The Option Investor Newsletter Sunday 09-15-2002 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: Cautious Bears Circling the Picnic. Index Trader Wrap: Like a carrot in a juicer Editor’s Plays: Failed Target Market Sentiment: Not So Fast Ask the Analyst: The Bigger Picture Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Storm Warning Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 9-13 WE 9-06 WE 8-30 WE 8-23 DOW 8312.69 -124.51 8437.20 -236.30 8663.50 -209.46 + 94.90 Nasdaq 1291.36 - 3.94 1295.30 - 19.76 1315.06 - 65.51 + 19.56 S&P-100 444.24 - 2.43 446.67 - 14.13 460.80 - 13.70 + 6.06 S&P-500 889.80 - 4.12 893.92 - 22.16 916.08 - 24.78 + 12.09 W5000 8440.88 - 40.32 8481.20 -172.84 8654.04 -222.85 +106.61 RUT 389.98 - 40.32 391.57 + .61 390.96 - 9.17 + 4.16 TRAN 2246.87 - 10.20 2257.07 - 8.56 2265.63 -128.69 + 54.92 VIX 39.31 - .73 40.04 + 4.24 35.80 + 2.99 - 0.01 VXN 55.85 - .69 56.54 + 1.56 54.98 + 7.36 - 3.03 TRIN 1.53 0.93 1.20 2.87 Put/Call 0.89 0.79 0.84 0.80 ****************************************************************** Cautious Bears Circling the Picnic. by Jim Brown Honeywell pulled the plug on the Dow for Friday and Adobe helped float the Nasdaq. Everybody else ended the week flat and failed to recoup Thursday's losses. Bears were out and about and every bounce was met with selling but there was no concentrated effort to press their luck. With a three day weekend ahead for many traders there was no urge to open new positions on Friday. Dow Chart Nasdaq Chart Economically Friday was not a good day. The PPI was flat and less than the +0.2% expected. Excluding energy and food the number fell -0.1% while prices for core goods rose +0.4%. There is a hint of inflation starting to appear even though the rise in gasoline and electricity failed to carry forward into the headline number. Falling food prices offset the hikes in energy prices. It continues to show that the recovery is very tentative and the minor inflation increase will not deter the Fed from further rate cuts. This is not a significant possibility (cuts) anyway so the PPI was basically a non-event. Retail Sales came in stronger than expected at +0.8% but only half that rate, +0.4%, without the strong auto sector. However electronics and appliances fell -0.4%. Clothing and accessories fell -0.3% with the biggest gains in furniture at +1.7% and auto parts +1.9%. It appears the nesting consumer is feathering their nest and fixing up their cars. Back to school sales fell at department and apparel stores which when coupled with the slow electronics sales is still bad news for the PC sector. Consumers appear to be taking money out of the markets to buy houses at once in a lifetime interest rates and cars at zero percent down. The ECRI Weekly Index dropped slightly to 120.5 from 120.7 and remained near the lows of the year. The drop was attributed to the spike in Jobless Claims to 426,000 from 407,000. This is signaling that the rebound is faltering. It would be much worse if not for the strong mortgage application rate. With any tick up in interest rates those applications will come to a screeching halt. The biggest report of the day was the Michigan Consumer Sentiment and if fell from 87.6 in August to 86.2 in September. The current conditions component showed the biggest drop of -2.6 points. This was the fourth consecutive decline and the lowest level since last November. The University said respondents were commenting on their drop in wealth more than any other time in the history of the survey. It appears the only thing holding up the current expectations component is the zero percent autos and low mortgage interest. Do you see the trend here. Once the auto buying spree fades as it is expected to do in the 4Q and the mortgage interest rates start climbing this indicator should fall quickly. The Dow was the biggest loser of the day after HON warned that for the quarter and the year. HON fell -17% to $23.56. Only 13 of the 30 Dow stocks fell and four of them were aerospace related. UTX dropped -5% to $58, GE dropped a dollar to $27 and Boeing dropped -$1 to $35 on the news as well as the strike vote. Another major NYSE loser was LU which traded 107 million shares to close -20% lower at $1.32. Lucent warned that sales for this quarter would be -25% less than expected and guaranteed the ninth straight quarterly loss. They now expect to lose -.45 cents, nearly three times the -.16 cent loss expected by analysts. Two major rating services downgraded Lucent debt again. Lehman said they were redefining what "worst case scenario" in the telecom sector meant. Lucent said the baby bells were cutting spending again and delaying major purchases. They also are taking charges for significant customer financing defaults. I guess not selling equipment is bad but selling it and then not getting paid is worse. The chip sector just keeps taking hit after hit. AMD announced today it was delaying the release of its Hammer chip, their answer to Intel's high performance P4. They also said they were delaying the new version of the Athlon chip. No reason was given but AMD had repeatedly tied its future to the Hammer chip. If it can't bring it to market until the 1Q or 2Q of 2003 then the Intel lead will skyrocket. Intel is going to release a 3GHZ P4 next month. An entire product cycle will be lost to AMD as Intel is expected to release a 4GHZ P4 in the 1Q of 2003. This is the competition the Hammer will face. AMD fell to $7.21 on the news. Intel gained +.33 to $16.00. In other chip news ESST warned that slow sales of its DVD chips would sharply lower earnings for the second half of the year. Competitors to ESST, CRUS and ZRAN also lost on the news. GNSS gains to $9.30 however after being upgraded and after raising guidance for the quarter. While the Dow finished the week in the negative due to the HON warning the other major indexes recovered from negative territory at the close as possible terrorist news stories were resolved. The three men in Florida were released after convincing police they were just pulling a joke on the waitress. The Liberian cargo ship was called no risk to the publics health and safety by the FBI who said the radiation was from some Spanish tile. A terrorist who bragged on TV just last week that he helped organize the 9/11 attack was finally arrested in Karachi. Police in New York arrested five men of Yemeni descent on suspicions of operating a terrorist cell in the U.S. They were discovered by an increase in communications traffic with a terrorist location overseas and some evidence at a training camp linked to Osama. The authorities said there was no evidence on an immediate attack plan in progress. All this positive terrorist news helped to strengthen the bulls and worry the bears. Still the bulls could not make any major moves off Thursday's close. Even a couple of short covering rallies failed to post decent gains. Money is flowing out of mutual funds again after there was no post 9/11 rally. Volume was very low again with less the three billion shares trading across all markets. It was a dead heat with 1.5B up volume and 1.4B down volume. The volatility continued to be a factor with the OEX/SPX trading on both sides of positive several times during the day. The Nasdaq riding on the back of Adobe and Intel was the strongest index by far and it only closed up +11 for the day but still negative for the week. Adding to the 9/11 anniversary week volatility was the triple witch option expiration week ahead of us. Traders planning to be out for Yom Kippur on Monday were either squaring positions on Friday or out of the market all together. Next week in addition to the options expiration we have a flood of economic reports. Business Inventories on Monday, Industrial Production on Tuesday, CPI on Wednesday, Building Permits and Housing Starts and Phily Fed on Thursday. The following week leads with Consumer Confidence and a Fed meeting. Needless to say there will be plenty of challenges. Many of those challenges will come in the form of earnings warnings. The Q3 season will shift into full swing next week and the Q3 season is the worst of the year, even in good economic times. Expect dozens of warnings with some coming from high profile companies. Bulls keep talking about the coming rally. Can you have a real rally without banks, drugs, manufacturing, telecoms, aerospace and techs? Can you have a rally on the backs of the already extended housing sector and defense sectors? If you are planning a rally on the basis of ADBE and GNSS then I suspect it is going to be very narrow. Even the oil sector will be negative if Bush gets a coalition going. Maybe it is just the cool weather here in Denver and the fact that my bear skin coat feels so comfy this weekend but my outlook has changed drastically since the post 9/11 relief rally was DOA. The Dow closed Friday resting on 8300 and has now posted three negative weeks in a row. If 8250 breaks next week the get out your parachute because 7500 is right around the corner again. Before I depress you totally there are still those that think next week will be the start of the relief rally. They point to the 9/11 stress and the numerous terrorist news stories as reasons it did not appear this week. If they are right then Tuesday should be the day. With many traders off Monday for Yom Kippur there is not likely to be enough bullish volume on Monday to make it stick. Just keep your focus on 8250. If that level fails then all the bullish rally talk was just that, talk. We added a new section to OptionInvestor beginning this Sunday. We added stock picks for investors with retirement accounts that may or not have options capability. The link to these picks is listed in the "Strategy" section on the left side of the website. We only started with three stocks this week since our outlook is negative for the next month. For the stocks we list there we will provide options strategies as well to limit the risk of going long stocks. If you have an IRA account that does not allow options then buy the stock in your IRA and buy the option in your trading account. You will still be hedged just not in the same account. The outlook for these stocks will be from three to 24 months but nothing prevents you from holding longer. In the future we will try to focus on lower priced stocks to minimize entry cost and maximize gains on successful plays. We will try to structure the plays to limit risk to $1 or less per share. We would appreciate your input and questions on this section. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** Like a carrot in a juicer It's been awhile since I've seen an infomercial where some guy with big bushy eyebrows, who calls himself "Dr. Juice," demonstrates the benefits of drinking a combination of healthy homemade beverages from carrots, celery, tomatoes, radishes, zucchini, or any other type of fruit or vegetable that one could imagine cramming into a blender-type device, which then relinquishes a concoction that's supposed to be good for you. "Dr. Juice" fires up his blender and elevates his voice in an excited tone so you can hear him talk and he begins shoving in carefully measured allotments of fruits and vegetables. Of course, as he pushes the food items into the blender, the small motor begins to bog down as a high "whirrrr" sound slowly drags down to a lower pitch as it become a bit overloaded. "Dr. Juice" releases some pressure, lets the motor come back up to speed and then slowly applies more pressure to the food items, with a finger-protecting plunger, and juice eventually begins to flow out of a spout. All of the above is somewhat descriptive of today's market action as it relates to a bearish index trader licking his/her chops in the early morning with stock futures to the downside, but was perhaps served up just enough bullish economic data to help put a bid under the major market averages. While some carrots were shoved into the blender in the early going, there just wasn't enough selling pressure from bulls caving in to burn out a motor which kept many of the market averages above their trend lines and key near-term levels of support. While a bear was licking his/her chops in the early going, almost as if in anticipation of a healthy dose of profits from downside action, what came out the spout by sessions end wasn't as delicious as a bear would have liked. Of the major market averages discussed here, only the Dow Industrials (INDU) 8,312 -0.79% finished in negative territory. The 66-point decline wasn't necessarily that bad when considering Dow component Honeywell (NYSE:HON) $23.56 -16% plummeted after lowering guidance last night, which helped drag down United Technologies (NYSE:UTX) $58.00 -5.07% along with cyclicals Alcoa (NYSE:AA) $21.99 -3.4% and Caterpillar (NYSE:CAT) $40.64 -4.12%. The hefty losses in previously mentioned Dow components were partially offset by gains in retailing components Wal Mart (NYSE:WMT) $54.40 +2.4% and Home Depot (NYSE:HD) $33.45 +2.98% after this morning's stronger than expected retail sales numbers for August. It's noteworthy that Dow component General Motors (NYSE:GM) $44.08 -2.92% didn't participate in the "retail segment" of gains like WMT and HD after this morning's retail sales numbers shows a 1.9% gain in auto sales for the month. This may hint that market participants are shunning away from "larger ticket item" stocks as consumer confidence toward purchases my be limited to smaller ticket items or at least away from cars, which can be considered a depreciating asset once driven off the dealer's lot. Recently beaten down technology components had shares of Intel (NASDAQ:INTC) $16.03 +2.1%, Microsoft (NASDAQ:MSFT) $47.91 +1.61% and IBM (NYSE:IBM) $72.50 +0.87% showing gains, while Hewlett Packard (NYSE:HPQ) $13.50 -0.73% lagged on trader talk that the recent acquisition of Compaq may be presenting some challenges. While not a component of the NASDAQ-100 (NDX.X) 923 +0.96%, shares of IBM (IBM) $72.51 +0.87% found intra-day resistance at its now-flat 50-day SMA of $72.75. As it relates to Dow Diamonds (DIA) 83.53 -0.72% traders, a move either side of IBM's 50-day SMA may also influence Dow trading in the coming sessions. In essence a move above the 50-day SMA in IBM, could have the DIA trying to elevate back up toward its 50-day SMA, which currently resides at $85.97. Once a week, I like to kind of "step back" and take a look at how the weekly market action unfolded. In a way, this kind of helps me understand what was weak and/or strong. I keep a weekly spreadsheet where I group the major market averages near the top. for me, a "meaningful move" is +/- 1%. As such, I attempt to try and "color code" the different averages/sectors with "blue" being a gain greater than 1%, "black" being relatively unchanged, and "red" representing a decline greater than 1%. I also like to "group" the sectors in some type of manner as I'll explain in the following spreadsheet. As mentioned in prior intraday comments, I believe the MARKET moves similar to a snake. In essence, money can shift from sector to sector based on various MARKET scenarios that are in play. While I keep a weekly tally of percentage change, I also like to keep a year-to-date tally and then break it down by quarter. What this does in a way is help me "understand" percentage change on a daily or weekly basis in a greater scope of things. For instance, if I'm long a call in an index and the index jumps 7% in one day and 12% by week's end, I can perhaps put that type of movement into a greater context of things when compared to year- to-date and quarterly moves found in recent past. Weekly Index/Sector Changes As you can see, the major market averages (grouped at the top) were little changed on the week. Only the Dow Industrials (INDU) fell by more than 1% and the bulk of that decline came in the last three sessions. I consider the major market averages like an "ocean" and their "tides" or movement/fluctuation is impacted by the various sectors, which may be considered "rivers" that eventually flow into the ocean's themselves. Then, individual stocks represent "fish" that swim within the "rivers"/indexes themselves. There's always some overlap between the various indexes, but I've tried to group "technology" sectors near the top. Biotech is in a world all its own. For the most part the group is not that sensitive to the "economy" and may not necessarily be too dependent on "healthcare" type needs, but more dependent on future breakthroughs in biologic sciences. I need to move Networking down a few notches and get it closer to the Wireless, Fiber Optic, and Telecom indexes. Today's guidance lower and further restructuring comments from Lucent (NYSE:LU) $1.26 -23.63%, which set the Networking Index (NWX.X) $114.26 -4.38% into a tail-spin today, and had that sector experiencing this week's biggest decline in technology. QQQ traders may use the above spreadsheet to focus on those sectors within the technology "arrows." Once again, sector "weighting" comes into play. See how there were a lot of negative percentages for 6 out of the 8 sectors? So why was the NASDAQ-100 (NDX.X) showing a marginal gain by week's end? In part, the "bullishness" in software (GSO.X) represents a 31.42% weighting in the QQQ, while biotech (BTK.X) represents 11.91% weighting. While networking (NWX.X) got pounded lower, there's not too many "networking" stocks that trade over $10 anymore that have much impact. QQQ component ADC Telecommunications (NASDAQ:ADCT) $1.47 +13.5% had a banner day today. Unfortunately for QQQ bears, Lucent (NYSE:LU) $1.26 -23% and Nortel (NYSE:NT) $0.95 -10.37% aren't listed on the NASDAQ and not eligible for being components of the QQQ. Note: The above percentage weighting are taken from the NASDAQ site. If you're interested in reviewing specific stock weightings for the QQQ, then this link will be helpful http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm A neat little invention called the NASDAQ-100 Dynamic Heatmap, shows intraday % gain/losses of individual stocks at this link http://screening.nasdaq.com/Heatmaps/Heatmap_100.asp Moving on, we get into "financials," where I generally group together the Banks, Brokers and Insurance stocks. Here's where a S&P index trader starts to perk up. Again, many of the NASDAQ- 100 stocks are components of the S&P 500 and S&P 100, but more of a "financial" representative begins to take place in the S&P indexes. Subscribers that would like a more detailed an inward look at the stocks/weightings can browse around at the Standard & Poor's site at this link http://www.spglobal.com/indexmain500.html Most traders might only be interested in the 500 and 100, and their respective links are at the left of the page link just given. Trader's in the S&P 500 Index (SPX.X) will note that "financials" represent a 21% weighting and "healthcare" a 14.6% weighting, while "information technology" represents a 13.6% weighting. It's notable that "consumer discretionary" represents a 13.5% weighting. In general, this would be considered some of the retailers like a Wal-Mart (WMT) $54.40 +2.4% on the day and Target (TGT) $36.22 +2.49% today. Laughing.... my mom used to always say .... "do you know just what is in those hot dogs you so love to stuff in your mouth?" For index traders, it's always a good thing to know just what's in that index your trading. I don't think a trader needs to "know" every little detail, but how things are weighted and how the various sectors can at times become "key" sectors to monitor, which might influence your trade size. For instance. If your a short-term trader in the S&P's, then perhaps last night's comments regarding the potential importance of this morning's retail sales numbers caught your eye. With "consumer discretionary" being a 13.5% weighting in the S&P 500 this morning's economic report had some influence on SPY traders. I'm rather "bearish" the SPY since Wednesday evening's Index Trader Wrap, but if there's going to be trouble for a bear in the S&P 500 Index (SPX.X), it most likely is going to start with the retailers. In the above spreadsheet, I'm using the Retail HOLDRS (AMEX:RTH) $82.40 +1.61%, which pretty much mimics the S&P Retailing Index (RLX.X) 300.73 +2.12%. The "reason" I'm using the RTH in the spreadsheet is that for some reason, between 05/14/02 and 06/05/02 the RLX.X didn't appear to trade and I don't have data for that time and it messed up any attempt at my quarterly benchmarking levels. Regardless, I'm going to put a scenario together as it relates to the RTH from a bearish trader's perspective. This scenario basically reads like a very simple computer program with a statements of if, then, else. Let's take a look at the RTH. As a trader, I always look for potential trouble that could adversely impact my trade (bullish or bearish). A bearish trader loves weakness, but is always on the alert for bullishness that may threaten a position. Retail HOLDRS Chart - Daily Interval Here's a "sector" that could give a bearish S&P trader some trouble. A bear hates to see any type of "leadership" or strength that could threaten his/her position. As such, I like to look for strength that could threaten my position. Here's my thinking, which I describe somewhat as computer logic. IF the RTH breaks above $84.50, THEN I must be alert to strength in the SPX, ELSE a decline from current levels my bearish SPX trade stands a better chance of reaching my target near SPX 835. Now, note three levels in the above chart. Note the 38.2% retracement in the RTH at 82.96 (say 83 round number), then note the 50-day and how "strong" the RTH is when we compare to the SPX chart, and then note the 19.1% retracement level. While some may think I'm crazy for saying the MARKETS (S&P 500 is a MARKET) are the Oceans, that the sectors/rivers (Retailers are a sector) flow toward, and the stocks (Wal-Mart is a stock, in the retail sector, which is a LARGE component of the S&P 500) are the fish within the sectors, you'll get this concept by the end of the update. Write down the "levels" from the RTH 38.2% of $83 and the 19.1% retracement of $77 on a piece of scratch paper to keep handy for reference in the S&P 500 chart below. Special note here. Retracement in the RTH is from this spring's highs to the July relative lows, JUST LIKE WE'VE done with the SPX chart in recent nights. CONSISTENCY is important, otherwise it becomes very difficult to pick up on DIVERGENCE like we're seeing with the retailers versus the SPX. S&P 500 Index Chart - Daily Interval The SPX did pierce below upward trend on the bar chart, but managed to rally back and close right near trend. While the retailers are just a portion of the SPX, traders can see how an SPX bear wants to see a decline in the RTH back to its 19.1% retracement to help provide some weakness in the SPX and increase the likelihood of a break below SPX retracement of 868, which is a "hurdle" to a trader's target near 835. It still look like the "tide" is falling for the SPX so still bearish, but not complacently so (see last night's wrap). However, just want to see one of the stronger running "rivers" in the retailers show some weakness as a bear hates to see any type of leadership come from an economically sensitive group. As it relates to "fish" in the retail sector, I spent quite a bit of time talking about Wal-Mart (WMT) as a stock for equity bulls to be studying back in July regarding some historical pattern recognition dating back to last fall. Thought was that WMT would "eventually" give a point and figure buy signal, which did take place at $49.00 on July 29th and I mentioned this in the intra- day update at 01:00 EST http://members.OptionInvestor.com/archive/intraday/2002/072902_3.asp This "BIG Bugger" has yet to give a sell signal on its point and figure chart, and past scenario was that this discount retailer (consumer discretionary) might trade bullish into the holiday shopping season. It's also "interesting" that WMT's bullish vertical count was $58, after that "buy signal" at $49 was generated. Just three day's ago, WMT traded a high of $57, and got suspiciously close to its bullish target. An SPX bear is looking for this one to stay in check as it relates to the retailers. OK, real quickly I need to cover the very bottom portion of the spreadsheet. Precious metals stocks as depicted by the Gold/Silver Index (XAU.X) 75.90 -0.23% recovered from a late morning decline and pegged their highs into the close. This was perhaps a "defensive" move I was looking for today to a degree, but this morning's economic data was just a bit too strong. I still don't think the bullishness in gold and 3.8% gain this week is "inflation" related, which gold is a perceived hedge against. No, its a defensive move based on a potential "Iraq attack." True, an attack on Iraq could have oil spiking higher, which could be partially inflationary, but if inflation were a BIG concern, then we wouldn't be seeing Treasury YIELDS as depicted by the 10-year Treasury YIELD closing at a new multi-year low of 3.9%. Inflation is one of the biggest threats to bonds, so I don't think bonds are seeing buying (lower YIELD) based on inflation. No sir/mam, the MARKET bought bonds in the past 4- weeks because it is looking for some safety. An finally, the U.S. Dollar. For the most part, I'm using this as a very simplistic way to try and get a feel for foreign equity flows into and out of the U.S. In essence, foreign capital that wants US-based assets, needs to convert from foreign currency into US Dollars, while money that wants out, sells dollars to convert back to its local currency, or rotate to another part of the world. The last month and 1/2, the Dollar has been range- bound between 106-108. Months ago I set up a retracement on the US Dollar Index (dx00y) using a fitted retracement technique, and currency traders look to be trading that like clockwork. I'll talk about what I think is the "relation" between the Dollar, Treasuries and stocks in a later update, but right now I think some money continues to flow toward the dollar, but has been placed in Treasuries. This makes sense perhaps as foreign investors seek out some safety from a "global power" like the U.S. should an attack on Iraq take place. Think about it. If you were a large investor in Europe or anywhere close to Iraq and Saddam Hussein, you're probably trying to shift some assets away from danger, unless you're betting Iraq is a victor. Nope. I'd think Saddam might get a little crazy, and perhaps launch chemical weapons if his end is near. If I shift assets to the U.S. and am lucky enough to escape with my life before Saddam gets me with the chemical weapons, then I've got some assets in the U.S. that I can eventually get my hands on again. Ugh! Terrible thoughts, but investing is all about risk management. Lets take a quick look at the S&P 100 Index (OEX.X) 444.24 +0.22%, which managed to battle back from early morning lows and close relatively unchanged on the day. I'm going to "blow up" the daily interval bar chart a bit tonight and talk real quick about two different upward trends. There's been discussions over the years as to where an upward trend should be "anchored" from. Do you take an anchor point from the very low of a bottom, or anchor to the low close of the bottom. Both arguments have merits as it relates to supply and demand. Those that anchor to the bottom will say, "you anchor to the bottom, because for some unknown reason, that's where the shift from excess supply to building demand took place." Those that anchor to the relative low close say, "you anchor to the bottom, because for some unknown reason, the MARKET decided that was the meaningful price the market agreed upon as the relative lows trade." Personally, I like to try and create as much trouble as I can in the technicals as this helps keep me honest. Here's what I'm talking about. Did the OEX close above, on, or below trend? S&P 100 Index Chart - Daily Interval The upward trending "pink" line is what I call a more "conservative" trend and is anchored to the 07/23 CLOSE. The "green" line is more "aggressive" and is anchored to the 07/23 LOW. Encouraging for a bear is that BOTH trends were punctured. The OEX also closed below its more aggressive trend, while closing right on the more conservative trend. If anything, this still has me cautious as a bear and not getting overly short/put in my account. Oh... I'm limited in how big my charts can be in these updates and the "data box" for Price, Open, High, Low, Close, MA(50), MA (200) etc., covers up the oscillator settings on the chart. Subscribers asked me after last night's wrap what settings I use for MACD on the OEX. I use the same MACD settings of (12,26,9) on all charts unless otherwise noted. Some traders like to "fine tune" there settings to try and get a more "exact" historical match. Every technician has a personal preference as to what they put more weight into. I put the most weight in the point and figure charts, then bar chart trends, moving averages, and finally MACD, volume and then stochastics. As it relates to the previous discussion with the retailers (RTH) and any bullish move above the $84.50 level, a short-term bear in the OEX, not willing to risk a move to 38.2% retracement, places a stop just above the 459 level or rounding 21-day SMA at 461.50. One thing to be cognizant of early next week is this. I do think that there was some bullish selling in the OEX and shorting ahead of this weekend on terrorist fears (code Orange) and Iraq issues. Should the weekend pass without any events, bears might expect some very short-term bearish speculators to perhaps cover speculative short positions on a move much above today's OEX high or 450. In last night's wrap I showed a point and figure chart of the Dow Diamonds (DIA) $83.53 -0.72%. Let's take a similar "blow up" look at the DIA as we just did in the OEX, with similar "aggressive" and "conservative" trends in place. Depending on YOUR tolerance for risk, trade the trend that you deem appropriate. "Aggressive bears" like the break and close just below "green" upward trend, while "conservative bears" still see a somewhat resilient DJX despite some of the weakness in AA, CAT, GE, HON and UTX today. Dow Diamonds Chart - Daily Interval As we look at the various daily interval bar charts, traders are undoubtedly saying .... "holy smokes, these darned charts all look pretty much the same right now" as it relates to the major market averages. I couldn't argue with that a bit, and is common when a MARKET is "fearful" of something. What tends to happen under more fearful conditions like we're currently experiencing is a more systematic amount of selling by bulls looking to shift some risk away from equities. One subject I want to cover quickly is the placement of stops. Stops are used by traders (bullish or bearish) to control risk in their account. As such, every trader has their own tolerance for risk and stops can be placed accordingly. In last night's wrap, I showed a chart of the DIA on the point and figure chart. Today's action would have a p/f chartist simply drawing in an "O" (supply) just under the current column of O at $83. The first sign of "meaningful" strength for the DIA would be a trade at $88 on the point and figure chart, which would generate a new "buy signal" and negate the current bearish vertical count of $74. Now, some trader's may say "there's no way I'm going to risk a move to $88 before stopping out, especially since I shorted the DIA at $85!" That's fine, and based on a trader's risk tolerance, they could well turn to the above bar chart and begin looking at moving averages or levels of resistance, that if broken would take them out of a bearish trade. Traders that may have been only establishing partial position shorts (1/4 or 1/2) as the DIA has not yet broken its bullish support trend on it point and figure chart, and waivers at both aggressive and conservative trends on the bar chart above, may have in essence limited some risk in their accounts as apposed to traders that currently have full positions on. As such, "true" bullishness in the DIA begins with the point and figure chart and a trade at $88 with a potential profit potential from the bearish vertical count at $74. A trader combining the bar chart can perhaps "limit risk" in his/her bearish trade with a stop just above the 50-day MA, 21- day MA or even Wednesday's high. It's really up to the individual trader and based on his/her own risk/reward profile. Sometimes, I find it useful to "trade places" with a bull, if I'm holding a bearish trade in a stock or index. For example, let's imagine that you shorted the DIA at $85.00 Thursday morning after reading a compelling index trader's wrap the previous night. Now switch places and put yourself long the DIA at $85, and holding long at $83.53. What are you thinking right now? I'm probably thinking "ugh!... I'm glad the economic data had retail sales rather strong today, but I just don't know if WMT and HD have enough umph to get the DIA above the $88.00 level and back on a p/f buy signal, let alone get me above the crisscrossing downward trend and horizontal resistance on the bar chart at $88.70. All this Iraq and "code orange" stuff seems to have buyers kind of sitting on the sidelines. Maybe if I can get a rally back near the 50-day or 21-day MA's, I should maybe sit things out too. But a break much below $82, then I'd better give up, stop out, as the spouse is already a little mad after I held a full position long in Cisco (CSCO) from $50." NASDAQ-100 Tracking Stock (QQQ) - 60-min./Daily Interval Here's a comparison chart of the QQQ, with the hourly interval chart on the left, and a daily interval chart on the right. In my opinion, the chart looks a little "neutral" currently as the 60-minute chart on the left looks as if a the possibility of some bullishness to the $23.50 level could take place early next week, depending on how things go over the weekend. However, we do find some correlative resistance in the QQQ near the $24 level. The QQQ has become increasingly "difficult" and harder to analyze as there are a lot of "garbage" stocks in the group that trade under $5.00, and on any given day, these now smaller stocks and 10% gains or losses can spark some unpredictable results as bullish and bearish trader may see a 10% move in a component and reality sets in on the volatility that can take place in a "like stock" they're trading and a move in then influenced. As such, traders need to live with some volatility and give the QQQ some room to move. Currently, a very short-term upward trend anchored from the August 5th low of $21.30 and attached to the September 5th relative of $21.93 is what stands between a bear and an initial bearish target of $21.35. Note the DIVERGENCE between the stochastics on the 60-minute and Daily Interval chart. I'd interpret the 60-minute as hinting at an "overbought" condition near $23.50, which would have the QQQ filling it's Thursday morning gap lower (gaps are similar to an area void of supply near-term). Meanwhile the Daily Interval chart has stochastic hinting lower with a possible test of upward trend. Note though, how the daily chart and stochastics reached "oversold" levels on August 28th when the QQQ traded down to $23.83, the QQQ then traded rather sideways the next two sessions, then fell lower again to the $22.00 level over the next three days. On a side note If traders or investors ever think there aren't some "perma bulls" in the market, then here's some comments from Bernstein regarding "exceptional value" that exists in the market. As reported by Briefing.com at 09:13 AM EST, before the market open. Bernstein says that net loss carry forwards represent significant real shareholder value for some network equipment companies. Net loss carried forwards (NLCFs) cannot be recognized until they are no longer expected to generate future losses, but the value is high as they will be used to offset future tax liabilities. Lucent (LU) has more than $7 billion to offset tax liability and in unlikely to pay cash tax for the next 7 years, which is worth $0.44 to LU; value also significant for PALM, NT, and COMS. Hmmmmm.... LU trading $1.26, PALM $0.80, NT $0.95 and COMS $4.92. Folks... as an old broker during the hay days of the late 90's and early 2000, I'll tell you what I told a client regarding paying taxes (on capital gains, income, whatever). It does little good to NOT pay taxes on a gain, when the alternative could be seeing profits slip away and then turn into a loss, especially when the sector's bullish % is overbought and the stock you're long begins giving "sell signals." My grandfather once told me that when you're paying taxes, it means you're making money. When you're not paying taxes, it means you're not making money. In essence, TAXES alone should never be the primary criteria in an investment decision. For any investment firm to say there is "value" in any company simply because it has NLCFs is rather remarkable. If you ever wondered why the government did away with individuals being able to write off their credit card debt interest payment, or interest on car loans, it was because some Americans actually believed that building up euphoric levels of debt was "OK" because the interest paid was tax deductible. These comments by Bernstein came before the market opened for trading. The MARKET responded to Bernstein and flushed Lucent (NYSE:LU) $1.26 -23.6% to a new 52-week low. Oh. At 10:51 AM EST, S&P cut Lucent's corporate credit to B, so I'm thinking they didn't see any exceptional value in the NLCFs either. I wonder what Enron's and WorlCom's NLCFs were/are worth? Jeff Bailey ------------------------------------------------------------ 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 ************** Failed Target The QQQ call play from two weeks ago ran into trouble when the post 9/11 relief rally failed to appear. All hope is not yet lost. If you still have your puts as insurance then you can continue the play for another week. Since the calls are for October there is still five more weeks. Granted those are not usually up weeks but then anything is possible. The calls, which cost us an average of $.98 cents traded at $1.60 on Wednesday. There was plenty of time to get out for a nice profit if a trader realized the market was going to tank. I don't expect that anyone took that exit however. We are all greedy and our expectations were for higher numbers after the initial post bounce sell off. The trouble was there was no secondary bounce. I suggest exiting the play, at least the call side on any bounce and for those who have the put insurance still open I would ride it down to the wire on Friday. Look for a nice dip to inflate your premiums and exit. ****************** CTSH - Cognizant This directional play from last week rocked to over $64 on Monday and then went sideways while the market was trending down the last three days. It is holding at $62 and I am looking at that level as an entry point. However, just like helium balloons are forced down in a down elevator, good stocks go down in a bad market. If the market drops I would watch for a lower low in CTSH to get back in. ************************** New Plays ************************** PNRA - Panera Bread - long put This stock has seen a cult following for the last two years but some analysts say it has come too far too fast. Insiders are selling in large amounts and when the CEO was questioned about his sales on CNBC he tripped over his tongue and could hardly complete a sentence. That was two weeks ago on August 29th when it was trading at $30. Some analysts have compared it with Boston Chicken. As long as they keep building stores they can increase sales but once the newness of those stores fades the sales will die. The stock looks like it has formed a perfect head and shoulders. A breakdown below the $25 level could spell a quick drop to $15. There was a volume print of 3,284,307 on Qcharts at 14:48 on Friday just before the bottom fell out. If this is correct it would be well over 10% of the outstanding 26 million shares. However I could not find it on a time and sales report and the total volume for the day is showing to be 1.36 million shares. Either way somebody was selling in quantity at the close. As a gambler I like the September $25 put for $1.00. A quick drop from the H&S pattern could double or triple it in a couple days. However, any bounce or even $1.00 for a couple days would make it worthless. The safest option is the Nov $25 put for $2.70 with plenty of time to run or even the $22.50 for $1.75. If the target comes to pass either will be a home run. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Not So Fast by Steven Price Divergence. This is the key word for today. After the markets had been moving in unison, we saw the techs higher (not very often that I get to say that), the S&P 500 higher, but the Dow lower. The Nasdaq Composite finished up 11.72 to close at 1291.40, while the NDX tacked on 8.82 to close at 923.83. The Dow gave up 66.72 to close at 8312.69, while the S&P 500 added 2.90 to close at 889.81. We were actually on the brink of a significant technical breakdown in all four major indices, before today's action threw us a bullish bone. A bearish head and shoulders had been forming in the Dow, Nasdaq, NDX and S&P 500. A neckline break looked as though it was about to occur at the Dow's 50% retracement level of its gains from July 24 to August 22, which is 8303. Lo and behold, the Dow found support at this level once again, after doing so on five straight occasions last week. So while the index was down on the day, the recovery from 8247 was actually somewhat bullish. Maybe bullish isn't the word just yet, but it could have been much worse. A similar phenomena occurred in the NDX and Nasdaq Composite, where the neckline breaks looked certain, only to find buyers committed enough to bring the averages positive on the day. I'd like to think it was due to Adobe's earnings, released last night, which beat the street and sent the stock up $2.32 to $20.77. This would have been the easy explanation and I could have predicted a failure on Monday instead, after the news wore off. However, if that were the case, the Nasdaq would not have dropped 9 points earlier in the day. No, it appears the buyers showed up at a critical level, much like they did in the Dow. What makes the support even more impressive is that it came after warnings from Honeywell (HON) and Lucent (LU). Honeywell lowered estimates, saying, "We are revising our 2002 outlook because it is clear that the broad economic recovery is not materializing." Lucent warned that 4th quarter earnings would come in below expectations citing market softness and uncertainty about consumer spending. Sounds pretty bearish, and yet there were still enough buyers to prevent this technical breakdown. The good news came from the retailers, whose sales rose by 0.8 percent in August. Even excluding auto sales, retail sales rose a better than expected 0.4 percent. This was in contrast to the University of Michigan Consumer Sentiment Index, which fell to 86.2 from 87.6 in August. This was the lowest number since last November. The Current Conditions Index dropped to 95.9 from 98.5 in August and the Expectations Index dropped from 80.6 to 80.0. These are also the lowest readings since November. So why did the buyers come back. That is the $64,000 question and next Tuesday's Cisco earnings will most likely give us the answer. Adobe did say that they saw a rebound in their U.S. business, which is the first time we have heard that in a while. What's more, they cited the education market as a significant reason for that rebound. Schools that are buying new software are most likely purchasing computers as well, and that is a pretty big customer. However, this still amounts to government spending, rather than business spending, and Alan Greenspan is trying to reduce that as I write. Maybe not specifically educational spending, but government spending in general. The main problem for the techs has been lack of IT spending by businesses, and we have yet to hear about an increase in that area. I still have a hard time seeing a rebound, but somebody out there held serve today. I will continue to look for a close under 8300 in the Dow as a very bearish sign for the market. However, I will also trade what I see and right now that is keeping me on the sidelines until I get confirmation. =---------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8312 Moving Averages: (Simple) 10-dma: 8450 50-dma: 8586 200-dma: 9635 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 889 Moving Averages: (Simple) 10-dma: 899 50-dma: 903 200-dma: 1054 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 892 Current : 923 Moving Averages: (Simple) 10-dma: 923 50-dma: 959 200-dma: 1290 ----------------------------------------------------------------- The Retail Index: Consumer spending is alive and well. For the month of August, anyway. We got a 0.8% increase in retail sales this morning, which was above expectations. The index jumped back over the 300 level and is looking at a double top formation. The second top actually traded higher than the first in intraday trading on Wednesday, but closed weakly near its lows. If the sector can take out its recent high of 306.72 and stay there, it could possibly lead a recovery in the broader markets. This is a big "IF," however. It was turned back from this level after August 22nd and is one of the few sectors actually re-testing resistance, rather than support. The index was reformulated earlier in the year, so the 52 week high/low levels are not reflective of current positioning and I have left them out below. 52-week High: n/a 52-week Low : n/a Current : 300 Moving Averages: (Simple) 10-dma: 294 50-dma: 288 200-dma: 329 ----------------------------------------------------------------- Market Volatility The VIX just keeps hanging in there around 40. The head and shoulders neckline test was successful across the board, and it appears that traders are not sure what to make of these levels. Even with 3 days of time decay ahead, premium levels have remained high. The divergence between a sinking Dow and rising Nasdaq hasn't made the picture any clearer, and it will take both indices heading up for several days together to bring the premiums down. CBOE Market Volatility Index (VIX) = 39.31 –1.41 Nasdaq-100 Volatility Index (VXN) = 55.85 –0.59 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.89 397,403 352,949 Equity Only 0.71 298,430 211,055 OEX 1.00 29,293 29,223 QQQ 0.83 34,899 28,821 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 43 + 0 Bull Confirmed NASDAQ-100 34 - 8 Bull Correction DOW 50 - 2 Bull Correction S&P 500 51 - 1 Bear Confirmed S&P 100 46 - 2 Bear Confirmed 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 1.25 10-Day Arms Index 1.41 21-Day Arms Index 1.33 55-Day Arms Index 1.31 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 they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1523 1168 NASDAQ 1743 1404 New Highs New Lows NYSE 13 58 NASDAQ 27 108 Volume (in millions) NYSE 1,487 NASDAQ 1,248 ----------------------------------------------------------------- Commitments Of Traders Report: 09/10/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials reduced long positions and added to shorts, reflecting an increase of almost 8,000 short contracts overall. Small traders increased both sides of the equation considerably, leaning long by an extra 3,000 contracts. Commercials Long Short Net % Of OI 08/20/02 422,100 469,556 (47,456) (5.3%) 08/27/02 425,982 469,087 (43,105) (4.8%) 09/03/02 431,755 468,529 (36,774) (4.1%) 09/10/02 426,230 470,537 (44,307) (5.0%) 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 08/20/02 156,974 69,071 87,903 38.9% 08/27/02 153,152 72,408 80,744 35.8% 09/03/02 158,262 80,130 78,132 32.8% 09/10/02 166,696 85,259 81,437 32.3% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials added to both long and short positions, for a net reduction of 1,000 contracts to the short positions. Small traders also added to both sides, netting out about the same as they finished the last period. Commercials Long Short Net % of OI 08/20/02 41,876 49,461 (7,585) ( 8.3%) 08/27/02 45,354 50,634 (5,280) ( 5.5%) 09/03/02 46,712 53,287 (6,575) ( 6.6%) 09/10/02 53,309 58,745 (5,436) ( 4.9%) 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 08/20/02 11,321 7,980 3,341 17.3% 08/27/02 10,156 8,040 2,116 11.6% 09/03/02 11,150 7,720 3,430 18.2% 09/10/02 14,024 10,494 3,530 14.4% 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 slightly to both sides, leaving their long contract positions slightly higher by about 800 contracts. Small traders beefed up both sides, with an extra 1,000 short contracts overall. Commercials Long Short Net % of OI 08/20/02 21,160 15,349 5,811 15.9% 08/27/02 21,023 14,328 6,695 18.9% 09/03/02 21,161 13,792 7,369 21.1% 09/10/02 22,946 14,936 8,010 21.1% 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 08/20/02 6,216 8,163 (1,947) (13.5%) 08/27/02 6,825 8,438 (1,613) (10.6%) 09/03/02 6,395 7,966 (1,571) (10.9%) 09/10/02 7,568 10,129 (2,561) (14.5%) 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 *************** The Bigger Picture by Steven Price Pnra seems to be at a juncture at 25.13. It appears it is ready to drop another leg to 20.00 my question is if I am reading the charts correctly for such at drop It appears to have some support at 24.70 ? PNRA - Panera Bread - $24.98 I received the above email regarding Panera Bread (PNRA), which has been the darling of many analysts recently. The reader correctly identifies some pivotal support in the stock in assessing it as a short candidate. The daily chart on PNRA shows the stock testing a pivotal level, with support just below $24. The stock has crossed below its 200 day moving average, and the last time this happened in July the stock gave up about $5 to where it is trading right now. The recent drop is actually more convincing. It has come with a series of lower lows, rather than one big market sympathy drop. It has also come after earnings were released and analysts have had time to digest the future profit potential. The same store sales and earnings, released at the end of August, were actually pretty good. However, it has not been enough to keep the yeast rising. Panera Bread Daily Chart A look at the longer-term charts actually shows an even more significant rollover. When a trader is considering shorting a stock, he/she wants to see a couple of things. Not only should the daily and intraday charts show weakness, but it helps if the long-term chart is showing weakness as well. A look at the weekly chart shows an even smoother rollover from highs around $35. The blue line is the same line from the daily chart, and you can see the significance of this level in the broader picture. While a $20 target can be used on a break below $24, it is derived from the last level of resistance on the way up. This signals support because there had to be enough buyers at that level to overcome quite a bit of selling pressure. The next real level of support on a downtrend is $15. Panera Bread Weekly Chart I have included the monthly chart as well, just to demonstrate how crucial these levels are in the big picture. The bottom line is that all of the short and long term charts are painting the same picture. A break below the recent low of $23.96 on July 24 and a close below this level, look like an excellent short opportunity in PNRA. PNRA Monthly Chart CSCO - Cisco Systems - $13.05 Hi, Any comments on where to open a long or short position on CSCO would be appreciated. Thanks, Ben Cisco will be on a lot of traders' minds this week as they get set for earnings on Tuesday. The stock has been mired in a range between $11.50 and $15 since June. The current price of $13.05 puts it close to the center of this range and provides little directional guidance. The last time CSCO released earnings there was some bullish action leading up to the release and then not much happened afterward that would provide profits for an options trader. I responded to numerous emails about buying and selling straddles on the stock. I thought they were too cheap to take a short chance on, but that the long move had already occurred and I didn't like the long straddle. Sometimes the best trades are the ones that you don't make, and this turned out to be the case last quarter. A look at Cisco's chart shows a couple of ranges in which to trade. The problem with trading the stock from this level is that the next buy point doesn't come until the stock breaks $14, the point of its last resistance. Just above that is $15 resistance, which doesn't provide room for a lot of profit, especially with time decay to fight in the calls. However, if we see the same bullish move up to $15 prior to earnings, a rollover from that level may be the best bet. The best ranges seem to be a bounce from $11.50 to $15, a break to the upside from $15 to 17.50, the move from $17.50 to $20, and then up to $22 from there. Because we are right in the middle of the broadest range, I would look for disappointing earnings, or accompanying statements, to provide the drop needed for the $11.50 to $15 range from the bottom, or for good news to drive the stock up to $15 and then look for a rollover back down to $11.50. Chart of CSCO Please send your questions and suggestions to: Contact Support ************* COMING EVENTS ************* ================================================== Market Watch for the week of September 16th ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ AAUK Anglo American PLC Tue, Sep 10 -----N/A----- N/A BBY Best Buy Tue, Sep 17 Before the Bell 0.18 BMET Biomet Tue, Sep 17 Before the Bell 0.24 CLL Celltech Group Plc Tue, Sep 17 -----N/A------ N/A CPRT Copart Tue, Sep 17 After the Bell 0.17 IBC Interstate Bakeries Tue, Sep 17 -----N/A------ 0.58 KR Kroger Tue, Sep 17 -----N/A------ 0.37 ORCL Oracle Tue, Sep 17 After the Bell 0.07 PIR Pier 1 Imports Tue, Sep 17 Before the Bell 0.23 ----------------------- WEDNESDAY ----------------------------- BSC Bear Stearns Wed, Sep 18 Before the Bell 1.21 CC Circuit City Stores Wed, Sep 18 -----N/A------ 0.00 DRI Darden Restaurants Wed, Sep 18 -----N/A------ 0.39 E ENI SpA Wed, Sep 18 -----N/A------ N/A GIS General Mills Wed, Sep 18 Before the Bell 0.53 MLHR Herman Miller Wed, Sep 18 After the Bell 0.03 KBH KB Home Wed, Sep 18 Before the Bell 1.67 LEN Lennar Wed, Sep 18 Before the Bell 1.78 NKE Nike Wed, Sep 18 Before the Bell 0.80 WOR Worthington Indstrs Wed, Sep 18 Before the Bell 0.24 ------------------------- THURSDAY ----------------------------- COMS 3Com Thu, Sep 19 After the Bell -0.03 CTAS Cintas Thu, Sep 19 -----N/A------ 0.36 CAG ConAgra Foods, Inc. Thu, Sep 19 Before the Bell 0.40 FDX FedEx Corp Thu, Sep 19 08:00 am ET 0.49 JBL Jabil Circuit Thu, Sep 19 After the Bell 0.14 MDZ MDS Thu, Sep 19 Before the Bell 0.18 PAYX Paychex Thu, Sep 19 Before the Bell 0.19 TEK Tektronix Thu, Sep 19 After the Bell 0.07 ------------------------- FRIDAY ------------------------------- CCL Carnival Fri, Sep 20 -----N/A------ 0.77 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable BLUD Immucor Inc. 3:2 09/13 09/16 DORL Doral Financial 3:2 09/14 09/16 -------------------------- Economic Reports This Week -------------------------- Let this market watch help to excavate the ruins of the bear market over the next week. ============================================================== -For- Monday, 09/16/02 ---------------- Business Inventories(BB)Jul Forecast: 0.2% Previous: 0.2% Tuesday, 09/17/02 ----------------- Industral Production(DM)Aug Forecast: 0.2% Previous: 0.2% Capacity Utilization(DM)Aug Forecast: 76.2% Previous: 76.1% Wednesday, 09/18/02 ------------------- CPI (BB) Aug Forecast: 0.2% Previous: 0.1% Core CPI (BB) Aug Forecast: 0.2% Previous: 0.2% Trade Balance (BB) Jul Forecast:-$37.0B Previous: -$37.2B Thursday, 09/19/02 ------------------ Initial Claims (BB) 09/14 Forecast: N/A Previous: 426K Housing Starts (BB) Aug Forecast: 1.650M Previous: 1.649M Building Permits (BB) Aug Forecast: 1.690M Previous: 1.712M Current Account (DM) Sep Forecast: 2.5 Previous: -3.1 Friday, 09/20/02 ---------------- Treasury Budget (AB) Aug Forecast:-$55.0B Previous: -$80.0B 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 09-15-2002 Sunday 2 of 5 In Section Two: Stock Picks: SUNW, GNSS, CSCO Daily Results Call Play of the Day: INVN Put Play of the Day: FDX Dropped Calls: CVG, OMC Dropped Puts: AA, EXC *********** STOCK PICKS *********** The Sun Will Come Out Tomorrow Stock Pick: SUNW - Sun Microsystems, Inc - Close: $3.10 Strategy: Long stock with put-option insurance We're not talking about the song sung by little orphan Annie. Reading some of the recent articles on SUNW you might picture its enthusiastic CEO Scott McNealy trying to lift the spirits of his employees and the company's stock price. We hope Scott has been practicing because his company's earnings news have been hitting some sour notes with investors. There is no mistaking that SUNW has been hit hard in the tech downturn but it is still fighting to gain market share. They are the leading high-end server maker. Unfortunately for SUNW they run with a tough crowd. Their main competitors are IBM, HPQ and DELL but they occupy a niche that sets them apart. Despite the precipitous drop in their share price from its highs, SUNW's market cap is still above $10 billion and they are currently selling at less than 1x sales with over $6 billion in cash in the bank. They are not in any danger of going under but they need to re-convince Wall Street that they can compete. They were considered fairly valued last year at 10x revenues which for the year ended 6/30/02 were $12.5 billion. Recent news in late August had the share price dropping again when SUNW lowered their revenue forecasts for their fiscal Q1. Evidently corporate America is still not in the mood to spend money on their I.T. budgets. This has brought the beleaguered share price extremely close to where many put the company's book value at $3.01 per share. Yet not everyone agrees with this number. A Salomon Smith Barney analyst has put a $2.00 price target on the company's stock price even while putting his own tangible book value for the company at $2.29. In spite of all this negativity we believe the recent descent in the share price, so close to book value (where ever you want to value it) makes for an attractive investment. SUNW is already trying to convince analysts that it will be able to snare new customers in new markets through new sales methods. We all know that the economic recession won't last forever and tech spending will come back. If you believe McNealy then SUNW will be stronger than ever when the economy returns. Given the current share price, we don't see a lot of risk but even if Scott's wrong our strategy should keep any potential losses to an absolute minimum. SUNW's high share price in 2000 was $65. While we do not expect them to reach that again any time soon it is not unreasonable to assume they could get back into double-digit territory over the next 24-36 months. The play as we see it is to go long SUNW stock at our target of $3.00 and go long one contract of the Jan-2003 $2.50-strike puts SUQ-MZ for each 100 shares you are long. As of Friday these puts settled at $0.45 (ask). There is no requirement to go long the put but it does prevent all but a very minimal loss should something unexpected happen to SUNW. We like to think of it as insurance on our investment. Here is how we see the possible outcomes for this play: Option 1: If SUNW is not above $4 by the end of January 2nd, 2003 - close both positions and exit the play. Option 2: If SUNW is below $3 on Jan-2nd then you have the option of closing the put for a potential profit and lowering your basis in the long stock play by the amount of the put premium received or closing both positions and exiting the play. Option 3: If SUNW is above $4.00 by Jan-2nd then close the put position for any remaining premium and set a stop loss on SUNW at your entry point of $3.00 plus any short fall on the put premium. We would aim to keep the $3.50 level our max ($3.00 per share plus 50 cents for the option). Weekly Chart of SUNW: --- New Signs of Hope Stock Pick: GNSS - Genesis Microchip, Inc - Close: $9.30 Strategy: Long stock with put-option insurance In a year fraught with bad news spreading across the board for semiconductor companies we might be seeing the very beginning of a potential turnaround - at least for this company. Genesis Microchip (GNSS) is a leading producer for chips in the digital video business. Just think big-screen TV's and flat- panel monitors and you'll know where to find chips from GNSS. 2001 was a tough year on Wall Street but demand for these products were a boon for shares of GNSS. The stock went from $9.25 to $66 in 2001. Unfortunately after the holiday shopping season was over investors were quick to take some money off the table. And boy did they ever! Shares of GNSS sank like a roller coaster that had just crossed the big peak at the start of the ride. The company that had appeared immune to the economic recession was suddenly announcing lower revenue estimates for their coming quarters. The last six months have been very tough on the semiconductor sector. Recently it seems that every brokerage house with a research department has downgraded the group and if that wasn't enough some of them seem to reiterate their bearish stance any time the SOX started to rally. The good news is that GNSS may be able escape the downward pressure of the falling SOX index, or better yet, maybe it will help lead the way higher for when the group does recover. This Thursday (Sept. 12th) after the close, GNSS announced that they would actually beat current Wall Street estimates. What's ironic is that GNSS was the one to lower these estimates just a few months ago but that's all part of the game. In the company's recent conference call, the CEO James Donegan told analysts that the company would bring in revenues of $45M to $46M for the quarter ending in September. This is about $3M more than the latest forecasts in July. The company expects to end the quarter with a 25% to 28% sequential rise in total shipments. The positive developments were due to a decline in previous inventory from buyers and the fact that prices for flat-panel displays had continued to drop making them more attractive to consumers. Wall Street applauded the news with an 8.5% gain in the stock price on Friday and a number of broker upgrades based on the new revenue numbers. This really shouldn't be a surprise considering that we are in the back-to-school shopping season and the holidays are just around the corner. When money managers decide to step back into the tech arena GNSS will probably be a strong candidate. The stock is trading below book value of $12.15 per share. Plus, shares of GNSS are currently trading at 1.2x sales with a P/E of less than 15. Chart readers will also be encouraged to note that GNSS appears to be building a reverse-head-and-shoulders pattern and is quickly approaching the neckline. An upside breakout would not only breakthrough the neckline of the pattern but also through the bottom of its gap-down window from its June drop. If this were to occur we could see a potential rush of short-covering. These potential technical developments may be good news for short-term traders but we are interested in suggesting a position before the breakout occurs. Given what could be the beginning of a recovery for GNSS we would not be surprised to see shares of this stock trading between $20 and $30 in the next 24 to 36 months if not sooner. To capture this move and keep our risk at a minimum we offer two potential strategies and both involve going long the stock and buying a protective put to reduce risk. Option 1: Shares of GNSS closed at $9.30 on Friday. One way to play this is to go long the stock and for every 100 shares you buy also purchase a March 2003 $7.50 put (QFE-OU). As of Friday, these options were $1.55 ask and we have six months to see if the play works out. The breakeven point would be $10.85 for the stock price. When March 1st, 2003 rolls around, if GNSS is below $10.85 then sell both positions. If GNSS is above $10.85, then close the put and place your stop loss on the stock at $10.85 or higher or wherever you believe is appropriate based on the stock's current value. Option 2: The second alteration on this strategy would be to buy the March 2003 $10.00 put (QFE-OB) for every 100 shares of stock you purchase. These were trading around $2.95 as of Friday's close and might seem a bit expensive but the December 10's were $2.30. With the March contracts we would have six months to see if the play progressed as planned but the breakeven point, based on Friday's numbers, would be $12.25. Of course if GNSS is significantly below the $10 mark the put is likely to be more valuable with a higher delta than the $7.50 strikes. If GNSS is above $12.25 then close the put and adjust your stop loss on the stock accordingly. Chart of GNSS: --- No Competition Stock Pick: CSCO - Cisco Systems - $13.05 Strategy: Long stock with put insurance Cisco Systems has been hit hard in the tech downturn but is continuing to gain market share. They are the leading computer Networking firm and have continued to take market share back from many of the upstarts in the sector like JNPR and SCMR. Their main competitors were LU and NT, but clearly with NT trading for less than $1.00 and LU likely to join it in the very near future, CSCO really has no competition. Their market cap is currently $95 billion and they are currently selling at just over 3x sales with over $12 billion in cash in the bank and growing quarterly. Most importantly, the company continues to generate actual earnings. Their high share price in 2000 was above $80. While we do not expect them to reach that again in the near future it is reasonable to assume they could get back to $22.00 over the next 24-36 months. That would make for a nice percentage return. Of course in order to start moving significantly higher, CSCO is going to need to be able to show evidence of improvement in the IT spending environment, which has proved quite elusive over the past couple years. Besides the fact that it appears to be building strong support in the $11-12 range, it is hard to go wrong with an industry leader, with well-respected management and a strong balance sheet. The play as we see it is to go long CSCO stock at our target of $12.00-13.00 and go long one contract of the Jan-2003 puts CYQ-MV at $1.65 for each 100 shares you are long. There is no requirement to go long the put but it does prevent all but a very minimal loss should something unexpected happen to CSCO. Option 1: If CSCO is not above $15 by Jan-2nd close both positions and exit the play. Option 2: If CSCO is below $12 on Jan-2nd then you have the option of closing the put for a slight profit and lowering your basis in the long stock play by the amount of the put premium received or closing both positions and exiting the play. Option 3: If CSCO is above $15.00 by Jan-2nd then close the put position for any remaining premium and set a stop loss on SUNW at your entry point of $12.00-13.00 plus any short fall on the put premium. ($13.50 max) Chart of Cisco Systems, Weekly ------------------------------------------------------------ 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 ------------------------------------------------------------ *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AZO 74.42 1.91 0.45 -1.05 –2.28 1.62 New, pullback CVG 18.89 0.56 0.65 0.04 -0.45 0.99 Drop, booooring INVN 35.76 -0.47 0.07 0.97 0.91 3.63 New, thru resistance LLL 56.98 1.99 0.11 0.17 –0.11 4.13 going strong MSFT 47.91 -1.44 1.09 -1.75 –1.39 0.66 held up OMC 61.69 2.04 1.20 0.89 –0.13 1.99 Drop, profit TRMS 46.20 -1.05 0.17 -1.08 –0.84 0.41 found support PUTS AA 21.99 0.71 0.46 -0.28 –1.10 -0.60 Drop, profit AET 39.25 0.19 -0.57 -0.17 –1.75 -2.39 still broken AGN 53.05 -0.61 -1.28 -1.21 –0.14 -4.00 keeps falling AVY 60.00 -0.39 0.25 -0.31 –0.67 -2.00 New, below support CMA 53.50 0.43 -1.53 -1.20 –2.00 -4.30 weak rebound CTX 49.80 1.59 -0.53 -0.53 –2.10 0.00 foreclosed EXC 43.86 0.58 -0.22 -0.12 –1.62 -0.54 Drop, sideways FDX 44.50 -0.03 -0.40 -0.50 –0.83 -1.93 New, breakdown GE 27.05 0.63 -0.12 -0.36 –1.00 -1.10 leading lower MTG 55.23 0.69 -1.09 -1.10 –2.07 -3.07 still heavy TXU 44.30 0.09 -1.19 -0.55 –1.47 -1.50 new entry point ------------------------------------------------------------ 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 ------------------------------------------------------------ ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* INVN – InVision Technologies $35.76 (+3.18 last week) See details in play list Put Play of the Day: ******************** FDX – FedEx Corporation $44.50 (-2.01 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 ^^^^^ CVG $18.89 (+0.95) Despite the fact that our CVG play managed to dodge the weakness in the broad markets last week, we're dropping it due to a lack of interest. After testing the $19 level on several occasions, it is clear the bulls don't have enough enthusiasm to get the job done, and with the deterioration in the broad market, we don't want to get caught in a selloff. There are better plays available and there is no sense having capital tied up in a play that just isn't moving. --- OMC $61.69 (+1.69) OMC treated us right last week, moving up from the $61 level almost to $65, before the broad market weakness dragged it back to earth. In order to preserve gains that were on the table, we tightened our stop to $62 last night and it seems like that was a prudent move. The stock fell sharply at the open on Friday and was never really able to stage a meaningful rebound going into the close. With our violated stop and daily oscillators rolling over from overbought, we're dropping the play this weekend to make room for stronger candidates. Use any sort of rebound on Monday to exit open positions at a better level. PUTS ^^^^ AA $21.99 -0.78 (-0.60 for the week) Short Play Alcoa has behaved admirably as the sector has suffered from oversupply, and falling prices. The loss of China as a customer, which instead became a competitor, has also beaten up the sector. We are removing this successful play to make room for others with bigger profit potential. For those readers already in the play, a stop loss of $23.75, just above yesterday's high looks good. We will no longer be updating the play, so consider it closed for a profit. However, if you wish to stay short AA, we have no argument. --- EXC $43.86 (-0.54) Thursday's price action had EXC looking like it would finally break down under the $44 support level. While the stock did break fractionally below that level, we think it should have been weaker, given the selling in the broad market. EXC remains mired in the fairly tight trading range of the past 2 weeks, and rather than spend any more time wishing it would break down, we're going to drop it this weekend. Use any weakness on Monday to exit open positions and look to deploy the cash in higher-odds plays. *********** 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. ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. 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The Option Investor Newsletter Sunday 09-15-2002 Sunday 3 of 5 In Section Three: New Calls: AZO, INVN Current Calls: MSFT, TRMS, LLL New Puts: AVY, FDX ------------------------------------------------------------ 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 ------------------------------------------------------------ ************** NEW CALL PLAYS ************** AZO - Autozone - $74.42 +1.34 (+1.13 for the week) Company Summary: AutoZone sells auto and light truck parts, chemicals and accessories through 3,052 AutoZone stores in 44 states plus the District of Columbia in the U.S. and 27 AutoZone stores in Mexico and also sells the ALLDATA brand automotive diagnostic and repair software. On the Web, AutoZone sells diagnostic and repair information through alldatadiy.com, and auto and light truck parts through AutoZone.com. (source: company release) AZO has been hanging out on the OI watch list looking for a good entry point. With each higher high and higher low, we've tried to avoid buying the top. The most recent technical breakout saw a triple top point and figure breakout from a bullish wedge formation. This wedge was the second in a row on the point and figure, and now the stock appears to be forming a third. The consistency in the pattern is quite convincing as the last two wedges were formed with a three box up/four box down pullback, before an extended run to the upside. This latest pattern showed only a three box reversal before the recent bounce, although a trade of $75 will be needed to complete the PnF reversal. The ascending bullish support line on the PnF chart has also served as support on the last three pullbacks, lending another element to the consistency in the pattern. The triple top had us looking for a pullback to support above the 200-dma as a long entry. We got that pullback on Wednesday and Thursday. We also got the show of support on Friday, as AZO rebounded just above the 200- dma, and closing near its high of the day. The series of bull flags has formed a larger ascending wedge, which had flattened out at $75.60. The latest breakout pushed through that flat-top. The rising trend line joining the lows from July, August and September has also shown remarkable consistency, and is now above the 50-dma and 200-dma. We will look for this trend line as support for the play. The management of the company also seems to feel this level is a good point to go long, as it re-purchased $300 million worth of stock when it was at this level in July. That was on the way down with the rest of the broad market swoon in July. The recovery, however, has shown a consistent series of higher highs and higher lows, resulting in the latest pullback referenced above. We like the current level for long entry on AZO, with an initial target of $81, where there was resistance in June. If the stock can break through that level, it will see all-time highs and we're not sure where it might stop, but the bullish vertical count of $91 could be an indication. We will place our stop loss at $71.00, just below recent support and the 200-dma. *** September Contracts Expire In 1 week *** BUY CALL SEP-70 AZO-IN OI= 2287 at $4.90 SL=2.50 BUY CALL SEP-75 AZO-IO OI= 2537 at $1.35 SL=0.75 BUY CALL OCT-70 AZO-JN OI= 203 at $7.20 SL=3.60 BUY CALL OCT-75 AZO-IO OI= 480 at $4.00 SL=2.00 Average Daily Volume = 556 K --- INVN – InVision Technologies $35.76 (+3.18 last week) Company Summary: InVision Technologies is a provider of FAA-certified explosives detection systems (EDSs) used at airports for screening checked passenger baggage. The company's EDS products are based on advanced computed tomography (CT), which is the only technology for explosives detection that has met the FAA certification standards. INVN was the first manufacturer and is one of only two whose EDS products have been certified by the FAA for screening baggage. Through the end of 2001, the company had shipped 18 EDS units for installation at United States airports and 103 units for installation in airports outside of the United States. Why We Like It: Quick! Name just one NASDAQ-listed stock that is up more than 1000% over the past 12 months. It doesn't take a rocket scientist to know that the stock couldn't possibly have come out of the Telecom or IT sectors. Following the attacks of last September, shares of INVN launched out of a base near the $3 level and by early March had reached as high as $50 as momentum investors gobbled up shares in anticipation of rapid growth in the explosives-detection market. After being pulled lower last spring, the stock built another base in the $20-25 area and since then has been steadily working higher. The PnF chart is a thing of beauty, as INVN has generated one Buy signal after another since late May. Buying volume ticked up significantly over the past 2 days (nearly triple the ADV on Friday) as INVN pushed through the $35 resistance level and generating a fresh Buy signal on the PnF chart. Daily Stochastics are in steep ascent here, and even though they are entering overbought territory, this has the looks of a powerful momentum move. While we'd prefer to get a pullback to the $34 intraday support level ($33.25 would be even better), we may just have to enter on continued price strength. If looking for a momentum entry, wait for INVN to power through the $37 resistance on continued heavy volume. Set stops at $32.50, as a drop under that level would invalidate last week's breakout move. *** September contracts expire next week *** BUY CALL SEP-35 FQQ-IG OI=4585 at $2.05 SL=1.00 BUY CALL OCT-35*FQQ-JG OI=2781 at $4.10 SL=2.50 BUY CALL OCT-40 FQQ-JH OI=1951 at $1.75 SL=1.00 Average Daily Volume = 917 K ------------------------------------------------------------ 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 ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** MSFT - Microsoft - $47.91 +0.76 (-1.21 for the week) Company Summary: Founded in 1975, Microsoft is the worldwide leader in software, services and Internet technologies for personal and business computing. The company offers a wide range of products and services designed to empower people through great software -- any time, any place and on any device (source: company release) Why We Like It: Microsoft rebounded from its PnF bullish support line today, the same way it has on each of the previous 5 times it tested that line. A trade of $46 would be needed to break this trend and this would coincide with our stop loss. Adobe's earnings surprise was positive for the software sector and Microsoft is the biggest fish in the pond. We like the show of support and the potential upside profit, making for a good risk/reward scenario. With Microsoft still selling the XP operating system at a record clip and a new OS on the way, the long-term prospects still look great for the company. With Cisco's earnings coming out on Tuesday, anything positive can give the techs a real boost. Today's rally into the close by both the Nasdaq and NDX looks bullish, as the indices approached a head and shoulders breakdown and found support. A continued rally on Monday should keep MSFT heading in the right direction. We will leave our stop loss at $46, where the stock has strong support. New entries should look for a trade above today's high of $48.26. *** September Contracts Expire In Less Than 2 Weeks *** BUY CALL SEP-45 MQF-II OI= 13422 at $3.40 SL=1.70 BUY CALL SEP-47.50 MQF-IW OI= 15796 at $1.50 SL=0.75 BUY CALL OCT-45 MQF-JI OI= 5825 at $4.90 SL=2.50 BUY CALL SEP-47.50 MQF-JW OI= 7211 at $3.20 SL=1.60 Average Daily Volume = 45.8 mil --- TRMS - Trimeris - $46.20 +0.82 (+0.90 for the week) Company Summary: Trimeris is a development stage, biopharmaceutical company engaged in the discovery and development of novel therapeutic agents that block viral infection by inhibiting viral fusion with host cells. Trimeris' lead product candidate, Fuzeon(TM), which inhibits fusion of the human immunodeficiency virus (HIV) with host cells, is currently in Phase III clinical trials and has received fast track designation from the FDA. Trimeris' second fusion inhibitor product candidate, T-1249, has also received fast track designation from the FDA and is in Phase I/II clinical trials. Why We Like It: Trimeris showed a nice bounce at $45.00 support, trading down to $45.01 before finding buyers. It also found support from the 50- dma of $44.77 just below. The recent dip appears to have found a higher low above the recent consolidation between $43 and $45. While the Biotech Index (BTK.X) has rolled over from its 50-dma, TRMS instead used it as a springboard. The company will be presenting data at the end of the month that shows great tolerance of its HIV drug Fuzeon, previously known as T-20, which will be the first drug of its kind to hit the market. This type of drug, known as a fusion inhibitor, prevents HIV from entering healthy cells, as opposed to other HIV drugs which interrupt the replication of the virus once it is inside. There is incredible demand for the product, as patients who have become resistant to other therapies now have somewhere else to turn. In fact the demand is outstripping supply right now. Of course at $15,000 per patient per year, I'm sure production will be ramped up to meet supply. In addition to the data on Fuzeon, they will also be presenting evidence of the effectiveness of another drug in the pipeline, designated T-1249. The conference they are presenting at (ICAAC) is one of the largest of its kind and attracts many analysts looking for the next hot product. The stock should get a big boost at that point and the technicals look good for a run to $50 before then. *** September Contracts Expire In 1 week *** BUY CALL SEP-40 RQM-IH OI= 35 at $6.70 SL=3.50 BUY CALL SEP-45*RQM-II OI= 129 at $2.25 SL=1.10 BUY CALL OCT-40 RQM-JH OI= 337 at $7.90 SL=4.00 BUY CALL OCT-45 RQM-JI OI= 218 at $4.40 SL=2.20 Average Daily Volume = 556 K --- LLL - L-3 Communications Holdings $5.98 (+4.14 last week) Company Summary: As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Why We Like It: Traders looking for a robust call play in this topsy-turvy market would have a hard time doing better than our LLL play. The Defense sector (DFI.X) has been consolidating its recent advance near the $575 level and with the continuing war rhetoric coming out of Washington, could be setting up for another leg higher. LLL hasn't been content to wait for the DFI index, and has been stubbornly powering higher over the past week. After stumbling a bit over the past few days with the $55-56 resistance level, it looks like the stock is ready to push even higher. Even with the broad market weakness on Friday, the stock dipped right to the $55 level before reversing and heading higher throughout the day, closing very close to the high of the day. We were looking for an entry on a pullback to the $55 level, and the market conveniently stepped forward and gave it to us, just like we asked. The next overhead resistance of significance appears to be $58.50, followed by $60. A pullback early next week can be used for new entries, so long as the bounce comes above the $55 level. If looking to trade a breakout, a move through Friday's high ($57.10) looks attractive, but look out for profit-taking as LLL approaches its next level of resistance. Keep stops set at $54. *** September contracts expire next week *** BUY CALL SEP-55 LLL-IK OI=1904 at $2.70 SL=1.25 BUY CALL OCT-55 LLL-JK OI=1845 at $4.40 SL=2.75 BUY CALL OCT-57*LLL-JY OI=2264 at $2.90 SL=1.50 BUY CALL OCT-60 LLL-JL OI=1927 at $1.80 SL=1.00 Average Daily Volume = 2.00 mln ************* NEW PUT PLAYS ************* AVY - Avery Dennison - $60.00 -0.72 (-2.00 for the week) Company Summary: Avery Dennison is a global leader in pressure-sensitive technology and innovative self-adhesive solutions for consumer products and label materials. Based in Pasadena, Calif., the Company had 2001 sales of $3.8 billion. Avery Dennison develops, manufactures and markets a wide range of products for consumer and industrial markets, including Avery-brand office products, Fasson-brand self-adhesive materials, peel-and-stick postage stamps, battery labels, reflective highway safety products, automated retail tag and labeling systems, and specialty tapes and chemicals. Why We Like It: Avery is suffering from a lack of business cutbacks much like we hear from the tech giants. Business spending is business spending. Budget cutbacks affect everything from employee salaries to PCs to office supplies. As more businesses fold up shop, the market for Avery's products shrinks. The stock was downgraded last month. Salomon Smith Barney lowered the rating from "buy" to "outperform." The analyst note based the downgrade on valuation and a defensive outlook for packaging stocks. From a technical standpoint, AVY had struggled mightily at $65 in the middle of August, before falling back into the low 60s. It found support from a rising 200-dma and 50-dma. It looked very heavy as it tested those levels throughout the past week. Today's breakdown took it below both of them. The low of $59.25 shook out some of the support at $60. Although the stock closed at $60, this level now looks like resistance, rather than its recent role as a level of support. A look at the short term charts (1-5 min) show the stock being repeatedly turned back from efforts to hold over this level throughout the day after breaking through it this morning. The trade of $60 created a new point and figure sell signal. The current bearish vertical count is $55, but it is still being added to negatively by the current column of "O"s. Each $1 box down will decrease the target by $2. Right now the stock is sitting right on its bullish support line and a trade of $59 would be a breakthrough to the downside. There is currently some support just below $57, which the stock will have to get through before testing the first major support level is between $52 and $53. We will target $53 on the play. We will use a stop loss of $63, which acted as resistance during the last week, however more conservative traders may want to place stops at $62, just above Thursday's high and the 10-dma. *** September Contracts Expire In 1 week*** BUY PUT SEP-60 AVY-UL OI= 53 at $1.15 SL=0.50 BUY PUT OCT-60*AVY-VL OI= 67 at $3.10 SL=1.60 Average Daily Volume = 547 k --- FDX – FedEx Corporation $44.50 (-2.01 last week) Company Summary: FedEx Corporation is a global provider of transportation, e-commerce and supply chain management services. Services offered by FedEx companies, through over 215,000 employees and contractors, include worldwide express delivery, ground small-parcel delivery, less-than-truckload freight delivery, supply chain management, customs brokerage, and trade facilitation and commerce solutions. Why We Like It: If the bearish news coming out of the Trucking sector is any indication, the economic recovery has not yet arrived. First came the CNF bankruptcy 2 weeks ago and multiple carriers have been warning about lower than expected package shipments. If there are less shipments, then that mush mean that there is less product that needs to be shipped. Translation: consumers and businesses are not buying as much because they don't see the demand. The impact of this bearish news can be seen in the recent price action in the DOW Transports, which appear close to breaking down under the $2200 level. That breakdown will open the door for a test of the July lows below $2100. Shares of FDX have been under pressure with the rest of the sector and came to rest on Friday less than $1 above the intraday low on July 24th. If FDX trades below $44, it will put the PnF chart back on a Sell signal with a double-bottom breakdown and will have the bears eyeing strong support near $40 as an obvious target. On a breakdown, we can use a trade under $43.50 to trigger new momentum-based entries, but only if the Transports are continuing to weaken below the $2200 level. In the meantime, we can use failed intraday rallies near the $46 resistance level to initiate new positions in anticipation of the eventual breakdown. Note that FDX announces earnings on September 19th, so this will be a short play. Place stops initially at $47, just above strong resistance. *** September contracts expire next week *** BUY PUT SEP-45 FDX-UI OI=1910 at $1.45 SL=0.75 BUY PUT OCT-45*FDX-VI OI=4754 at $2.90 SL=1.50 BUY PUT OCT-40 FDX-VH OI= 404 at $1.20 SL=0.50 Average Daily Volume = 1.89 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. 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The Option Investor Newsletter Sunday 09-15-2002 Sunday 4 of 5 In Section Four: Current Put Plays: AET, CTX, AGN, CMA, GE, MTG, TXU Leaps: Who Won? Traders Corner: Charting – Trendlines; Types & Construction Traders Corner: Directional Spreads: Grab A Leg and Make A Wish Traders Corner: Learning Curve ------------------------------------------------------------ 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 ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** Company Summary: Aetna is one of the nation's leading providers of health care and related group benefits, serving approximately 14.4 million health care members, 11.9 million dental members and 12.0 million group insurance customers, as of June 30, 2002 (source: company release) Why We Like It: AET dove today at the open, but showed some amazing resiliency in turning green by 0.02 by the end of the day. This was most likely due to rumors that they were going to warn on earnings next week. Apparently, the company made some comments during a conference call that business was not going so well and this led to the pre-announcement rumor. Our pick of AET as a short was not based on the rumor, so the rebound from a drop due to that rumor doesn't do much for the play. The stock experienced a significant breakdown Thursday, falling through its 200-dma and establishing a triple bottom breakdown on the point and figure chart. The stock had been in consolidation between $40 and $45 since the middle of July. The longer the consolidation rectangle, the more significant is its breakout. After a 6-week pattern, we expect to see a significant downside to AET's break. The current bearish vertical count on AET is $29 and a reversal up to the 200-dma of 40.46 would solidify this count with a three-box reversal from today's low under $37. New short entries should look for a failed rebound at the 200-dma of $40.46, or a move below the July low of $38.30. The downside minimum measuring objective, based on the rectangle pattern, is approximately $35. Given the strong downtrend since the middle of June and the support break, we can see this stock re-testing its February lows around $30. *** September Contracts Expire In 1 week *** BUY PUT SEP-40*AET-UH OI=2205 at $1.65 SL=0.85 BUY PUT OCT-40 AET-VH OI=5008 at $3.00 SL=1.50 Average Daily Volume = 1.47 mil --- CTX - Centex - $48.87 -2.10 (-1.00 for the week) Company Summary: Centex Corporation, through other subsidiaries, ranks as one of the nation's largest non-bank-affiliated retail mortgage loan originators and general building contractors. The company also has operations in home services and investment real estate and owns a majority interest in a publicly held construction products company. (source: company release) Why We Like It: After yesterday's precipitous drop in the homebuilding sector, following Alan Greenspan's warning about naturally increased interest rates, the group managed a mild rebound today. The rebound, however, was unconvincing after the series of higher highs was reversed by a lower high for both CTX and the Dow Jones Home Construction Index (DJUSHB). After such a terrific run in mortgages and new homes, resulting from the lowest interest rates in 40 years, we are finally starting to see cracks in the armour. Increasing layoffs are resulting in record foreclosure rates. With these stocks bought on speculation of rates staying low, it won't matter that the next rate move is most likely up, as fewer people will be able to afford homes without jobs. The fact that foreclosures are up is very bearish. Foreclosure usually indicates that any home equity has already been drained as the economy has worsened and losing the house is a matter of last resort. It also indicates that more people are being forced to sell their homes to rescue any equity, in order to avoid foreclosure. More homes on the market equals more supply - not good for the builders. Today's rally above the 50-dma indicates that traders should look for confirmation from the sector before entering new short plays. New entries should look for a break back below the 50-dma in CTX of $49.24 and a break in the DJUSHB (335.19) below its 50-dma of 323.93. *** September Contracts Expire In 1 week*** BUY PUT SEP-50*CTX-UJ OI=1149 at $1.65 SL=1.30 BUY PUT OCT-50*CTX-VJ OI=1485 at $3.60 SL=2.00 Average Daily Volume = 1.47 mil --- AGN – Allergan, Inc. $53.05 (-4.04 last week) Company Summary: Allergan is a technology-driven, global healthcare company that develops and commercializes specialty pharmaceutical products for the ophthalmic neurological, dermatological and other specialty markets, as well as ophthalmic surgical devices and contact lens care solutions. Its revenues are principally generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intra-ocular lenses and contact lens care products. The company's are sold to drug wholesalers, independent and chain drug stores, pharmacies, commercial optical chains, commercial optical chains, food stores, hospitals and individual medical practitioners. Why We Like It: In a bear market, the weak get weaker, and the strong, well they weaken too. AGN definitely falls into the 'weaker' group, as it has been mired under its descending trendline since last December. After last rolling over near the $63 level (right at the trendline 3 weeks ago, AGN has been steadily losing ground. In the process, the stock has broken below all of its moving averages and suffered an important technical failure when it dropped under the $55 support level on Wednesday. The current vertical count from the bearish PnF chart is pointing to a price target of $42, and that is looking more likely now that AGN has broken its bullish support trendline at $55. The July lows will start to come into play near the $50-51 area, and with daily Stochastics buried deep in oversold territory, an oversold bounce could be just around the corner. For that reason, we don't want to consider new entries on further weakness, but instead want to wait for a failed rally. Use a dip near the July lows to harvest partial gains on open positions and then look to re-enter on a rollover from the vicinity of $55. Keep stops set at $56.50. *** September contracts expire next week *** BUY PUT SEP-55 AGN-UK OI= 624 at $2.60 SL=1.25 BUY PUT OCT-55*AGN-VK OI=1325 at $4.10 SL=2.50 BUY PUT OCT-50 AGN-VJ OI= 341 at $1.95 SL=1.00 Average Daily Volume = 1.09 mln --- CMA – Comerica Inc. $53.50 (-4.38 this week) Company Summary: Comerica Incorporated is a multi-state financial services provider. The company has strategically aligned its operations into three major lines of business: the Business Bank, the Individual Bank and the Investment Bank. The Business Bank is comprised of middle-market lending, asset-based lending, large corporate banking, international financial services and specialty deposit gathering. The Individual Bank includes consumer lending, consumer deposit gathering, mortgage loan origination and servicing, small business banking and private banking. The Investment Bank is responsible for the sale of mutual fund and annuity products, as well as life, disability and long-term care insurance products. Why We Like It: After the opening drop on Friday, the sellers took a break, allowing CMA to stage a minor recovery off its lows. Despite the green candle on the daily chart, it is important to note that the stock was barely able to fill its opening gap. Not only that, but it is well below its $56 breakdown level from Thursday. That breakdown put CMA back on a PnF Sell signal and with the intraday drop on Friday, the column of O's grew, extending the bearish price target down to $46. Provided the weekend passes uneventfully, the stock's oversold bounce could continue on Monday. That should provide us with an attractive entry point as CMA likely rolls over from the first tangible level of resistance near $54.50. If that fails, the heavy resistance at $56 should keep the bulls in check and a rollover near that level would be a very attractive entry point into the play. Should the bears come back from the weekend refreshed, then momentum traders can target a breakdown under $53, but only if selling volume is strong and the Banking index (BKX.X) returns to its recent pattern of weakness. Keep stops set at $57. *** September contracts expire next week *** BUY PUT SEP-55 CMA-UK OI=195 at $1.95 SL=1.00 BUY PUT OCT-55*CMA-VK OI=555 at $3.20 SL=1.50 BUY PUT OCT-50 CMA-VJ OI=200 at $1.30 SL=0.75 Average Daily Volume = 1.00 mln --- GE – General Electric $27.05 (-1.25 last week) Company Summary: As one of the largest and most diversified industrial companies in the world, GE's products include major appliances, lighting products, industrial automation equipment, medical diagnostic equipment, electrical distribution and control equipment and power generation and delivery products. Additionally, GE provides commercial and military aircraft jet engines, locomotives and nuclear power support services. Through the National Broadcasting Company (NBC), GE delivers network television services, operates television stations and provides cable, Internet and multimedia programming and distribution services. Why We Like It: As scrutiny of high-profile CEOs picked up again last week, GE's former CEO found himself in the limelight over the details of his retirement compensation package. While that may not have been meaningful to GE's price action, the spectre of asbestos-related litigation certainly didn't motivate investors to buy the stock. We started coverage on Thursday, looking for a breakdown under the $28 level and we didn't have to wait long. Friday's session began with a gap down below our $27.75 entry trigger and then price fell to the $27 area, where the stock spent the rest of the day consolidating. Also weighing on the stock was the warning from HON on Thursday night. After hitting the $28 level, GE's PnF chart went back on a sell signal and Friday's drop extended the column of O's, dropping the bearish price target to $21. GE now has significant overhead resistance at the $28 level and a failed rally near that level would make for an attractive entry point. Momentum traders will want to wait for a drop under $26.50 on continued strong volume before entering new positions. Lower stops to $29.75, just above Wednesday's intraday high. *** September contracts expire next week *** BUY PUT SEP-27 GE-UY OI=28741 at $1.10 SL=0.50 BUY PUT OCT-27*GE-VY OI= 8366 at $2.10 SL=1.00 BUY PUT OCT-25 GE-VE OI= 2759 at $1.00 SL=0.50 Average Daily Volume = 29.5 mln --- MTG – MGIC Investment Corp. $55.23 (-3.15 last week) Company Summary: MGIC Investment Corporation is a holding company that, through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), is a provider of private mortgage insurance coverage in the United States to the home mortgage lending industry. Private mortgage insurance covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes with less than 20% down payments. Private mortgage insurance also facilitates the sale of low down payment mortgage loans in the secondary mortgage market, principally to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Why We Like It: Friday was a day of consolidation for the broad markets, with very little meaningful price movement. That was certainly the case with MTG, as it spent the bulk of the day recovering from the small opening gap down. Recall that the primary catalyst for the play is the fact that with foreclosures on the rise (hitting a new record in the 2Q), which is very likely to have a detrimental effect on MTG's bottom line. After the sharp decline earlier in the week, the stock was due for a bit of consolidation. This just looks like a pause in the dominant downtrend, especially with the strong Sell signal on the PnF chart. After generating a double-bottom breakdown at $57, the column of O's has grown such that the bearish price target is now $46. That leaves plenty of room to the downside, once the play has been entered. Speaking of entries, look for a rollover near the $56 level as a first opportunity to open positions. Should there be a bit stronger bounce, then look for a rollover near $57 as the trigger. Recall that there is still strong support near $54, so we want to avoid entering on a breakdown for the time being. Stops remain in place at $58. *** September contracts expire next week *** BUY PUT SEP-55 MTG-UK OI=1222 at $1.60 SL=0.75 BUY PUT OCT-55*MTG-VK OI= 190 at $3.20 SL=1.50 BUY PUT OCT-50 MTG-VJ OI= 11 at $1.70 SL=0.75 Average Daily Volume = 803 K --- TXU – TXU Corporation $44.30 (-1.62 last week) Company Summary: TXU Corporation is a global energy services company that engages in electricity generation, wholesale energy trading, retail energy marketing, energy delivery, other energy-related services and, through a joint venture, telecommunications services. TXU owns over 22,600 megawatts of power generation and sells 335 terawatt hours of electricity and 2.8 trillion cubic feet of natural gas annually. The company delivers or sells energy to approximately 11 million residential, commercial and industrial customers primarily in the United States, Europe and Australia. Why We Like It: We've been focused on the weakness in the Utility sector (UTY.X) over the past week, as the sector has continued to weaken. Last week the UTY index broke support at $270 and then proceeded to take out the $260 level on Thursday. With that damage, Friday's recovery looks like little more than an oversold bounce. We saw a similar pattern in our TXU play, as it recovered from the $43 support level on Friday. But there is no question that the bears are still in control, as the stock was unable to move back above the $45 level. In fact, a rollover near that level next week looks like a decent entry, although a failed rally closer to major resistance at $46 would look even better. Given that the daily Stochastics is buried in oversold territory, we don't want to attempt new entries on a decline to new lows. Risk is much easier to manage by fading the failed rallies. Keep stops set at $46 and confirm renewed weakness in the UTY index before entering new positions. *** September contracts expire next week *** BUY PUT SEP-45 TXU-UI OI= 180 at $1.30 SL=0.75 BUY PUT OCT-45*TXU-VI OI=1378 at $2.60 SL=1.25 BUY PUT OCT-40 TXU-VH OI=1334 at $0.95 SL=0.50 Average Daily Volume = 1.76 mln ------------------------------------------------------------ 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 ------------------------------------------------------------ ***** LEAPS ***** Who Won? By Mark Phillips mphillips@OptionInvestor.com It seems like you can't turn on CNBC without another passel of airhead (not the word I wanted to use, but let's keep this professional) analysts pounding the drum that the bear market is over and we should expect significantly higher equity prices over the next 12 months. Yadda, yadda, etc. About as valuable as all those Styrofoam peanuts with which products are shipped. Those peanuts have no intrinsic value (even though you have to pay for them), but they serve the purpose of protecting what is being shipped. Analysts on the other hand, get paid exorbitant salaries, have very little to say that has any value, but they do have a purpose. That purpose is to keep Joe and Jane average invested in the stock market all the way down. One of the constants of my youth was watching Wall Street Week with Louis Rukeyser every Friday night at 8:30pm. Most of what was said on the show went right over my head, but Dad was watching it and he seemed to think it was pretty important stuff. I remember thinking at the time that someday I wanted to understand all the important-sounding concepts that were covered each week. I didn't watch old Louis again until a few weeks ago when he moved his show to CNBC. He comes on while I'm still writing the weekend content, so it makes for good background noise as I try to transfer my thoughts into a coherent printed form. Well, I started watching again recently, and have come to the conclusion, that Mr. Rukeyser is an arrogant and smug buffoon. Either that or he is a menace on par with Abbey Joseph Cohen. Long-time readers will recall that I don't have much respect for Ms. Cohen, as she and the rest of the analyst community are largely at fault for an incredible destruction of investor wealth in the past 30 months. I'm not talking about people like you and I -- I'm referring to those that have held investments for DECADES. Ms. Cohen and her ilk continued to preach ever higher stock prices even as it was clear that the bubble had been pricked. Thousands of investors have now watched very profitable long-term investments wither away because they made two mistakes -- they had no defined approach for harvesting gains and they listened to the siren's song of the analyst community, which preached that stock's could grow to the sky. Take the very staid company of McDonalds (NYSE:MCD), which nobody could argue has much of anything to do with the burst Technology bubble. But the food chain's stock price hit another 52-week low last week. Since late 1999, MCD has given up well over half its value and has now fallen to levels not seen since late 1995. Don't you think some cautionary comments from the analyst community would have been appropriate. I know, I'm preaching old news to the choir, because you all "get it" already. Like me, you probably laughed heartily at the Barron's article last weekend, where all the leading analysts put forth their prognostications for the S&P500 over the next 12 months. All except for one (Doug Cliggot) see the S&P being substantially higher than it currently is, with estimates ranging as high as 1300. How do you say the S&P500 is capable of advancing 45% in a 12 month period without cracking a smile? Coming back to Sir Rukeyser, I've noticed that since having Doug Cliggot (his S&P500 estimate is 750, by the way) on several week's ago, his new show is heavily biased to the bullish side. I can deal with that, but not when he's talking like it is a new secular bull market. Oh speaking of that, did you hear Dick Hoey on CNBC last week stating that the market would be in a secular bull market by November first? Yes, of this year! But I digress. Coming back to old Louis, here's what he said this week, that launched me on this long tirade. In his opening dialogue, he pointed out that the market was up for 5 weeks, down for 3 and then flat last week. That's fine as far as it goes, but then he goes on to state that we are in neither a bull or bear market? Huh? You know, I don't think the guy would recognize a trendline on a chart or a chart for that matter if it jumped up and bit him in the... Well, you know what I mean. Since I'm on the topic though, let's take a look at a chart and try to divine what king of market we're faced with. My wife just drifted into the room, so I asked her if the chart above looked like an established trend. She said "Yes, down!" But then we need to take her opinion with a grain of salt, because she isn't the "investment professional" that Mr. Rukeyser is. The pattern of lower highs and lower lows that began in September of 2000, hasn't even come close to being broken. In fact, if I had put on the center line of that channel, you would notice that the SPX is back in the lower half of the channel. That sure wasn't a very convincing rally, now was it? Stochastics tell a very similar picture, as the peaks have been coming at lower and lower levels since late 2001. Note that the oscillator is rolling over again after having barely traversed half the distance to overbought. The bears are definitely in charge and will likely remain so until there is some definitive evidence that the economic picture is actually improving. You've all heard my feelings on this before, but it doesn't hurt to repeat them from time to time to let you know that I haven't changed my opinion. Especially when those with access to a microphone are spouting such blatantly foolish things about the 'imminent bull market'. Based on the recent rebound off the July lows and the subsequent muddled market action, I expect the historical pattern of a market selloff in September-October will put in a repeat performance this year. Best case, we get a retest of the July lows. Worst case, we break those lows and start having to take Bill Gross seriously. Recall his prediction from a couple weeks ago, where he called the DOW fairly valued at 5000? I hope that doesn't happen, but then again, how many times have we said the market can't possibly go any lower? Remember back when 1600 looked like a solid floor for the NASDAQ Composite? Well don't look now, but it hasn't been back above that level since early June, and even 1400 is now looking like pretty stiff resistance. Remember, anything is possible in a bear market. Let's look at a shorter-term picture for the rest of our visit this weekend. Amazingly, the VIX is still hanging around near 40, as investors are clearly nervous with the lack of good economic news, record foreclosures, fear of war with Iraq, potential for terrorist actions, and the usually bearish pattern of this time of the year. Did I leave anything out? Actually, when you look at it in that light, it's impressive that the market hasn't fallen back further. At least not yet. There's been a lot of discussion in the newsletter of late about the pending H&S pattern in the broad market. I don't have time to discuss it here tonight, but tune in on Monday, as I plan to dice and slice the SPX and possibly the DOW to show how the same chart pattern can be interpreted a couple of different ways. I'll actually write it up this weekend, so I won't have the benefit of knowing what happened on Monday until the article is complete. But coming back to the title of this week's column, I believe the answer is nobody yet -- but the bears will win in the weeks to come. Alright, without further ado, let's take a look at the play lists. Portfolio: I told you it wouldn't be long and we'd start to repopulate the Portfolio. The only thing that would make me happier would be to see us get entries on the BBH and MO plays. All in good time. For this week, we have new Portfolio positions for both QQQ and SMH. See the writeups below for details. Watch List: MO - MO keeps drifting lower, but it is now back under the 50-dma, and I think the only thing holding it up is the fact that the broad market can't decide whether its going to sell off or rebound. Keep that entry target where it is, as I suspect the weakness in the broad markets in coming weeks is going to give us exactly the entry that we're looking for. BA - About as exciting as watching paint dry, BA continues to work its way down towards our entry target. Don't be in a hurry here, as IO suspect we'll get our opportunity right around the time that the broad market finds a relative bottom over the next 6 weeks. Patience is the key. BBH - I really thought a post-9/11 rally was going to be the ticket to give us a tasty entry into the BBH play, but the fact that there was no follow-through to the opening gap kept us on the sidelines. Look for a failed rally near our target to give us the motivation to enter the play. Eager traders can consider initiating 1/2 positions on a failed rally near the $84-85 area, while we'll leave our official entry target at $86-88. After entry, we'll look to establish a stop at $90. Even though the playlists are rather light again this weekend, I actually feel pretty good about it. The broad markets are at an important crossroads here. Either they will bounce from near current levels or they are going to break down and likely retest the July lows. If we get the breakout, our QQQ play has us well positioned for upside movement. If we get a breakdown, then our SMH play should lead to the downside, given the abysmal conditions in the industry. Be sure to check out my Monday Trader's Corner article, and then I think you'll understand my trepidation at adding more plays until things become a bit more clear. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: QQQ 09/09/02 '03 $ 24 QAV-AX $ 2.20 $ 2.10 - 4.55% $21 '04 $ 24 KLF-AX $ 4.10 $ 4.20 + 2.44% $21 Puts: SMH 09/11/02 '04 $ 20 KBS-MD $ 3.40 $ 4.30 +26.47% $26 '05 $ 20 ZTO-MD $ 4.70 $ 5.40 +14.89% $26 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BA 06/30/02 $32 JAN-2004 $ 45 LBO-AI CC JAN-2004 $ 40 LBO-AH JAN-2005 $ 50 ZBO-AJ CC JAN-2005 $ 40 ZBO-AH MO 08/25/02 $43-44 JAN-2004 $ 50 LMO-AJ CC JAN-2004 $ 45 LMO-AI JAN-2005 $ 50 ZMO-AJ CC JAN-2005 $ 40 ZMO-AH PUTS: BBH 08/30/02 $86-88 JAN-2004 $ 80 EVK-MP JAN-2005 $ 80 EIL-MP New Portfolio Plays QQQ - NASDAQ-100 Trust $23.08 **Call Play** Well, that sort of worked the way I had in mind. With the nervousness in the market ahead of the 9/11 anniversary, QQQ dropped to $22.39 on Monday, right in the middle of our desired entry range and pulling us into the play. But instead of a relief rally after the anniversary, the markets did an about face and apparently "sold the news" as there was apparently nobody left to buy. We'll need to see what happens next week before we'll know if this was a good play or a fool's errand. Despite the weakness in the Technology arena (particularly due to the Chip stocks), there was a bright spot from the ADBE earnings report and if we hear anything positive from MSFT during this earnings cycle, it could reinvigorate the entire Software group. For now, we'll keep our stop set at $21. Late-comers can use any successful bounce above the $21.50 level to enter the play, ahead of an expected end-of-year rally that should take the QQQ up near the $26 level. BUY LEAP JAN-2003 $ 24 QAV-AX $2.20 BUY LEAP JAN-2004 $ 24 KLF-AX $4.10 SMH - Semiconductor HOLDR $24.51 **Put Play** Alright, I cheated! Even though the desired entry zone was $25.50-26.00, that pop and drop on 9/11 was just too good to pass up. The intraday high was only $25.25, but I think that's good enough for a solid entry into the play. There is no joy in Chip-ville, as warnings and downgrades seem to now be a daily occurrence. Nobody is venturing predictions about an IT spending recovery until mid-2003, and that is likely to continue pressuring the SOX ever lower. In fact, the last trip down that set new lows at $22, put the PnF chart back on a Sell signal, and the bearish price target is -- are you ready? -- $14!! Holy price discounts, Batman! I don't know if it will get there, but both the technical and fundamental picture is downright ugly. If you missed that entry point, use any failed rally below the $25.50 level to initiate new positions, because this ship is going down. We'll initially place our stop at $26, just above the top of the descending channel that began back in March. BUY LEAP JAN-2004 $ 20 KBS-MD $3.40 BUY LEAP JAN-2005 $ 20 ZTO-MD $4.70 New Watchlist Plays None Drops None ************** TRADERS CORNER ************** Charting – Trendlines; Types & Construction By Leigh Stevens email@example.com I often assume OI readers know all the basics of technical analysis, but then I get e-mails that suggest otherwise – as an old college chum used to say: “never assume” – and he was right! A trendline is one of the most basic and useful tools in assessing trends or trend reversals in stocks, stock indexes and other financial instruments; e.g., bonds, currencies, etc. A trendline is, as the name implies, a line that attempts to measure and define a price trend in any market that involves prices set by the free actions of buyers and sellers. “Free” trading is worth noting as, for example, the fed funds rate is not such a market. A trendline is also by definition a line that either slopes up or down to some degree in keeping with the primary definition of a trend as meaning a predominant up or down price direction. Parallel lines that are drawn across the highs and lows of a sideways trend or trading range are usually referred to simply as “horizontal” lines. A (I’m tempted to say “the”) basic technique of charting is the use of trendlines. However, not all trendlines are drawn the same or rather, there is not ONE correct way to construct trendlines. I tend to be a bit creative in the construction of trendlines in that I will use a type of construction that could be called “best fit” analysis or use of “internal” trendlines. A “conventional” trendline, or what we learn in charting 101, is to draw an initial trendline through the 2 or more (preferably a minimum of 3 points) highest highs or lowest lows on a bar, candlestick or line (close-only) chart. An internal trendline draws a line through the MOST number of highs or lows - more on this later. A rising up trendline is usually drawn by connecting 2 or more – 3 if available, however you can “start” with 2 - of the lowest lows. The resulting line is then generally BELOW the level of the other periodic price drops that occur in a rising market. Some other names for these minor counter-trend movements are: price “dips”, “pullbacks”, “corrections” and “reaction” lows – for every action there is some “re-action”, such as caused by sellers who think a stock is overvalued, even if perhaps only temporarily. What really defines a rising up trendline is not the advancing price moves or price swings, but the low point of the downswings, dips or pullbacks on the way up. You hear the saying “buy dips” or buy weakness. This generally refers to buying the corrections in a rising trend or buying pullbacks to the up trendline. Downside reactions in an uptrend will usually stop above, at or near the rising up trendline. The chart below illustrates a simple up trendline and connects 3 or more intraday lows – you never have to search very far for examples of trendlines. A down trendline slopes down as it measures a declining price trend and is typically drawn by connecting two or more, usually three if available, of the highest highs of the periodic upswings or rallies that occur in a downtrend. The points that establish the down trendline are the high points or peaks of the upswings, or minor rallies that run counter to the general downward direction. The advice to “sell rallies” is typically in reference to a declining trend and a rebound to the down trendline would be a good way to do it - there are always some countertrend movements. In a decline, trendlines that slope down in a very steep manner are more common than those that have a radically steep upward slope. Rallies in a downtrend will usually stop below, at or near a falling down trendline. Trendline resistance is the expected selling that tends to develop on rallies that carry up to a down trendline. The chart below is a line chart that “touches” or connects 3 or more closing lows. The downtrend above is best defined on the 3rd touch or defining point of a down trendline, in February – note the steep drop after that. A downtrend is then assumed to be in effect until May, when (on a closing basis) there was a rally to above the dominant down trendline. There was a steeper down trendline (not shown) that could have been drawn through the rebound high in early-March, the later rally high in late-March and through the price peak of early- April – 3 “touches” or points – the upside breakout above this line in mid-April was a tip off that that at least the short-term trend was reversing Note that the rebound from the resistance trendline on the lower right of the chart illustrates the principal that support and resistance trendlines can assume also opposite roles at a later stage – here, the resistance trendline, once broken, later defines a support area. This brings us an obvious question of which chart TYPE to use and does it make a difference? Generally it does not make a difference whether you use a bar (or candlestick) or line chart, assuming you have enough points to construct a trendline, in terms of whether one is “better” than the other. I use both and sometimes see slightly different things. A pullback in an uptrend may dip under the trendline that uses the lows, but not be apparent on a close-only line chart. I tend to prefer drawing trendlines on daily bar charts. For weekly and monthly charts, I generally draw a line first with a bar chart, than switch to a line chart for comparison. If the line chart gives me a clearer trendline definition I save and use that one. You can also draw trendlines on Point & Figure charts, which makes a third choice as can be seen in the chart below, that of the S&P 500 (SPX) Index. The upside penetration of the down or resistance trendline at the extreme right suggests a trend reversal from down to up. Charting applications based on a monthly fee, like Q-Charts and TradeStation have the most feature rich trendline functionality. However, even free internet sites like BigCharts (“java” chart option) will allow you to construct simple trendlines. Next are some charts that include descriptions related to methods and points related to trendline construction. Because the use of trendlines is often an “art”, rather than a “science”, traders can get frustrated when the trendline “rules” do not seem to work. Also, there is the fact that it takes some months and years to see how trendlines work in a variety of stocks and market conditions. Conventional or traditional trendlines are straight lines drawn through at least two lows or highs, preferably three, and such a trendline never bisects or “cuts through” any bar (price range) in a bar chart or any part of a candlestick – or, any close on a line chart. However, if we look at trendlines as angular measures of price MOMENTUM and that momentum is not always precisely defined, we have made a case for trendlines that cut through some of the bars. I call these “best fit” trendlines - ones that go through the greatest number of highs and lows. And, I always remember that I am trying to visually depict the dominant momentum of the trend. Trendlines that go through the most number of high and low points and/or involve subjective judgments as to “best fit”, have been called internal trendlines by Jack Schwager, a technical analyst and writer in this field. Although there is more than one way to draw a trendline – the guidelines for best USE of trendlines are the same as seen in the concluding charts. The guidelines for using trendlines regardless of how they are precisely constructed, is to buy on declines to or near a support (up) trendline and sell rallies that touch or approach a resistance (down) trendline. A decline that goes through (breaks) an up trendline is an indication that the trend has reversed and a shorting/put buy strategy is suggested. A rally that goes through (breaks out above) a down trendline is an indication that the trend has reversed and a buy/long call In a further Trader’s Corner article on trendlines, I’ll discuss what they can (and can’t) do to help you spot trends and trend reversals – sometimes trendlines don’t “work” in providing a good definition of a trend, such as in choppy markets or sideways trends. Nevertheless, there are ways to minimize losses in such situations. PAST Trader’s Corner ARTICLES by Leigh Stevens Indicators - Arms Index (TRIN): http://www.OptionInvestor.com/traderscorner/062002_2.asp Indicators - Bollinger Bands – http://www.OptionInvestor.com/traderscorner/071102_1.asp Indicators - Moving Average Envelopes: http://www.OptionInvestor.com/traderscorner/062702_2.asp Indicators_Oscillators – MACD: http://www.OptionInvestor.com/traderscorner/080802_1.asp Indicators_Oscillators - RSI: http://www.OptionInvestor.com/traderscorner/080102_1.asp Indicators_Oscillators – Stochastics: http://www.OptionInvestor.com/traderscorner/072502_1.asp Patterns_Continuation – Flags: http://www.OptionInvestor.com/traderscorner/081502_1.asp Patterns_Continuation - Triangles & Rectangles: http://www.OptionInvestor.com/traderscorner/082202_1.asp Patterns_Reversals - Head & Shoulder's: http://www.OptionInvestor.com/traderscorner/061602_1.asp Patterns_Reversals – Wedges: http://www.OptionInvestor.com/traderscorner/082902_2.asp Program trading & Stock/Index Futures Arbitrage: http://www.OptionInvestor.com/traderscorner/071802_1.asp Sentiment; as a contrary indicator – http://members.OptionInvestor.com/archive/traderscorner/2002/031702_1.asp ************** TRADERS CORNER ************** Directional Spreads: Grab A Leg and Make A Wish By Mike Parnos, Investing With Attitude Occasionally Couch Potato Trading Institute students will have an opinion. Or, more likely, they heard someone else’s opinion and now it’s their own. A few CPTI rebels have torn themselves away from a Bow-Flex infomercial long enough to request a way of playing a direction with limited risk and significant upside. Although contrary to our usual trading strategies, it’s true. Such an animal exists. As much as we encourage neutrality in our trading, there will always be a few students who buck the trend. At the CPTI we feel an obligation to teach them how they can cover their assets, before they bend over and kiss them goodbye. A “calendar spread” is the purchase of a long-term option on a stock and the subsequent sale of a short-term option on the same stock/index. There are a number of “calendar spread” variations. The following example, will explain the most popular version – the “diagonal calendar spread.” The “diagonal” simply means that both the long-term option and the short- term option are sold at the different strike prices. If the strike prices were the same, it would be a “horizontal calendar spread.” It’s a powerful strategy that allows you to control a large amount of money with a relatively small amount of money. It uses the passage of time and the erosion of premium to put profits in your account – if you pick the right direction. Lately some analysts are predicting a DOW 5,000. If you have a bearish view of the DOW, a calendar spread can help you play that opinion with a defined risk and a reasonable amount of time to be right. In this example, we will use a horizontal calendar spread to take advantage of an index that has moved up, hit resistance, and seems to be on its way back down to the July lows, or perhaps further. The Scenario: The DOW is trading at 8,450 (at this writing). When we trade DOW options, we like the DJX because of its liquidity, small spreads and one or two dollar strike price increments. 1) Buy 10 contracts Dec. $84 strike put @ $5.70 = $5,700 2) Sell 10 contracts Oct. $80 strike put @ $2.00 = $2,000 Total cost: $3,700 Regardless of where the DOW moves, our total risk is defined at $3,700. What happens if . . . a) What if the DOW is 8,200 at Oct. expiration? The Oct. $80 put will expire worthless. The Dec. $84 put will be $2 in the money and headed in the right direction. You can now sell 10 contracts of the Nov. $78 strike put for about $1.50 = $1,500. The total risk is now only $2,200 ($3,700 - $1,500). b) What if the DOW is 7,800 at Oct. expiration? The Oct. $80 put will have a value of $2.00. The Dec. $84 put will have a value of $6.00 plus a little time value. The positions can be liquidated on expiration for about $6.25 ($4,250). Your adjusted defined risk was $3,700. Thus, you still make a small profit of $550. Or, you could buy back the short Oct. $80 put and roll it down and out if you believe the DOW has further to fall. c) What if the DOW is 8,600 at Oct. expiration? The Oct. $80 put will expire worthless. The Dec. $84 puts will be $2 out of the money, but will still have a value of about $3.25. You could liquidate and accept the small $.45 ($450) loss. Or, if you still believe the DOW will go down, you could sell the Nov. $80 put for about $1.50 and further reduce your risk to $2,200. Now, let’s move ahead to November expiration. Scenario “a” has played out and your adjusted risk is only $2,200. You are long the Dec. $84 puts and short the $78 puts. Your projection (guess) of the direction of the DOW was accurate. It closes at 7,600. If you buy back the $78 put for $2 ($2,000) and sell the Dec. $84 put for $8 ($8,000), you will have taken in $6 ($6,000). Subtract your adjusted risk of $2,200 and you have a profit of $3,800. That a nice piece of change. If you still believe the DOW will tank further, you could just hold the Dec. $84 put and ride it down (with a tight stop, I hope). Or, you could use the common sense God gave a dog and come in out of the rain. Take your profits and count your lucky stars. Are you ready for a little icing on the cake? Look at the DOW chart for the last six months. You’ll notice there’s some near term resistance at 8,800 and substantially stronger resistance at 9,000. Let’s put on a bear call spread on the DOW and take in some more money. Hmmm. “More Money” – I like the sound of that. If you were to sell the Oct. $88 calls and buy the Oct. $92 calls, you would take in an additional $.90. If scenario “a” played out as we described above, you could do that again in November and perhaps take in another $.90 with a slight downward adjustment of the strike prices for the November bear call spread. The $1.80 ($1,800) in proceeds from the Oct. and Nov. bear call spreads could conceivable reduce the risk to $400 ($2,300 – $1,800). A $3,800 profit on only a $500 risk. It’s almost too good to be true, but so is winning the Lottery. With a “diagonal calendar spread,” it’s the months of time you buy in the long option that gives you flexibility. You can buy more or less time, depending on how long you think it will take for the underlying to go in your direction. It gives you choices. You can take profits (if they exist) by liquidating at any time during the life of the long option. WARNING: To CPTI students and the rest of our semi-sane trading world. Be careful. The worst thing that can happen is that you pick the right direction on one or two trades. You’ve become the speculator instead of the casino. You begin to feel invincible. You think it’s OK to double your bets. Just because you put on a Superman costume doesn’t mean you can fly. We want to make sure CPTI students don’t have to pawn their remote for a bus ticket back home. Retail option traders are a lot like plungers. They spend most of their time cleaning up messes. At the CPTI, we aim to teach that good judgment will save you pain -- both financial and emotional. Too often, a lot of good judgment comes from bad judgment. Let it be someone else’s bad judgment you learn from. _________________________________________________ Iron Condor Update: BBH is at $81.35. On Monday, BBH dropped below $80 and we shorted 1,000 shares at $79.80 to protect our short $80 put. Later, on Monday, we covered our short 1,000 shares at $80.00 as BBH moved back over $80. On Thursday, we again shorted 1,000 shares at $80 and today (Friday) we covered again at $80. We’re starting to feel like a yo-yo, but most of our profits are intact and our position is protected. We may still get bounced around a bit near this support level, but the situation is under control. Sooner or later, BBH will pick a direction, and, if we stay alert, it really doesn’t matter which way it goes. We originally put on this hypothetical BBH Iron Condor trade a few weeks ago with BBH. We established an Oct. $80/$75 bull put spread and an Oct. $110/$115 bear call spread for a credit of $1.10. The objective is for BBH to close inside the 30-point range. Happy trading! The CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. mparnos@OptionInvestor.com ************** TRADERS CORNER ************** Learning Curve By John Seckinger jseckinger@OptionInvestor.com I know of millions of things that won’t work. I’ve certainly learned a lot. – Thomas Edison Roughly six months before I actually put on a trade, I began “paper trading”. This was my first of many mistakes. While at the CBOT, I would flash the array of hand signals to myself, always executing my trades perfectly while taking monstrous “profits” every day with little trouble. Moreover, I was never stressed while paper trading; excited about how easy this trading thing was going to be. Mistake Number two was when I decided to listen to all the “professionals” working at the CBOT. This filtering-out process is important, since putting a trade on while believing in a “10-year veteran” gets extremely costly. Why? First of all, there are people who work 10-years, and then there are people who work one—year, ten times over. See my point? Most traders are afraid to change, looking at the market with the same dull perspective. This lack of dynamism is analogous to going to grad school and trying to use logic learned in kindergarten. It is too limited in scope to be effective. After speaking with hundreds of traders, I decided only two of them had a good feel for the market. Fortunately, we became great friends and tackled the market as a team for many years. Disclaimer: I have known Jim Brown and Jeff Bailey for quite some time now, and it is my honest opinion that they do in-fact have a “cutting edge” view of trading conditions. There view of the market is definitely given significant weight. The third costly error I made was using too many trading indicators at once. I was also under the impression that all the indicators not only worked, but worked on every single contract. They really don’t, believe me. It took roughly five years of trading before I was down to using only a select group of indicators. Are these indicators the Holy Grail to trading? Of course not. I just feel most comfortable (not to be confused with complacent) when using them. Volume, RSI, MACD (sometimes), and sometimes Bollinger Bands (five-minute chart only). In fact, most of the time I don’t use any indicators, just price action. Well, I guess that indicator could be called “mass psychology.” Number four in horrible trading mistakes was the impression that execution only “kind of mattered.” Boy was I wrong. Execution is the most important of all, and that includes cutting slippage to a minimum. Part of my beginning execution problems was that I was greedy. I wanted to be in the market so bad, that I would put on a trade when price action “got close enough” to my objective. That mistake alone cost me thousands. Why? Quick example: After analysis, I would decide to go long shares of XYZ at 42. During trading, shares would fall to 44 and then quietly sit there. I would go long. Minutes later shares fell to 42, and then 41.50 (hitting stops). I would get nervous, sweat, get upset, and look for an exit. Shares would then bid back to 42 and sit there for a while. I would sell, take the loss, and after a while shares would rise substantially. That brings me to me to mistake number five. Using the previous example, I would only use mental stops. I promised myself that I would exit at 41; however, with no actual stop in place, I would change that price as I saw fit. Fortunately, this use of mental stops was not long lasting. Note: When I trade options, I only use prices in the underlying shares for exit reasons. The sixth error might not be well accepted by all readers. It has to do with attempting to trade stock options on pretty illiquid securities. Some traders can do it, I cannot. This has been the most costly of all for me, since market makers could play with the spread and seemingly taunt me as the trade went the opposite direction. Example: Bought 10 at-the-money calls of XYZ at 3.50. The bid at the time was 3.00 and various attempts to by at 3.25 failed. Minutes later, shares fell and went under my exit price. The quote was 3.10 offer at 2.25. “You have to be kidding me,” I told myself. I tried to sell at 3, 2.75, and even 2.25 once just to get out. Nothing. The bid mysteriously fell to 2 while the offer stayed at 3.10. I eventually exited with a sizable loss. Number seven deals with trying to trade one timeframe and forgetting to realize the importance of other longer or shorter timeframes. Example: I would tell myself, “Support has to hold at $30.” Then, minutes later, shares would be at 29, 28, and then 27.25 before large bids entered. The problem was, I would find out later that market participants were looking at a weekly low from many months prior. Looking at a weekly chart, the 27.25 did seem significant; however, I would either not draw a line or discount its importance. Mistake. Eight. This mistake could also be called “eight hundred.” Why? It refers to putting on commission intensive trades that somehow forced me to keep a position longer than normal. Example: I would put on a number of Bond futures diagonal calendar spreads (commissions roughly 300) and then not exit the trade when it either (a) went against me, or (b) rose to only breakeven level and then gave a pretty obvious sell signal. I now try my best to put commissions in the back of my mind. The ninth “sin” was thinking about becoming a long-term trader when the trade entered was clearly intended on a short-term basis. Did I need the immediate gratification of a short-term trade, or was the position entered to be kept for weeks or even months? If I sold too quickly, was that a form on insecurity? Short-term trading quickly became the most comfortable for myself; something that I have not changed. Note: I am talking about my trading account and not an account designed specifically for retirement. Rounding out the top ten is realizing that having a negative attitude and taking the market home with me was debilitating and hindered future performance. There is a fine line between confidence and arrogance. In the past, I would exit a trade at a loss, go home extremely frustrated, and then look at chart patterns in a different light. It would turn into a battle between me and the market. “The market owes me this money,” I would tell myself. A poor mindset and negative attitude can offset a plethora of successful trading notions. One of the errors I want to touch on in-depth is Number Four, execution. One definition of execution is “a carrying into effect or to completion; performance; achievement; consummation; as, the execution of a plan, a work, etc.” As a trader, it would hard not to define execution as “The completion of an order to buy or sell securities.” I have to be able to execute the absolute second a new technical pattern takes hold. The word “new” refers to the market reversing through a support area; something that should not happen when a trader is long. Unfortunately, this “second” is during a market opening and it feels like eternity. Almost every day I battle with myself about whether I am actually right about market direction. Who wins this battle? Technical analysis, always. Every morning, I look at a weekly chart (making sure I didn’t miss anything the day before), daily, 60 minute, and then 5-minute chart. Support and resistance lines are drawn, and then a sentiment reading constructed. What about fundamental analysis for execution purposes? I use fundamental analysis only when the market seems to be following the news and goes opposite of my opinion on market direction as well as under intermediate support levels. Example: Non-farm productivity reported at 200k, while expectations were for a rise of 15k. In the current market environment, this should be good news for blue-chip holders. Let’s further say that I was long the broad market. Following the report, the Dow falls 200 points and breaks an obvious bullish trend line. Why the sell-off? Now it is time to look at fundamental analysis. Is there wage-push inflation? Wage-push inflation shouldn’t matter with today’s deflationary concerns, so I doubt that. Seasonal adjustments? Sure, but the market is usually more forward looking. With no answers, it would make sense to take another look at the overall economy. To me, following all the other indices is a form of fundamental analysis. Reading the headline news is a form of fundamental analysis, mainly because I have something to talk about with my trader friends. However, learning about some moratorium on interest payments in Argentina usually will not lead to a more profitable trading account. Ok, time for some illustrations. With another trading week behind us, I first begin with a weekly chart of the Dow and note possible support and resistance levels. Chart of the Dow Jones, Weekly The next timeframe I choose is a daily chart, changing the colors for support and resistance to black. If at least two time frames match up, the color becomes green. The Daily chart, with its use of black and thicker line, makes it more obvious to determine trend and possible psychology. The Dow is currently under an intermediate trend line, most likely taking sentiment to either “neutral” or “slightly bearish”. Of course, this is more of an overview reading and does not mean I will be selling the market immediately on Monday. Chart of Dow Jones, Daily Chart of the Dow Jones, 60 minute Only a few lines were added to the graph when the time frame went to a 60-minute chart. One line, between 8300 and 8400 was turned to green. Now let’s look at a five-minute chart and take things to a more practical trading level. Chart of Dow Jones, Five Minute After all of these time frames, my sentiment going into Monday is relatively neutral, with a slight bearish slant. This would mean that a slightly larger position would be put on if prices fall. A move above 8353 (top green line) should have bullish traders entering equities, while a rise above the black line (from 8375 to 8395 for Monday) should confirm the bullishness for more conservative traders. Under 8243 (lower green line) should take things to more bearish readings, while a drop under 8214 (darker, thicker line) should have bearish traders looking for a move towards the declining black line at 8043 to 8017. I like doing these lines because it takes emotion out and gets things to more of a science. I hope you do too. John Seckinger ------------------------------------------------------------ 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 09-15-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Market Terms & Definitions Naked Puts: Options 101: More Q&A With The Naked-Puts Editor Spreads/Straddles/Combos: Nothing Sweet About This Honey! Updated In The Site Tonight: Market Watch Market Posture ------------------------------------------------------------ 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 ------------------------------------------------------------ ************* COVERED CALLS ************* Trading Basics: Market Terms & Definitions By Mark Wnetrzak One of our new readers asked about the term "Target-Shoot" with regard to covered-call positions. Attn: Covered-calls Editor Subject: Option Trading Terms Hello Mark, I joined the OIN last month and I have found it to be a very useful service for both option traders and stock buyers like myself. I am comfortable with covered-calls and that's why I like your section but I don't quite understand all the terms and phrases you use in your descriptions. Specifically, what does "target shoot" mean when it involves a covered call? Is that referring to the stock price or the option or both? Also, you sometimes talk about potential play adjustments in the summary section but I did not think there was anything to be done after a call is sold against the stock. You are either called or you keep the stock, right?!? Anyway, thanks for a great product and keep up the good work! LD Regarding the technique of "Target-Shooting" with Covered-Calls: This method of opening a position involves placing a buy-write (with a net-debit) order at a price less than the current market and waiting for a dip to fill the order. A buy-write involves the buying of stock, whilst simultaneously writing a call against the purchase of that underlying security. Sometimes you can wait days for a dip, but in the current market climate we are seeing volatile activity almost every day. Normally the dips are too quick to react with manual orders but if you have an existing (limit) order, you can get filled when it happens and sometimes at the low for the day. Obviously, if you use this method, you will enter fewer plays because not all the orders will be filled. However, the plays you do enter will have better profit potential and you may be buying-in at the low for the day. In simple terms, using the buy-write order can help you establish a new position at an acceptable risk/reward ratio without the possibility of loss during the transaction. The stock does not have to be monitored during the day's trading as the order will be executed only when the appropriate net-debit is achieved. This type of trading works well with low volume issues and provides the market-maker with an opportunity to fill the request based on other orders in the pits. It can also be used with volatile stocks that new investors might otherwise avoid when utilizing the conservative, covered-writing strategy. Regarding potential adjustments with Covered-Calls: The important thing to remember when you're in a covered-call position is there are different strategies you can use as the play progresses. Despite what many people think, you are not "locked-in" to only one situation. At the same time, you need to be flexible and creative to ensure long-term success with the strategy. An example would be when the stock rallies shortly after the position is initiated. You can repurchase the sold call and "roll" up to the next higher strike, taking advantage of the opportunity to continue in a more aggressive position with potentially higher profits. Of course, the downside break-even point is increased by the amount of money required to complete the transition so when one rolls up, it is generally beneficial to move to a future expiration date as it reduces the overall cost of the new position. Another illustration of flexibility in the covered-call strategy can be seen when investors with large positions in a specific stock diversify by spreading the sold calls over time, as well as different strike prices. One can gain several benefits by writing a portion of the options near-term and the remaining calls further in the future. In the event of significant stock price movement, all of the various positions will not need to be adjusted at the same time. This may include either having the stock called away, or buying back one written call and selling another. A second advantage is the level of option premiums may become more favorable than when the original series of calls were written. At worst, only one group of options would be sold when the premiums are low and hopefully, they would increase in value before the next expiration period. This type of flexibility will allow you to own various positions at different strike prices, smoothing your portfolio balance as the market fluctuates. This approach also prevents all of one's stock from being committed at a single price, thus is offers an excellent balance between potential return and favorable downside protection. 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 ALKS 7.70 7.75 SEP 7.50 1.25 *$ 1.05 11.8% IMCL 8.30 7.67 SEP 7.50 1.30 *$ 0.50 10.9% NXTL 5.49 8.29 SEP 5.00 1.10 *$ 0.61 10.1% MDR 6.00 6.72 SEP 5.00 1.50 *$ 0.50 8.0% CKFR 11.70 13.05 SEP 10.00 2.05 *$ 0.35 7.9% OSTE 9.34 9.30 SEP 7.50 2.20 *$ 0.36 7.7% WEBX 15.02 14.54 SEP 15.00 1.40 $ 0.92 7.3% TDY 17.80 18.40 SEP 17.50 1.05 *$ 0.75 6.8% MNS 11.20 10.41 SEP 10.00 1.75 *$ 0.55 6.3% NWRE 16.94 15.97 SEP 15.00 2.65 *$ 0.71 5.4% V 12.96 13.12 SEP 10.00 3.30 *$ 0.34 5.4% XOMA 5.66 6.05 SEP 5.00 0.95 *$ 0.29 5.4% NWRE 17.82 15.97 SEP 15.00 3.30 *$ 0.48 5.0% ABFS 27.46 28.22 SEP 25.00 3.00 *$ 0.54 4.8% AFFX 18.51 19.07 SEP 15.00 4.40 *$ 0.89 4.6% MRCY 24.79 25.51 SEP 22.50 3.60 *$ 1.31 4.5% NET 14.56 14.22 SEP 12.50 2.55 *$ 0.49 4.4% VMSI 22.30 20.33 SEP 20.00 2.80 *$ 0.50 3.9% QCOM 28.46 28.58 SEP 25.00 3.90 *$ 0.44 3.9% ICST 20.74 17.01 SEP 17.50 4.20 $ 0.47 2.5% ORCL 10.79 9.73 SEP 10.00 1.15 $ 0.09 1.0% IDTI 15.20 11.85 SEP 12.50 3.30 $ -0.05 0.0% ISIS 11.25 8.97 SEP 10.00 2.05 $ -0.23 0.0% JDEC 13.05 11.41 SEP 12.50 1.30 $ -0.34 0.0% FFIV 14.04 10.79 SEP 12.50 2.55 $ -0.70 0.0% AMR 11.14 7.36 SEP 10.00 1.65 $ -2.13 0.0% OSTE 9.45 9.30 OCT 7.50 2.50 *$ 0.55 5.7% CVC 9.48 10.98 OCT 7.50 2.50 *$ 0.52 5.4% NOK 13.95 14.04 OCT 12.50 2.20 *$ 0.75 4.6% FLE 6.02 7.51 OCT 5.00 1.30 *$ 0.28 4.3% *$ = Stock price is above the sold striking price. Comments: The major averages threaten to move lower as investors pause to remember and pray. The strength in the NASDAQ on Friday was encouraging though the SP-500 and DOW appear poised for a test of the July low. Two issues stand out on the early exit watch list and will be shown closed. AMR Corporation (NYSE:AMR), which said it sees a weaker September, and J.D. Edwards (NASDAQ:JDEC), which appears to have boosted its earnings. Both stocks offered agile investors a less painful exit at the open on Friday. Other early exit candidates include : F5 Networks (NASDAQ:FFIV), ISIS Pharmaceuticals (NASDAQ:ISIS), Integrated Device Tech. (NASDAQ: IDTI), Alkermes (NASDAQ:ALKS), WebEx Communications (NASDAQ:WEBX), Ventana Medical Systems (NASDAQ:VMSI), and Integrated Circuit System (NASDAQ:ICST). The current consolidation in these stocks appears a bit excessive and with the current market environment, capital preservation still rules. Positions Closed: Semtech (NASDAQ:SMTC), Tibco Software (NASDAQ:TIBX), Myriad Genetics (NASDAQ:MYGN), Millennium Pharmaceutical (NASDAQ:MLNM), and Cree (NASDAQ:CREE). 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 BSTE 29.40 SEP 25.00 BQS JE 5.70 148 23.70 35 4.8% CMLS 16.85 SEP 15.00 UUC JC 2.55 268 14.30 35 4.3% LMNX 7.53 SEP 7.50 UEN JU 0.60 20 6.93 35 7.1% MACR 8.49 SEP 7.50 MRQ JT 1.45 11 7.04 35 5.7% NWRE 15.97 SEP 12.50 QQA JV 4.10 159 11.87 35 4.6% PRX 28.20 SEP 25.00 PRX JE 4.30 12 23.90 35 4.0% RSTO 5.70 SEP 5.00 URF JA 1.20 133 4.50 35 9.7% 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 RSTO 5.70 SEP 5.00 URF JA 1.20 133 4.50 35 9.7% LMNX 7.53 SEP 7.50 UEN JU 0.60 20 6.93 35 7.1% MACR 8.49 SEP 7.50 MRQ JT 1.45 11 7.04 35 5.7% BSTE 29.40 SEP 25.00 BQS JE 5.70 148 23.70 35 4.8% NWRE 15.97 SEP 12.50 QQA JV 4.10 159 11.87 35 4.6% CMLS 16.85 SEP 15.00 UUC JC 2.55 268 14.30 35 4.3% PRX 28.20 SEP 25.00 PRX JE 4.30 12 23.90 35 4.0% 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). ***** BSTE - Biosite $29.40 *** Resolution Rally *** Biosite (NASDAQ:BSTE) is a research-based diagnostics company dedicated to the discovery and development of novel protein- based tests that improve a physician's ability to diagnose disease. The company combines separate, yet integrated, discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new approaches to diagnosis. In March 2002, Biosite entered into a multi-year collaborative agreement with Amgen (NASDAQ:AMGN). Shares of Biosite have rallied almost $10 since the company announced that it and Xoma (NASDAQ:XOMA) had "resolved all outstanding disputes" related to patents for certain research technologies involving antibodies. Obviously, investors are pleased with the news and this position offers a way to speculate conservatively on the company's future share value with a cost basis closer to technical support. SEP 25.00 BQS JE LB=5.70 OI=148 CB=23.70 DE=35 TY=4.8% ***** CMLS - Cumulus Media $16.85 *** Radio Sector Speculation *** Cumulus Media (NASDAQ:CMLS) is a radio broadcasting company that focuses on acquiring, operating and developing radio stations in mid-size radio markets in the United States. As of December 31, 2001, the company owned and operated 208 stations (153 FM and 55 AM) in 44 U.S. markets. The company also provides sales and marketing services under local marketing agreements (pending FCC approval of acquisitions) for 14 stations in six U.S. markets. The company will own and operate a total of 245 radio stations in 51 U.S. markets upon consummation of all of its pending acquisitions and dispositions. Merrill Lynch on Tuesday said it started coverage of the radio, broadcast and outdoor advertising industries with a "positive" rating, saying radio stocks are poised to outperform other advertising media during the next 12 months. We simply favor the rally back above the long-term moving average which completes the recent consolidation phase. Traders can speculate on the near-term performance of the issue with this conservative position. SEP 15.00 UUC JC LB=2.55 OI=268 CB=14.30 DE=35 TY=4.3% ***** LMNX - Luminex $7.53 *** Bracing For A Rally? *** Luminex (NASDAQ:LMNX) manufactures and markets products featuring a proprietary technology that advances and simplifies biological testing for the life sciences industry. LMNX's xMAP technology allows its Luminex 100 System to simultaneously perform up to 100 bioassays on a single drop of fluid by reading biological tests taking place on the surface of microscopic polystyrene beads called microspheres. xMAP technology combines this miniaturized liquid array bioassay capability with small lasers, digital signal processors and proprietary software to create a system offering advantages in speed, precision, flexibility and cost. Luminex's xMAP technology is used within the various segments of the life sciences industry in the fields of drug discovery, clinical diagnostics, genetic analysis and biomedical research. Luminex recently announced the completion of its Rules-Based Medicine(TM) research and development project ("RBM"). Luminex received a stock interest and will receive royalties from the marketing of RBM's products based on Luminex's xMAP technology, as well as revenue from the sale of instruments and microspheres. We simply favor the recent bullish technical indications and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. SEP 7.50 UEN JU LB=0.60 OI=20 CB=6.93 DE=35 TY=7.1% ***** MACR - Macromedia $8.49 *** On The Mend? *** Macromedia (NASDAQ:MACR) provides software that empowers millions of developers and designers to create effective user experiences on the Internet. The company's integrated family of software technologies enables the development of a wide range of Internet solutions including Websites, rich media content, and Internet applications across multiple platforms and devices. With an installed base of more than 3 million developers and designers, and with Macromedia Flash Player available to 98% of Web users, the company is a strategic information technology supplier to customers in the business, government and educational markets. There's not much news on MACR but technical indications suggest the issue has successfully completed a recent consolidation and is poised for future gains. This position offers excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. SEP 7.50 MRQ JT LB=1.45 OI=11 CB=7.04 DE=35 TY=5.7% ***** NWRE - Neoware Systems $15.97 *** Pullback = Entry Point? *** Neoware Systems (NASDAQ:NWRE) provides software and solutions to enable appliance computing, a web-based computing architecture targeted at business customers that is designed to be simpler and easier than traditional personal computer-based computing. The company's software and management tools power and manage a new generation of smart computing appliances that utilize the benefits of open, industry-standard technologies to create new alternatives to PCs used in business and a variety of proprietary business devices. Neoware Systems provides its software on top of a number of embedded operating systems, including Microsoft's Windows CE and NT Embedded, as well as an embedded version of the Linux operating system. The company reported sharply higher revenue and earnings for its 4th-quarter and fiscal year ended June 30, 2002. Neoware is gaining market share with growing profitability, a strong balance sheet and no debt. Neoware has been in "rally mode" since last November with the issue moving from $2 to $18 in only 10 months and the recent consolidation may be offering a second chance entry point. Investors looking for a long-term holding can use this position to obtain a low risk entry point in the issue. SEP 12.50 QQA JV LB=4.10 OI=159 CB=11.87 DE=35 TY=4.6% ***** PRX - Pharmaceutical Resources $28.20 *** Bullish Outlook *** Pharmaceutical Resources (NYSE:PRX) is a holding company that, through its subsidiaries, is in the business of developing, manufacturing and distributing a broad line of generic drugs in the United States. PRX operates primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc., a manufacturer and distributor of generic drugs. PRX's product line consists of prescription and, to a lesser extent, over-the-counter generic drugs consisting of approximately 119 products representing various dosage strengths for 51 drugs. The company also has strategic alliances with several pharmaceutical and chemical companies. PRX markets its products primarily to wholesalers, retail drug store chains, drug distributors and repackagers. On Thursday, Pharmaceutical Resources raised its profit forecast amid strong sales of its anorexia drug and the launch of generic versions of an ulcer drug and a treatment for muscle spasms. The company also will make a presentation on Wednesday, September 18 at the Bear Stearns Healthcare Conference. Our outlook is also bullish, due to the recent technical strength and this position provides a low risk cost basis in the issue. SEP 25.00 PRX JE LB=4.30 OI=12 CB=23.90 DE=35 TY=4.0% ***** RSTO - Restoration Hardware $5.70 *** Post-Earnings Rally *** Restoration Hardware (NASDAQ:RSTO) with its subsidiaries, is a specialty retailer of home furnishings, functional and decorative hardware and related merchandise. RSTO markets its merchandise through retail locations, mail order catalogs and on the worldwide Web (www.restorationhardware.com). The company's merchandise strategy and its stores' architectural style create an attractive selling environment designed to appeal to an affluent, well educated 35- to 60-year old customer. The company operated 104 stores in 31 states, the District of Columbia and in Canada as of February 2, 2002. The company operates a direct-to-customer sales channel, in addition to its retail stores, which includes both catalog and Internet, and a wholly owned furniture manufacturer. RSTO rallied in August after the company posted a second-quarter loss of $3.6 million, or 12 cents a share, narrower than its year ago loss of $6.9 million, or 30 cents a share. Sales rose 12% for the quarter and the company expects same-store sales growth in the 12 to 15 percent range in the third quarter. We simply favor the break-out above resistance at $5 and the recent move through the 50-dma on increasing volume. Cheap speculation for bottom-fishers. SEP 5.00 URF JA LB=1.20 OI=133 CB=4.50 DE=35 TY=9.7% ***** ***************** 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 VRSN 7.57 SEP 7.50 QVR JU 0.95 757 6.62 35 11.6% SEE 17.14 SEP 15.00 SEE JC 3.10 1621 14.04 35 5.9% OVER 22.78 SEP 20.00 GUO JD 4.00 127 18.78 35 5.6% NET 14.22 SEP 12.50 NET JV 2.45 87 11.77 35 5.4% PPD 21.41 SEP 17.50 PPD JW 4.80 136 16.61 35 4.7% VRTS 17.74 SEP 15.00 VIV JC 3.50 449 14.24 35 4.6% ESPD 10.25 SEP 10.00 ENU JB 0.75 240 9.50 35 4.6% QCOM 28.58 SEP 25.00 AAW JE 4.70 2702 23.88 35 4.1% INVN 35.76 SEP 30.00 FQQ JF 7.00 5227 28.76 35 3.7% ***************** NAKED PUT SECTION ***************** Options 101: More Q&A With The Naked-Puts Editor By Ray Cummins Much like the market, the OIN is forever in a state of flux and sometimes that makes it difficult to keep track of everything. Attn: Contact Support Subject: Position tracking and Summaries Ray, I am a faithful reader and follower of your advice. In trying to track your recommendations I am having trouble finding previous recommendations on each weeks listing of Current Positions. For example, today (9/11/02) the summary is as of 08-27-02. I can find none of the New Candidates from 8-25-02 like GISX or IMN. What am I doing wrong or what am I missing? PH Hello PH, First, thanks for being a faithful OIN reader!!! Next, I must apologize, as there is occasionally some confusion about the two sections you referred to...and the many newsletter products are continuously evolving with little explanation offered as to the ongoing changes. The collection of "premium selling" issues offered on Wednesdays, which until recently was called "Big Covered Calls & Naked Puts" because it historically focused on large-capitalization stocks (now few and far between), has nothing to do with the week-end edition of "Naked-Puts." The two groups of candidates are completely separate; Wednesday's plays include "at-the-money" options and various spread and combination positions while Saturday's candidate list, which is directed at the conservative trader, is limited to "out-of-the-money" plays on relatively low-priced issues. The summaries and comments for both sections are published once each week along with their respective sections. I hope this explanation helps you understand the differences in these two products and regardless of what section you favor, remember that the newsletter simply provides 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. Have A Great Day! Ray Attn: questions@OptionInvestor.com Subject: High Volume and Open Interest Dear OIN, I have only been trading options for a few months and you might say I am still "learning the ropes." This week, I was watching the volume in the September options for Hershey - HSY and the number of large trades was incredible. Since these are certainly not normal traders, I assume they are mutual fund managers and major brokers trying to profit from the sale (or protect against no sale) of the company. My question is who are these big players and do they make option prices better or worse for the average trader? Thanks, RM Hello RM, Indeed, option trading in Hershey has been rather active lately, due to the possible sale of the company and the complications surrounding the deal. The large block trades are likely the result of mutual fund managers protecting their holdings and institutional traders speculating on the future of the company. Institutional traders use futures, options and other financial instruments to help control risk and maximize the value of their portfolios. In the stock-options market, portfolio managers are often option sellers as well as buyers, writing both call and put options to improve the income of their equity holdings and provide a margin for downside movement in volatile markets. The covered-write strategy has also become a popular technique for pension funds and other specialized investment vehicles, who use this method to outperform the major indices. Since pension funds have few alternatives to holding a major portion of their assets in common stocks, covered-writing also provides a form of risk management with no additional cash outlays our expenditures. Another shared strategy among institutional option traders is the protective put. Fund managers who want to eliminate the risk of a downward price movement can simply purchase a block of puts to "protect" the value of a specific holding. This method is more common because it allows the buyer to "lock-in" a realized profit at specific cost basis and also participate in any future upside activity in the underlying. Institutions are almost always in the market for put options and they are willing to pay a premium for the insurance against a drop in the price of the held asset. This is the main reason that put options have enjoyed relatively high premiums over the past few months and the trend is likely to continue for some time. Some of the most frequent institutional traders in the options market are hedge fund managers. Hedge funds are simply private pools of capital usually limited to a small number of "qualified" investors and administered by a fund manager (who may also have his/her own money in the fund). Hedge funds profit through the use of a range of unique strategies including everything from sophisticated arbitrage techniques to speculation in high growth issues and short-term structured products. Some funds invest only in ordinary stocks and bonds while others focus on intricate risk management systems and complex financial derivatives. Almost all of them use high leverage instruments and short positions in their portfolios but most of these funds don't actually "hedge" as the title suggests. The concept of "hedging" refers to the practice among traders of buying or selling opposing futures contracts or other derivatives to limit or reduce exposure to unwanted price movements. Most hedge funds simply use a variety of strategies to reduce their overall exposure to the market in which they trade. As you can see, institutional traders do have a significant impact on the options market and even more so with equity-index options, which are used to insure portions of, or entire stock portfolios. The activity of institutional traders adds liquidity to the market and allows retail traders to enter and exit their positions much more efficiently and with better prices, and that's something we can all use help with! Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule: Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a "buy-to-close" STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield ITMN 27.39 29.29 SEP 25.00 0.75 *$ 0.75 17.5% ADRX 24.00 24.65 SEP 17.50 0.40 *$ 0.40 16.7% TYC 15.69 16.88 SEP 12.50 0.30 *$ 0.30 13.3% JDEC 13.05 11.41 SEP 10.00 0.45 *$ 0.45 12.8% PPD 20.67 21.41 SEP 15.00 0.35 *$ 0.35 11.9% KMX 19.02 18.50 SEP 17.50 0.35 *$ 0.35 11.8% MRVL 22.21 20.70 SEP 17.50 0.50 *$ 0.50 11.0% NWRE 14.00 15.97 SEP 10.00 0.40 *$ 0.40 10.9% FDRY 8.99 8.30 SEP 7.50 0.35 *$ 0.35 10.3% CIMA 22.99 23.37 SEP 20.00 0.30 *$ 0.30 10.0% RGLD 14.86 18.05 SEP 12.50 0.25 *$ 0.25 9.9% AMLN 13.00 12.98 SEP 10.00 0.40 *$ 0.40 9.7% IMDC 23.45 23.65 SEP 20.00 0.40 *$ 0.40 9.6% INVN 28.36 35.76 SEP 22.50 0.85 *$ 0.85 9.4% JDEC 13.40 11.41 SEP 10.00 0.25 *$ 0.25 9.3% ICOS 27.49 23.72 SEP 20.00 0.75 *$ 0.75 8.7% WMGI 20.49 18.75 SEP 17.50 0.45 *$ 0.45 8.6% CVTX 26.01 21.68 SEP 20.00 0.70 *$ 0.70 8.6% ITMN 24.87 29.29 SEP 20.00 0.30 *$ 0.30 8.5% UOPX 28.78 30.60 SEP 25.00 0.45 *$ 0.45 8.4% CCMP 43.60 44.12 SEP 35.00 0.35 *$ 0.35 8.3% PPD 21.95 21.41 SEP 15.00 0.35 *$ 0.35 8.0% ENZN 24.13 21.65 SEP 17.50 0.60 *$ 0.60 8.0% VIA 41.70 42.47 SEP 37.50 0.45 *$ 0.45 7.6% ADRX 24.63 24.65 SEP 15.00 0.25 *$ 0.25 7.3% AU 25.20 27.90 SEP 22.50 0.25 *$ 0.25 7.1% SIE 22.88 18.52 SEP 17.50 0.40 *$ 0.40 7.0% TTWO 23.40 27.00 SEP 17.50 0.40 *$ 0.40 6.8% LNCR 33.38 31.91 SEP 30.00 0.80 *$ 0.80 6.5% NPSP 23.06 19.70 SEP 15.00 0.45 *$ 0.45 6.4% PPD 22.23 21.41 SEP 12.50 0.35 *$ 0.35 6.3% HD 33.25 33.45 SEP 30.00 0.30 *$ 0.30 6.3% IVGN 35.60 36.29 SEP 30.00 0.35 *$ 0.35 5.9% HGSI 17.59 12.95 SEP 12.50 0.25 *$ 0.25 5.8% HD 32.93 33.45 SEP 30.00 0.40 *$ 0.40 5.7% HGSI 17.87 12.95 SEP 12.50 0.30 *$ 0.30 5.6% IMN 33.05 31.43 SEP 30.00 0.55 *$ 0.55 5.6% LOW 44.03 44.97 SEP 40.00 0.35 *$ 0.35 5.5% CLS 23.80 21.60 SEP 17.50 0.30 *$ 0.30 5.2% *$ = Stock price is above the sold striking price. Comments: Technology stocks struggled to remain "in the black" Friday after recent sharp declines and although the outlook is rather bleak, the range-bound activity may continue for the next few weeks. From a long-term viewpoint the trend is bearish, thus stock selection and effective position management will be the key to achieving portfolio profits. Marvell Technology Group (NASDAQ:MRVL) has bounced back and Wednesday's rally provided a great "early-exit" opportunity with a profitable outcome. J.D. Edwards (NASDAQ:JDEC) is our new concern and despite a favorable earnings outlook, the issue's technical indications are less than outstanding. Human Genome Sciences (NASDAQ:HGSI), CV Therapeutics (NASDAQ:CVTX), and Icos (NASDAQ:ICOS) continue to be potential exit candidates and issues on the watch-list include Sierra Health (NYSE:SIE), Enzon (NASDAQ:ENZN), Wright Medical (NASDAQ:WMGI), and Imation (NYSE:IMN). Positions Previously Closed: OSI Pharmaceuticals (NASDAQ:OSIP), Global Imaging (NASDAQ:GISX), Multimedia Games (NASDAQ:MGAM), and Vertex Pharmaceuticals (NASDAQ:VRTX). 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 AMZN 16.61 SEP 12.50 ZQN VQ 0.30 5771 12.20 35 7.2% BSX 30.18 SEP 27.50 BSX VY 0.85 278 26.65 35 7.2% COF 38.92 SEP 27.50 COF VY 0.60 187 26.90 35 6.2% IDE 25.50 SEP 22.50 IDE VX 0.75 10 21.75 35 8.2% INVN 35.76 SEP 25.00 FQQ VE 0.45 1453 24.55 35 5.1% MDG 20.40 SEP 17.50 MDG VW 0.55 310 16.95 35 8.2% PPD 21.41 SEP 15.00 PPD VC 0.60 562 14.40 35 10.7% RGLD 18.05 SEP 15.00 MJQ VC 0.50 303 14.50 35 9.3% STN 14.15 SEP 12.50 STN VV 0.25 117 12.25 35 5.1% UTHR 16.50 SEP 15.00 FUH VC 0.55 0 14.45 35 8.5% 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 PPD 21.41 SEP 15.00 PPD VC 0.60 562 14.40 35 10.7% RGLD 18.05 SEP 15.00 MJQ VC 0.50 303 14.50 35 9.3% UTHR 16.50 SEP 15.00 FUH VC 0.55 0 14.45 35 8.5% IDE 25.50 SEP 22.50 IDE VX 0.75 10 21.75 35 8.2% MDG 20.40 SEP 17.50 MDG VW 0.55 310 16.95 35 8.2% AMZN 16.61 SEP 12.50 ZQN VQ 0.30 5771 12.20 35 7.2% BSX 30.18 SEP 27.50 BSX VY 0.85 278 26.65 35 7.2% COF 38.92 SEP 27.50 COF VY 0.60 187 26.90 35 6.2% INVN 35.76 SEP 25.00 FQQ VE 0.45 1453 24.55 35 5.1% STN 14.15 SEP 12.50 STN VV 0.25 117 12.25 35 5.1% 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). ***** AMZN - Amazon.com $16.61 *** Internet Retail Giant *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. Amazon.com in July posted a second quarter net loss of $94 million, or $0.25 per share, but boosted its full-year sales outlook. Earlier this month, Moody's Investors Service raised one of AMZN's ratings, saying the Internet retailer has improved its ability to generate cash. Investors who wouldn't mind owning the Internet's retail leader near a cost basis of $12 should consider this position. SEP 12.50 ZQN VQ LB=0.30 OI=5771 CB=12.20 DE=35 TY=7.2% ***** BSX - Boston Scientific $30.18 *** Solid Outlook! *** Boston Scientific (NYSE:BSX) is a global developer, manufacturer and marketer of less-invasive medical devices. The firm's unique products are offered by two major business groups, Cardiovascular and Endosurgery. The Cardiovascular segment focuses on products and technologies for use in the firm's interventional cardiology, interventional radiology, peripheral vascular and neurovascular procedures. The Endosurgery organization focuses on products and technologies for use in oncology, vascular surgery, endoscopy, urology and gynecology procedures. Standard & Poor's recently said that FDA approval of Boston Scientific's Express2 coronary stent system will help keep the company "on track" because it allows them to participate in the forthcoming $5 billion U.S. drug-coated coronary stent market. Investors apparently agree with a bullish outlook as they pushed the issue to a test of two-year highs last week. Traders who believe the upward trend will continue can profit from that outcome with this play. SEP 27.50 BSX VY LB=0.85 OI=278 CB=26.65 DE=35 TY=7.2% ***** COF - Capital One $38.92 *** Premium Selling! *** 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. Option premiums in COF are at historically high levels and traders who wouldn't mind the stock in their long-term portfolio can establish a cost basis near $27 with this position. SEP 27.50 COF VY LB=0.60 OI=187 CB=26.90 DE=35 TY=6.2% ***** IDE - Integrated Defense Tech. $25.50 *** New Acquisition *** Integrated Defense Technologies (NYSE:IDE) is a developer and provider of advanced electronics and technology products to the defense and intelligence industries. The company offers over 500 products comprising electronic combat systems, diagnostics and power systems and communications and surveillance systems. These are installed on or used in a broad array of military platforms in order to enhance their operational performance or extend their useful life. Integrated Defense Technologies' installed product base is found on major military platforms such as the F-16 and C-17 aircraft, the DDG-51Destroyer and the Trident submarine, the M1 Abrams Main Battle Tank and the Light Armored Vehicle, the High Mobility Multi-purpose Wheeled Vehicle as well as the Patriot and Tomahawk missile systems. Shares of IDE soared Friday after the provider of electronic products for the defense and intelligence industries said it had reached an agreement to buy the BAE Systems' advanced systems business, which makes radio frequency surveillance equipment, for $146 million in cash. The company says the deal, which is expected to close early in the fourth quarter, will be accretive to 2003 earnings and investors are apparently in favor of the acquisition. SEP 22.50 IDE VX LB=0.75 OI=10 CB=21.75 DE=35 TY=8.2% ***** INVN - InVision Technologies $35.76 *** Aviation Security *** 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. Invision has been in "rally mode" over the past few months and with the increased demand for detection of bombs and other explosive devices, this looks like an excellent long-term portfolio issue. SEP 25.00 FQQ VE LB=0.45 OI=1453 CB=24.55 DE=35 TY=5.1% ***** MDG - Meridian Gold $20.40 *** Market Hedge! *** Meridian Gold (NYSE:MDG) is a precious metals producer with a long and successful history of discovering, developing, and profitably operating gold ore mines. Meridian has been active in the gold business since 1981, when it was FMC Gold, and during its history the company has discovered five "grass roots" deposits containing over 8.7 million ounces of gold, invested nearly $400 million in gold extraction facilities, successfully built three gold mines: El Peñón; Beartrack and Paradise Peak, established three joint ventures from discoveries, two of which were developed into very successful gold mines and the third of which (Rossi) is currently being developed by joint venture partner Barrick Gold Corporation. Meridian Gold is one of our broad-market hedge plays for the month of October and traders who believe that equity values will slump can profit from the likely rise in gold stocks with this position. SEP 17.50 MDG VW LB=0.55 OI=310 CB=16.95 DE=35 TY=8.2% ***** PPD - Pre-Paid Legal $21.41 *** More Premium Selling! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. Legal services include unlimited attorney consultation, traffic violation defense, auto-related criminal charges defense, letter writing/document preparation, will preparation and review and a general trial defense benefit. Pre-Paid shares rallied Friday, despite news that it had been reported to the U.S. Securities and Exchange Commission for not disclosing fees paid to a magazine that subsequently recommended its stock. The report said Pre-Paid Legal Services issued a press release Tuesday boasting about the recommendation but the release didn't disclose that PPD paid more than $30,000 to the publication. Pre-Paid always seems to be doing something wrong, but the stock is a great speculative candidate for traders who favor aggressive "premium-selling" positions. SEP 15.00 PPD VC LB=0.60 OI=562 CB=14.40 DE=35 TY=10.7% ***** RGLD - Royal Gold $18.05 *** Broad-Market Hedge *** Royal Gold (NASDAQ:RGLD) is the largest U.S.-based royalty firm engaging in the acquisition and management of precious metal royalty interests. Royal Gold seeks to acquire existing royalties or to finance projects that are in production or near production in exchange for royalty interests. The firm, to a reduced extent, also explores and develops properties thought to contain precious metals and seeks to obtain royalty and other carried ownership interests in these properties through the subsequent transfer of operating interests to other mining companies. Substantially all of the firm's revenues are and can be expected to be derived from royalty interests, rather than from mining operations conducted by the company. During 2001, the company focused on the acquisition of royalty interests, rather than the creation of such interests through exploration, followed by further development and property transfers to larger mining companies. Royal Gold is another good candidate for a broad-market hedge and traders who want to profit from a decline in the major equity averages should consider this position. SEP 15.00 MJQ VC LB=0.50 OI=303 CB=14.50 DE=35 TY=9.3% ***** STN - Station Casinos $14.15 *** Hot Sector! *** Station Casinos (NYSE:STN) is the leading provider of gaming and entertainment to the residents of Las Vegas, Nevada. Station's properties are regional entertainment destinations and include various amenities, including numerous restaurants, entertainment venues, movie theaters, bowling, and convention/banquet space, as well as traditional casino gaming offerings such as video poker, slot machines, table games, bingo and race and sports wagering. Station owns and operates Palace Station Hotel & Casino, Boulder Station Hotel & Casino, Santa Fe Station Hotel & Casino and Wild Wild West Gambling Hall & Hotel, Texas Station Gambling Hall & Hotel and Fiesta Rancho Casino Hotel in Las Vegas, Nevada, and Sunset Station Hotel & Casino and Fiesta Henderson Casino Hotel in Henderson, Nevada. Station also owns a 50% interest in both Barley's Casino & Brewing Company and Green Valley Ranch Station Casino in Henderson, Nevada. Casino and Resort stocks have been "on the move" in recent weeks and this position offers a low risk cost basis in a rebounding issue with favorable buying support. SEP 12.50 STN VV LB=0.25 OI=117 CB=12.25 DE=35 TY=5.1% ***** UTHR - United Therapeutics $16.50 *** Own This One! *** United Therapeutics (NASDAQ:UTHR) is a biotechnology firm focused on combating various chronic and life-threatening cardiovascular, infectious and oncological diseases with unique therapeutic drugs. United Therapeutics is active in three primary therapeutic areas (cardiovascular medicine, infectious disease and oncology), with four major therapeutic platforms: prostacyclin analogs, arginine formulations, telemedicine and iminosugars. Most of the company's resources are focused on its analogs of the endogenous hormone prostacyclin for the ongoing treatment of pulmonary hypertension, peripheral vascular disease and metastatic cancer. The firm's second principal focus is the development of iminosugar compounds for the treatment of hepatitis B and C. United Therapeutics also devotes resources to the commercialization and further development of arginine therapy, especially in coronary artery disease, and of telecardiology, principally for cardiac arrhythmia. Investors who are interested in owning a unique biotechnology stock with a solid outlook and bullish technicals should consider this position. SEP 15.00 FUH VC LB=0.55 OI=0 CB=14.45 DE=35 TY=8.5% ***** ***************** 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 CKFR 13.05 SEP 10.00 FCQ VB 0.50 120 9.50 35 14.0% GNSS 9.31 SEP 7.50 QFE VU 0.30 165 7.20 35 11.8% ITMN 29.29 SEP 25.00 IQY VE 0.95 748 24.05 35 9.9% ROAD 33.06 SEP 30.00 EJQ VF 1.30 40 28.70 35 9.9% ADRX 24.65 SEP 15.00 QAX VC 0.60 434 14.40 35 9.4% GYMB 18.80 SEP 17.50 GQU VW 0.65 4 16.85 35 8.2% AU 27.90 SEP 25.00 AU VE 0.85 417 24.15 35 8.1% ADBE 20.77 SEP 17.50 AEQ VW 0.50 729 17.00 35 7.8% GTK 24.02 SEP 22.50 GTK VX 0.70 0 21.80 35 6.9% VRTS 17.74 SEP 12.50 VIV VV 0.25 298 12.25 35 5.7% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Nothing Sweet About This Honey! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** September 13, 2002 A sell-off in blue-chip stocks pulled the Dow Industrials lower Friday after a grim profit forecast from Honeywell International. Despite upbeat data showing low inflation and strong retail sales, industrial stocks struggled throughout the session amid concerns over earnings at one of America's most well-known conglomerates. Honeywell became the biggest percentage loser on the Dow after the company slashed earnings estimates for the third quarter and full year, saying the broad economic recovery was not materializing, especially in the aviation industry. The unexpected news weighed on industry competitors United Technologies (NYSE:UTX) and General Electric (NYSE:GE), who both contributed to the 66-point Dow drop. On the bright side, investors sought refuge in technology stocks after Adobe Systems (NASDAQ:ADBE) announced that net earnings rose from a year earlier as investment losses narrowed. The software firm also forecast growth in the current quarter and the optimistic outlook helped lift the tech-heavy NASDAQ Composite Index 11 points to 1,291. In the broader equity sectors, retailers enjoyed some bullish activity amid upbeat sales data and construction, media, and consumer services shares also edged higher. Standard & Poor's 500-stock index rebounded 3 points to 889. Advancing stocks paced declining issues by roughly 4 to 3 on both the NASDAQ and the New York Stock Exchange. Big Board volume was light at 1.59 billion shares while the technology exchange saw 1.2 billion shares trade hands. The benchmark 10-year Treasury climbed 4/32 to 103 26/32, yielding 3.91%. For the week, the major stock averages ended lower and the combination of poor earnings, uncertainty about terrorism, and waning consumer confidence will likely lead to future declines in the equity markets. ****************************************************************** - PORTFOLIO SUMMARY - ****************************************************************** Last week's new plays (positions/opening prices/strategy): Lumenis (NSDQ:LUME) JAN5C/JAN7.5C $1.00 debit bull-call Ball Corp. (NYSE:BLL) OCT45P/OCT50P $0.70 credit bull-put Michaels (NYSE:MIK) SEP40P/SEP45P $0.35 credit bull-put Pharmacia (NYSE:PHA) OCT50C/OCT45C $0.60 credit bear-call RJ Reynolds (NYSE:RJR) SEP60C/SEP55C $0.70 credit bear-call S&P 100 (CBOE:OEX) OCT395P/400P $0.45 credit bull-put S&P 100 (CBOE:OEX) OCT500C/495C $0.45 credit bear-call Boyd Group (NYSE:BYD) DEC20C/DEC15P $0.15 debit synthetic CableVision (NYSE:CVC) DEC15C/DEC5P $0.10 debit synthetic Met-Life (NYSE:MET) JAN20P/JAN30C $0.05 credit synthetic Pfizer (NYSE:PFE) DEC25P/DEC35C $0.15 credit synthetic Int.Sec.Sys. (NSDQ:ISSX) SEP15C/SEP15P $1.80 debit straddle The majority of our new combination plays were available near the suggested entry prices, although some targets would not have been achieved (on a simultaneous order basis) until late in the week. Portfolio Activity: The recent decline in equity values had relatively little effect on the Spreads/Combos portfolio as most positions remained in a profitable range. In the largest category: Credit Spreads, 16 of 19 plays are currently successful and all of the losing positions were previously identified as potential "early-exit" candidates. Spreads in International Business Machines (NYSE:IBM) and Express Scripts (NASDAQ:ESRX) should have been closed (or adjusted), but one play that has yet to be decided is Lockheed Martin (NYSE:LMT). as the issue is struggling to move beyond short-term resistance (and our break-even point) near $66. In the time-selling group, Amylin (NASDAQ:AMLN) and Nextel (NASDAQ:NXTL) have been the top plays but older spreads in Goldcorp (NYSE:GG) and Kellogg (NYSE:K) have rebounded in recent sessions. Neutral-outlook plays in eBay (NASDAQ:EBAY) and Forest Labs (NYSE:FRX) are at maximum profit and the speculative debit straddle in Emulex (NYSE:ELX) reached the upside break-even point when the stock rallied to $19.75 during Wednesday's rally. Traders who chose to exit the bullish portion of the play now have a free (and profitable) SEP-$17.50 put to sell in the coming week. Among the synthetic positions, Dupont Photomasks (NASDAQ:DPMI), Hershey (NYSE:HSY) and Mylan (NYSE:MYL), have all offered small gains. Next week, we will be making some changes to the summary format. The new layout will be similar to Wednesday's "Big-Cap Plays" design with a data-based summary and comments for individual positions within each strategy group. This method will allow all of the portfolio plays to be tracked with one spreadsheet and the ongoing results will be posted on a weekly basis. In order to make the transition simple and less cumbersome, plays published prior to September will not be included. Traders with questions previous positions should send them to: Contact Support ****************************************************************** - READER'S WRITE E-MAIL REPLIES - ****************************************************************** Attn: Contact Support Subject: Option Trading Books Hi Ray, While I have been an OI subscriber for over 5 years, I have up until now not explored option strategies more complex than simple calls or puts for short term trading. I would like to expand my horizon so it looks like I will become a regular reader of your section in the newsletter dealing with combinations and straddles. My personal library has quite a selection of books on technical analysis, swing trading, point and figure charting etc. I have just ordered the book titled Option Volatility & Pricing, and I already own McMillan's book on Options as a Strategic investment. Are there any other books that you know of dealing with the subject of complex option strategies that would complement what I currently have today? By the way, I would normally say something like great article or something comparable. Quite honestly I could not say, one way or the other. What I can say is that over time I have been able to learn and educate myself through OI and have a great deal of respect for what you guys are doing. It really is awesome and reminds me of some of the more productive teams I have worked with in my other professional life and career at Hewlett Packard. Best regards, DS (Sko) Hello Sko, Thanks for your interest in my section and, more importantly, in being a long-time subscriber to the Option Investor Newsletter. Your comments about the "team" were very generous and I can say from a personal perspective that the core members of the OIN (from the pre-website days) are truly dedicated to offering the best retail option trading resource, at a reasonable price, on the Internet. Of course, the newsletter has evolved substantially over the years and we are always trying to make improvements and conform to the reader's requests -- which seem to change on a regular basis. One thing that hasn't changed is the way options are traded and that fact, along with subscriber comments, has led me to do far less writing on the subject of strategies and focus more on simply providing candidates. Indeed, that's the current direction of my small contribution to the OIN and I have found that most readers of the Spreads/Combos section want little more than a high-quality list of potential plays. It is important however, that successful trading techniques and strategies are covered by other writers and I believe with the current staff, we have finally achieved a favorable balance between market coverage, commentaries and play research. Regarding books on spreads and combination trading, a short list of the titles I have found to be most useful includes: Option Volatility & Pricing: Advanced Trading Strategies and Techniques; by Sheldon Natenberg McMillan on Options; by Lawrence McMillan Options As a Strategic Investment (4th ed.); by Lawrence McMillan Option Market Making: Trading and Risk Analysis for the Financial and Commodity Option Markets; by Allen J. Baird Advanced Options Trading: The Analysis and Evaluation of Trading Strategies, Hedging Tactics and Pricing Models; by Robert Daigler Hope that helps, Ray ****************************************************************** - STRADDLES AND STRANGLES - One of our subscribers suggested we offer some additional credit (short) strangles to take advantage of the recent increase in option premiums (implied volatility) and the range-bound trends of many stocks. Indeed, the current market conditions make that approach viable and here are some new candidates for aggressive traders who favor premium-selling strategies. All of the issues have relatively stable chart patterns but current news and market sentiment will have an effect on these positions, so review each play individually and make your own decision about its outcome. ****************************************************************** ADRX - Andrx Corporation $24.65 *** Generic Drug-Maker *** Andrx Corporation (NASDAQ:ADRX) is a specialty pharmaceutical company engaged in the formulation and commercialization of oral controlled-release generic and brand pharmaceuticals utilizing its proprietary drug delivery technologies. The firm has nine proprietary controlled-release drug delivery technologies that are patented for certain applications or for which it has filed for patent protection for certain applications. Andrx uses its proprietary drug delivery technologies and formulation skills to develop bioequivalent versions of selected controlled-release brand name pharmaceuticals, and brand name controlled-release formulations of existing immediate-release or controlled-release drugs. The company is also developing bioequivalent versions of specialty, niche and immediate-release pharmaceutical products and markets and distributes pharmaceutical products manufactured by third parties. PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-40 QAX-JH OI=334 B=$0.45 SELL PUT OCT-15 QAX-VC OI=434 B=$0.60 INITIAL NET CREDIT TARGET=$1.10-$1.20 PROFIT(max)=18% UPSIDE B/E=$41.10 DOWNSIDE B/E=$13.90 ****************************************************************** ISIS - ISIS Pharmaceuticals $8.97 *** Antisense Technology *** ISIS Pharmaceuticals (NASDAQ:ISIS) is a biopharmaceutical company focused on delivering RNA-based drug discovery technologies to identify and commercialize novel drugs to treat important diseases. RNA (ribonucleic acid) is a molecule that provides to a cell the information that it needs to produce proteins, including those proteins that are involved in disease. Interference with RNA can keep the body from producing proteins that are involved in disease. The company has a strong proprietary position in RNA-based drug discovery technologies. With its primary technology, antisense, ISIS creates inhibitors designed to bind with high specificity to their RNA target and modulate protein production. With its Ibis technology, the firm uses its discoveries in RNA to design small molecule therapeutics that bind to RNA. ISIS also uses its unique antisense technology in collaborations with pharmaceutical firms to identify and prioritize attractive gene targets for their drug discovery programs. PLAY (very aggressive - neutral/credit strangle): SELL CALL OCT-15.00 QIS-JC OI=3825 B=$0.60 SELL PUT OCT-7.50 QIS-VU OI=1150 B=$0.90 INITIAL NET CREDIT TARGET=$1.55-$1.60 PROFIT(max)=40% UPSIDE B/E=$16.55 DOWNSIDE B/E=$5.95 ****************************************************************** QCOM - Qualcomm $28.58 *** Trading Range? *** Qualcomm (NASDAQ:QCOM) is a developer and global supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. The company offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology, enhanced component integration and interoperability, as well as reduced time to market. PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-32.50 AAW-JZ OI=10411 B=$0.80 SELL PUT OCT-22.50 AAW-VX OI=3525 B=$0.65 INITIAL NET CREDIT TARGET=$1.50-$1.60 PROFIT(max)=20% UPSIDE B/E=$34.00 DOWNSIDE B/E=$21.00 ****************************************************************** TKTX - Transkaryotic Therapies $34.41 *** Another Biotech *** Transkaryotic Therapies (NASDAQ:TKTX) is a biopharmaceutical firm dedicated to the development and commercialization of products based on its proprietary development platforms: Niche Protein products, Gene-Activated proteins, and gene therapy. The firm's Niche Protein product platform is based on protein replacement for the treatment of rare genetic diseases, a small group of disorders characterized by the absence of certain metabolic enzymes. TKT's gene activation technology is a proprietary approach to the large scale production of therapeutic proteins, which does not require the cloning of genes and their subsequent insertion into non-human cell lines. The firm's primary gene therapy technology, known as Transkaryotic Therapy, is focused on the commercialization of non viral, ex vivo gene therapy products for the long-term treatment of chronic protein deficiency states. PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-45.00 UFT-JI OI=3693 B=$0.75 SELL PUT OCT-25.00 UFT-VE OI=36 B=$0.75 INITIAL NET CREDIT TARGET=$1.55-$1.60 PROFIT(max)=18% UPSIDE B/E=$46.55 DOWNSIDE B/E=$23.45 ****************************************************************** - SYNTHETIC POSITIONS - Both of these stocks have established trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ****************************************************************** BRCD - Brocade Communications $12.33 *** Can It Go Lower? *** 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 firm delivers and enables hardware and software products, education and other services that allow companies to implement highly available, scalable, manageable and secure environments for a wide range of business-critical storage applications. Companies can leverage the Brocade's SAN infrastructure solutions to connect servers with storage devices and scale them independently, consolidate and share servers and storage resources, centralize and manage data and share valuable backup resources across the enterprise, and provision and manage additional storage without increasing personnel resources. PLAY (conservative - bearish/synthetic position): BUY PUT OCT-10.00 BQB-VB OI=2690 A=$0.75 SELL CALL OCT-15.00 BQB-JC OI=6720 B=$0.60 INITIAL NET-DEBIT TARGET=$0.00-$0.05 TARGET PROFIT=$0.40-$0.75 Note: Using options, the position is similar to being short the stock. The initial collateral requirement for the sold call is approximately $310 per contract. ****************************************************************** TARO - Taro Pharmaceutical $32.55 *** Next Leg Up? *** Taro Pharmaceutical Industries (NYSE:TARO) is a multinational, science-based pharmaceutical company dedicated to meeting the needs of its customers through the discovery, development, manufacturing and marketing of the highest quality healthcare products. The company was founded with the goal of building a pharmaceutical company in Israel that would provide quality pharmaceutical products while investing in research to develop an international presence. PLAY (conservative - bullish/synthetic position): BUY CALL OCT-37.50 QTT-JU OI=154 A=$0.65 SELL PUT OCT-27.50 QTT-VY OI=91 B=$0.70 INITIAL NET CREDIT TARGET=$0.10-$0.20 TARGET PROFIT=$0.70-$0.90 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $875 per contract. ****************************************************************** - CALENDAR SPREADS - A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. ****************************************************************** SGP - Schering-Plough $23.67 *** Cheap Speculation! *** Schering-Plough Corporation (NYSE:SGP) is a holding company whose subsidiaries are engaged primarily in the discovery, development, manufacturing and marketing of pharmaceutical products worldwide. Discovery and development efforts target the field of human health but occasionally, applications in the field of animal health can result from these efforts. The company views its animal health applications as a means to maximize the return on investments in discovery and development. The company operates primarily in the prescription pharmaceutical marketplace however, where appropriate, Schering-Plough has sought and may in the future seek regulatory approval to switch prescription products to over-the-counter (OTC) status as a means of extending a product's life cycle. In this way, the OTC marketplace is yet another means of maximizing the return on investments in discovery and development. Strategy Explanation: A less neutral and more bullish type of calendar or time spread is initiated when the current value of the underlying issue is below the strike price of the options. This type of position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the underlying stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option's strike price. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the trader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are "in-the-money" at expiration, he will have to buy them back to preserve the long-term position. PLAY (conservative - bullish/calendar spread): BUY CALL JAN-27.50 SGP-AY OI=9399 A=$1.40 SELL CALL OCT-27.50 SGP-JY OI=1398 B=$0.65 INITIAL NET DEBIT TARGET=$0.75-$0.80 TARGET PROFIT=25-50% ****************************************************************** - CREDIT SPREADS - These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Both of these plays offer favorable risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** OHP - Oxford Health Plans $42.62 *** On The Rebound! *** Oxford Health Plans (NYSE:OHP) is a healthcare company providing health benefit plans in New York, New Jersey & Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice plans and other third-party administration of employer-funded benefit plans. The company offers its products through its HMO subsidiaries, Oxford Health Plans (NY), Oxford Health Plans (NJ), and Oxford Health Plans (CT), and through Oxford Health Insurance, Oxford's health insurance subsidiary. PLAY (conservative - bullish/credit spread): BUY PUT OCT-32.50 OHP-VZ OI=90 A=$0.30 SELL PUT OCT-35.00 OHP-VG OI=149 B=$0.55 INITIAL NET CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$34.70 ****************************************************************** SLAB - Silicon Laboratories $19.66 *** Bearish Outlook! *** Silicon Laboratories (NASDAQ:SLAB) designs, builds and markets proprietary high-performance mixed-signal integrated circuits for the wire-less, wire-line and optical communications industries. Mixed-signal ICs are electronic components that convert real-world analog signals such as sound and radio waves into digital signals that electronic products can process. The company's mixed-signal design engineers utilize complementary metal oxide semiconductor (CMOS) technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. The firm's expertise in analog CMOS and mixed-signal IC design allows the company to develop new products rapidly, which enables their customers to improve their time-to-market with end products that respond to consumer demand in the communications industry. PLAY (conservative - bearish/credit spread): BUY CALL OCT-30.00 QFJ-JF OI=677 A=$0.20 SELL CALL OCT-25.00 QFJ-JE OI=1083 B=$0.65 INITIAL NET CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$25.50 ****************************************************************** ------------------------------------------------------------ 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. 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