The Option Investor Newsletter Wednesday 09-18-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: The Matador Usually Wins Index Trader Wrap: Close, but no cigar Weekly Fund Family Profile: J. & W. Seligman: Seligman Group of Funds Options 101: More On Managing Risk Updated on the site tonight: Swing Trader Game Plan: Motion Sickness Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 09-18-2002 High Low Volume Advance/Decl DJIA 8172.45 - 35.10 8253.53 8051.91 1752 mln 532/1210 NASDAQ 1252.13 - 7.81 1263.90 1233.08 1560 mln 472/1057 S&P 100 435.99 - 2.56 441.04 429.93 totals 1004/2267 S&P 500 869.46 - 4.06 878.45 857.39 RUS 2000 376.75 - 2.56 379.83 373.27 DJ TRANS 2162.72 - 40.97 2200.88 2153.38 VIX 40.89 - 1.07 44.30 40.30 VIXN 59.33 - 1.06 61.76 57.45 Put/Call Ratio 1.36 ******************************************************************* The Matador Usually Wins by Steven Price We had an interesting batch of conflicting data and news stories this morning. First of all, the markets tanked on news from J.P. Morgan that they would be reducing their earnings forecast due to credit losses and lower trading revenue. The reaction was dramatic, as earnings forecasts were slashed on the bank. Lehman cut its forecast from 0.58 to 0.38 and lowered its price target on JPM from $31 to $23. Fitch ratings downgraded the bank's debt, as did Standard and Poor's, which said that it could lower the rating once again if trading problems persist in the fourth quarter. JPM has been estimated to have as much as $20 trillion (yes, I said trillion) of derivatives positions on its books, which is another source of tremendous risk for the company. They are the world's largest holder of gold derivatives. Two percent of a bank's derivatives exposure is usually considered at risk in the normal course of business. Two percent of $20 trillion is $400 billion. Considering a market cap of $37 billion for JPM, we could be seeing a lot more red on its chart than we already have. I am not saying that JPM could not profit from this portfolio, rather than lose, but the risk is enormous. The credit problem was pinned on loans to the telecom sector, which resulted in an increase of $1 billion in bad debt. If JPM is seeing high default rates from the telecoms, there are undoubtedly other banks with similar problems. While they may not have the same amount of exposure, we could still see some heavy losses. Taking this pattern a step further, there are other sectors that have performed horribly and seen financial problems as well. How many of these are also having problems making payments? How many banks are suffering from bad debts that we have not yet heard about? I think this announcement could just be the tip of the iceberg and I would stay away from playing the banks long on anything but a short-term basis. On the positive side, the U.S. trade deficit decreased by 6 percent in July, to $34.6 billion. Exports increased for the fifth straight month, while June's record trade deficit was revised downward to $36.8 billion from $37.2 billion. Inflation also appears to be peaking its head back out, as the consumer price index rose 0.3 percent. The core rate, which excludes the more volatile food and energy components, was also up by the same amount. Those increases were a bit higher than forecasts of 0.2 percent. Oracle released earnings after the bell yesterday. They met expectations, but issued cautious statements. The company's earnings fell 33 percent from last year and Jeff Henley, Oracle's CFO said, " We think the worst is over, and we think we'll see gradually better year-over-year numbers ... but it's still a difficult, slow recovery. We're being very cautious with our business planning at this point." These comments weighed heavily on the markets this morning as well, as the Nasdaq started the day down 15 points. Oracle ended the day down 8 percent (0.73) at $8.30. I have been writing recently about the bearish head and shoulders pattern forming across the broader indices. Yesterday's action in the Dow led to a definitive neckline break, as the index closed below 8305, which was the 50% retracement of its gains from July 24 to August 22. The neckline can be drawn from several different points, but there wasn't much to argue about in yesterday's Dow breakdown. The previous low at that support level was set on September 5 in the Dow. The Nasdaq Composite (COMPX), however, is a slightly different story. The September 5 low, which is also the point at which there is little argument about a neckline break, was 1251.00. The September 5 low is also the last significant support level above 1200. The Nasdaq traded as low as 1233.08 this morning and a breakdown appeared certain. However, much like the action in the Dow when it was testing the 50% retracement level the week of September 5, a rally boosted the Nasdaq back above the crucial level. Chart of the Nasdaq Composite (COMPX) After the bell, Electronic Data Systems (EDS) warned that they would miss expectations for the third and fourth quarters, as well as the full year. EDS said that lack of demand for infrastructure technology services is very soft and lowered earnings estimates from 74 cents to 12 to 15 cents for the third quarter. Although it was halted in after hours trading, rival IBM was trading down $3.55 to $66.00. This should be the kicker that takes the Nasdaq back down below that 1251 level and on its way to 1200. While neither IBM nor EDS are Nasdaq stocks, IBM is the biggest of the techs and should tip the scales. As a Dow stock, it may also lead us back below today's low of 8051.91. IBM is the third heaviest weighted stock in the Dow, and a significant move could speed the process toward re-testing July's low. Today's low got us within 21 points of 8030, which is the last significant support level between where the index is currently trading and the July low of 7532. I had planned on writing about the strength of the intraday turnaround, but if IBM does not rebound from its $3.50 dollar drop after the close, it is likely we will see tomorrow's action take us below 8030. This afternoon's rebound brought us back above the 61.8% retracement level and it appeared that this might be the next level of consolidation. However, given the news after the bell, I am no longer confident that this level will hold. Chart of The Dow In what appears to be more bad news for the brokerage sector, Merrill Lynch announced after the bell that they have fired Vice Chairman Thomas W. Davis and Schuyler Tilney, an investment banking managing director, for refusing to testify in the SEC and Department of Justice investigation of financial transactions Merrill completed with Enron. Merrill sold off after the announcement, as investors worry what the two executives are hiding. A refusal to testify does not always mean the subject is hiding something, however. The way the law is structured, it rarely benefits a potential defendant to speak up on his own behalf. Statements made for your own benefit are not admissible in court, while statements made against your own interest are allowed. Therefore, there is little to gain by speaking up on your own behalf and many attorneys counsel clients to simply remain quiet. Regardless of this rule, investors don't like hearing about non-cooperation in a government probe, especially when it has turned up many violations already. A development that did not get much media play today, but could have serious effects on our economy, was an informal agreement between OPEC members to leave oil production quotas unchanged. There had been predictions that they would raise their official quota of 21.7 million barrels a day at the September 19 meeting in Osaka, Japan, in order to bring the per barrel price down to palatable levels. But even Saudi Arabia, the world's largest producer of crude oil, apparently has agreed to leave current quotas unchanged. They had previously come out in support of raising quotas. This is partially the result of the fact that the OPEC members have actually been overproducing by about 1.7 million barrels per day, and will simply "cheat" on the current quota, rather than raise it. The problem for the U.S. is that the country's crude oil inventories have contracted by 15.3 million barrels in the last three weeks, and now stand at the lowest level, 287.8 million barrels, since March 2001. Heading into the winter, this could squeeze prices even higher than they are now - and that does not include the possibility of an invasion into Iraq. Crude Oil Futures jumped again today, as news of the unchanged quotas seeped out. A vote by Congress authorizing military action in Iraq will almost certainly push the price of futures over $30 per barrel. With an economy that is already growing at a very slow pace, increasing fuel costs could have a pronounced effect on all industries, as well as cutting into discretionary spending by consumers who will be paying higher prices at the pump. Chart of Crude Oil Futures With so many factors weighing on the markets today, look for a much lower open tomorrow. A hold above the 8000 level in the Dow could be viewed as bullish, however, the overall trend appears as though it is just a matter of time before we re-test July's lows. The put/call ratio is once again growing and now stands at 1.36, which shows an even greater number of puts trading than calls. While this is not an exact science, experience on the floor has taught me that puts trade when the smart money is bearish, and they trade more than calls when the smart money is very bearish. There will be pockets of opportunity from the long side, but remember that when the trend is down, the longs are usually short-term plays. Choose your plays carefully and don't lose sight of the big picture. ******************** INDEX TRADER SUMMARY ******************** Close, but no cigar Just as index bears found it rather tough sledding to break some upward trends on our bar charts and even some of the point and figure charts, today's tempting lows of the indexes near our swing-trader's targets has bears saying "close, but no cigar." After some September lows were reached in the late-morning session, stocks managed to rebound from their lows to leave the major indexes all showing marginal losses. Still, the technicals hint that a break is in the wings, but just as bears had to wait for breaks of trends, another day will have to pass for outlined targets to be achieved. Fathers and mothers will understand a waiting game as it relates to the families anxiously awaited new addition to the family. For the most part, the mother can't wait for it to be over, while the father resides in the reception room with cigars ready for distribution. Each time a nurse comes out from the delivery room, the expectant fathers all look up, awaiting the news, but as the nurse passes them by, they chuckle nervously and think, "close but no cigar." Trading volume was brisk today with the NYSE trading 1.47 billion shares and the NASDAQ trading nearly 1.57 billion. I've argued before that volume by itself doesn't really tell a trader anything about price action, but tells you everything about interest among participants. After all, a supply/demand theorist knows that for every buyer there's a seller, and the most aggressive buyer/seller eventually wins out over a give time period. Breadth remained negative throughout the session, despite some gains before the close in the major averages. The NYSE ended with 19 stocks declining for every 12 stocks showing a gain, while NASDAQ breadth was just a negative at 20 to 12. New highs versus new lows has shown stability in the new highs category in recent sessions, but stocks hitting new 52-week lows continues to deteriorate. For instance, on Monday the NYSE had 43 stocks reaching new 52- week highs versus 76 stocks at new lows. Today, the NYSE had 42 stocks at new highs versus 228 new lows. For me, this is like a rubber band stretching as if you or I hold a rubber band vertically, then pull the rubber band lower. Eventually, we'd stretch the rubber band to its extreme and it would break. Either that, or we'd have "give in" on one of the ends if the rubber band is to stay intact. With the Dow Industrials (INDU) 8,172 -0.42% (-35 points), S&P 500 (SPX.X) 869.46 -0.46% (-4 points), S&P 100 (OEX.X) 436 -0.58% (-2.5 points) and NASDAQ-100 Tracking Stock (QQQ) $21.93 -1.12% (-$0.25) it would be a stretch to say much happened over the entire trading session. Commercial airline carries were the weakest sector today with the Airline Index (XAL.X) 37.99 -5.04% breaking and then closing at a new 52-week low. Notable new 52-week lows had AMR Corporation (NYSE:AMR) $5.82 -11.8% and Continental Airlines (NYSE:CAL) $6.79 -15.4% also trading new 52-week lows. AMR is a component of the S&P 500 Index, but not the OEX. As I go down a list of new 52-week lows, it is increasing difficult to find many stocks that trade over $10, let alone $5. I think this is important as you and I need to focus on those stocks that are more "institutional." I'm not saying that institutions don't own a bunch of these stocks, which have gone south, but for the most part, their impact on the indexes you and I are trading is rather meaningless. What we can draw from the new highs/versus new lows list is somewhat of a pulse on how aggressive bulls are in an attempt to pick a bottom and take on risk, and at the same time try and get a feel for how eager a bear is to capture gains, remove the risk of being short from his/her portfolio and move on to another meal. There is also some psychology at play when investors see a stock like EMC Corp. (NYSE:EMC) $5.40 -7.84% break to a new 52-week low. This will weigh on any bulls mind with the thought being "if this data storage giant isn't doing well, then why should I be interested in the other guys in the group?" There were some notable new 52-week lows traded in NASDAQ-100 components like PeopleSoft (NASDAQ:PSFT) $13.96 -1.89% and QLogic (NASDAQ:QLGC) $29.54 -3.74% and Integrated Devices (NASDAQ:IDTI) $10.52 -4.79%. The oscillators of all these three stocks all have the MACD (12,26,9) starting to roll below zero level, while the daily stochastics (5,3,3) are all buried in oversold conditions. Short-term, the only "smart money" that buys these stocks from the bullish side are those that know for certain of a near-term catalyst for a rebound. Either that, or a bear from higher levels coming in to lock in a gain. For the QQQ trader, it's the bears covering their shorts that we need to worry about, not bulls buying. The question for a QQQ trader is when are the shorts going to come in and cover? That's the toughest, if not an impossible question to answer. For the technician, like myself, the only thing a QQQ trader and do I think is simply monitor his/her bearish trade and look for any sector, with representation in the QQQ that could cause upside movement. As mentioned in the past couple of wraps and in the "market monitor," its these darned biotechs, as depicted by the Biotech Index (BTK.X) 336.64 +1.69% that looks to be holding things together. Remember, per NASDAQ (as of 08/31/02), biotech represented an 11.9% weighting and that's the sector that has traded a flat range between 320-350 for the past 12 sessions that has had the QQQ gently trading lower and not giving the Q-bears our swing-trade bearish target of $21.35. The more heavily weighted software group of stocks, which according to NASDAQ (as of 08/31/02) represents a 31.42% weighting, has us seeing the GSTI Software Index (GSO.X) 89.97 - 1.80% attempting to break September support of 89.63 on an intra- day basis today. Do you "get the feel" for just how these two sectors are kind of "stretching" just like we noted above in the new highs versus new lows categories on both the NASDAQ and NYSE? In essence, the biotechs are attempting to anchor themselves in a base, while the software stocks attempt to break lower from September consolidation. And "in between" in the QQQ. I'll apologize for the following chart, but I want to try and explain how I'd look to control a bearish trade in the QQQ. The QQQ came close to our bearish target of $21.35, but today's low of $21.78 just didn't get us there. Tonight, I'd look to lower a trader's stop to just above today's QQQ high of GSO.X, QQQ and BTK.X Comparison - Daily Intervals Again, I'm limited on horizontal space, but what I'm trying to show here is how the QQQ is "sandwiched" between the software and biotech stocks that make up a large portion of the QQQ. We see weakness from the software chart (far left) as it broke upward trend two day's ago and intraday, broke to a September low. The "impact" was the QQQ making a more confirmed break below trend today. But the QQQ bear finds some problems as it relates to near-term technical strength in the biotechs. See how the biotechs are holding above trend and even trying to challenge both the 21-day SMA and 50-day SMA? As such, a QQQ trader that is short/put that can watch things would cover his/her QQQ position if..... The biotechs break above the 352 level COMBINED with any bullishness in the software group. Today the lower software action was ENOUGH to keep the QQQ lower. A bearish target near $21.35 can be achieved, but a bear wants to see weakness in the biotech COMBINED with weakness in the software stocks. Do you "note" the DIVERGING characteristics that the oscillators in the biotechs show, when compared to the software and QQQ charts? Why is this? The only explanation I can come up with and have discussed before is that the biotechs trade in a world of their own. They're not as "economically" sensitive, nor does any type of "attack on Iraq" really impact biotechs. What impacts biotech stock action is the "hope" of new discovery drugs and bulls getting aggressive and willing to take on greater risk. The one stock that "bothers" a bull right now is Genzyme (NASDAQ:GENZ) $21.70 +5.23%, which posts a third consecutive gain today, despite warning on earnings three days ago. What is in play here I think is a note I jotted down months ago from a little blurb in a newswire. Next Thursday, GENZ's Fabrazyme drug is up for review and possible FDA approval. I think bears are covering shorts and bulls may be speculating long ahead of this report. When you look at the NASDAQ-100 Heatmap of the NASDAQ- 100 today, its probably not a coincidence that other biotech components like GILD +6.25%, CHIR +4.11%, HGSI +3.75%, IMCL +3.03%, ABGX +2.21%, ICOS +2.13%, PDLI +1.94%, BGEN +1.59%, etc. saw bidding today. For those of you that have traded long enough, you've probably noted how just one positive bit of news related to FDA Approval in one sector stocks tends to boost bullishness in the sector on a short-term basis. This is why I think the biotechs are bidding. For a QQQ bear, they want it to stop short of BTK.X 503. For those traders that can't correlate action intra-day with their trades, I'd play it safe with a QQQ stop at $22.60, which is about equal risk of $0.67 to our potential reward target of $21.35 (roughly $0.58 gain potential). I spent a lot of time... I spent a lot of time on the QQQ's and getting a trader's mindset to try and look "beyond" just the security they're trading to try and understand and perhaps look for what could threaten a QQQ bear's profits so close to target. This is time consuming, but once learned, subscribers will know to take steps of their own to further investigate and perhaps lay out scenarios of what they want to happen based on a technical scenario. For other sector traders in the Dow Industrials, SPX and OEX, and even the QQQ's, bears should get some early morning weakness after tonight's earning's warning out of Electronic Data Systems (NYSE:EDS) $36.46 -3.4% and BIG MISS on earnings they now expect for the upcoming quarter. What this has done in after-hours trading is had the bulk of "computer-related" technology stocks trading lower, and had S&P futures at 862, which is about 8-points below fair value. In essence, as it stands at the time of this writing, stocks look to open lower in the morning on a broader scale. The "key phrase" I pick up on and perhaps other market participants are, is "economy is having a major impact on its results" and management concedes that it was more optimistic than it should have been in its ability to fight its way through a tough economy; noting it expected customer discretionary spending to tighten, but not virtually stop altogether. Currently, I'd look to lock in some profits from bearish index trades at previously outlined swing-trade targets. For review. DIA target is $80.50 : today's low was $80.77 : closed $81.42 OEX target is 419 : today's low was 430 : closed 436 SPX target is 835 : today's low was 858 : closed 870 SPY target is $84 : today's low was $86.95 : closed $86.95 QQQ target is $21.35 : today's low was $21.78 : closed $21.93. Stochastics have MACD still showing weakness, but daily stochastics with settings (5,3,3) are all below oversold levels. As such, traders can continue to use the 21-day or 50-day SMA's as stops, or if that's too much room, simply take today's closes, then calculate how much downside potential to your swing-trader's targets are left, just like we did in the QQQ. Then add that amount back to today's closes to put current risk/reward at 1:1. Again, using what we did in the QQQ as an example. Remember that index expiration is tomorrow, so traders shouldn't be surprised if some volatility is experienced. Be willing to trade targets and if taken out of a trade as you book gains from a bearish target level, DON'T then panic should a move lower take place. Most likely, traders will get a rebound, get some better trade setups for new entry points. I do think that bears have had plenty of "bad news" lately for bulls to cave in for our swing-trader's targets to be hit. We're close to our targets, but no cigars can be passed out yet. Did you know that I was the "biggest baby" of the month that was born in Lewistown, Montana? That's right! A whopping 10 lbs. 8 oz.! Oooooeeee, was mom glad when that was over. Dad worked for Boeing at the time. He denies ever calling me his "little 747." Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** J. & W. Seligman: Seligman Group of Funds Founded in 1864 and based in New York City, J. & W. Seligman and Company Inc. is one of the nation's oldest investment firms with more than $22 billion in assets under management as of June 30, 2002. Seligman manages money for institutions including public funds, corporations, endowments and foundations and Taft-Hartley plans, and provides a broad range of mutual funds and variable annuity products for individual investors including the Seligman Group of Funds. Seligman also manages Tri-Continental Corp., the largest publicly traded, diversified closed-end investment company in the U.S. and two closed-end municipal bond funds which are traded on the NYSE. In addition, they manage a range of offshore investments that are available exclusively to non-U.S. investors. The old established firm has additional offices in Palo Alto, and its affiliates have marketing offices in London, Hong Kong, and Buenos Aires. Our main focus this week is on the Seligman Group of Funds, which provide a full range of investment possibilities designed to help individuals work toward their fiscal goals at each stage of their life. Like other load fund groups, Seligman believes a qualified financial advisor can help individuals develop a solid investment strategy. Accordingly, Seligman's open-end mutual funds are sold primarily through financial advisors and come in multiple classes including Class A, B, C, D and I shares, which differ in fees and availability. A Seligman financial advisor can help you find out which class shares may be right for you. We will use the Class A shares for discussion and comparison purposes, which have a front load of 4.75%. The minimum initial investment is $1,000 for most Seligman fund shares. History/Background This firm's roots trace back to 1864. At that time, the Seligman family was one of the era's leading investment bankers. Frontier investing is what they call it, and the Seligman's were among the financiers that helped to build public utilities and railroads to the Western United States. In 1864, for instance, the Seligman's joined forces with the Vanderbilt's to create public utilities in New York. As the 20th century ensued, the Seligman's shifted their emphasis from investment banking toward investment management. They lent support and backing to the construction of the Panama Canal, and expanded to support the launch of urban transit systems and fund the growing capital needs of public utilities, large mines, land ventures, etc. They also played a role in the development of the automobile industry, participating in the early underwritings for General Motors Corporation ("GM"). In the late 1920s, Seligman became a leading contributor to the development and growth of the modern investment company (mutual fund). In 1929, they created Tri-Continential Corporation, the largest diversified, closed-end investment company listed on the New York Stock Exchange. In 1930, Seligman introduced its first mutual fund, Broad Street Investing Company (called the Seligman Common Stock Fund today). Prior to 1983, the firm had just four mutual funds on the market but as the mutual fund industry grew in the 1980s and 1990s, the firm expanded its fund lineup to include the era's new frontiers (science and technology, small companies, emerging markets, and global). Today, the Seligman Group of Funds provides investors more than 50 investment choices to help them meet personal needs and goals. Investment Style/Strategy At Seligman, equity strategies are designed to achieve growth of capital over the long run by maintaining a consistent investment discipline through both fundamental research and portfolio risk management. Portfolios employ the company's extensive research capabilities, applied by skilled portfolio managers and research analysts to the security selection process. Seligman's website says the firm is recognized today as a leader in the areas of "technology" research, analysis, and investment. They are also one of the largest investors in the communication, information and technology sectors with over $5 billion invested in technology companies worldwide as of mid-year 2002 (primarily through the Seligman Communication & Information Fund). Stock portfolio construction evolves through a "bottom-up" focus on the analysis of individual companies. Particular emphasis is placed on direct contact with company management. Equity mutual funds cover the range of investment styles from value to growth, and are invested across all equity capitalization ranges. Mixed equity funds and international funds round out the equity lineup. Seligman's fixed income strategies are designed to achieve high total return while reducing overall risk. Bond funds are based on active fixed income management and thorough analysis of long- term secular trends. Presently, Seligman offers three funds in the fixed income peer group, a long-term government bond fund, an intermediate fixed income fund, and a high yield fund that seeks to generate high current income vis-a-vis investment in a portfolio of mid- and lower-quality bonds. Seligman's intermediate-term fixed income strategy seeks strong risk-adjusted total returns, with capital preservation, in down markets through investments in a range of government, corporate and asset-backed issuers, with varying duration and maturity. In the next section, we look to see how well Seligman's funds have performed in comparison with similar funds using data by Morningstar. Investment Performance Over the last three years, a volatile period for tech stocks, Seligman's relative performance has been superior compared to other science and technology funds. Over the trailing 3-year period through September 17, 2002, Seligman Communication and Information Fund (SLMCX) produced a negative 18.5% annualized total return. While that is a negative number, it was strong enough on a relative basis to rank in the 10th percentile (top decile) of the technology fund category, per Morningstar. Per the funds tracker, the average tech fund declined by an annual rate of 29.3% on average over the past three years. The Communications and Information Fund's average annual total return for the trailing 10-year period through August 31, 2002 shows what this offering is capable of over a long time period, though you have to remember that the bull market of the 1990's was in large part technology-driven. For the trailing 10-year period, the fund generated a positive 15.8% annualized return. That was 5.4% more a year on average than the S&P 500 index of U.S. stocks and good enough to rank the fund in the top 25% of the technology category per Morningstar. Accordingly, in terms of total return and consistency compared with other tech funds, Seligman Communications and Information Fund has performed relatively well. And, they have shown over the last three years that they can limit losses in relation to the average technology fund in down markets. Seligman Global Technology Fund (SHGTX) has similar performance numbers/ranks within the technology fund category, according to Morningstar. The story is a little different for Seligman's three original equity fund products: Common Stock A (SCSFX), Growth A (SGRFX) and Income A (SINFX). Below are each fund's trailing 10-year average annual total returns and rankings within the category. Seligman Common Stock Fund (SCSFX): 10-Year Average Total Return: +4.9% (-5.4% vs. S&P 500) Rank in Large-Blend Category: 95th percentile Seligman Growth Fund (SGRFX): 10-Year Average Total Return: +5.6% (-4.8% vs. S&P 500) Rank in Large-Growth Category: 81st percentile Seligman Income Fund (SINFX): 10-Year Average Total Return: +4.1% (-6.3% vs. S&P 500) Rank in Domestic Hybrid Category: 96th percentile Seligman's relative performance here is disappointing over the long-term, especially considering that there is over a billion dollars invested today in these three large-cap oriented funds. In terms of performance - as adjusted for risks, sales charges and expenses - Morningstar gives the Common Stock Fund Class A just one star. Growth Fund is 2-star rated and Income Fund is also 1-star rated by Morningstar. Seligman's international funds have also struggled. Seligman International Growth Fund (SHIFX) has a negative 0.3% average total return for the trailing 10-year period as of August 31, 2002. That bleak performance was 4.3% a year on average less than the MSCI EAFE index of developed markets, ranking in the 100th percentile of the foreign stock category. The fund's 3- year and 5-year performance also ranks in the category's 100th percentile per Morningstar. Seligman's Global Growth (SHGOX) and Emerging Markets (SHEMX) funds don't have 10-year track records, but their performance over the trailing 5-year period through September 17, 2002 is also ranked in the bottom quintile of their relative category groups using Morningstar's data. In the case of the Emerging Markets Fund (SHEMX), relative return ranks in the category's bottom decile. None of the three taxable bond fund products mentioned before have Morningstar ratings of above two stars, signifying below average performance there compared to relative category peers. Where Seligman looks good is on the municipal bond side where several state muni funds have earned good independent ratings. For example, Seligman's Massachusetts muni fund is rated five stars by Morningstar with several more state muni funds rated four stars. Conclusion Seligman's website states the firm's tax-exempt separate account business has grown considerably in the last few years from under $4 billion at the end of 1996 to more than $7 billion as of June 30, 2002. However, total assets under management are much lower today than they were at the end of 2001, primarily due to return performance and mutual fund withdrawals. At this point, unless you are looking to add exposure to certain sectors, such as communications, information and technology, you may want to wait and see if Seligman's performance in their bond and stock funds improves on an absolute and relative basis. For more information, log on to www.seligman.com. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** More On Managing Risk by Mark Phillips mphillips@OptionInvestor.com Last week we talked about the basics of managing risk, beginning with the proper use of Stop Loss orders (through reference to a prior article) and then extended the discussion to looking at how intelligent selection of entry points can help us to mitigate our risk in a trade. Specifically, buying/selling near important support/resistance levels allows us to set stops just the other side of those support/resistance levels. Then I extended the train of thought to selecting the right options trade, based on selecting stocks/options with the appropriate liquidity for each individual's risk tolerance. Apparently that got a lot of readers' brains whirling, as I got a fair amount of questions asking for more information on how to properly manage risk, both on an individual trade basis, as well as for an overall account. Being an engineer in my prior life, I'm always reluctant to reinvent the wheel if it isn't necessary. One of my early engineering mentors pointed out to me that engineers are basically lazy, and it is our desire to find more efficient solutions to problems and rely on the discoveries of others in order to accomplish more with less effort. When it comes right down to it, that's what engineers do, take advantage of prior discoveries, so that they can leverage that knowledge into new and better cars, airplanes, TVs, computers, etc. Keeping with that theme, I'm going to start out by echoing the recent words of our own Jeff Bailey. In yesterday's Market Monitor, Jeff pointed out how to evaluate position size, relative to the overall account. I think the key point that Jeff makes is that before we ever implement the first trade in an account, we MUST have a detailed, written business plan that dictates every aspect of how we are going to trade that account. It needs to include our goals and expectations (such as percentage return), as well as how we intend to trade that account and how we will manage risk. In my experience, failure to go through this process is at the core of just about every blown-up account. This observation led me to write What To Do When You Can't Do Anything Right back in April. If you missed that article back when I first wrote it and you don't have that detailed trading plan sitting on your desk right now, then you need to read it. We need to understand that the roadmap that I laid out in that article is just the starting point, as it is then incumbent on the individual to do the hard work of answering all the questions laid out in the numbered list in the lower half of the article. One of the things that requires a lot more clarification than what I provide in that article is what type of money management system to employ. This part of the trading plan needs to address questions such as What is the maximum amount I can risk in any given trade? Also important are the issues of the maximum portion of the account that should be exposed to risk at any given time (i.e. what is the minimum amount of cash to always hold). Defining the amount of risk you are willing to accept in any specific trade then leads to other questions such as: If trading options, will I use stop losses or limit my position size such that I can use 100% risk capital on each trade? If you've already answered all of these questions for yourself, then you're well on your way (or perhaps already there) to having a strong, usable trading plan. But for everyone else, you've got some work to do. Fortunately we have some more great educational content available in the Trader's Corner archives. For fairly new subscribers, let me encourage you to go through these archives -- there is a wealth of information contained therein, equal to a graduate degree in trading methodology and experience. Coming back to our Risk Management theme, I owe 'Gumby' (long-time OI reader) a huge debt of gratitude to pointing out a great series of articles written on the topic of Account Management back in the ancient past of late 2000 and early 2001. If you're still struggling for a way to quantify your risk management rules, I would highly recommend perusing the following articles. Methodical Account Management Methodical Account Management II Proper Account Management (Through Good Times & Bad) Gumby went on in his email to describe a purely mechanical approach he uses for Risk Management, that dovetails nicely with both Austin's descriptions in the above articles, as well as Jeff's use of the terms like 'Full Position' or 'Half Position'. Rather than try to reword his description, I'll just let you read it here as I received it. "After reading these articles, I generated a simple spreadsheet; account size in one cell (A1), pre-calculated % risk (B1=0.05*A1), position cost (C1), pain level (D1 - can be your estimated cost if price action hits a certain point, or you could set your stop at a % level - depends upon your strategy), then calculated # of contracts [risk/((cost-stop)*100)], to give you the size of a full position. OK, for the techies, it's: B1/((C1-D1)*100 per contract). One can then judge the scenario, see if a full, half or quarter position is warranted; easy to do when one knows what a "full" position is at any given time in a cycle. Also, after setting up the spreadsheet, all you do is the planning part - enter the current cost, your maximum pain level on the position, and viola! I find it quite useful at various times, in that I like to play front-month contracts - in the first week of a cycle, I'll either fix the loss to a given % or to a previous contract price given price action at a known support/resistance level. Or, in the last few days of a cycle, set the stop loss at zero - doesn't matter much, in that my maximum account risk is known and fixed prior to entering the trade. If traders can incorporate this or some similar method into their trading practice, it forces you to do several critical, related topics, including selection of exit point (prior to entry) and implementing a strategy of risk management. And all you have to do is plug in a couple of numbers." All I have to add to that is THANKS! What Gumby has done here is create a mechanical system that he can plug a prospective trade into and it tells him exactly how large a position to put on, based on his tolerance for risk -- which he defines. As a side note, I think I can say with a high degree of certainty, that he has his detailed trading plan already written and sitting within easy reach of his trading station. I think that is a good signal to all of us of the importance of taking the time to develop our own trading plan. I know this approach will appeal to all the other "lazy" engineers out there, and hopefully even those that aren't overly fluent in Excel can use this information to their benefit. It's kind of like the tagline on the commercial frequently seen on CNBC - "Manage your risk and you can do anything." How true! Questions are always welcome. Mark ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Motion Sickness If you are susceptible to motion sickness there was a good chance you need Dramamine today. With a gap down open on the JPM/ORCL news knocking the Dow to the mid 8000 range traders needed an airsickness bag. After a prolonged bout of choppiness the Dow recovered +200 points only to go into free fall again at the close. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************Advertisement************************* _If you haven_t traded options online _ you haven_t really traded options,_ claims author Larry Spears in his new compact guide book: _7 Steps to Success _ Trading Options Online_. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Wednesday 09-18-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: AVY, TIN Dropped Calls: NONE Dropped Puts: NONE Play of the Day: Put - BRL Big Cap Covered Calls & Naked Puts: A Key Test Approaches! Updated on the site tonight: Market Watch Market Posture ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** AVY - put Adjust from $63 down to $62 TIN - put Adjust from $50.50 down to $48 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* _If you haven_t traded options online _ you haven_t really traded options,_ claims author Larry Spears in his new compact guide book: _7 Steps to Success _ Trading Options Online_. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* BRL – Barr Laboratories $65.29 -1.03 (-1.88 this week) Company Summary: Barr Laboratories is a pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. Barr markets approximately 85 pharmaceutical products, representing various dosage strengths and product forms of approximately 35 chemical entities. BRL's product line focuses principally on oncology and female healthcare categories, including hormone replacement and oral contraceptives. The company's Duramed subsidiary develops, manufactures and markets a line of prescription drug products in tablet, capsule and liquid forms. Most Recent Write-Up: With virtually every sector of the market ending in the red on Tuesday, it was like a smorgasbord, looking for attractive downside plays. While it hasn't broken down quite yet, the Pharmaceutical index (DRG.X) is looking particularly top-heavy, as it is resting just above critical support at the $284 level. What is particularly telling is that each rally attempt over the past few weeks has resulted in a lower high, with the 20-dma (currently $296) continuing to provide resistance. Add to this the fact that the DRG index broke back under its 50-dma (just above $287) on Tuesday, and it looks like the bears may be coming out of their brief period of hibernation. BRL had a nice run to the upside throughout most of the month of August, but with the DRG sector falling and BRL now solidly below the 200-dma ($67.68),the bears are coming back out to play. Particularly interesting is the series of lower highs and lower lows that the stock has posted over the past few weeks, and with the stock resting precariously on the $66 support level, we have a couple of solid action points to work with. Momentum traders will want to enter the play as BRL falls under the $65 support level (just below this week's intraday lows), preferably with the DRG index confirming this weakness with a break under the $284 support level. Should we get an oversold rebound first, look to fade that rally attempt by entering on a rollover from resistance, first at $67 and then possibly as high as $68.50. Initial stops are in place at $69. Why This Is Our Play of the Day: Today's trading brought some wild swings across the board. While most equities were down this morning, the furious rally in the Dow and Nasdaq provided a market wide boost. The Pharmaceutical Index even finished slightly up on the day. BRL on the other hand saw its attempt to rally back over $66 fail miserably and it now looks like this level is providing new resistance to the upside. The bears piled on and Barr closed just 0.02 off its low of the day, showing us the sellers were still present as the market closed. New entries can look for a break below $65.00 or a failed rally attempt at $66.00. BUY PUT OCT-65*BRL-VM OI= 94 at $3.60 SL=1.80 BUY PUT OCT-60 BRL-VL OI=356 at $1.80 SL=0.90 Average Daily Volume = 573 K ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* A Key Test Approaches! By Ray Cummins The major equity averages moved closer to the July lows Wednesday amid renewed concerns over waning corporate profits and the weak U.S. economy. J.P. Morgan (NYSE:JPM) was the biggest Dow loser by far, tumbling almost 10% after the banking giant issued a third-quarter profit warning late Tuesday. The company attributed the shortfall to high commercial credit costs in the telecom and cable sectors and weak trading performance. A rating downgrade from Fitch followed the announcement. The blue-chip industrial average sank 34 points to 8,173. In the technology segment, software issues were among the biggest decliners as investors took heed of a cautious outlook by Oracle (NASDAQ:ORCL). After the close Tuesday, the software bellwether reported acceptable first-quarter earnings but said it still expects a "difficult and slow recovery" and conceded that second-quarter revenue would be lower versus last year's levels. The NASDAQ Composite index slid 6 points to 1,253. In the broader market, airline shares went into a tailspin after Merrill Lynch cut its industry earnings forecast for the group. The oil service sector achieved mild gains after the American Petroleum Institute reported a drop in supplies and utility, gold and defense issues also benefited from moderate buying pressure. The S&P 500-stock index slipped 4 points to 869. Trading volume totaled 1.5 billion on the NYSE and 1.52 billion on the NASDAQ. Market breadth was sloppy, with losers racing past winners by 19 to 13 on the NYSE and by 20 to 13 on the technology exchange. The 10-year Treasury note inched down 3/32 to yield 3.83% while the 30-year government bond added 2/32 to yield 4.72%. Today's economic news was guardedly upbeat as the August consumer price index climbed 0.3% both overall and at the core, which omits the food and energy components. Economists had expected a 0.2% increase in both numbers. The country's foreign exchange data was also bullish as the July trade numbers revealed a deficit of $34.6 billion, lower than the $37 billion gap forecast by economists. Despite the optimistic data, equity values continued to slump and the bearish trend shows no signs of a respite in the coming weeks. The technical indications suggest a move through the July lows and a possible dip into the 675-700 range (S&P 500 index) before the historical up-trend resumes. *************** SUMMARY OF CURRENT POSITIONS *************** (As of 09-17-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield PLMD SEP 22 21.85 24.40 $0.65 5.39% AMGN SEP 35 34.40 45.17 $0.60 4.26% CCMP SEP 25 24.45 40.76 $0.55 4.44% AMGN SEP 37 37.00 45.17 $0.50 4.11% CCR SEP 45 44.35 47.41 $0.65 4.15% CEPH SEP 35 34.05 42.75 $0.95 7.61% CHIR SEP 32 32.05 36.76 $0.45 4.03% CVTX SEP 20 19.65 21.05 $0.35 4.87% IDPH SEP 35 34.30 44.03 $0.70 5.84% IVGN SEP 30 29.40 36.15 $0.60 5.66% AMGN SEP 40 39.40 45.17 $0.60 5.88% GDT SEP 30 29.70 35.85 $0.30 4.41% IDPH SEP 35 34.35 44.03 $0.65 7.96% INVN SEP 25 24.75 34.54 $0.25 4.91% IVGN SEP 30 29.65 36.15 $0.35 5.28% AMGN OCT 35 33.15 45.17 $0.85 6.08% CHTT OCT 35 34.50 37.00 $0.50 4.27% CCMP OCT 30 28.90 40.76 $1.10 8.06% INVN SEP 30 29.60 34.54 $0.40 7.34% IVGN SEP 30 29.65 36.15 $0.35 7.39% MIK SEP 40 39.60 45.90 $0.40 6.00% UOPX SEP 25 24.75 31.30 $0.25 6.56% INTU OCT 40 38.60 46.34 $1.40 6.87% COF OCT 30 29.30 35.24 $0.70 6.47% CTSH OCT 50 49.25 63.02 $0.75 4.57% EASI OCT 50 49.00 59.37 $1.00 5.13% INVN OCT 25 24.45 34.54 $0.55 6.31% LLL OCT 47 46.65 53.83 $0.85 4.70% MIK OCT 40 39.35 45.90 $0.65 4.65% ROOM OCT 40 39.25 46.60 $0.75 5.16% Previously closed: OSI Pharmaceuticals (NASDAQ:OSIP) Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield HIT SEP 60 60.60 51.70 $0.60 4.63% MUR SEP 90 91.05 82.40 $1.05 5.13% OMC SEP 70 70.60 61.44 $0.60 5.74% QLGC SEP 40 40.45 30.69 $0.45 6.61% ERTS SEP 65 65.66 63.35 $0.55 5.30% MMM SEP 125 126.75 116.67 $1.75 7.29% MUR SEP 90 91.00 82.40 $1.00 6.74% QLGC OCT 40 41.20 30.69 $1.20 9.74% INTU OCT 50 51.50 46.34 $1.50 6.80% EBAY OCT 65 66.20 57.22 $1.20 5.48% QLGC OCT 45 45.45 30.69 $0.45 4.91% XL OCT 80 81.25 73.74 $1.25 4.66% GILD OCT 35 36.45 32.00 $1.45 9.78% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status PII 67.90 68.37 SEP 50 55 0.60 54.40 $0.60 Open BSC 65.44 59.50 SEP 55 60 0.55 59.45 $0.05 Open? * CCMP 41.50 40.76 SEP 25 30 0.40 29.60 $0.40 Open SCHL 44.00 44.00 SEP 35 40 0.50 39.50 $0.50 Open CCR 52.47 47.41 SEP 45 50 0.65 49.35 ($0.60) Closed * EASI 52.40 59.37 SEP 45 50 0.90 49.10 $0.90 Open EASI 55.00 59.37 SEP 45 50 0.55 49.45 $0.55 Open HRB 51.30 49.45 OCT 40 45 0.45 44.55 $0.45 Open LOW 45.20 44.06 OCT 35 40 0.50 39.50 $0.50 Open Countrywide Credit (NYSE:CCR) was closed Monday when the issue moved below the sold strike at $50. The cost to exit the play was $1.25, but the initial credit reduced the position loss to $0.60. Traders should also consider closing the bullish spread in Bear Stearns (NYSE:BSC) to limit potential losses. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status AAP 45.95 53.90 SEP 60 55 0.70 55.70 $0.70 Open AIG 62.08 58.11 SEP 75 70 0.65 70.65 $0.65 Open INTU 41.04 46.34 SEP 55 50 0.60 50.60 $0.60 Open AVE 63.62 54.17 SEP 75 70 0.55 70.55 $0.55 Open HI 38.09 29.52 SEP 50 45 0.65 45.65 $0.65 Open AET 41.89 38.45 SEP 50 45 0.45 45.45 $0.45 Open COF 35.33 35.24 SEP 42 40 0.25 40.25 $0.25 Open LEH 56.22 53.55 SEP 65 60 0.40 60.40 $0.40 Open ATH 60.41 69.05 SEP 70 65 0.60 65.60 ($1.40) Closed * GSK 37.73 37.47 SEP 42 40 0.30 40.30 $0.30 Open EBAY 55.59 57.22 SEP 65 60 0.55 60.55 $0.55 Open JNJ 55.48 53.59 OCT 65 60 0.50 60.50 $0.50 Open MSFT 48.58 47.29 OCT 60 55 0.55 55.55 $0.55 Open PHM 48.46 47.60 OCT 60 55 0.60 55.60 $0.60 Open WFT 39.37 36.57 OCT 50 45 0.60 45.60 $0.60 Open Anthem (NYSE:ATH) was closed Wednesday (9/11) when the issue moved above the sold strike at $65. The cost to exit the play was $2.00, but the initial credit reduced the position loss to $1.40. Previously closed: Engineered Support Systems (NASDAQ:EASI) Credit Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month &Price Basis Price (Loss) Mon. Yield INTU OCT 50C 51.50 46.34 $1.50 6.80% INTU OCT 40P 38.60 46.34 $1.40 6.87% GILD OCT 35C 36.45 32.00 $1.45 9.78% GILD OCT 30P 28.50 32.00 $1.50 10.36% Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status PDX 34.15 33.28 NOV40C/30P 0.40 29.60 0.20 Open Ball Corporation (NYSE:BLL) continued to rally after we exited the play, offering up to a $2.25 closing credit. Countrywide Credit (NYSE:CCR), InVision Technologies (NASDAQ:INVN) and International Business Machines (NYSE:IBM) achieved the target exit points in our bullish plays. Goldman Sachs (NYSE:GS) also yielded a favorable early-exit profit. American Express was closed to prevent losses and a move below $32 will be our exit signal for the Pediatrix Medical (NYSE:PDX) play. Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (I monitor the positions marked with ***). *************** BULLISH PLAYS - Premium Selling All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. *************** BSTE - Biosite $30.50 *** Rally Mode! *** 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 firm 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). BSTE - Biosite $30.50 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 20 BQS VD 367 0.35 19.65 5.6% *** SELL PUT OCT 22.5 BQS VX 130 0.55 21.95 8.5% SELL PUT OCT 25 BQS VE 424 1.10 23.90 13.8% *************** ESRX - Express Scripts $54.88 *** On The Rebound! *** Express Scripts (NASDAQ:ESRX) is a pharmacy benefit management company in North America. The company is independent from any pharmaceutical manufacturer ownership, which allows it to make unbiased formulary recommendations to its clients, balancing both clinical efficacy and cost. The company provides a full range of pharmacy benefit management services, including retail drug card programs, mail pharmacy services, drug formulary management programs and other clinical management programs for approximately 19,000 client groups that include HMOs, health insurers, third-party administrators, employers, sponsored benefit plans and government health programs. As of January 1, 2002, some of the company's largest clients included AARP, Aetna U.S. Healthcare and Blue Cross of Massachusetts. ESRX - Express Scripts $54.88 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 45 XTQ VI 238 0.50 44.50 4.0% "TS" SELL PUT OCT 50 XTQ VJ 438 1.35 48.65 7.4% SELL PUT OCT 55 XTQ VK 190 2.70 52.30 11.1% *************** GD - General Dynamics $83.91 *** Defense Sector Rally! *** General Dynamics (NYSE:GD) operates a range of businesses that produce information and communications technology, land and amphibious combat systems, and is engaged in naval and commercial shipbuilding, and business aviation. These are high technology businesses that use design, manufacturing and program management expertise together with advanced technology and the integration of complex systems as part of their everyday operations. The company operates in four primary business groups: Information Systems and Technology, Combat Systems, Marine Systems, and Aerospace. The company employs approximately 54,000 people worldwide and anticipates 2002 revenues of $14-$15 billion. GD - General Dynamics $83.91 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 70 GD VN 1,320 0.65 69.35 3.2% "TS" SELL PUT OCT 75 GD VO 585 1.35 73.65 5.3% *** SELL PUT OCT 80 GD VP 277 2.40 77.60 7.6% *************** INVN - InVision Technologies $34.00 *** 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. INVN - InVision Technologies $34.00 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 25 FQQ VE 1,253 0.55 24.45 7.8% *** SELL PUT OCT 30 FQQ VF 1,217 1.50 28.50 13.0% *************** NOC - Northrop Grumman 124.77 *** Another Defense Stock *** Northrop Grumman (NYSE:NOC) is a global defense firm that provides unique technologically advanced products, services and solutions in defense and commercial electronics, defense systems integration, information technology and nuclear and non-nuclear shipbuilding and systems. Northrop Grumman has operations in 44 states and 25 countries, serving U.S. and international military, government and commercial customers. Northrop Grumman is aligned into six main business sectors: Electronic Systems, Information Technology, Integrated Systems, Ship Systems, Newport News and Component Technologies. NOC - Northrop Grumman 124.77 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 105 NOC VA 617 0.95 104.05 3.1% "TS" SELL PUT OCT 110 NOC VB 2,608 1.45 108.55 4.0% *** SELL PUT OCT 115 NOC VC 1,353 2.10 112.90 5.0% SELL PUT OCT 120 NOC VD 624 3.20 116.80 6.7% *************** XAU - PHLX Gold & Silver Sector $73.81 *** Market Hedge *** The PHLX Gold & Silver Sector (XAU) is a capitalization-weighted index composed of the common stocks of 9 companies involved in the gold and silver mining industry. The XAU was set to an initial value of 100 in January 1979; options commenced trading on December 19, 1983. For more information on the XAU, go to www.phlx.com. XAU - PHLX Gold & Silver Sector $73.81 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 60 XAU VL 968 0.75 59.25 4.6% *** SELL PUT OCT 65 XAU VM 413 1.40 63.60 6.4% SELL PUT OCT 70 XAU VN 345 2.90 67.10 10.3% *************** BULLISH PLAYS - Credit Spreads *************** MBG - Mandalay Resort Group $32.46 *** Sector Rally! *** Mandalay Resort Group (NYSE:MBG) is a hotel-casino operator. The firm's Mandalay Mile is a large-scale hotel-casino resort development in Las Vegas, the world's largest gaming market. Mandalay Mile consists of three interconnected mega-resorts on 230 acres, including its flagship property, Mandalay Bay. The company and the joint ventures in which it participates operate a total of 16 properties with more than 27,000 guest rooms and more than one million square feet of casino space in Nevada, Mississippi, Illinois and Michigan. Of these properties, 12 are wholly owned and have more than 22,400 guestrooms and more than 800,000 square feet of casino space. In addition, the company owns a 50% interest in each of three joint venture casino properties that have approximately 4,700 guest rooms and more than 200,000 square feet of casino space, and a 53.5% interest in a fourth joint venture casino with 75,000 square feet of casino space. MBG - Mandalay Resort Group $32.46 PLAY (conservative - bullish/credit spread): BUY PUT OCT-27.50 MBG-VY OI=27 A=$0.35 SELL PUT OCT-30.00 MBG-VF OI=20 B=$0.65 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$27.85 *************** PDCO - Patterson Dental $52.63 *** A Big Day! ** Patterson Dental (NASDAQ:PDCO) is a value-added distributor serving the North American dental supply and companion-pet (dogs, cats and other common household pets) veterinary supply markets. The company has two operating segments, dental supply and veterinary supply. As the firm's largest segment, dental supply provides a virtually complete range of consumable dental products, clinical and laboratory equipment, and value-added services to dentists, dental laboratories, institutions and other healthcare providers throughout North America. Patterson's veterinary supply segment distributes consumable supplies, equipment, diagnostic products, biologicals (vaccines) and pharmaceuticals to companion pet veterinary clinics principally in the eastern, mid-Atlantic and southeastern regions of the United States. PDCO - Patterson Dental $52.63 PLAY (conservative - bullish/credit spread): BUY PUT OCT-45 DOU-VI OI=100 A=$0.35 SELL PUT OCT-50 DOU-VJ OI=103 B=$1.00 INITIAL NET-CREDIT TARGET=$0.70-$0.75 POTENTIAL PROFIT(max)=17% B/E=$49.30 *************** SYK - Stryker $60.03 *** Hot Sector! *** Stryker Corporation (NYSE:SYK) and its subsidiaries develop, manufacture and market specialty surgical and medical products, including orthopaedic reconstructive implants. The company operates in two reportable segments: Orthopaedic Implants, which sells orthopaedic reconstructive, trauma and spinal implants, bone cement and the bone growth factor osteogenic protein-1, and the MedSurg Equipment segment, which sells powered surgical instruments, endoscopic systems, medical video imaging equipment, craniomaxillofacial implants, image-guided surgical systems and hospital beds and stretchers. The firm's Other segment includes Physical Therapy Services and corporate administration. SYK - Stryker $60.03 PLAY (conservative - bullish/credit spread): BUY PUT OCT-50 SYK-VJ OI=230 A=$0.30 SELL PUT OCT-55 SYK-VK OI=150 B=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$54.50 *************** Neutral Plays - Credit 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 is a second group of new candidates for 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. *************** BBBY - Bed Bath & Beyond $34.34 *** Trading Range? *** Bed Bath & Beyond (NASDAQ:BBBY) is an operator of stores selling predominantly better quality domestics merchandise and other home furnishings typically found in better department stores. The company operates over 400 Bed Bath & Beyond stores in 44 states and one territory. Domestics merchandise includes bed linens and related items, bath items and kitchen textiles. Home Furnishings include kitchen and tabletop items, fine tabletop and giftware, basic house-wares and general home furnishings. BBBY - Bed Bath & Beyond $34.34 PLAY (moderately aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 27.5 BHQ VY 108 0.45 27.05 6.2% SELL CALL OCT 37.5 BHQ JU 1,053 0.80 38.30 7.1% *************** CAI - CACI International $35.67 *** In A Comfort Zone *** CACI International (NYSE:CAI) is a holding company and its many operations are conducted through subsidiaries located in the United States and Europe. The company delivers information technology and communications solutions to clients through four areas of expertise or lines of business: systems integration, managed network services, document technology and engineering services. The company's primary markets, both domestic and international, are agencies of national governments, major corporations and state and local governments. The demand for CACI's services in large measure is created by the increasingly complex network, systems and information environment in which governments and businesses operate, and by the need to stay current with emerging technology while increasing productivity and, ultimately, performance. CAI - CACI International $35.67 PLAY (moderately aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 30 CAI VF 20 0.45 29.55 5.0% SELL CALL OCT 40 CAI JH 216 0.55 40.55 5.3% *************** WFMI - Whole Foods Market $45.41 *** Recent Volatility *** Whole Foods Market (NASDAQ:WFMI) owns and operates a chain of natural and organic foods supermarkets. The categories of products that the company offers include: produce, grocery, meat and poultry, seafood, bakery, prepared foods, specialty (beer/wine/cheese), nutritional supplements, body care, pet products, floral, household products and educational products such as books. On average, the firm's stores carry over 20,000 SKUs (stock-keeping units) of food and non-food products. The company has a broad product selection with a heavy emphasis on perishable foods designed to appeal to both natural foods and gourmet shoppers. WFMI - Whole Foods Market $45.41 PLAY (conservative - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 40 FMQ VH 143 0.55 39.45 4.2% SELL CALL OCT 50 FMQ JJ 179 0.50 50.50 3.6% *************** BEARISH PLAYS - Naked Calls Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** DIA - Diamonds Trust $81.42 *** Trade The Dow! *** Diamonds represent ownership in the Diamonds, Trust Series 1, a unit investment trust established to accumulate and hold a portfolio of the equity securities that comprise the Dow Jones Industrial Average. Diamonds seek investment results that, before expenses, generally correspond to the price and yield performance of the DJIA although there is no assurance that the price and yield performance of the DJIA can be fully matched. For more information, go to www.amex.com. DIA - Diamonds Trust $81.42 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 83 DAV JE 235 2.20 85.20 6.7% SELL CALL OCT 84 DAV JF 1,665 1.80 85.80 5.7% SELL CALL OCT 85 DAV JG 809 1.35 86.35 4.5% SELL CALL OCT 86 DAV JH 1,669 1.15 87.15 4.0% *** *************** MUR - Murphy Oil $83.38 *** Oil Sector Volatility *** Murphy Oil Corporation (NYSE:MUR) is a worldwide oil and gas exploration and production company with refining and marketing operations in the United States and the United Kingdom. The company's operations are classified into two primary businesses: Exploration and Production; and Refining and Marketing. The company's principal exploration and production activities are conducted in the United States, Ecuador and Malaysia by wholly owned Murphy Exploration & Production and its subsidiaries; in western Canada and offshore eastern Canada by Murphy Oil Ltd. and its subsidiaries; and in the U.K. North Sea/Atlantic Margin by wholly owned Murphy Petroleum Limited. Murphy Oil USA, a wholly owned subsidiary, owns and operates two refineries in the United States. MOUSA markets refined products through a network of retail gasoline stations and branded and unbranded wholesale customers in a 23-state area of the southern and Midwestern United States. MUR - Murphy Oil $83.38 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 85 MUR JQ 1,283 4.00 89.00 11.3% SELL CALL OCT 90 MUR JR 1,134 1.75 91.75 6.2% *** SELL CALL OCT 95 MUR JS 210 0.85 95.85 3.8% "TS" *************** BEARISH PLAYS - Credit Spreads All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** APA - Apache Oil $56.57 *** Trading Range? *** Apache Corporation (NYSE:APA) is an energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. The company has interests in seven countries including the United States, Canada, Egypt, Australia, China, Poland and Argentina. As of January 1, 2002, Apache had estimated reserves of 599 million barrels of crude oil, condensate and NGLs (natural gas liquids) and four Tcf (trillion cubic feet) of natural gas. Combined, these total estimated proved reserves are equivalent to 1.3 billion barrels of oil or 7.6 Tcf of gas. Worldwide, in 2001, the company participated in drilling 939 new wells, with 828 (88%) completed as producers. Canada was Apache's most active region, with 447 gross new wells at a success rate of 93%. Apache also performed over 1,350 major work-overs and re-completions in North America during the year. APA - Apache Oil $56.57 PLAY (conservative - bearish/credit spread): BUY CALL OCT-65 APA-JM OI=1294 A=$0.25 SELL CALL OCT-60 APA-JL OI=2865 B=$1.00 INITIAL NET-CREDIT TARGET=$0.75-$0.85 POTENTIAL PROFIT(max)=18% B/E=$60.75 *************** WY - Weyerhaeuser Company $49.78 *** New 2002 Low! *** Weyerhaeuser Company (NYSE:WY) is principally engaged in the growing and harvesting of timber as well as the manufacture, distribution and sale of forest products, real estate and construction and other real estate-related activities. The company's business segments are timberlands; wood products; pulp, paper and packaging, and real estate and related assets. The firm is engaged in the management of 5.9 million acres of company-owned and .5 million acres of leased commercial forest in North America (3.8 million acres in the South and 2.6 million acres in the Pacific Northwest and Canada). The company's wood products businesses produce and sell softwood lumber, plywood and veneer; oriented strand board, composite and other panels; engineered lumber, hardwood lumber and treated products. The company's pulp, paper and packaging businesses include pulp, paper, containerboard packaging, paperboard and recycling. WY - Weyerhaeuser Company $49.78 PLAY (conservative - bearish/credit spread): BUY CALL OCT-60 WY-JL OI=830 A=$0.25 SELL CALL OCT-55 WY-JK OI=835 B=$0.80 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$55.60 *************** SEE DISCLAIMER *************** ************** MARKET POSTURE ************** Turning Over An Old Leaf To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/091802.asp ************ MARKET WATCH ************ High Dive To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/091802.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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