The Option Investor Newsletter Wednesday 08-28-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Follow the Leader Weekly Fund Family Profile: Strong Funds Options 101: Odds & Ends From the Land of LEAPS INDEX TRADER SUMMARY : THERE'S THE BEAR! THE SECTOR BEAT - 8/28 Updated on the site tonight: Swing Trader Game Plan: Bulls Go Down Swinging Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 08-28-2002 High Low Volume Advance/Decl DJIA 8694.09 -130.32 8823.99 8646.19 1371 mln 773/1965 NASDAQ 1314.38 - 33.40 1340.01 1312.25 1338 mln 955/2231 S&P 100 462.53 - 8.62 471.15 459.99 totals 1728/4196 S&P 500 917.87 - 16.95 934.82 913.21 RUS 2000 389.38 - 8.07 397.45 389.38 DJ TRANS 2313.38 - 69.98 2382.64 2299.00 VIX 36.23 + 3.50 36.96 33.88 VIXN 54.70 + 4.69 56.26 51.53 Put/Call Ratio 0.88 ******************************************************************* Follow the Leader by Steven Price It appears the trend of the Nasdaq leading the rest of the broader markets around by the nose is still in tact. Yesterday's breakdown in the Nasdaq and NDX was the first close below their 50-dmas since last Monday, August 19, when all four major indices, including the Dow and S&P 500 broke above that level for the first time since spring. Sure enough, today the Dow and S&P 500 played follow the leader. Charts of 50-dma break in Nasdaq, NDX, and Dow Taking this theory a step further, what is it that leads the Nasdaq? Intel helped answer this question yesterday when its lukewarm comments about next quarter and continuing lack of IT spending sent the semiconductors crashing, and brought the Dow along with them. In an economy driven by computers and technology, this sector has been a barometer for the rest of the markets. After all of the major indices broke their 50-dmas last week, things looked rosy, except for one factor. The Semiconductor Index (SOX.X) was unable to hold above this level. Instead it found resistance at this point, and as a Nasdaq market leader, raised doubts about whether the rest of the market could move forward without it. We got our answer yesterday and today. Prudential cut its 2002 earnings estimates on Intel, and increased AMD's loss estimates for 2002 and 2003. It cited developments in the Taiwanese PC supply chain, suggesting that Intel will not see more than 10% sequential growth in the fourth quarter. Also back to school spending is not at expected levels. A look at last week's rally in the SOX, shows the group making it just over the 50-dma, but unable to hold, foreshadowing weakness in the tech sector. As the other indices continued upward, finding support at the 50-dma on pullbacks, the SOX continued to struggle with this level. Until the IT spending environment improves, or we discover another moving economic force, the broader markets will have an anchor hanging around their necks. Chart of the SOX In addition to the bad news for the chip makers, Hewlett Packard made comments regarding continuation of the IT spending slowdown, indicating that customers were putting off making large purchases until the economy improves. Revenue also came in more than $500 million below HP's initial guidance. Revenues were down 9% overall. Nortel warned on Tuesday that third-quarter revenue would be below previous guidance. They are cutting 7,000 jobs and closing facilities. Chief executive Frank Dunn said, "We continue to see reductions in near-term spending plans by service providers especially in the United States." The company is now expecting a drop of 10% in quarterly revenue, as opposed to initial forecasts of flat growth. Goldman Sachs said this morning that given the current IT spending weakness, it did not expect Sun Microsystems to unlikely to meet earnings estimates for this quarter. Goldman also believes revenue will be closer to the low end of its targeted 10-15% range. As for the Dow, which ended the day down 130.32, at 8694.09, things do not look good. After falling through support at 8750, it made several attempts to get back above that level, only to be turned away, indicating this level is now acting as resistance. Chart of the Dow Resistance What may also be significant is a look at the Point and Figure chart of the Dow. Today's trade of 8750 established a triple bottom breakdown sell signal, followed by 2 additional "O"s at 8700 and 8650, which confirm the breakdown and get us past the possibility of a bear trap. The bear trap is when a single "O" on a triple bottom breakdown is followed by an immediate reversal up. This breakdown formation is very bearish and lends credence to the breakdown of support at 8750. Point and Figure Chart of the Dow Another recent concern exerting considerable weight on the economy is the price of oil. There is no better way to keep costs high than to raise the price of fuel for all industries. The so-called Iraqi premium built into crude oil futures has stayed high as Vice President Dick Cheney indicated the U.S. was considering an invasion sooner rather than later. Iraq is the fourth largest Middle East oil producer. This comes at a time when global inventories are now falling, as OPEC supply curbs come into play. OPEC ministers meet on September 19, a week after the September 11 anniversary and will discuss possible changes in output to keep prices within its targeted range of $22-$28 per barrel. This is not a slam-dunk, however. After cutting output three times in 2001 and again on Jan. 1, OPEC is holding production quotas at the lowest level since 1991 to achieve this price objective. President Hugo Chavez of Venezuela said his country would not support an increase in quotas, and Kuwait has come out against any change, as well. Qatar's OPEC governor has also said OPEC shouldn't increase output because the world is "awash with oil." OPEC's president, Rilwanu Lukman, however, said the organization has spare output capacity to deal with rising prices. Asked about prices rising over the current target levels, Lukman said, "We are not worried about that. We have enough oil to put into the market if needs be." There is currently several dollars of war premium built into the per barrel price and OPEC's reference export price of $26.67 a barrel reflects a 44% increase so far this year. Since OPEC nations rely on oil profits to fund their governments, restricting supply and raising prices also raises their profits. However, if prices go too high, other countries are encouraged to develop other sources of energy, or increase drilling at home. In addition, as we enter the busiest travel vacation time of the year, just before labor day and the start of school, higher gas prices will keep more families at home, as the cost of fuel is figured into trips. For those who won't let higher gas prices keep them at home, they will wind up spending less on hotels or restaurants as their larger portions of the vacation budget are eaten up at the pump. This impact on discretionary income is already being felt in consumer spending. The recent downgrades by Merrill Lynch on 16 retail stocks came on the heels of a sharp decline in sales. Analyst Daniel Barry said, "Retailers are saying that traffic is holding up but discretionary spending is slowing... The sales outlook is not good." It is no coincidence that Wal-Mart has issued sales warnings the last two weeks, while Federated, which owns Macy's and Bloomingdale's, has issued sales warnings the last three weeks. These warnings have coincided with the increase in oil prices, as consumers are beginning to feel pinched at the pump. A look at the retail Index (RLX.X) shows the rally from the beginning of August rounding off as oil futures broke above $28 a barrel and stayed there. While oil prices are certainly not the only factor influencing spending, it only adds to concerns about a new wave of layoffs and the economy in general. These factors are all taken into account and reflected in Consumer Confidence, which took a hit on Tuesday. Chart of Retail & Oil WorldCom executives Scott Sullivan and Buford Yates were indicted by a grand jury on charges of securities fraud and making false filings with the SEC. They are accused of hiding more than $7 billion in expenses at the phone carrier, a move that created false profits and kept investors in the dark about the true deteriorating finances of WorldCom. Conspicuous by his absence was former controller David Myers, who was arrested very publicly the same morning as Scott Sullivan. This has led to speculation that Myers may be cooperating with prosecutors, who are trying to determine whether CEO Bernard Ebbers was also involved in the scheme. In more WorldCom news, Citigroup owned Salomon Smith Barney apparently allocated thousands of shares of hot IPOs in the 1990s to WorldCom execs. During 1996 and 1997, before Citigroup bought Salomon as part of its merger with Travelers, the average allocation was 101,500 shares for each officer, with a first day payday of $597,570 each. After November 1997, the average allocation was 6,409 shares, for an average first day gain of $60,238 each. Ebbers was allocated more than 800,000 shares from several IPOS, including Juniper networks, UPS, and Qwest Communications. The markets will be listening closely tomorrow as Alan Greenspan makes remarks at the Kansas City Fed-sponsored economic symposium in Jackson Hole, Wyoming. After four Fed presidents have indicated over the last month that they think interest rates are currently low enough to promote economic recovery, investors will be looking to Greenspan for confirmation. Similar remarks from the Big Cheese will significantly discount any chance of a rate cut at the September 24 FOMC meeting. Short-term interest rate futures right now reflect about a 25% chance of a rate cut, and after tomorrow's speech, it could drop to half that level. This is already a huge reduction from the almost 100% chance the futures were showing at the beginning of the month. Look closely for 8750 to offer continued resistance on any rebound attempt tomorrow after release of initial GDP, which is expected to come in at 1.1%. We will also see initial jobless claims for the week of August 24, which are expected to be 385,000. Either of these numbers could help with a bounce, but if nothing extraordinary comes out of them, the next level of support in the Dow looks to be just below 8500. The tide certainly appears to have turned, as the Dow has followed the Nasdaq into the red. With September 11 looming, and the traditional fall swoon possibly ahead, be very careful with long positions, lean short, and keep a few extra puts in your pocket. ******************** INDEX TRADER SUMMARY ******************** THERE'S THE BEAR! By Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Maybe I should say the Bear is back - its definitely a "sighting" and the bull was seen turning tail and running. But we don't know if he's (she?) is back for a visit or REALLY back, like Jeff (Bailey) was suggesting would be the tendency for September - his closing comments on our Market Monitor (6:37) lay out the seasonal case quite well - and, the P&F (Point & Figure) charting viewpoint. I am not a major user of P&F analysis, but it doesn't mean that there is not a lot to it. But, its like candlesticks or Gann charting - it’s a lot about what you get used to and what you want to put your time in on. I'm a classics kind of person - study of Plato and "classical" chart analysis is my thing. And speaking of "classic" patterns - the Bearish rising wedge patterns, on both the various indices and sample individually chart patterns shown in my weekly Index Trader at http://members.OptionInvestor.com/itrader/marketwrap/082502_1.asp are looking more and more like they signaled impending downside reversals. That and the low volume as prices climbed higher - this is also a CLASSIC divergence. Charles Dow was the first one that I know about that said that volume should "confirm" price action - you didn't automatically sell because trade volume was not expanding (increasing) in the same DIRECTION as the trend, but this secondary indicator put you on alert that there were few fewer and fewer buyers pushing a market up (or, of course, fewer and fewer sellers pushing prices down). If so, when it got to the point that everyone that was going to buy had already bought - who was left to buy then? At that point it doesn't take a HUGE amount of selling to start the market rolling down the hill. And of course it takes a little time for the ball to get rolling, but when it does, look OUT below. This dynamic is also the origin of the saying that "bull markets 'die' of their own weight". It takes buying to keep em up. I know I haven’t spent much time talking about the "funny- mentals", but Jim & Company always have such a comprehensive and informative view on the market news and views that I sometimes don't do more than a synopsis of what I thought were the key daily market dynamics and fundamental influences. What struck me today was the leadership on the way down was back to what has been the chief market drag for months - and years now - technology stocks. The Networking sector (NWX) and the Wireless group (YLS) were each off over 6% on Nortel's warning of a shortfall in revenue. Also, HP (Hewlett-Packard: HPQ) had cautionary words on expected IT spending for the coming months. And, of course, HPQ is a Dow stock so packs some impact - however, the stock was up a bit on the day as their earnings squeaked in at expectations. Phillip Morris was the noteworthy DJIA stock running up the down escalator today, as it increased its dividend by 10% - you remember dividends I'm sure. Those quarterly checks that our parents and grandparents used to receive in the mail and, sometimes actually lived on! Oh where have you gone Ma Bell? By the way ("BTW" as my internet hip friends say), dividends, in such a low interest environment, are going to come back as a more important consideration in owning certain stocks. You heard it here first. Of course, the bulls are saying today that this correction was expected and "normal" profit taking after a very substantial initial run up. The bears were saying the sky may fall any time - or was that Chicken Little?! A big underlying worry for the bears centers on what we do regarding Iraq. I don't discount the bearish sentiment that the war/invasion prospect engenders in investors. Previous times that oil was in the $30 a barrel area, have tended to coincide with economic recession so this plays in to the "double dip" scenario. I suppose it depends on how LONG prices stay up at these levels. Our former Texas oil men running the show in Washington are probably thinking sooner rather than later - for invasion plans seem to be pretty well mapped out by now. I think I'll take a long vacation and not by air. S&P 100 Index (OEX) - Daily/Hourly charts: Near OEX resistance is now at the "neckline" or the trendline that connects prior lows at 471 and 468 - the current overhead intersection of this line is now in the 466 area. For this reason, I suggested on our Market Monitor today, that a tight "stop" or exit point for OEX puts would be 467, or just above this trendline. It's not uncommon for a return rally TO a broken trendline - but, its less common for a rebound to above this line, unless the trend is reversing back to the upside. Key resistance relating to the trend is at 481-482, as it would take a move above this prior (up) swing high to suggest that the uptrend was resuming. A bear trend is lower rally highs and progressively lower downswing lows. Today's break of the "neckline" of the Head & Shoulder's (H&S) top, suggests a possible "minimum" downside to the 450-455 area. S&P 500 Index (SPX) - Hourly chart: 930, the previous pivotal "line" of support, was broken and now becomes key resistance. An hourly, then daily, close above 930 is needed to suggest that the S&P 500 had regained its bullish footing. Absent that, I suggest that traders continue to stay with a bearish trading strategy. 920-915 is the next potential support area, but the target implied by the H&S top is to around 900. DJ Industrial Index (1/100 of INDU) - $DJX - Daily/Hourly charts: DJX continued to move lower today, following its bearish trendline break. Resistance is now at the prior hourly low at 87.6, then at the previously broken trendline - at the red arrow, currently in the 89 area. The same Head & Shoulder's top pattern is apparent on the DJX hourly chart - I have not previously outlined, but it is on the chart above. A downside objective implied by the H&S top pattern is to the 85 area as noted on the chart. The final "confirming" bearish confirming note of a DJX falling under its prior swing low at 87.6 happened today, which is now confirming further weakness in my estimation. Nasdaq Composite Index (COMPX) Hourly chart: The potential support zone I am focusing on currently is the area between the two level (dashed) lines between the prior 1265 low and an area around 1287, which also corresponds with my lower trading "envelope" line set at 5% above (& below) its 21-hour moving average (not shown). Prior to August, trading swings tended to occur within these parameters. Key Nasdaq Composite resistance is the downside gap between the high of today and the low of yesterday or between 1340 and 1346. Rallies up to this area offer a selling opportunity in my opinion. Downside price "gaps" tend to act as resistance. However, a move above 1346-1350 would suggest a possible bullish turnaround; if so, pivotal resistance then is 1360. A bullish trend is not really back on track without COMPX regaining 1360 and staying above this level. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: My projected "minimum" downside objective of 23.00 based on the Head & Shoulder's top is now near. Some profit taking on puts and short QQQ positions at and under 23.00 looks like a good idea. If the Q's get back the prior hourly low at 22.5, especially given the oversold reading on the hourly stochastic, a rebound would not be surprising. Key resistance, as with the Composite, is at the downside gap that formed from today's lower opening - in the case of QQQ, this is 24-24.15. A close above the gap would suggest covering short positions also. 24.60 is the next resistance, at the prior low and the "neckline" of the H&S. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Strong Funds This week, we revisit the Wisconsin-based Strong Funds family at the request of one of our readers. Strong Capital Management, a firm with more than $43 billion in assets under management as of June 30, 2002, is the investment advisor for the funds. Richard Strong, Chairman, founded the investment firm in 1974, and since then its principal business has been providing investment advice for individuals and institutional accounts, such as pension and profit sharing plans. Securities are offered through Strong Investments, an affiliated company. Strong Financial Corporation is the parent company of Strong Capital Management and Strong Investments. Headquarters are located in Menomonee Falls, Wisconsin near Milwaukee. They also have offices in Madison, WI; Minneapolis, MN; St. Paul, MN; Indianapolis, IN; and Scottsdale, AR. As a privately held firm, Strong Capital Management focuses on money management without conflict of interest or undue pressure from Wall Street, the website touts. The website states that being based in the Midwest has allowed Strong to cultivate an independent, entrepreneurial approach that takes them across the U.S., visiting the companies they invest in, and conducting what they call their own brand on intensive, hands-on research. Per Strong's Press Room, assets under management totaled $43.1 billion as of June 30, 2002, with 1,377 associates serving the needs of approximately 480,000 households (1.1 million active accounts). For self-directed individual investors, Strong has their family of mutual funds and offers other services such as brokerage services, retirement planning, and college planning. For individuals that seek advice, Strong offers professionally managed portfolios through their "Strong Advisor" and "Private Client" programs. The Strong Funds and the Strong Advisor Funds differ in costs, expenses and availability. The basic difference is their load structure. The Strong Funds are offered on a "no-load" basis, while the Strong Advisor Funds have multiple class shares that vary in fees and availability. The Strong funds have a $2,500 minimum initial investment except for the Strong Balanced Fund (STAAX) which costs just $250 to invest initially. Today, Strong is one of the industry leaders, ranking in 38th place among 647 mutual fund families based on assets, per the company website. In addition, Strong offers a broad range of 401(k) retirement services aimed to plan sponsors, unions and individuals participating in their workplace plan. Additional Background The story goes that Richard Strong began operations in August 1974 (he was 32 at the time), renting a small office in space located in Milwaukee. Strong's ambition was to build a world class asset management business. By the end of the 70s, Strong's business was picking up steam, landing two multi-million dollar institutional accounts in 79. The website states that by the time 1980 rolled around, Strong had moved the firm to new bigger digs, increased his full-time staff to six, and hit the $40 million mark for assets managed. By 1983, Strong had $1 billion in assets under management, and was starting to garner some attention from the financial press. Asset growth in the 80s led to their move in October 1987 into new headquarters in Menomonee Falls, Wisconsin located outside Milwaukee. At that point, the firm had 100 full-time and part- time associates on staff. Strong Balanced Fund (STAAX) and Strong Large Cap Growth Fund (STRFX) were the firm's first two mutual funds, dating back to December 1981. The fund family's largest fund today with $3.2 billion in assets, Strong Opportunity Fund (SOPFX) launched in December 1985. Strong Corporate Bond Fund (STCBX), the firm's first bond mutual fund, also began operations in December 1985. Two other "billion-dollar" bond funds today, Strong Government Securities (STVSX) and Strong Short-Term Bond (SSTBX) had their respective starts in October 1986 and August 1987. By the late 80's, Strong was further diversifying his business into other core investment disciplines and starting to recruit leading money managers to the firm, such as Dick Weiss and Ron Ognar. Weiss joined Strong in 1991 and started the firm's mid- and small-cap core equity business, while Ognar came aboard in 1993 and manages the firm's growth products. Both of them are still with Strong Capital Management in 2002. Strong reached the $10 billion in assets milestone in February 1994. By the end of 1996, assets had more than doubled to $22 billion. The website states that at the start of 2001, Strong had over 1,400 associates, over 150 separately managed account relationships, and offered over 50 mutual funds (some of which are offered through variable annuity products). Investment Style/Strategy A variety of actively managed equity strategies and styles are offered in the Strong stock funds. These include growth funds, value funds, core funds, sector funds, international funds, as well as Advisor Equity funds. In the management of stock fund portfolios, Strong seeks to add value through company-specific research, rigorous analysis, and in-depth interviews with firm management. Equity portfolios are managed by teams of "seasoned" investment professionals, or specialists, in various asset classes. They are supported by a team of equity analysts covering the various industry sectors, as well as the latest technology, the website states. According to Morningstar, Strong's largest stock funds today are invested primarily in the mid/large-cap range, and in core/growth stocks in terms of style. In stock selection, they favor companies with above-average growth prospects, selling at reasonable valuations (GARP-like in style). Various fixed income strategies are offered via the Strong bond funds. These include taxable and tax-free ("muni") bond funds. On the fixed income side, Strong seeks to provide total return through investments in higher quality portfolios across a range of duration benchmarks. Their approach emphasizes risk control and credit research. Like the stock portfolios, Strong's bond portfolios are run by teams of specialists in various bond classes. Five bond funds have over $1 billion in net assets, including Ultra Short-Term Income (STADX), Government Securities (STVSX), Ultra Short-Term Municipal Income (SMUAX), Short-Term Bond (SSTBX) and Corporate Bond (STCBX). According to Morningstar, Strong's largest fixed income funds are all "investment-grade" based on average credit quality, with three of top five largest bond funds "high-grade" quality. High-grade funds have average credit qualities of AAA or AA, representing the top two tiers of the "investment-grade" spectrum. Strong's Life Stage Series is also offered, and is suitable for individuals saving for long-term goals such as retirement. The series includes three separate portfolios of Strong Funds, each designed to pursue either conservative, moderate, or aggressive objectives. Each Life Stage portfolio invests in a combination of stocks, bonds and cash, offering three levels of risk-reward tradeoff. The Conservative Portfolio emphasizes income through investment in Strong bond and money market funds, and invests a small portion of assets in Strong stock funds to enhance growth potential. The Moderate Portfolio is like a balanced fund, and focuses 60% of investments in Strong stock funds, with 40% held in Strong bond and money market funds to help manage volatility. Growth Portfolio, has the highest Strong stock fund allocation, and offers enhanced growth potential. In the next section, I'll tell you which Strong Funds have done the best on a risk-adjusted performance basis relative to other funds in their respective category, using data from Morningstar. Top-Rated Funds Currently, none of Strong's billion-dollar stock funds are rated 4 stars or above by Morningstar for risk-adjusted performance in relation to their category peers. Their largest stock funds are mostly 3-star (average) rated, including Strong Opportunity Fund (SOPFX), Strong Advisor: Common Stock Fund Z (STCSX), and Strong Growth Fund (SGROX). Richard Weiss (Opportunity Fund and Common Stock Fund) and Ronald Ognar (Large Cap Growth Fund) are average rated under Morningstar's new "category-based" rating system. Strong Mid-Cap Disciplined Fund (SMCDX) holds Morningstar's best 5-star rating, but the fund recently had a manager change so you can't attribute the fund's performance and rating to the current manager. Strong Advisor: Small Cap Value Fund Z (SSMVX) is also 5-star rated by Morningstar, but as the Z class designates, this fund is closed to new investors. Stock funds that have Morningstar 4-star (above-average) ratings include Blue Chip (SBCHX), Dividend Income (SDVIX), Asia Pacific (SASPX), Value (STVAX), and Large Cap Core (SLCRX). Strong Life Stages Aggressive (SAGGX) is also 4-star rated for risk-adjusted performance within its category peer group. Long-term investors may want to look at these above-average performers. For further information, go to the Strong website. On the fixed income side, Strong's two largest funds are rated 4 stars or above, per Morningstar. Strong Ultra Short-Term Income (STADX), a $2.6 billion fund, is currently 4-star rated, and has an average credit quality of AA (high-grade). Strong Government Securities (STVSX), a $1.9 billion fund, currently owns a 5-star rating, and has an average credit quality of AAA (highest-grade). Between the two funds, Government Securities Fund offers greater total return potential. If you seek high current yield, you may want to look at Strong's Short-Term High Yield Bond Fund (STHYX), which is also currently 5-star rated by Morningstar. The portfolio maintains an average credit quality of BB, the highest tier of the speculative-grade bond, and a short-term duration benchmark, so its volatility is below that of the typical high yield bond fund. Summary Overall, Strong's stock mutual fund performance has been on par with peers, with some funds earning above-average risk-adjusted return ratings from Morningstar. Bond fund performance looks a little bit stronger relatively speaking, with the larger Strong funds earning above-average or better ratings, per Morningstar. For more information on the Strong Funds, call 1-800-368-1030 or log on to www.strong.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org *********** OPTIONS 101 *********** Odds & Ends From the Land of LEAPS by Mark Phillips mphillips@OptionInvestor.com As we wind down the final week of summer, the wisdom of sitting out for the last 2 weeks of August is becoming increasingly clear. Choppy trade, gap moves and sharp reversals are a seemingly daily occurrence, while the bulk of Wall Street's professionals grab a little bit of vacation time before getting back to work after Labor Day. For those of you that have been trading over the past couple weeks, I hope you've found the insights of the Market Monitor team beneficial. While I haven't been actively trading myself (Hey, I'm entitled to a bit of R&R, right?), I have noticed that they're doing a bang-up job of helping all who are interested to navigate these volatile markets. Since I haven't been focused on trading, it has given me the opportunity to catch up on my backlog of email and get a feel for some of the questions that seem to be nagging at some of my readers. That process guided me to last week's topic on Collaring, which hopefully many of you found useful before this latest downward leg in the markets got started. Monday's Trader's Corner was likewise stimulated by a fresh batch of questions relating to the difference between Stop and Stop Limit orders, and how to apply them. Since I seem to be on a roll and we only have 2 more days before the long holiday weekend, I thought I'd round out my August commentary with an answer to another question that has been cropping up fairly regularly. I've been running the LEAPS column for over 2 years now (Wow! Has it been that long?) and one of the important changes we made last year was to start talking more about how to implement covered calls on LEAPS. To be fair, it isn't really a covered call when we write a short-term call against a LEAP in our account. It is really a calendar spread (either vertical or diagonal), at least as far as your broker is concerned. What is important here, is that if done properly, the position behaves exactly like a standard covered call. But if we don't initiate the LEAP position and then the covered call against it in the right way, we end up having to maintain margin in our account to cover the spread. First off, if this strategy sounds interesting to you, but also new, then let me point you to an introductory article I wrote last year entitled, Covered Calls on the Cheap. http://members.OptionInvestor.com/archive/options101/2001/061901_1.asp That's where I laid out the basic strategy for writing short- term calls against LEAPS. As you can see, it is little different from writing short-term calls against the underlying shares in the standardCovered Call strategy. The nature of the question I want to address tonight is the fact that we want to select a different strike LEAP to purchase if we are planning on selling short-term calls against it to offset our initial cost. Let's say that we are looking to buy LEAP Calls on the QQQ, with it currently trading at $23.48. If this is going to be a simple Buy-and-Hold trade, then we would likely want to target the $25 strike. That way, we get the benefit of both Gamma and Delta working in our favor, as the QQQ appreciates through the strike of our LEAP. On the other hand, if we intend to sell short-term calls against our LEAP, then we want to select a different strike, either ATM or quite possibly ITM for our LEAP. The reason is that we want to avoid having to maintain margin in our account to cover the difference between the strike of the LEAP and the strike of the sold call. In the case of the QQQ, if we bought the $25 2004 LEAP Call, then we are limited to selling the $25 strike or HIGHER for the front month if we want to avoid maintaining margin on this trade. The simpler solution is to initially purchase a lower strike LEAP on the QQQ, one that gives some flexibility in which short-term call we choose to write. For the sake of argument, if we had purchased the $20 LEAP, then we have the freedom to write calls nearer to the money, consequently taking in more premium. Keep in mind that we don't have to write that call close to the money, but sometimes we want the flexibility to do so. If I've lost you in this discourse, then I most humbly apologize. Let me direct you back to the archives for a couple of Q&A articles on the subject of Covered Calls on LEAPS. Questions on LEAPS Covered Calls - Part 1 http://members.OptionInvestor.com/archive/options101/2001/070201_1.asp Questions on LEAPS Covered Calls - Part 2 http://members.OptionInvestor.com/archive/options101/2001/070301_1.asp That should have given everyone a good enough refresher that we're all on the same page and now we can proceed to the central issue that I want to cover. When we list a new LEAP Call play in the Watch List on the website, we list 2 strikes for each expiration year. That has generated some confusion in the recent past, as some readers have wondered if that means they should buy the first LEAP and then sell the one with "** Covered Call **" next to it. If you've been following the discussion so far, then you probably already have the answer figured out, but let's walk through it, shall we? Here's a typical example of the recommended LEAPS listed at the end of one of the LEAP Call write-ups. BUY LEAP JAN-2004 $50 LMO-AJ BUY LEAP JAN-2004 $45 LMO-AI **Covered Call** BUY LEAP JAN-2005 $50 ZMO-AJ BUY LEAP JAN-2005 $40 ZMO-AH **Covered Call** The way to use this information depends on the trading strategy that you have chosen to employ. If you are just a simple Buy-and-Hold LEAPS investor, then you will simply use either the LMO-AJ or ZMO-AJ LEAPS. These LEAPS are for the MO LEAP call, so with the current price of $49.31, you can see that those strikes are now near-the-money. But we want to enter the play back down near the $46 level, at which point, the $50 strikes will be a bit out of the money. That will give the standard Buy-and-Hold investor the ability to profit from both Delta and Gamma as MO gets headed north again. But for the trader that wants to write short-term calls against their long LEAP, the $45 strike makes more sense. This enables us to write front-month calls against the LEAP, all the way down to the $45 strike, which should continue to generate a decent premium, even if MO temporarily falls down into the $42-43 area, the site of strong support. Contrast this to the situation we would be in, if we bought the $50 LEAP, MO declines to $43 and we want to write a call against the LEAP. I don't think I need to tell you that the premium collected from that transaction would scarcely cover the commission required to sell the call. That would only leave us with the option of writing the $45 front-month call and then maintaining margin to cover the risk between the strikes. Hopefully, I've made it clear that the additional strikes listed (those with the **Covered Call** notation), are just there to aid you in your selection of the appropriate strike, depending on your chosen trading strategy. Next week will see us in a new month, volume will be back in the markets and hopefully rationality will prevail. (ok, I got a little carried away there...) At a minimum, I'll dream up some new and exciting topics for us to share. In the meantime, keep those questions coming! Have a Great Holiday Weekend! Mark ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 8/28 by Leigh Stevens NEWS & VIEWS - The big sector story was on - guess what - WARNINGS on earnings and was NOT music to investors ears. Telecommunications stocks retreated en masse on Wednesday in the wake of yet another sales warning from Nortel Networks (NT). The telecom-equipment maker warned on its Q3 revenues and profits and said it will cut 7,000 more jobs to offset weakening sales. Nortel's (NT) stock fell 15% to $1.04. Nortel's decline was a dead weight on the Networking Index (NWX) fell by 6%. Ciena (CIEN), and Lucent (LU) both lost over 10%. The companies sell hardware to many of the same phone companies as Nortel. Nearly all the stocks in the Networking Index (NSX) fell. Cisco (CSCO), which competes with NT lost over 2%. JDS Uniphase (JDSU) dropped nearly 7%. The same Nortel news also contributed to the Wireless Telecom sector index (YLS) falling by over 6% also. Semiconductor sector (SOX) stocks were hit by a Prudential downgrade on the sector, which also hurt financial stocks. Pru cut Q4 estimates for Intel (INTC) and Advanced Micro (AMD), stating that the current level and expected outlook for Taiwan PC manufacturing suggested that seasonal growth patterns of more than 10% will not be seen. DOWN (or unchanged) on Tuesday - UP (or unchanged) on Tuesday - FURGETABOWIT! - The Dow Jones Home Builder's Index (DJUSHB) was unchanged, so this was the monster "rally" of today. SECTOR TRADE RECOMMENDATIONS - NEW/OPEN TRADE RECOMMENDATIONS - NONE TRADE LIQUIDATIONS - NONE Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* _If you haven_t traded options online _ you haven_t really traded options,_ claims author Larry Spears in his new compact guide book: _7 Steps to Success _ Trading Options Online_. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Bulls Go Down Swinging It was not pretty. The markets dropped at the open with bulls being trampled by the bears on continued negative news from the chip sector. They managed a feeble recovery around noon after breaking 8700 the first time but could not hold it. Two buy programs at 3:30 gave bulls hope again with another spike above 8700 but again sellers appeared and the indexes sold off into the close. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Wednesday 08-28-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: MXIM, QLGC, IBM, EBAY, GS Dropped Calls: None Dropped Puts: None Play of the Day: Put - ADI Big Cap Covered Calls & Naked Puts: Sell-Off In Progress! Updated on the site tonight: Market Watch Market Posture ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** MXIM - adjust down from 36.50 to 34.00 QLGC - adjust down from 39.00 to 36.00 IBM - adjust down from 81.50 to 78.00 EBAY - adjust down from 60.00 to 57.50 GS - adjust down from 80.00 to 78.50 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* _If you haven_t traded options online _ you haven_t really traded options,_ claims author Larry Spears in his new compact guide book: _7 Steps to Success _ Trading Options Online_. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* ADI - Analog Devices, Inc. - $25.96 -1.66 (-0.54 for the week) Company Summary: Analog Devices is a leading manufacturer of precision high- performance integrated circuits used in analog and digital signal processing applications. The company is headquartered in Norwood, Massachusetts and employs approximately 8,800 people worldwide. It has manufacturing facilities in Massachusetts, California, North Carolina, Ireland, the Philippines, Taiwan and the United Kingdom. Analog Devices' stock is listed on the New York Stock Exchange and the company is included in the S&P 500 Index. Most Recent Write-up ADI made a run following its earnings release on August 15. This was actually more due to Dell's initially positive spin on its own profit outlook the same day. ADI's forecast was actually quite bearish. They experienced a fiscal third quarter drop in both revenue and profits. Although the third quarter numbers met expectations, ADI warned, saying its profits for the current quarter were likely to fall short of expectations. In a classic case of the rising tide lifting all boats, ADI followed the recent surge of the Semiconductor Index (SOX.X) on its 28%, 79- point surge from August 5 to August 19. The semiconductor surge was not accompanied by any change in basic fundamentals, or increased sales projections. Salomon Smith Barney downgraded the sector on Thursday, reducing growth expectations from 4% for 2002, to only 0.5%. They also reduced forecasts for 2003 growth from 21% to 12% and projected 2004 at 17%. The truth is, there is no way to tell just how long the lack of IT spending will continue. We were originally told to look for the beginning of 2002 for a recovery; then the second half; then the first half of 2003. Now projections are for 2004. We see a pattern developing here, and it is not a bullish one. As ADI was the beneficiary of a sector run, it looks like one of the first to fall. As some of the sector wide enthusiasm wore off, ADI's forecast has begun to catch up with the stock. It managed to peek over its 50-dma for a few days, but could not complete a daily trading range over this level. Now it has dropped back below and we can expect to see this level as resistance to the upside. As the stock attempted to break out above $28, it also saw bearish PnF resistance at $30. The stochastics have recently turned and given a sell signal, to confirm what we are seeing on the daily chart. We will target $20 on the play, which is its recent low, just before the market rally following August 5th. Place stops at $28.50, above the recent highs from which the stock was turned away, as this would signal renewed strength. Why This is Our Play of the Day: ADI gapped down to start the day, and the rest of the tech sector went along with it. Nortel's announcement that it would miss estimates and was laying off 7,000 workers, combined with Hewlett Packard's comments about the slow IT spending environment doomed the techs. The Semiconductor Index (SOX.X), now trading 303.80, has now given up 75% of its recent gains and ADI will suffer with it, as it approaches support of 300. AS the overal market rebounded slightly this afternoon, ADI had a difficult time. it found temporary support at $24.00, however a look at the 5 minute chart shows its rebound efforts were met with plenty of supply at $24.50. The stock ended the day on the way down and we will look for a break in $24 support on Thursday. BUY PUT SEP-30 ADI-UF OI=1054 at $6.00 SL=3.00 BUY PUT SEP-25*ADI-UE OI=1992 at $2.05 SL=1.00 Average Daily Volume = 3.30 mil ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************************************** SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS SECTION ***************************************** Sell-Off In Progress! By Ray Cummins The major equity averages extended their recent losses today amid renewed weakness in technology, energy and financial issues. The Dow Jones Industrial Average retreated 130 points to 8,694 with Alcoa (NYSE:AA), Walt Disney (NYSE:DIS), Citigroup (NYSE:C), Exxon Mobil (NYSE:XOM), and International Business Machines (NYSE:IBM) pacing the decline for the popular blue-chip gauge. The technology-laced NASDAQ Composite dropped 33 points to 1,314 as the networking segment tanked in the wake of a negative report from Nortel Networks (NYSEL:NT). The familiar networking firm warned of a shortfall in revenues and a meager outlook for product demand. A downbeat analyst call on Sun Microsystems (NASDAQ:SUNW) also weighed on hi-tech stocks and additional pressure came from a downgrade of the chip sector. The broader S&P 500-stock index lost 16 points to 917 as airlines, finance, and energy stocks led a widespread slump in share values. Trading volumes were mediocre with a lack of interest pervading the market ahead of Monday's Labor Day holiday. Only 1.3 billion shares exchanged hands on the NASDAQ while 1.1 billion shares were traded on the New York Stock Exchange. Breadth was strongly negative with losers more than doubling winners on both the Big Board and the technology exchange. The sell-off in equities had an uplifting effect on the bond market, which rose across the board after a wrenching retreat on Tuesday. The 10-year Treasury note climbed 14/32 to yield 4.22% while the 30-year government bond gained 24/32 to yield 5.01%. *************** SUMMARY OF CURRENT POSITIONS *************** (As of 08-27-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield PLMD SEP 22.5 21.85 23.15 $0.65 5.39% AMGN SEP 35 34.40 45.21 $0.60 4.26% CCMP SEP 25 24.45 41.98 $0.55 4.44% AMGN SEP 37.5 37.00 45.21 $0.50 4.11% CCR SEP 45 44.35 52.35 $0.65 4.15% CEPH SEP 35 34.05 44.80 $0.95 7.61% CHIR SEP 32.5 32.05 39.67 $0.45 4.03% CVTX SEP 20 19.65 24.64 $0.35 4.87% IDPH SEP 35 34.30 41.30 $0.70 5.84% IVGN SEP 30 29.40 36.21 $0.60 5.66% OSIP SEP 23 21.65 16.16 ($2.25)+ 0.00% OSIP SEP 20 19.55 16.16 ($0.65)+ 0.00% OSI Pharmaceuticals (NASDAQ:OSIP) lost more than half its value last week when a rival's setback raised concerns about the company's anti-cancer drug. The stock declined because a U.K.-based pharmaceutical company, AstraZeneca (NYSE:AZN), announced disappointing testing results for its anti-cancer drug, Iressa. Iressa and OSI's key experimental compound, Tarceva, both belong to the same class of drugs known as epidermal growth factor inhibitors. These unique drugs are used to interfere with the uncontrolled growth of cancerous cells. Analyst Meirav Chovav at UBS Warburg argued that the Iressa disappointment wasn't necessarily bad news for OSI because the company could gain a competitive advantage if Tarceva turns out to be a success in clinical trials. But, investors didn't agree with that optimistic outlook and after the pre-market announcement (8/19), they sold the issue down to levels not seen for two years. The high for that day was $23 and traders who exited our bullish plays in the morning paid a large premium to close the positions, despite the fact that both (sold) options were "out-of-the-money." We will record the losses in our portfolio but this is one issue that may be worth a recovery attempt as the company's product has yet to have its day in court. Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status PII 67.90 74.35 SEP 50 55 0.60 54.40 $0.60 Open BSC 65.44 65.56 SEP 55 60 0.55 59.45 $0.55 Open CCMP 41.50 41.98 SEP 25 30 0.40 29.60 $0.40 Open SCHL 44.00 42.60 SEP 35 40 0.50 39.50 $0.50 Open Scholastic (NASDAQ:SCHL) is on the "watch-list" for further downside activity. Traders should monitor the issue for an early exit as it approaches the sold strike at $40. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status AAP 45.95 53.49 SEP 60 55 0.70 55.70 $0.70 Open? AIG 62.08 64.57 SEP 75 70 0.65 70.65 $0.65 Open INTU 41.04 45.17 SEP 55 50 0.60 50.60 $0.60 Open AVE 63.62 61.54 SEP 75 70 0.55 70.55 $0.55 Open EASI 47.68 50.49 SEP 60 55 0.60 55.60 $0.60 Open? HI 38.09 37.70 SEP 50 45 0.65 45.65 $0.65 Open Advance Auto Parts (NYSE:AAP) rallied with stocks in the Auto Parts Stores group and the close above near-term resistance at $52 was a potential "early-exit" signal for the position. A change in character has also taken place in Engineered Support Systems (NASDAQ:EASI) and further upside activity will signal an exit or adjustment in the position. Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status AXP 35.26 37.09 SEP40C/30P 0.10 29.90 0.20 Open CCR 50.81 52.35 SEP55C/45P 0.20 44.80 1.20 Closed INVN 27.25 32.05 SEP35C/20P 0.00 20.00 1.25 Closed BLL 45.60 47.51 NOV55C/35P (0.10) 35.10 0.30 Open GS 78.50 79.10 SEP85C/70P 0.10 69.90 1.00 Open? IBM 74.92 77.96 SEP85C/60P 0.10 59.90 1.75 Closed Countrywide Credit (NYSE:CCR), InVision Technologies (NASDAQ:INVN) and International Business Machines (NYSE:IBM) have achieved the target exit points in our bullish plays. Goldman Sachs (NYSE:GS) has also yielded a favorable "early-exit" profit. Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of 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 are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (I monitor the positions marked with ***). *************** BULLISH PLAYS - Premium Selling All of these issues have robust option premiums and favorable technical indications. However, news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. *************** AMGN - Amgen $45.18 *** New Drug Approvals! *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and sells human therapeutic products, including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. The company has research facilities in the United States as well as clinical development staff in the United States, the European Union, Canada, Australia and Japan. The company recently bought Immunex, a biopharmaceutical company dedicated to developing new immune system sciences to protect human health. Immunex had successfully developed two products, Enbrel and Leukine, and was marketing four products treating multiple indications, Enbrel, Leukine, Novantrone and Thioplex. AMGN - Amgen $45.18 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT SEP 37.5 AMQ UU 5,448 0.35 37.15 4.3% "TS" SELL PUT SEP 40 AMQ UH 4,105 0.60 39.40 5.9% *** SELL PUT SEP 42.5 AMQ UV 1,848 1.05 41.35 8.5% *************** GDT - Guidant $35.50 *** Bullish Earnings Guidance! *** Guidant Corporation (NYSE:GDT) pioneers lifesaving technology for cardiac and vascular patients. The firm develops, manufactures and markets a broad array of products and services that enable less-invasive care for most threatening medical conditions. The company offers stent systems, implantable defibrillator systems, implantable pacemaker systems as well as cardiac resynchronization therapy, products for use in less-invasive endovascular procedures, including the treatment of abdominal aortic aneurysms, products to help perform cardiac surgery procedures such as Off-Pump Coronary Revascularization with EndoScopic vessel harvesting as well as intravascular radiotherapy systems for artery disease. GDT - Guidant $35.50 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT SEP 30 GDT UF 939 0.30 29.70 4.4% *** SELL PUT SEP 35 GDT UG 2,104 1.40 33.60 12.3% *************** IDPH - IDEC Pharmaceuticals $41.41 *** Analyst "Buy" Rating! *** IDEC Pharmaceuticals (NASDAQ:IDPH) is a biopharmaceutical company engaged primarily in the research, development, manufacture and commercialization of targeted therapies for the treatment of many cancer and autoimmune and inflammatory diseases. The company's two primary commercial products, Rituxan and Zevalin (ibritumomab tiuxetan), are for use in the treatment of B-cell non-Hodgkin's lymphomas. The company is also developing new products for the treatment of cancer and various other autoimmune diseases such as rheumatoid arthritis, psoriasis, allergic asthma and allergic rhinitis. Rituxan, the company's first product, and Zevalin, its second product approved for marketing in the United States, as well as its other primary products under development, address immune system disorders such as lymphomas, autoimmune and many inflammatory diseases. In addition, the company has discovered other product candidates through the application of its unique technology platform. IDPH - IDEC Pharmaceuticals $41.41 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT SEP 35 IDK UG 1,298 0.65 34.35 8.0% *** SELL PUT SEP 40 IDK UH 3,544 1.85 38.15 14.4% *************** INVN - InVision Technologies $32.51 *** 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. INVN - InVision Technologies $32.51 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT SEP 25 FQQ UE 1,272 0.25 24.75 4.9% *** SELL PUT SEP 30 FQQ UF 883 0.95 29.05 10.9% *************** IVGN - Invitrogen $35.96 *** Solid Technicals! *** Invitrogen (NASDAQ:IVGN) develops, manufactures and markets more than 10,000 products for the life sciences markets. Invitrogen's products are principally research tools in reagent and kit form, biochemicals, sera, media, and other products and services, which the company sells to corporate, academic and government entities. The company focuses its core business on two principal segments, Molecular Biology Products and Cell Culture Products. IVGN - Invitrogen $35.96 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT SEP 30 IUV UF 90 0.35 29.65 5.3% *** SELL PUT SEP 32.5 IUV UZ 329 0.75 31.75 8.5% SELL PUT SEP 35 IUV UG 28 1.50 33.50 13.3% *************** BULLISH PLAYS - Credit Spreads There are relatively few favorable issues to choose from for this strategy and the near-term outlook for equities does not support a bullish bias. However, traders who are optimistic about a continuation of the recent recovery rally should consider these limited-risk positions. *************** CCR - Countrywide Credit $52.87 *** Mighty Mortgager! *** Countrywide Credit Industries (NYSE:CCR) is a holding company that originates, purchases, sells and services mortgage loans through its principal subsidiary, Countrywide Home Loans. The company's mortgage loans are principally prime credit first-lien mortgage loans secured by single family residences (prime credit first mortgages). Countrywide Credit also offers home equity loans and sub-prime credit loans. Countrywide, through its other wholly owned subsidiaries, offers products and services that are largely complementary to its mortgage banking business, including primary underwriting of lender-placed mortgage insurance, insurance policy brokerage, mortgage-backed securities brokerage and underwriting, brokerage of bulk servicing transactions, loan processing and also servicing in foreign countries, and retail banking. The company conducts its business through four segments: Insurance Segment, Capital Markets Segment, Global Segment and Banking Segment. CCR - Countrywide Credit $52.87 PLAY (moderately aggressive - bullish/credit spread): BUY PUT SEP-45 CCR-UI OI=2525 A=$0.45 SELL PUT SEP-50 CCR-UJ OI=1371 B=$1.10 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$49.35 *************** EASI - Engineered Support $52.40 *** Character Change! *** Engineered Support Systems (NASDAQ:EASI) along with its various subsidiaries, designs and manufactures military support equipment and electronics for the United States armed forces. The company also engineers and manufactures air handling and heat transfer equipment, material handling equipment and custom molded plastic products for commercial and industrial users. Engineered Support Systems' six wholly owned subsidiaries are Systems & Electronics (SEI), Engineered Air Systems (Engineered Air), Keco Industries, (Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered Electric Company (d/b/a Fermont) and Engineered Specialty Plastics. EASI - Engineered Support Systems $52.40 PLAY (aggressive - bullish/credit spread): BUY PUT SEP-45 UFE-UI OI=80 A=$0.55 SELL PUT SEP-50 UFE-UJ OI=10 B=$1.40 INITIAL NET-CREDIT TARGET=$0.90-$1.00 POTENTIAL PROFIT(max)=22% B/E=$49.10 *************** BEARISH PLAYS - Naked Calls Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** HIT - Hitachi $54.68 *** Another Leg Down? *** Hitachi (NYSE:HIT) is a global electronics company that makes and markets a range of products, including computers, semiconductors, consumer products, and power and industrial equipment. The firm's business is very diversified, and is classified into five industry segments: Information Systems and Electronics, Power and Industrial Systems, Consumer Products, Materials, and Service and Other. HIT - Hitachi $54.68 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL SEP 60 HIT IL 38 0.60 60.60 4.6% *** SELL CALL SEP 55 HIT IK 36 2.05 57.05 11.5% *************** MUR - Murphy Oil $82.87 *** Failed Rally? *** Murphy Oil Corporation (NYSE:MUR) is a worldwide oil and gas exploration and production company with refining and marketing operations in the United States and the United Kingdom. The company's operations are classified into two primary businesses: Exploration and Production; and Refining and Marketing. The company's principal exploration and production activities are conducted in the United States, Ecuador and Malaysia by wholly owned Murphy Exploration & Production and its subsidiaries; in western Canada and offshore eastern Canada by Murphy Oil Ltd. and its subsidiaries; and in the U.K. North Sea/Atlantic Margin by wholly owned Murphy Petroleum Limited. Murphy Oil USA, a wholly owned subsidiary, owns and operates two refineries in the United States. MOUSA markets refined products through a network of retail gasoline stations and branded and unbranded wholesale customers in a 23-state area of the southern and Midwestern United States. MUR - Murphy Oil $82.87 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL SEP 90 MUR IR 419 1.05 91.05 5.1% *** SELL CALL SEP 85 MUR IQ 438 2.40 87.40 9.5% *************** OMC - Omnicom Group $59.45 *** Premium Selling! *** Omnicom (NYSE:OMC) is a marketing and corporate communications company. Omnicom has grown its strategic holdings to over 1,500 subsidiary agencies operating in more than 100 countries. The company's wholly and partially owned businesses provide various communications services to clients on a global, pan-regional and national basis. The firm's agencies provide an extensive range of marketing and corporate communications services, including advertising, brand consultancy, crisis communications, custom publishing, database management, digital-interactive marketing, direct marketing, directory and business-to-business advertising, employee communications and environmental design. Omnicom also provides field marketing, healthcare communications, marketing research, media planning and buying, multi-cultural marketing, non-profit marketing, promotional marketing, public affairs, public relations, recruitment and specialty communications, and sports and event marketing. OMC - Omnicom Group $59.45 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL SEP 70 OMC IN 1,468 0.60 70.60 5.7% *** SELL CALL SEP 65 OMC IM 1,578 1.60 66.60 10.7% SELL CALL SEP 60 OMC IL 4,825 3.20 63.20 16.0% *************** QLGC - QLogic $34.68 *** Sector Slump! *** QLogic Corporation (NASDAQ:QLGC) designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers. The company's products are based on SCSI, iSCSI, Fibre Channel and Infiniband standards. The company is the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Their products include its SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool Kit management software. QLogic is the only HBA vendor that supports SCSI, Internet Protocol, Virtual Interface and FICON protocols with the same Fibre Channel HBA. In addition, the company designs and supplies controller chips used in a variety of hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure. QLGC - QLogic $34.68 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL SEP 40 QLC IH 4,944 0.45 40.45 6.6% *** SELL CALL SEP 37 QLC IU 975 1.05 38.55 11.5% SELL CALL SEP 35 QLC IG 5,960 2.10 37.10 17.7% *************** BEARISH PLAYS - Credit Spreads All of these positions are favorable candidates for "bear-call" credit spreads, 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, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** AET - Aetna $41.89 *** Rolling Over? *** Aetna (NYSE:AET) is a health benefits company whose business operations are conducted in the Health Care, Group Insurance and Large Case Pensions segments. The company was spun off with the remaining entity merged into a subsidiary of ING Groep N.V. The Health Care group consists of health and dental benefit products, including health maintenance organization, point-of-service, preferred provider organization and indemnity products, and group insurance products, including life, disability and long-term care insurance products. The Group Life Insurance segment consists principally of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. The Large Case Pensions group manages a wide variety of retirement products, including pension and annuity products, offered to qualified defined benefit and contribution plans. AET - Aetna $41.89 PLAY (conservative - bearish/credit spread): BUY CALL SEP-50 AET-IJ OI=265 A=$0.20 SELL CALL SEP-45 AET-II OI=7240 B=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$45.55 *************** COF - Capital One $35.33 *** A Necessary Consolidation! *** Capital One Financial (NYSE:COF) is a holding company whose major subsidiaries market a variety of financial products and services to consumers using its proprietary information-based strategy. The company's primary business is consumer lending, with a focus on credit cards, but including other consumer lending activities such as unsecured installment lending and automobile financing. The company's principal subsidiary, Capital One Bank, a limited purpose, state-chartered credit card bank, offers credit card products. Capital One, F.S.B., a federally chartered bank, offers consumer lending and deposit products. Capital One Services, the other major subsidiary, provides various operating, administrative and business services to the company and its subsidiaries. COF - Capital One $35.33 PLAY (conservative - bearish/credit spread): BUY CALL SEP-42.50 COF-IV OI=1433 A=$0.30 SELL CALL SEP-40.00 COF-IH OI=2619 B=$0.55 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=12% B/E=$40.30 *************** LEH - Lehman Brothers $56.22 *** Brokerage Downgrade! *** Lehman Brothers Holdings (NYSE:LEH) is a global investment bank serving institutional, corporate, government and high-net-worth individual clients and customers. The firm is engaged primarily in providing financial services and operates in three business segments: Investment Banking, Capital Markets and Client Services. Other businesses in which the firm is engaged represent less than 10% of consolidated assets, revenues or pre-tax income. Lehman's business includes capital raising for clients through securities underwriting and direct placements, corporate finance and other strategic advisory services, private equity investments, stock sales and trading, research and the trading of foreign exchange and derivative products and certain commodities. The firm acts as a market-maker in all major equity and fixed-income products in both the domestic and international markets. LEH - Lehman Brothers $56.22 PLAY (conservative - bearish/credit spread): BUY CALL SEP-65 LEH-IM OI=3129 A=$0.20 SELL CALL SEP-60 LEH-IL OI=4597 B=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$60.50 ************** MARKET POSTURE ************** Putting On Our Horns To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/082802.asp ************ MARKET WATCH ************ Eyes Peeled on 50-dmas To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/082802.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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