backward and forward between generations, giving its original equipment manufacturers, customers and end users a low cost of ownership. PLAY (speculative - neutral/debit straddle): BUY CALL AUG-10.00 UVA-HB OI=4026 A=$0.35 BUY PUT AUG-10.00 UVA-TB OI=4029 A=$1.20 INITIAL NET DEBIT TARGET=$1.35-$1.45 TARGET PROFIT=15-25% Note: The Delta or "hedge ratio" in the position suggests that we should buy 1 call for every 3 puts (1:3 ratio) to maintain a neutral outlook. However, any upward movement in the issue on Monday should allow both sides of the position to be purchased at similar prices. ****************************************************************** SRNA - Serena Software $9.86 Serena Software (NASDAQ:SRNA) is a provider of infrastructure software to manage change to enterprise applications. Serena's products and services are used to manage and control application change for organizations, the business operations of which are dependent on managing information technology. The company's products help IT managers manage changes to applications by automating and enforcing the process throughout the application life cycle. Serena's consulting services help companies improve their work process by identifying where their current practices deviate from standard practices and making recommendations. As of January 31, 2002, Serena's products had been installed in over 2,750 customer sites worldwide, and its customers included 42 of the Fortune 50 companies, such as American Express, UBS AG, Navy Federal Credit Union, Suntrust Bank, Bank of America, Caterpillar, Citigroup, General Electric, IBM, MetLife, Prudential and SBC Communications. PLAY (speculative - neutral/debit straddle): BUY CALL AUG-10.00 NHU-HB OI=235 A=$0.50 BUY PUT AUG-10.00 NHU-TB OI=1257 A=$0.65 INITIAL NET DEBIT TARGET=$1.00-$1.05 TARGET PROFIT=20-25% ****************************************************************** URBN - Urban Outfitters $24.49 Urban Outfitters (NASDAQ:URBN) is a merchandising company that operates specialty retail stores under two distinct brands, Urban Outfitters and Anthropologie, as well as the Free People wholesale division. Urban Outfitters creates and manages retail stores that offer highly unique collections of fashion apparel, accessories and home goods in dynamic store settings. In addition to its many retail stores, the company offers its products and markets its brands directly to the consumer on urbn.com and anthropologie.com, as well as through the Anthropologie catalog. PLAY (speculative - neutral/debit straddle): BUY CALL AUG-25 URQ-HE OI=71 A=$1.15 BUY PUT AUG-25 URQ-TE OI=18 A=$1.65 INITIAL NET DEBIT TARGET=$2.50-$2.60 TARGET PROFIT=15-25% ****************************************************************** - CREDIT SPREADS - These plays are based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may 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 issues, so review each play individually and make your own decision about the future outcome of the position. ****************************************************************** CCMP - Cabot Microelectronics $41.26 *** 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. PLAY (conservative - bullish/credit spread): BUY PUT SEP-25 UKR-UE OI=2676 A=$0.50 SELL PUT SEP-30 UKR-UF OI=194 B=$0.95 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% ****************************************************************** ERTS - Electronic Arts $60.32 *** Range-bound! *** Electronic Arts (NASDAQ:ERTS) is a global software company that operates in two primary business segments. The EA Core business segment comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed of the creation, marketing and distribution of various entertainment software that can be played or sold online, ongoing management of subscriptions of online games as well as Website advertising. EA.com also owns Pogo Corporation, an ad-supported games service that reaches a broad consumer market. Pogo's many Internet-based family games focus on easy-to-play card, board and puzzle games. PLAY (conservative - bearish/credit spread): BUY CALL SEP-75 EZQ-IO OI=1634 A=$0.30 SELL CALL SEP-70 EZQ-IN OI=2382 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% ****************************************************************** NKE - Nike $43.92 *** Rolling Over! *** Nike (NYSE:NKE) principally is engaged in the design, development and worldwide marketing of footwear, apparel, equipment and other clothing accessory products. Nike sells its products to over 17,000 retail accounts in the United States and through a mix of independent distributors, licensees and subsidiaries in over 140 countries around the world. Virtually all of Nike's products are manufactured by independent contractors. Most of the company's footwear products are produced outside the United States, while apparel products are produced in the United States and abroad. PLAY (conservative - bearish/credit spread): BUY CALL SEP-55 NKE-IK OI=157 A=$0.25 SELL CALL SEP-50 NKE-IJ OI=106 B=$0.75 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% ****************************************************************** ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************ 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/081002.asp ************** MARKET POSTURE ************** More movement to report from Friday’s session. Unfortunately, most of it was to the downside. To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/081102.asp ********************* SWING TRADER GAMEPLAN ********************* Lost That loving Feeling? by - Jim Brown Bulls tried and tried to break through tough overhead resistance again on Friday. Unfortunately they lost that positive momentum and fair weather traders started to abandon the herd as the close drew near. That new love affair may be coming to an end if conditions do not change at the open on Monday. 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