The Option Investor Newsletter Sunday 09-22-2002 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: That Makes Four in a Row! Index Trader Wrap: Big volume, but little movement Editor’s Plays: Dead Cats and Found Money Market Sentiment: Wake Me Up Ask the Analyst: Historically Speaking Coming Events: Earnings, Splits, Economic Events Updated In The Site Tonight: Swing Trade Game Plan: No Bounce For The Weary Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 9-20 WE 9-13 WE 9-06 WE 8-30 DOW 7986.02 -326.67 8312.69 -124.51 8437.20 -236.30 -209.46 Nasdaq 1221.08 - 70.28 1291.36 - 3.94 1295.30 - 19.76 - 65.51 S&P-100 423.90 - 20.34 444.24 - 2.43 446.67 - 14.13 - 13.70 S&P-500 845.39 - 44.41 889.80 - 4.12 893.92 - 22.16 - 24.78 W5000 8023.17 -417.71 8440.88 - 40.32 8481.20 -172.84 -222.85 RUT 367.28 - 22.70 389.98 - 40.32 391.57 + .61 - 9.17 TRAN 2184.02 - 62.85 2246.87 - 10.20 2257.07 - 8.56 -128.69 VIX 44.55 + 5.24 39.31 - .73 40.04 + 4.24 + 2.99 VXN 59.08 + 3.23 55.85 - .69 56.54 + 1.56 + 7.36 TRIN 0.86 1.53 0.93 1.20 Put/Call 1.16 0.89 0.79 0.84 ****************************************************************** The markets have now posted four losing weeks in a row and the odds are really good they will stretch it to five. The triple witching options expiration week expired peacefully with all the major indexes posting minimal gains on Friday but down for the week. Earnings warnings are accelerating and the biggest week is still ahead. Dow Chart Nasdaq Chart Nasdaq Weekly Chart Nasdaq Monthly Chart With no economic reports at the open the markets were left to trade on stock news and that news was led by Duke Energy, which warned before the bell for 2002 and said 2003 would be flat as well. Bowater, a large newspaper and paper products company, warned that they would miss earnings because of the weak economy. The reason? Fewer job ads and fewer merchandise ads in newspapers and magazines had cut the consumption of paper drastically. There is a real indicator! Knight Ridder (Nyse:KRI) warned on the same lines that classified and general advertising had continued to decline into September. The Nasdaq closed with a +4 gain on Friday thanks to QCOM and the biotech sector. Software and chips tried their best to derail the gains. SEBL dropped -8% after bear Stearns warned that they were having trouble closing big deals this quarter. SABA dropped -11% on inline earnings despite affirming estimates. Chip stocks just can't get a break. TXN was cut to "inline" by Salomon Smith Barney citing slowing chip unit growth, continued weak PC demand and an anticipated peak in wireless components coming in the 4Q. They cut the price target to $15 from $30. Micron dropped nearly -10% after Bear Stearns cut estimates on the company through 2004 on weak PC demand and pricing pressure on DRAM chips. UTEK fell after warning that revenue for the 3Q could drop as much as 50% from the 2Q. They credited this to the lack of a recovery in chips and slowing order rates along with push outs and outright cancellations. Still the SOX only lost -3.59 and is fighting to hold the 250 level. A couple analysts are predicting 200 as the index low. The only big chip winner Friday was Triquint Semi (TQNT). The company said it would lose less than previously expected and it forecast revenues to be up in the 4Q to a possible profit. TQNT is a broad based chip maker for everything from wireless phones to aerospace and defense. CIEN announced they were going to layoff another -450 employees due to the continued weakness in the telecom and networking sector. They said the layoffs would result in $50 million in yearly cost savings. That is over $110K per employee. That is some serious bucks! The warning season has hit full speed and next week will be very busy for the confessors. So far this quarter there have been 457 negative warnings, 209 positive announcements and 208 inline affirmations. According to First Call the pace of warnings is worse than both the 1Q and the 2Q and we still have three weeks to go. Dow components have been doing their share to maintain the warning rate. To date MCD, HON, JPM, INTC, HD, DIS have already warned if my memory is correct. EK affirmed current estimates but talked down future expectations. CAT is rumored to be going to warn and PG raised guidance. This is not meant to be a comprehensive list of all the Dow 30 but it is the ones I remember off the top of my head. Notably absent from the list are IBM and GE. We have been speculating on an IBM warning for some time and with the magnitude of the EDS warnings it is almost unthinkable that IBM will not warn. That leaves us with GE, yes GE! Last quarter GE was rushing to affirm about twice a week. Every time somebody even close to their sectors would warn, GE would make an announcement and affirm their outlook of 17% growth for the year and defend their stock. Well, things have changed. Times are tougher and Dow components are dropping like flies around them and their stock is at $26. There have been cuts in estimates by several high profile analysts due to the weakness in the power and airline sectors but no response from GE. There have been several news articles about increased pension fund liabilities but no word from GE. One analyst said the reduced pension fund income could knock three cents off of GE earnings. GE is notorious for taking costs out of their balance sheets to enable them to make estimates. With the increased scrutiny over financials and accounting rules it is doubtful they can be as free with their reporting this time. I am not predicting a warning from GE but the fact that they did not affirm during the problems with Honeywell makes investors nervous. With their stock price hitting a low of $26.02 on Friday, -$7 off its August highs, it is obvious there is serious concern. Put a warning from GE and IBM in the same week and we could see a really ugly market. Another Dow component, Citigroup, just continues to be pressured. The stock broke under $27 on Friday on worries that their legal problems and loan liabilities were growing. One Prudential analyst estimated they had a $10 billion liability in the Enron, Global Crossing, Worldcom problems. With Jack Grubman close to turning states evidence against Salomon Smith Barney and civil liability and even criminal cases on the horizon it does not look good for Citigroup. All of these problems paint a picture for the Dow that is far from rosy. The failure to close the week over 8000 was a technical failure for the Dow. Now only 450 points away from the July lows there is a good possibility that those lows will not hold. This is a scary prospect for most traders. Just like the 8062 level was supposed to hold for the Dow in July and didn't, the 7532 July lows may not hold in October. If we do break that level then it is not a successful retest but just a new low in a longer term pattern. The Nasdaq is on the verge of breaking critical lows as well. 1216 has held for two days now but worries in the tech sector are far from over. That critical level is Nasdaq 1200. Once that level is broken there are several trains of thought that sees it going to sub 1000. We are getting almost daily chip warnings and downgrades and over valued comments. The PC sector is dying without the back-to-school sales and we are only 30 days away from the holiday surge being over for the PC manufacturers. The chips are made, boxed and awaiting orders for holiday inventory. With consumers buying houses and cars there is not a lot of money left for computers. Next week we have a full calendar of economics reports next week and Tuesday is the Fed meeting to determine changes in the monetary policy. I see only the slimmest chance of a rate cut on Tuesday. If they were going to do it this would be the meeting since there is not another meeting before the November elections. The Fed funds futures have spiked from 8% to something in the 30% range but the indicators are not there to support a cut. The Fed always telegraphs their intentions to change rates so the bond markets do not get wiped out by unexpected events. The only comments we have had lately have been that the Fed was going to stand pat while the economy recovered slowly. There have been no comments about the Fed needing to take action. The Fed is stuck on this one. If they cut then they are admitting the economy is slipping into danger and the markets may crash. If they don't cut then the markets will realize there is no additional help on the horizon and will sell off as well. The Fed likely sees the coming market weakness and is still unwilling to use one of their remaining bullets. They need to save them in case there is another terrorist event or the economy really starts to decelerate. Still there are some respected analysts calling for a cut on Tuesday. It would be a surprise and could give the market a bounce, but only a bounce. This sets up a couple of rocky weeks ahead of us. We have an almost 100% chance of a retest of the July 7532 low and the Nasdaq falling below 1200. However, even at these levels analysts are still calling stocks overvalued. We are on track to attack Iraq in the next couple of months and Brazil is going to elect an anti IMF candidate. Japan held a bond auction on Friday and nobody came. For the first time since auctions began in 1988 Japan could not sell all the bonds it needed to fund its programs. This is in an economy that has a negative interest rate and a stock market at a 19 year low. Analysts said the auction failed because investors don't feel Japan has the resolve to correct its currently spiraling economy. The U.S. may be one big economic island but these types of problems will continue to weigh on our markets. We closed under Dow 8000 for the week. Many investors with day jobs will open the paper this weekend and see the number for the Dow starting with 7 and think, damn, I should have taken my money out when it bounced to 9000 and now it is 7000 again. (obviously it is not 7000 but the impression is what counts). The decision will be made to remove the rest of their shattered account from harms way and wait for better times. Funds will get those dreaded withdrawal calls on Monday and the rest is history. OIN readers know better than to withdraw money now and are looking forward to the coming buying opportunity. Unfortunately the herd is not that smart and will be looking to exit at the bottom. I had several readers tell me this week they were transferring more money into their trading account to be ready. Obviously our readers are smarter than the herd. (shameless plug) Buckle your seatbelts and watch out for sudden drops ahead. Enter Very Passively, Exit Very Aggressively! Jim Brown "Chance favors the prepared mind" ********************* SPECIAL LIMITED OFFER ********************* Unbelievable Trading System. We were upgrading some trading systems at the office and found an incredible combination of circumstances. I have a 2.2GHZ PC with four flat panel 20 inch monitors for my trading system. I was buying some more monitors and computers for the office and found a quantity of the monitors in one spot. When coupled with a great multi-monitor video card and super fast PC they make a great trading station. I talked it over with James and we decided to buy the entire lot of monitors and build 10 dual monitor trading systems for any reader that wants one. I am not going to list the complete specs here but it is an Intel P4 2.53GHZ PC with 1GB ram, 80GB disk, DVD drive, CDRW drive, V.92 Modem, 10/100 Lan card, 500W Subwoofer w/2 speakers, Firewire card, Dual monitor GE-Force 440x video card AND Two 20-inch flat panel NEC monitors. 1280x1024 resolution, the monitors swivel from horizontal to vertical depending on your preferences. The cost of the system is $3,495 plus shipping. The monitors alone are worth more than that. This offer is limited to 10 systems because we were only able to get 20 monitors at this price. If you are interested click this link for a complete description http://www.OptionInvestor.com/systemdeal/ There are ONLY TEN SYSTEMS !!! We are not in the computer business but we receive enough questions on how to get a system like this that we decided to make the offer. ******************** INDEX TRADER SUMMARY ******************** Big volume, but little movement With quarterly triple-witching complete, volume was heavy today at both the NYSE and NASDAQ with over 1.7 billion shares traded at each exchange, but there was little volatility that can often come at quarter expirations. Breadth finished slightly positive at both the NYSE and NADAQ, with advancers edging out decliners by a narrow 16:15 margin on the big board and 17:16 at the NASDAQ. Triple-witching can be an informative even for index traders and sometimes, the quarterly expiration action can give traders a "window" to make note of as it relates to where some institutions were rolling contracts to. I'm not going to do this for every index, but lets take a quick look at the S&P 500 Index (SPX.X) 845.39 +0.24%. For now, this is for historical purposes only so that we can come back and take a look at where some institutions may have been making bets. Some options traders believe that options were created in order for investors to "speculate and leverage from." This is not true. Options were created so that institutions can hedge their holding. For the most part, when market volatility is high, like it is now as depicted by the Market Volatility Index (VIX.X) 44.55, institutions are SELLING premiums. Only when it's low will they buy and then hedge positions. You know this to be true as the saying goes... "buy low, sell high." This information is not provided for trader/investors to now go hog wild on. No, what we want to do is plant a seed of potential ranges of support and resistance. As time passes, a trader can benchmark from this Triple-witching expiration and track open interest. 09/20/02 SPX Contracts Traded - Sorted by Volume What I'm looking for right now is where the volume was at this day after index expiration. Where were some institutions perhaps rolling? Volume tells me nothing about future price direction, but it hints where interest (not open interest, just today's interest) is at and may help us define a range of trading for the next month and quarter. If you believe like I do that institutions prefer to sell premium when volatility is high then we can perhaps imagine that we're selling calls and puts at levels we feel we won't lose money when expiration comes around. The hypothesis: There was a lot of volume today is the Oct. 700 puts. So what I've done is "pretend" that I'm an institutional trader and selling premium. As such, if I sold this put today, my average price (mid-point of High/low was $4.85) was $4.85. If I sold that put, then I would keep that premium if the SPX closes above 695.15, come October 17, 2002. I could begin calling this my monthly support (I've placed an M/S by this option to depict Monthly Support). Let's also look at the call side of things. Again, if institutions are selling premium, then the sale of the October 875 call with an average price today of $18.50, would have the trader thinking that 875 + 18.50 = 893.50 is resistance. After all, a trader wouldn't want to sell the 875 calls if he/she thought the SPX was going above 893.50 level before the end of the month. Again, these are hypothetical thoughts, but may help get a trader in the mindset of establishing some ranges of monthly and quarter support/resistance levels if institutions are indeed selling premium right now. Real quick then, lets take the two most actively traded SPX options today for October expiration and state a hypothesis. Hypothesis stated: Based on the belief that institutions sell option premium when volatility is high, today's volume interest in the October 700 puts and October 875 calls has October's SPX trading range between 695.15 and 893.50. We should also benchmark against the SPX open interest. It would not be correct to assume a trading range on one-days volume. The reason I want to benchmark current open interest is that over time, based on information obtained gathered each day by investors, there will be changes to current scenarios in play. Should open interest build at a strike price, then that can become a "peg level" where the bulk of market participants are making bets on or against. 09/20/02 SPX Contracts - Sorted by 09/19/02 Open Interest I'm doing the same things with my establishment of support and resistance. I didn't calculate all the potential levels of quarterly support (Q/S), quarterly resistance (Q/R), monthly support (M/S) and monthly resistance (M/R) from the various open interest of the options. Do you notice how the open interest is all in December? That's because most institutions have already made some bets on fourth- quarter levels based on the information they currently have at hand. From the above open interest, one could also state a hypothesis from current open interest. Hypothesis stated: Based on the belief that institutions sell option premium when volatility is high, current open interest in the October 800 puts and October 900 calls has October's SPX trading range between 780.75 and 910.60. Again, I'm stating the hypothesis off of the greatest amount of open interest. You will note that there are several option contracts in the December expiration that have very similar open interest right now. As time passes, open interest can change markedly as expirations near and more information is gathered from market participants and positions put on. Let's take a look at the S&P 500 Index Chart (SPX.X) 845.39 +0.25% and see if our last hypothesis based on open interest makes any sense. S&P 500 Index Chart - Daily Interval Triple-witching Friday's are tough to interpret because we get so many hedges coming off and getting rolled forward to future expirations that it can really cloud a more naturally traded market. Once again, SPX trader's came close to their bearish trader's target of 835, but fell short by about 4 points. A trader bearish after our 09/11/02 Index Trader Wrap (You were bearish) has been holding a trade for 7 days. I'd look to protect gains on Monday with a stop just above today's high and continue to monitor the Dow Industrials for weakness/strength as discussed in last night's Index Wrap. I've also placed our "hypothesis" levels. I don't know about you, but I sure like that 910 level, which correlates very nicely with the original stop we had in place for SPX bears as resistance in our 09/11/02 wrap of 912
The Option Investor Newsletter Sunday 09-22-2002 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: ABT Put Play of the Day: BBOX Dropped Calls: None Dropped Puts: AVY, TIN ************************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 ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AZO 74.78 0.70 -0.31 -0.69 0.53 +1.07 Rally mode MMM 117.19 -0.99 -2.40 1.69 –1.16 -0.37 Contrarian ABT 75.58 +1.69 +0.28 +1.83 -0.32 +4.18 triple top PUTS AVY 56.62 -0.09 -0.63 -0.41 –2.25 -2.30 drop, profits BRL 62.72 -0.20 -0.68 -1.03 –2.57 -3.52 looking good BSC 58.21 0.11 -2.20 1.93 –2.22 -3.39 safety net gone LTR 47.55 0.13 -1.41 0.30 –1.37 -7.68 Smokers'cough MAR 28.51 0.57 -0.74 -0.76 –1.99 -2.60 weak bounce MXIM 24.45 -1.07 -0.89 -0.18 –0.86 -3.70 sector rolling TIN 43.52 -0.29 -0.94 -1.95 –1.05 -3.52 drop, profits JCI 77.04 -1.08 -1.10 -1.92 -0.36 -4.64 Hanging out BBOX 29.85 -0.40 -0.88 -0.17 -2.52 -4.43 Under support AIG 56.35 +0.20 -0.69 +0.63 -1.24 -2.25 Filled Gap ************************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 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* ABT - Abbott Labs - $41.80 +1.70 (+4.18 for the week) See details in play list Put Play of the Day: ******************** BBOX – Black Box Corporation $29.85 (-4.43 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ AVY $57.70 +1.08 (-2.30 for the week) Originally picked at $60.00, AVY has had a poor week to say the least. With products used in a variety of businesses, it has failed as the business world has cut costs and closed many doors. Today's rebound fell short of yesterday's high, but nonetheless rebounded strongly. We will close this play for a profit, and look to other stocks with less support. We would not argue with traders who wanted to retain this short, as the failed rally is still a bearish sign, however we are taking our profits and investing them elsewhere. TIN $44.47 (-3.52) Turn out the lights, the party's over! As weakness resurfaced in the Housing sector last week, shares of TIN came under extreme selling pressure, treating us to a very well behaved put play, dropping as low as $43 after we picked up near $46.50. As we mentioned on Thursday, it looked like the stock could be ready to bounce, and Boy, did it ever on Friday. After the early morning dip failed to produce a breakdown, the shorts started covering and that helped to lift the stock by more than 2% by the close. The daily candle looks like a pretty solid reversal signal, and rather than risk a further erosion of our gains, we're closing the play this weekend to make room for other bearish candidates with more room to fall. *********** 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. ************************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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-22-2002 Sunday 3 of 5 In Section Three: New Calls: ABT Current Calls: AZO, MMM New Puts: AIG, BBOX, JCI ************************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 ************************************************************** ************** NEW CALL PLAYS ************** ABT - Abbott Labs - $41.80 +1.70 (+4.18 for the week) Company Summary: Abbott Laboratories is a global, broad-based health care company devoted to the discovery, development, manufacture and marketing of pharmaceuticals, nutritionals, and medical products, including devices and diagnostics. The company employs approximately 70,000 people and markets its products in more than 130 countries. In 2001, the company's sales and net earnings were $16.3 billion and $2.9 billion, respectively, with diluted earnings per share of $1.88, excluding one-time charges. (source: company release) Why We Like It: Abbott has outperformed both the Pharmaceutical Index (DRG.X) and Biotech Index (BTK.X) this week. Those indices sold off 4% and 5% respectively his week, while ABT gained 11%. The FDA recently approved Abbot's Vysis PathVysion® fluorescence in situ hybridization (FISH) test to be included in labeling for Herceptin, a treatment for breast cancer. This will increase use of the test to determine which patients are candidates for the treatment. Edward L. Michael, Vice President of Diagnostic Commercial Operations for Abbott said, " We're pleased by the FDA's decision to include PathVysion as part of Herceptin's label and believe it opens the door for this important test to become more widely used in the selection of appropriate therapy for women with breast cancer." Earlier this year, the FDA approved inclusion of Herceptin in PathVysion's label, making it the only product of its type to have three claims: Herceptin therapy selection; Adriamycin- based therapy selection and prognosis. While this will probably mean more to doctors than to traders, it basically opens the door for Abbot's product to be more widely used, especially with the most common form of cancer among women in the U.S. Following the announcement, Abbott was upgraded from a "hold" to a "buy," by A.G. Edwards. The stock has found recent resistance at $42 since the end of July. However, it has also maintained itself over $37 after the gap up on July 25 following the FDA's approval of its 47-year old drug, Synthroid, for thyroid disease management. While the market has sold off heavily since its run from July 24 to August 22, Abbott has hung in there, giving up less than 10% of its price during the slide. The 50-dma in the stock provided support throughout the first part of September. ABT has rebounded during the last week, taking out the $42 resistance level intraday, before finishing at $41.80. The trade of $42 established a triple top point and figure breakout after forming a bullish flag pattern. This combination of patterns has us bullish. The triple top breakout, according to Professor Earl Davis' study, is profitable 87.9% of the time for an average gain of 28.7% over a period of 6.8 months. While we are targeting a shorter time frame, this probability lends support to our bullish sentiment. These numbers are also for use in a bull market (which we are not in), however the Pharmaceutical Index is in bull alert status. The closing price is also above recent relative highs. We would look for a long entry on a trade above today's high of $42.27. More conservative traders may want to wait for a trade of $43 to avoid a possible "bull trap," which is a one- box breakout followed by a reversal. The bullish vertical count on the stock is $64, which is a bit higher than the earlier mentioned percentage gain, which brings with it a target of $54.05. These numbers seem awfully aggressive, however they serve underscore the possibilities of the long play. Keep in mind that the Dow failed to break back above 8000 and longs may want to wait for a hold above that level before initiating entries. Place stops at $38.25, just below the 50-dma of $38.37. BUY CALL OCT-40* ABT-JH OI= 1703 at $ 3.20 SL=1.60 BUY CALL OCT-42.50 ABT-JV OI= 1460 at $ 1.65 SL=0.80 BUY CALL NOV-40 ABT-KH OI= 4730 at $ 3.80 SL=1.90 BUY CALL NOV-42.50 ABT-KV OI= 4664 at $ 2.30 SL=1.20 Average Daily Volume = 5.02 mil ************************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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** AZO - Autozone - $75.85 +1.07 (+1.43 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 continued to show strength on both down days and up over the last week. It has not yet broken the $77.00 level, as it seems to have the weight of the market on its shoulders, however it got close today. This was very bullish, given yesterday's intraday resistance at $76.00. A look at the intraday chart shows a series of higher highs and higher lows, with buyers stepping in at each pullback. Zack's liked the stock enough to add it to its recommended list recently, even before the triple top point and figure breakout. That came at $76 and the possibility of a bull trap, which is a one-box breakout that is immediately followed by a sell-off, seems to have been overcome by the subsequent three-box reversal finding support and reversing up once again. Although the stock has traded over $76, it needs to trade $77 for a bullish catapult to be achieved. The catapult is a triple top breakout followed by a double top breakout. The continuing series of higher highs and higher lows on the daily chart remains very bullish, and although the stock has experienced sideways movement the last ten days, it has outperformed the overall markets tremendously. Any broad market rally could see this stock achieve our initial target of $83 in a hurry. The bullish vertical count of $91 would be the secondary target. A hold above $76 could be seen as an entry point for new longs. More conservative investors looking for another buy signal can wait for a trade of $77.00. We are raising the stop loss to $72.00, just below the new higher lows. Remember that AZO's earnings are September 25, so we will close the play ahead of that date. BUY CALL OCT-70 AZO-JN OI= 226 at $ 7.20 SL=3.60 BUY CALL OCT-75*AZO-JO OI= 1162 at $ 4.60 SL=2.30 BUY CALL DEC-70 AZO-LN OI= 794 at $10.30 SL=5.50 BUY CALL DEC-75 AZO-LO OI= 1370 at $ 7.40 SL=4.00 Average Daily Volume = 556 K MMM – 3M Company $119.46 (-0.37 last week) Company Summary: Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. Why We Like It: Talk about resilience! When it became clear that the bears weren't going to take a serious run at driving the markets lower on Friday, the bulls started putting money to work in the strongest names in the DOW. MMM headed that list with a nearly 2% gain heading into the weekend. Fortunately, we got a great entry before the run began, as MMM dipped to just above the $117 level in the early going. After several slightly higher lows throughout the day, the shorts covered and MMM rebounded into the close. It is interesting to note that the high print of the day was $119.99. Recall that momentum traders want to see a strong push through $120 before taking a position, and clearly the enthusiasm wasn't there ahead of the weekend. Those looking to buy the dips can still take advantage of intraday trips down near the $117 level, and with the broad markets still looking weak, we're likely to get that opportunity early next week. Once clear of the $120 level, MMM will need to clear its 200-dma ($120.72) before making a concerted attempt at a real rally. Look for MMM to lead on any broad market rally, and if the broad market actually follows through, we could be looking at the stock trading in the $124-126 area in fairly short order. Keep stops in place at $115. BUY CALL OCT-115 MMM-JC OI=1894 at $8.00 SL=5.75 BUY CALL OCT-120*MMM-JD OI=4015 at $4.80 SL=3.00 BUY CALL OCT-125 MMM-JE OI=4139 at $2.50 SL=1.25 BUY CALL JAN-125 MMM-AE OI=1596 at $7.10 SL=5.00 Average Daily Volume = 2.73 mln ************* NEW PUT PLAYS ************* AIG – American International Grp. $56.35 (-2.25 last week) Company Summary: Engaged in a broad range of insurance and insurance-related activities through its subsidiaries, AIG's primary focus is on its general and life insurance businesses. Additionally, the company is growing its presence in financial services and asset management. Other operations include auto insurance, mortgage guaranty, annuities, and aircraft leasing. With operations in 130 countries, AIG generates more than half of its revenues outside the United States. Why We Like It: In the wake of the September 11th attacks last year, Insurance stocks got sold off pretty hard, as investors tried to envision how bad the financial hit would be. Clearly, investors are still worried about a repeat event, as demonstrated by the strong negative action in select Insurance stocks on Friday when rumors surfaced that the U.S. would go to Red alert on its terrorist status. Those rumors turned out to be false, but a quick look at the chart of AIG shows just how quick on the trigger some traders were. Once bitten, twice shy! In about 30 minutes, the stock crumbled from $57 down to $55.40, before gradually recovering for the remainder of the day. Of course, the string of downgrades to about 3 dozen life insurance companies on Thursday certainly didn't help the bullish case for AIG as another negative week drew to a close. Quite possibly, the cause for the rebound from just above $55 on Friday was due to the stock hitting its bullish support trend on the PnF chart. The weakness in the rebound (as well as the bearish price target of $47) hints that there is more downside to come and we can look to initiate new positions on the next failed rally. A rollover from $57 would work, although a rebound and failure up at $58 would be even better. Owing to the possibility of a short-covering rally early next week, we want to start out with a fairly wide stop at $60. BUY PUT OCT-60 AIG-VL OI=5670 at $5.30 SL=3.25 BUY PUT OCT-55*AIG-VK OI=6720 at $2.85 SL=1.50 Average Daily Volume = 7.10 mln BBOX – Black Box Corporation $29.85 (-4.43 last week) Company Summary: As a technical services company, Black Box Corp. designs, builds and maintains network infrastructure systems. The Black Box team serves more than 150,000 clients in 132 countries, providing technical services on the phone, on site and online. Through its catalogs and Website, the company offers more than 90,000 infrastructure and networking products, and designs and builds more than 650,000 custom products each year. Why We Like It: As the broad markets broke down through important support levels late last week, there were numerous individual stocks that made their own break to the downside. Second only to the weakness in the Semiconductor index, the Networking index (NWX.X) has shown zero signs of life, as warnings and downgrades continue to flow out of the industry. The NWX broke below its July lows last Monday ($114) last Monday and never looked back, closing below $100 for the first time on Thursday. Even the attempted rally in the broad markets couldn't inject any life into the sector and our new put play BBOX generated its own breakdown. The bulls had tried valiantly to hold the line at $32 (the site of the early August low), but in the end the bearish news throughout the sector took its toll and the stock crumbled to below $30 at Friday's close. PnF aficionados will recognize the importance of this latest move, as it created a fresh triple-bottom Sell signal, and the vertical count is now pointing to the $21 level as the stock's eventual downside target. While there is still some old historical support at $27 to contend with, the weekly chart shows the importance of the $21 level as it provided support both in 1997 and 1998. At this stage, any lift will be a gift, as it will give us a better entry into the play as the stock continues to be a favorite of the bears. Look for a failed rally near last week's breakdown ($32) to provide for new entries or else enter on a breakdown under $29.50 (Friday's intraday low). We are initially setting our stop at $33, as a rally through that level appears very unlikely at this juncture. BUY PUT OCT-30*QBX-VF OI= 105 at $2.55 SL=1.25 BUY PUT DEC-25 QBX-XE OI=1591 at $2.00 SL=1.00 Average Daily Volume = 460 K JCI – Johnson Controls, Inc. $77.04 (-4.64 last week) Company Summary: Johnson Controls, Inc. is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems and batteries. For non-residential facilities, JCI provides building control systems and services, energy management and integrated facility management. Why We Like It: The bloom is off the rose of zero-percent auto financing, as it is becoming clearer that consumers are running out of money they can spend (or debt that they can assume). This much is evident by looking at the charts of the Big Three auto-makers, all of which have been falling for the past month. But the real play here isn't in the actual manufacturers. It's in their suppliers and here's how the logic works. If consumers are buying fewer cars, then the manufacturers will be building fewer of them and that means they don't need to buy as many parts from their suppliers. It's trickle-down economics in reverse. JCI is a major supplier to this industry, and judging by the recent sharp plunge in share price, the future doesn't look good. The stock posted a lower high near $86 about 2 weeks ago, and since then it hasn't been pretty, with the stock plunging by more than 10%. Note that early last week, the stock broke back below the 50-dma ($81.17), putting it below all of its moving averages. The PnF chart is a thing of beauty (to a bear), with the current column of O's giving a bearish price target of $65, which is below the July lows. Not only that, but the large gap down on Wednesday placed the stock below its bullish support line of $78. Since that gap, the $78 level has proven to be formidable resistance and we want to target a rollover near this level for new entries. Alternatively, use a drop below $75.50 (Wednesday's intraday low) to initiate new momentum-based positions. Should JCI push through overhead resistance, we will want to be out of the play, so we are placing a tight stop at $78.50. BUY PUT OCT-80 JCI-VP OI=326 at $5.10 SL=3.00 BUY PUT OCT-75*JCI-VO OI=254 at $2.65 SL=1.25 Average Daily Volume = 582 K ************************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. 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The Option Investor Newsletter Sunday 09-22-2002 Sunday 4 of 5 In Section Four: Current Put Plays: BSC, MAR, MXIM, BRL, LTR Leaps: Confirmation Traders Corner: Capitalizing Without Using Capital Traders Corner: Charting: Trendlines; Price Channels - ************************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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** BSC - Bear Stearns - $57.72 -0.49 (-3.39 for the week) Company Summary: Founded in 1923, The Bear Stearns Companies Inc. is the parent company of Bear, Stearns & Co. Inc., a leading investment banking and securities trading and brokerage firm serving governments, corporations, institutions and individuals worldwide. With approximately $29.6 billion in total capital, the company's business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear, Stearns Securities Corp., it offers prime broker and broker dealer clearing services, including clearing and securities lending. Headquartered in New York City, the company has approximately 10,500 employees worldwide. Why We Like It: Bear Stearns has continued its sell-off since getting a boost after releasing earnings on September 18. This boost actually just provided a better short entry point. The fact that the earnings boost failed at the 200-dma and 50-dma demonstrates a lack of conviction from buyers who should have been able to move the stock over those levels if they were true believers. It now appears anyone who bought on those numbers has left the building. The entire brokerage and investment banking sector has sold off amid worries of falling profits and illegal dealings. After J.P. Morgan warned that earnings would be much lower than expected, investors looked to one of the reasons - lower trading revenues, and began selling the sector. Investors have been pulling money out of mutual funds in record numbers for the last several months, as evidenced by the slide in the overall markets. A firm that relies heavily on trading is bound to see lower revenues as a result. After CSFB and Goldman Sachs handed over IPO documents to the U.S. House Financial Services Committee yesterday, it is obvious the hunt for financial offenders is far from over. If Salomon Smith Barney and Merrill Lynch were seeing a crossover between the investment banking and brokerage divisions, it is likely plenty of other firms were as well. While this investigation may not land on BSC's doorstep, it is likely to sell-off with the rest of the sector as violations are uncovered at other firms. This isn't to say it won't wind up at their doorstep either, which would certainly kick start the short play. The next level of support appears to be $55.80 and then it looks clear dwon to the July low of $50.50. We will leave our stop loss at $61.00, as today's movement was not enough to justify a move. While the stock only dropped half a dollar, it still went our way on an up day for the Dow. BUY PUT OCT-60*BSC-VL OI= 5917 at $4.40 SL=2.20 BUY PUT OCT-55 BSC-VK OI= 2505 at $2.20 SL=1.10 Average Daily Volume = 1.22 mil MAR - Marriott International - $28.58 +0.09 (-2.62 for the week) Company Summary: MARRIOTT INTERNATIONAL, INC., a leading worldwide hospitality company celebrating its 75th Anniversary in 2002, has over 2,600 operating units in the United States and 64 other countries and territories. Marriott International operates and franchises hotels under the Marriott, JW Marriott, The Ritz-Carlton, Renaissance, Residence Inn, Courtyard, TownePlace Suites, Fairfield Inn, SpringHill Suites and Ramada International brand names; develops and operates vacation ownership resorts under the Marriott Vacation Club International, Horizons, The Ritz- Carlton Club and Marriott Grand Residence Club brands; operates Marriott Executive Apartments; provides furnished corporate housing through its Marriott ExecuStay division; and operates conference centers. Other Marriott businesses include senior living communities and services, and wholesale food distribution. The company is headquartered in Washington, D.C., and has approximately 145,000 employees. Why We Like It: Marriott attempted a bounce from yesterday's sell-off, but managed on a $0.09 gain. Not terribly impressive after breaking $30 support and dropping almost $4.00 in three days. We would have still seen a failed rebound to $30 as an entry point, but today's weakness looks even more bearish. A look at the intraday chart shows MAR's initial venture over $29 turned back quickly and then subsequent attempts at $29 turned back on at least 8 occasions. It now appears that $30 will serve as a ceiling on the stock after acting as support since the end of July. The break from the $5 rectangle pattern that had been holding the stock between $30 and $35 between the end of July and Thursday would indicate a minimum downside objective of $25 on this play. The rule about consolidation patterns is that the longer the pattern holds, the more significant is its breakdown. The 5 week pattern would seem to fit this bill. The decline in hotel revenues, particularly among the higher end hotels, has been hard on the entire industry. The month of September will likely be even harder. The stock was downgraded by J.P. Morgan from a "long term buy" to a "market perform" the day after the 9/11 anniversary and shortly after the hotel revenue numbers were released. A "market perform" rating in the current market is not much of an endorsement. After the mild rebound attempt we will leave our stop loss unchanged at $31.50. Today's failure under both $30 and $29 is a signal for new short entries on the weakness. BUY PUT OCT-30*MAR-VF OI= 2780 at $3.00 SL=1.60 BUY PUT JAN-30 MAR-MF OI= 67 at $4.10 SL=2.20 Average Daily Volume = 1.54 mil MXIM - Maxim Integrated Products - $25.48 -0.89 (-2.42 for the week) Company Summary: Founded in 1983, Maxim Integrated Products (MXIM) designs, develops, manufactures, and markets a broad range of linear and mixed-signal integrated circuits (ICs) for use in a variety of electronic products. Maxim circuits "connect" the real world and the digital world by detecting, measuring, amplifying, and converting real-world and communications signals, such as temperature, pressure, sound, voice, or light to the digital signals necessary for computer and DSP processing. (source: company release) Why We Like It: The Semiconductor Sector Index (SOX.X) looked like it was ready for a bounce, as it had sold off from 300 down to what appeared to be support at 250. The index closed at 252 yesterday and the bounce was good for all of 4 points before rolling over and breaking below 250, to close at 248. This failed rebound makes the sector look even weaker. Bank of America and Prudential recently cut 2002 and 2003 earnings outlooks on a combined 15 stocks in the sector. Not that this was really news, since earnings and revenues cuts for the semiconductors have become as common as rain in April. However, last night's announcement by Qualcomm that it was raising estimates for mobile phone chip demand in the fourth quarter looked as though it might give the sector a boost. The good vibes lasted until this morning, when Salomon Smith Barney downgraded Texas Instruments and cut its price target for the stock from $30 to $15. The entire sector continues to look extremely weak, and although it is hard to imagine the downtrend to continue without some form of a bounce, there will need to be some overwhelming good news to achieve a meaningful rally. Until then, we will continue to play it short with Maxim, which is continuing its slide from a triple bottom point and figure breakdown. The series of lower highs and lower lows has turned into simply lower lows, with each failed rebound. The PnF bearish vertical count of $17 will be our eventual target, but it will have to get through $20 round number support first. the stock attempted a rally early this morning, but was stopped at $25.01. New entries can looked for another failed rally at $25 or simply go short at the current level. BUY PUT OCT-25 XIQ-VE OI= 1249 at $2.80 SL=1.40 BUY PUT NOV-25*XIQ-WE OI= 1537 at $3.80 SL=1.90 Average Daily Volume = 8.96 mil BRL – Barr Laboratories $63.65 (-3.52 last 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. Why We Like It: After beating up on shares of BRL all week, the bears took a break on Friday, allowing a slight lift to come into the stock as Friday's session drew to a close. Underscoring just how weak the stock is though, it couldn't even approach Thursday's highs (following a gap down) near $64.50. It made sense for BRL to find support where it did on Friday, as it is now resting just above its 50-dma ($63.11). The broad market appears to be resting on the edge of a cliff, preparing to retest the July lows, and judging by the weakness in the Pharmaceutical sector (DRG.X), which is barely clinging to support near $276, our BRL play is likely to trade significantly lower before finding any meaningful and lasting support Following the recent breakdown on the PnF chart, there is a bearish price target of $55 in play, and the only real obstacles in the way of the bears achieving that goal are mild support near $61 (late July swing high) and the bullish support line on the PnF chart at $57. A continuation of Friday's late day lift could give us an attractive entry into the play on a rollover from the vicinity of $64.50. We would even look favorably on a rally as high as $65.25 (the top of Thursday's gap) for initiating new entries once the rollover begins. Alternatively, momentum traders can enter on weakness, as BRL falls under $62.50 (just below Friday's intraday low) if accompanied by the DRG index breaking its own support. Keep stops set at $65.50. BUY PUT OCT-65 BRL-VM OI=2834 at $4.10 SL=2.50 BUY PUT OCT-60*BRL-VL OI= 444 at $2.25 SL=1.00 Average Daily Volume = 588 K LTR – Loews Corp. $45.97 (-4.29 last week) Company Summary: Loews Corporation is a holding company with subsidiaries engaged in property, casualty and life insurance (CNA Financial Corporation); the production and sale of cigarettes (Lorillard, Inc.); the operation of hotels (Loews Hotels Holding Corporation); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling), and the distribution and sale of watches and clocks (Bulova Corporation). Why We Like It: They say there is no rest for the wicked, and for those of you that apply the moniker 'Sin Stocks' to the shares of those companies involved in the Tobacco industry, the saying appears to be true. Pressured by a flurry of bearish analyst comments about increasing price pressures from low cost producers on one side and increased litigation risks on the other, the whole Tobacco group has been under significant pressure in recent days. Of course, LTR is also involved in the Insurance industry. This group of stocks hasn't been doing very well either, as measured by the Insurance index (IUX.X), which shed another 1.2% on Friday. One factor pressuring the LTR was Moody's confirming their Negative outlook on LTR's senior unsecured debt. Thursday's selling party in LTR commenced on Friday with a gap down open, and the stock then proceeded to trade down near the $45 level before catching a bit of a bounce in the final 2 hours. Support at the $45 level is rather tenuous, and once it breaks, LTR will likely seek out its July lows in the $41 area. Use any failed rallies that run out of steam below the $48 level (old support becomes new resistance) to initiate new positions ahead of the eventual breakdown. If you'd prefer to enter on the breakdown, then wait for the stock to trade below $44.90 before entering. Our stop has been lowered to $49, just above Thursday's intraday high. BUY PUT OCT-50 LTR-VJ OI=114 at $4.50 SL=2.75 BUY PUT OCT-45*LTR-VI OI=150 at $1.75 SL=0.75 Average Daily Volume = 600 K ************************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 ************************************************************** ***** LEAPS ***** Confirmation By Mark Phillips mphillips@OptionInvestor.com We didn't quite get to it last weekend, but we did cover in detail in Monday's Trader's Corner article the important technical patterns shaping up in the broad markets. Up through last Monday, the bulls were still hanging onto some semblance of support, but then the patterns broke down and with a vengeance too! Let's recap what has happened so that we can perhaps gain a better perspective on where we're going. All of the major indices (DOW, S&Ps and NASDAQ) broke down early last week, confirming the bearish H&S patterns, each of which carries a downside price target that isn't going to be comforting to the bulls. The targets for the DOW and S&Ps is fairly close to the intraday lows set back in July. But on the NASDAQ Composite, the picture isn't quite so appealing, with a current target down near 1100, which is nearly 100 points below the July low. Turning to the Point and Figure (PNF charts), we can see that all of the major indices are on Sell signals again and the bearish price targets are not encouraging: Index Current July low Bearish Target DOW 7986 7532 7150 S&P 500 845 775 755 S&P 100 424 385 384 NASDAQ-100 871 856 750 NYSE Composite 459 418 420 Ouch! Note that aside from the NYSE Composite and the OEX, all of the PnF price targets currently in play are well below the July lows. Not only that, but most of the columns of O's used to generate these targets are STILL GROWING. That means those downside targets are continuing to move further away. And the Bullish Percent charts are providing little in the way of bullish indications. Both the SPX and OEX have gone back into Bear Confirmed, the DOW, NYSE and NASDAQ-100 have reversed into Bull Correction mode, and only the NASDAQ Composite is still hanging out in Bull Confirmed territory. Note that while the COMP has not yet reversed into a more bearish condition, it is only at 30, a handful of points away from going back into Bear Confirmed. I won't even waste any time here going on a rant about the broken-clock analysts that still have ridiculously high price targets for the markets by year end. You already know the drill and if you have been paying attention over the past several months you have a clear picture of my expectations for the broad markets -- DOWN. We had our little bullish rally off the July lows, and we're likely to get another one into the end of the year. But not before testing and most likely breaking the July lows. Note that the VIX is lurking in the mid-40s again, having broken its string of lower highs that began with its foray to above the 56 level on July 24th. While the underlying market dynamics are significantly different (then we were in a raging bull and now we are in a mauling bear), but the VIX pattern now is eerily reminiscent of that seen in late 1998. I've often said that we have some of the smartest subscribers. The observation about that similarity to the 1998 timeframe didn't come out of my grey matter, it came from one of you. Keep it up, because I need all the help I can get! GRIN My expectation is that we will test and likely break the July lows over the next 6 weeks, and in the process, the VIX will shoot over 55 again. This may make for another attractive MOCO play like we had back in July, but at this juncture I just can't say. But the point I want to make here is that there is a lot of downward pressure on the markets and I certainly don't want to jump in front of that speeding train until it stops in front of the station. In the meantime, bearish plays are the way to go. Either that or stay in cash, in anticipation of a decent long entry near the end of October. I went round and round with myself this weekend about adding new Watch List plays and for the life of me, I'm still undecided. Not about what stocks I want to add, but what the entry strategy should look like. I have 3 stocks that I think are going to be solid performers for us, if only we can pick an advantageous entry. So in a slight deviation from my normal Watch List writeup this weekend, I'm going to give you the symbol, along with a brief description of why I like it. They'll each probably make it onto the Watch List in the weeks ahead, but right now the technicals are a bit too muddled for me to feel right about actually listing entries. MSFT - I continue to be amazed with this stock's refusal to sell off, even with the rest of the market looking ugly. I think the overall market will likely drag MSFT down with it, but I think this is one that may actually stay to the upper side of its July lows. This play is all about Relative Strength. Look for a formal Watch List Play in the next couple weeks. KBH - I've been bearish on the housing sector for quite a while now, but it looks like the fundamentals and technicals are finally coming together, pointing to a topping out in the industry (and some of the stocks). Very few of the Housing stocks have LEAPS available, but KBH is one of them. It appears to be topping out near the $50 level. I need to do some more detailed research, but look for KBH to show up as a new Put play on the Watch List next weekend. GOLD - While I'm not what would normally be termed a 'gold bug', I am starting to recognize that there is a shifting tide in the inter-market dynamics. While the equity markets continue to weaken, the Gold market is persistently moving higher. If Gold continues to increase in price, then that increase will help to propel the share prices of many gold stocks higher, especially those of the companies that do not hedge their forward production. While ABX has hedged in the past, the company has radically curtailed its production. We successfully played ABX last year due to the fact it was the only one of the gold stocks that had LEAPS available. Checking some options chains this weekend, I found that NEM also is LEAP-able now. I need to do some more research, but those of you that are looking to play the new bull market in gold, we'll shortly have one of these two stocks on our Watch List. To round things out, lets look at what we have active on the Watch List and Portfolio Portfolio: QQQ - Have you noticed how well the QQQ has held up in light of the weakness in the broad market? Sure, it is losing ground, but very slowly, leading me to think we could get a successful retest of the August low at $21.30. See how little ground QQQ has given up as our SMH play has slid substantially lower? New entries near current levels could work nicely, but I want to see evidence of some buying interest first. Keep in mind, our stop loss is set at $21 -- a close below there and we're gone! SMH - Picture perfect, is what I would call the action in the SMH. The Semiconductor sector used to be the linchpin of every broad-market rally, but those days are gone for some time to come. It looks like I did the right thing by pushing it a bit on the entry, because the SOX just continues to print new multi-year lows on a daily basis. That has the SMH closing in on the $20 level, and likely to go significantly lower throughout the remainder of September and on into November. The critical event to watch for next week will be MU's earnings on Tuesday. Should they admit to more problems on the demand side, it will likely usher in the next downward leg. We've got a nice downward trend working in our favor, and I see no reason to squeeze it too tight with our stop. Move stops down to $24.25, just above the top of the 6-month descending channel. Watch List: MO - Say thank you to Solly and Morgan Stanley for making bearish comments on the Tobacco stocks related to pricing pressure for tobacco products and the never-ending litigation risk. This is one that looks better and better, the cheaper it gets. The reason why is that nice fat dividend yield. While we don't get the yield as LEAPS buyers, investors as a whole are going to be increasingly attracted to stocks that are paying out cash in excess of what they can get, even from a 30-year bond. I was looking for the $43-44 level to provide an attractive entry into the play, but it appears that price action is going to give us an even better entry. I'm lowering and widening the entry zone to $40-42 this weekend, as any bounce in that vicinity ought to make for a solid entry. After entry, the stop will be set at $38.50, to give it room to breathe. Remember, don't try to catch a falling knife - wait for this decline to run its course and then buy it on the rebound. BA - Is anyone else wondering if BA is ever going to get down to our price target? I'm willing to be patient, as a broad-market decline back to the July lows may be just the catalyst we're waiting for. Then we'll be in a position to take an attractive entry, managed with a tight stop at $30. It's been a long time coming, but I believe my patience is going to be rewarded. BBH - Grrrr! How many times can I be right on this one (in terms of direction) and miss the entry? Last week, I lowered the entry to $84-85, and the BBH topped out at $83.30 intraday. This is the potential frustration of trying to pick entries based on price points up to a week in the future. Of course, when we do get filled, it tends to be a position in which we can easily manage risk, and I love that! I'm willing to give it one more shot with our BBH play. Lower the entry target to $83-84. Resistance has been building near $83 and $84 is now the site of the descending trendline that began back in March. If we get an entry, then look to set stops at $85. In my opinion, the markets are in their full bearish mode, with all of the major indices having confirmed breakdowns from those Head & Shoulders patterns. It appears that a retest of the July lows is a foregone conclusion and any long-term bullish positions are likely to be unsuccessful over the near-term. We have our token long QQQ position right now and we'll let that one run to completion -- either stopping us out or holding the line at support. Other than that, we're looking to have some attractive plays on the Watch List when the current decline runs its course. Trade Carefully! 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 $ 1.45 -34.01% $21 '04 $ 24 KLF-AX $ 4.10 $ 3.40 -17.07% $21 Puts: SMH 09/11/02 '04 $ 20 KBS-MD $ 3.40 $ 5.00 +47.06% $24.25 '05 $ 20 ZTO-MD $ 4.70 $ 6.20 +31.91% $24.25 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BA 06/30/02 $32 JAN-2004 $ 35 LBO-AG CC JAN-2004 $ 30 LBO-AF JAN-2005 $ 40 ZBO-AH CC JAN-2005 $ 30 ZBO-AF MO 08/25/02 $40-42 JAN-2004 $ 45 LMO-AI CC JAN-2004 $ 40 LMO-AH JAN-2005 $ 50 ZMO-AJ CC JAN-2005 $ 40 ZMO-AH PUTS: BBH 08/30/02 $83-84 JAN-2004 $ 80 EVK-MP JAN-2005 $ 80 EIL-MP New Portfolio Plays None New Watchlist Plays None Drops None ************** TRADERS CORNER ************** Capitalizing Without Using Capital Couch Potato Trading Institute students know how to recognize a bargain when they see one. Advanced CPTI students know how to create a bargain – their own man-made Blue Light Special. Learn how we can take chicken and make chicken salad instead of chicken . . . . out of this market. And, if it works out, you’ll get fries and an apple pie as a bonus. The Adventure Begins The QQQs, as well as the rest of the market, have taken a beating – and there’s a good chance that the beating isn’t over yet. There’s a way you can take advantage of the continuing downtrend and be positioned to profit by the rebound – and never take out your wallet. The QQQs are trading at $21.58. 1. We sell 10 contracts of the QQQ Oct. 21 calls @ $1.65 – a credit of $1,650. 2. We buy 10 contracts of the QQQ Nov. 24 calls @ $.85 – a debit of $850 3. We buy 200 contracts of the QQQ Nov. 26 calls @ $.40 – a debit of $800. The total credit is $1,650 and the total debit is $1,650. The net cost out of your pocket is ZERO. That’s right! Your pizza money stays in your pocket. Ideally, at October expiration, the QQQs will be below $21. Thus, the short Oct. 21 call will expire worthless and you will be long 10 of the November $24 calls and 20 of the November $26 calls at a cost of ZERO. Then, you have an entire month for the rubber band to snap back if there’s still some twang in that thang. You have an unlimited profit potential. The Plot Thickens If the QQQs benefit by a series of short covering bounces and make a few of their anticipated 3-point moves prior to November expiration, it could reach the heavy overhead resistance at $26. At $26, your 10 Nov. $24 calls will be worth about $2.25 ($2,250). The 20 Nov. $26 calls will be worth about $.50 ($1,000). That’s $3,250 profit – with NO costs. If the QQQs really spike up in November, there is no limit to what you can make. Sound too good to be true? Well, every silver lining has at least a little cloud. You do have some exposure. If the QQQs are between $21 and $24 at October expiration, you will need to buy back the short October $21 call. Technically, the maximum exposure is $3.00, because, above $24, you are covered by the 10 November $24 calls you purchased. However, in reality, the exposure is significantly less. If the QQQs finish at $23 at October expiration, you could sell the November $24 calls for about $1.00 ($1,000) and the 20 November $26 calls for about $.50 ($1,000). After you subtract the proceeds of the sale of the November calls ($2,000), your exposure is really only about $1,000. If the QQQs continue on down, and remain below $21, you have nothing to lose. Your brokerage firm will want you to cover your $3,000 exposure in your account in the form of cash or margin. Another Possibility Looms There is an interesting variation. Instead of buying 20 of the Nov. $26 calls for $800, you could buy 10 of the Nov. $19 puts for about the same money. If the QQQs continue to circle the bowl in its current search for the septic system we call the market, you can profit dollar for dollar on movement below $19. By buying the Nov. $19 puts, we’ve essentially created a November $24/$19 strangle at ZERO cost and ZERO exposure. I’ve always enjoyed adding up zeroes, especially if there are a bunch of them preceded by a nice large digit. While the majority of traders are getting regular financial wedgies, CPTI students, who know how to play the game, are adding up their profits – during commercials, of course. ____________________________________________________________ Mike, I liked your article last week about taking advantage of the price discrepancies of options very near the strike price. I started tracking about 50 stocks near a strike price with this month’s and next month’s options. Since last Thursday's close (9/12) the cost to buy next month's option and sell this month's has been in excess of $1.50 for each calendar spread. Will this cost shrink as this week goes on (it is already Wednesday afternoon), or have I selected the wrong stocks? Response: Thanks for the kind words. I'm glad you enjoyed the column. You have to keep your eyes on the option chain of each stock (50 seems like a lot to watch effectively). If it's going to work, you'll notice the price of the Sept. call move up and the Oct. call go down. The $1.50 difference figure might go down to $.70 or $.80 late Thursday or some time on Friday. That's when you make your move. It doesn't happen on all stocks. You may not see any -- it depends on the stocks you choose to monitor, but it's worth looking. Trading the unwinding is a good strategy. However, it's labor intensive and requires the ability to pull the trigger when the opportunity presents itself. Mike Thanks for the response. If I understand you correctly, if I am lucky, one or two of the stocks I am monitoring might fall to a good entry of .70 - .80, and I should enter the play no sooner than Thursday afternoon. I set up a watch list on E-Signal that makes it easy to see the cost of the spread, so the monitoring of them is not difficult. Thanks again! Response: Look for a stock that is moving toward the strike price (as I gave in my example in last Sunday’s column) as opposed to one that is moving away. In this falling market, that might be very difficult to find. It's nice to know that there is a scan that can possibly simplify the task for you. However, remember that when you're looking for a spread, the scan will likely focus on one exchange. Just as, when you place a spread order, both legs go to one exchange instead of searching for the best bid and best ask, which are usually on different exchanges. Scanning one exchange out of four or five will not necessarily give you an accurate representation. Possibly only one exchange out of the four might bump up the price of the September call. While another will have the artificially lowered price on the October calls. It's unlikely they will all go in unison. You might inquire what prices will show up on the E-signal scan. I’m not familiar with the software. If it's scanning all exchanges and giving you the difference based on the best bid and best ask, it would really be a great tool for this strategy. Keep us posted. A number of OI readers would be very interested. You mentioned that the approximate average cost to close a September position and open the long October position is about $1.50. You can't use $.80 as a monitor as to what the spread difference should be. Look at QLGC. At this writing, it's trading about $29. Right now, the Sept. 30 can be sold for .55 and the Oct. 30 can be bought for $3.00. If the unwinding scheme works out, the $.55 might move up to $.85 and the $3.00 might move down to $2.60. The point is that you can still possibly get the $.75 discount -- it will not seem as significant because it's a pricier stock, but $.75 is still $.75. In this falling market, using puts, and going in the other direction, might be the wiser tact. You would sell the September put and buy the October put. ______________________________________________________________ Iron Condor Update: Hooray!! BBH is at $77.06. It looks like BBH may have finally picked a direction – down. Well, that’s great. On Thursday, when BBH broke below $80, we shorted 1,000 shares again. Now we can root for BBH to tank seriously. The lower, the better. The minute BBH sinks below $75, we will be making money, over and above our credit spread profits, dollar for dollar. . If BBH goes to $65, we’ve just made an additional $10,000 ($10 value of the $75 put X 10 contracts). Our $80 short put is covered by our short stock. That frees up our long $75 put to make us a bushel of money. 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. Happy trading! Remember 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 ************** Charting: Trendlines; Price Channels - By Leigh Stevens firstname.lastname@example.org In two prior Trader’s Corner articles (9/15 & 9/19), I bisected and dissected trendlines and their use. Building further on this prior information about the construction and best use of trendlines takes us to trendline “channels”. A very useful further use of trendlines is incorporated in the drawing of price trend channels. There is frequently a tendency, especially in the stock indices but also in individual stocks, for prices to trend higher or lower not only in relation to up or down trendlines, but also in relation to an opposite channel line drawn PARRALEL to the dominant trendline. Not only do prices tend to come down to an up trendline in a rising trend and then rebound, beginning a move to still higher levels, but there also often tends to be an ever-rising area where prices find resistance on rallies. In a rising trend, resistance (areas of selling interest) often rises along a straight parallel line linked to the up trendline. In an uptrend or downtrend, the two parallel lines form a rising or declining channel. Going back to the uptrend example, we start with an up trendline - ongoing buying on price dips, will tend to place an effective floor under a rising trend. A line through these downswing lows forms the up trendline. As well, there will develop areas where scale up selling goes on in an uptrend, by traders who take periodic profits on long positions and shorting by bearish traders on the stock or index. If a line is drawn through the various rally peaks, it often will form an upper boundary of a rising trading range. Conversely, in a downtrend, there can develop a falling “line” of support running parallel to a falling resistance down trendline (an area of selling interest or “supply” on the way down, related to scale-down selling) as traders take periodic profits on short positions by buying; and, those bullish also do some scale-down buying. Hey, if a stock was “cheap” at 50, it’s even “cheaper” at 40 - or so goes the sometimes wishful thinking on the Street of Dreams. PRICDE CHANNELS - A price channel is constructed by drawing a line parallel to either an up or down trendline that slopes in the same direction. A trendline is the first requirement, which can be constructed after 2-3 lows or highs form. The second, parallel, line can then initially be constructed with only ONE high or low point, which is a concept quite different than the rule for drawing the underlying trendline. Most charting software will place a line parallel to another, as long as you have a starting point or any one point above or below a trendline. In an uptrend there are minor price swings that go with and against the direction of the trend. The downswings are used to define an uptrend line. The top of the first upswing can be used to define the upper boundary of the price “channel” within which a trend tends to proceed as seen below. The chart above shows how an uptrend channel is constructed. The upper channel line in an uptrend tends to define resistance, or a rising area of selling interest, as prices trend higher. Note here that after the first 2 downswing lows allowed the initial drawing of an up trendline, the first rally high AFTER these two lows, then defined a “line” of resistance not only going forward, but going back in time as well by extending the line “backward” from that point. This is an interesting aside only, as the useful aspect of the upper channel line here is to see where the next rally highs might come in. There tends to be 3 results after selling pressure, at the upper end of the channel, acts in such a “deflecting” manner: prices continue higher but stay just under or around the upper channel line, there is a pullback to around the middle of the channel, OR prices drop back to the low end of the channel – back to the support trendline. If there is a subsequent high that forms that is above the first top that has been used to construct the upper channel line, it is typically redrawn with a parallel line that goes through this higher high as is seen in the chart below. The widest point is used to construct the opposing channel line, relative to the trendline. This, because we want to see the widest possible parameters for our channel - in keeping with its intended use to define potential extremes within the price boundaries traversed by a trend in its “trajectory”. An example of a downtrend channel is provided in that next chart, that of General Electric (GE) below. There is always a point or an area where prices get ahead of themselves in an uptrend or downtrend – my saying that being “ahead” of itself refers to a price that overshoots a reasonable valuation level for the moment – market prices often go from undervalued to overvalued and back again. Prices get over or under valued within the dominant trend and they will then adjust accordingly. The usefulness of a channel line is that the upper boundary line of an uptrend channel and the lower boundary of a downtrend channel are potential areas for both profit taking and trading against the trend -- for short-term traders. In addition, investors looking for an improved price entry may want to look for a price channel line to buy/sell, if one can be defined. After the upper line is reached in an uptrend channel, there is an increased likelihood that prices will dip from there, at least to the midpoint of the channel. This tendency also suggests that a better (cheaper) price entry, on a reaction or countertrend move, is a likely possibility once the top or bottom end of a channel is reached. The channel pattern does not always appear nor, once constructed, do the boundaries always deflect and contain the price swings that unfold during a trend. However, when you do see this pattern holding up over time, it often works quite well in defining the pause or “resting” places for price swings. And, if prices break out above or below a price channel that has existed for some time already, it’s a reason to look more closely at what is happening. An upside breakout above a well-defined uptrend channel is a definitive indication that the trend momentum and strength are accelerating in the direction of the trend. If there is a decline under a lower channel boundary, it’s no different than any similar trendline break and is a likely reversal sell “signal”. In my Index Trading wraps, I make extensive use of trend channels, ranging from hourly – to weekly charts – The above charts being recent (end-August) examples. Then, as you can see in the example charts above, there other patterns and indicators along with the channels that can be used to make other related analysis of the trend. For example, at the upper trend channel boundary on the weekly chart above, the S&P 500 (SPX) was at an overbought extreme according to the Relative Strength Index (RSI), at least on an 8-week basis. Or, in the example provided in the hourly SPX chart above (the weekly chart), a Head & Shoulder’s (H&S) top formed within the boundaries of the uptrend channel – the fact that the “left shoulder” and the “Head” formed at resistance implied by the upper channel line gives more credibility to the top implied by the H&S formation - more on the Head & Shoulder’s pattern in my past Trader’s Corner article at - http://www.OptionInvestor.com/traderscorner/061602_1.asp Moreover, the H&S top pattern then had a “confirming” event when there was the break of the uptrend channel on the hourly SPX chart shown above. After this event in turn, the rising bearish flag was given more credence because prices were outside (had “broken”) or below its former bullish/rising uptrend channel. We were on the alert, so to speak, for bearish patterns and places to sell rallies after the bearish break of the uptrend channel. ************************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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-22-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Using Margin In Covered-Calls Naked Puts: Options 101: Questions Concerning Trading Stops Spreads/Straddles/Combos: Looking For A Diamond In The Rough Updated In The Site Tonight: Market Watch Market Posture ************************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 ************************************************************** ************* COVERED CALLS ************* Trading Basics: Using Margin In Covered-Calls By Mark Wnetrzak One of our readers asked if we recommend the use of margin in covered-call positions. Attn: Covered-calls Editor Subject: Buying covered-call stocks on margin Hello Mark, I was scanning the summary for the covered-calls section and I noticed you don't use margin when calculating the results for your plays. Is that because you don't recommend using margin when buying stocks for these positions? Also, what about stock and option commissions -- do you factor them into the potential monthly yield? If so, what are the average costs used in these calculations? My broker charges $12 for stock orders and about $35 for a 10-contract option trade. That seems about average for most online brokers...who do you use/recommend? Thanks for all the great information and keep up the good work! JY Regarding the use of margin with covered-call stocks: Before you consider using margin, it's important to be aware of the guidelines brokers have established for this type of trading. To initiate and maintain a margin account, a broker requires a minimum of $2,000-$5,000 in any combination of cash or marginable securities to be on deposit at your brokerage. Margin accounts are obligated to maintain certain minimum equity levels; generally 30% of the portfolio value. If the market value of your margin account declines below that ratio, the broker may request that you deposit more collateral through a "margin" call. A margin-maintenance call should always be answered promptly with the delivery of additional securities or funds to avoid liquidation of portfolio holdings. If you are one of our regular readers, you know that our plays are generally very conservative and almost always "in-the-money". We focus on this method because our primary goal is to provide positions that generate consistent, acceptable returns while still receiving an above-average amount of downside protection. Buying stock on margin in a covered-call position is an excellent way to enhance profit potential when the technique is used correctly. The advantage of trading on margin is that your return is doubled. The downfall lies in the fact that you may be asked to contribute more collateral to the brokerage should the value of your stock decline significantly. In our current approach, we generally do not expect to own the stock at the end of the strike period. If we open a new position and it turns negative (breaks technical support and/or nears a 20% loss), we always recommend that you consider closing/adjusting the play to preserve capital. The key is to monitor your positions closely and use sound judgment (no emotions!). If you follow this practice, the net loss should always be kept to a minimum and then your remaining funds can be moved into another play. Regarding commissions, we do not include the cost of trading in our results because different brokerages charge varying commission fees and with discount online brokers, the overall effect on most positions is minor. E*trade, for example, charges $19.95 to buy a 1000 shares of stock and $37.50 to sell 10 option contracts. If the stock is called away at expiration, an additional $19.95 would be charged to sell the stock for a total cost around $78. This impacts the potential profit target of an ITM position by about 8 cents (on a per share basis). Other discount brokers (such as Scottrade) charge even less. Obviously, that's a relatively small amount for most option-trading strategies, and I leave it up to the individual investor to evaluate the impact on their in-the-money covered-calls. It is important to understand how they affect the potential gain of each position. As far as favored brokers, we can't make recommendations because of our current affiliations and since they all have their benefits and disadvantages, it is important for your to carefully evaluate the differences and choose the one that best fits your trading needs. These web-sites will help you review the different features and limitations: http://www.investorlinks.com/directory/broker-dddiscount.html and http://www.gomezadvisors.com/ Then visit the chat sites and message boards such as: http://messages.yahoo.com/yahoo/Business_and_Finance/ for other trader's experiences. With regard to overall popularity, Ameritrade, Datek, E-trade, Schwab, and Scottrade seem to be the most commonly used brokerages among the readers of this section. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield NXTL 5.49 7.44 SEP 5.00 1.10 *$ 0.61 10.1% MDR 6.00 5.88 SEP 5.00 1.50 *$ 0.50 8.0% CKFR 11.70 11.45 SEP 10.00 2.05 *$ 0.35 7.9% OSTE 9.34 9.42 SEP 7.50 2.20 *$ 0.36 7.7% TDY 17.80 17.77 SEP 17.50 1.05 *$ 0.75 6.8% V 12.96 12.91 SEP 10.00 3.30 *$ 0.34 5.4% XOMA 5.66 5.84 SEP 5.00 0.95 *$ 0.29 5.4% ABFS 27.46 27.53 SEP 25.00 3.00 *$ 0.54 4.8% AFFX 18.51 19.38 SEP 15.00 4.40 *$ 0.89 4.6% MRCY 24.79 23.60 SEP 22.50 3.60 *$ 1.31 4.5% NET 14.56 13.50 SEP 12.50 2.55 *$ 0.49 4.4% QCOM 28.46 28.08 SEP 25.00 3.90 *$ 0.44 3.9% IMCL 8.30 6.74 SEP 7.50 1.30 $ -0.26 0.0% MNS 11.20 9.15 SEP 10.00 1.75 $ -0.30 0.0% NWRE 16.94 13.01 SEP 15.00 2.65 $ -1.28 0.0% NWRE 17.82 13.01 SEP 15.00 3.30 $ -1.51 0.0% ORCL 10.79 7.99 SEP 10.00 1.15 $ -1.65 0.0% RSTO 5.70 5.53 OCT 5.00 1.20 *$ 0.50 9.7% OSTE 9.45 9.42 OCT 7.50 2.50 *$ 0.55 5.7% MACR 8.49 8.10 OCT 7.50 1.45 *$ 0.46 5.7% CVC 9.48 10.25 OCT 7.50 2.50 *$ 0.52 5.4% BSTE 29.40 28.44 OCT 25.00 5.70 *$ 1.30 4.8% NOK 13.95 12.84 OCT 12.50 2.20 *$ 0.75 4.6% NWRE 15.97 13.01 OCT 12.50 4.10 *$ 0.63 4.6% FLE 6.02 6.03 OCT 5.00 1.30 *$ 0.28 4.3% CMLS 16.85 17.00 OCT 15.00 2.55 *$ 0.70 4.3% PRX 28.20 27.98 OCT 25.00 4.30 *$ 1.10 4.0% LMNX 7.53 6.90 OCT 7.50 0.60 $ -0.03 0.0% *$ = Stock price is above the sold striking price. Comments: The major averages followed through with their threat, moving closer to the July lows. Will we have a successful test or just another bear-trap rally and then a final breakdown? Time will tell but I don't like it when we move to test the "bottom" of a support area. In any case, we closed several positions on our watch list though Alkermes (NASDAQ:ALKS) did rally on Friday and provided a bit of vexation (shrug - Murphy's Law). Overall, considering the bearish environment -- including the threat of war -- the covered-call portfolio held up better than expected. This week, Oracle's (NASDAQ:ORCL) dismal earnings (ouch!) was offset a bit by Qualcomm's (NASDAQ:QCOM) increased chip demand. As for Neoware Systems (NASDAQ:NWRE), we could still see a pullback towards the 150-dma (near $11.00) before the uptrend is broken - reevaluate your long-term outlook and act accordingly. As for October positions, Luminex (NASDAQ: LMNX) is acting a bit worrisome as the share price has moved below its 30- and 50-dmas. A move below $6.50 on a closing basis could be used for an exit signal. Money management remains paramount, especially if you believe the markets will continue to move lower. As for new positions, sitting on the sidelines until bullish activity resumes may be the best bet. Positions Closed: Semtech (NASDAQ:SMTC), Tibco Software (NASDAQ:TIBX), Myriad Genetics (NASDAQ:MYGN), Millennium Pharmaceutical (NASDAQ:MLNM), Cree (NASDAQ:CREE), J.D. Edwards (NASDAQ:JDEC), AMR Corporation (NYSE:AMR), 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). 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 AES 2.92 OCT 2.50 AES JZ 0.75 564 2.17 28 16.5% CNXT 1.26 OCT 2.50 CZI JT 0.45 929 0.81 28 60.4% *** CRY 2.94 OCT 2.50 CRY JZ 0.75 49 2.19 28 15.4% GNSS 8.73 OCT 7.50 QFE JU 1.60 576 7.13 28 5.6% PPD 21.80 OCT 17.50 PPD JW 5.00 147 16.80 28 4.5% QCOM 28.08 OCT 25.00 AAW JE 4.20 5705 23.88 28 5.1% UDI 22.58 OCT 20.00 UDI JD 3.30 765 19.28 28 4.1% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CNXT 1.26 OCT 2.50 CZI JT 0.45 929 0.81 28 60.4% *** AES 2.92 OCT 2.50 AES JZ 0.75 564 2.17 28 16.5% CRY 2.94 OCT 2.50 CRY JZ 0.75 49 2.19 28 15.4% GNSS 8.73 OCT 7.50 QFE JU 1.60 576 7.13 28 5.6% QCOM 28.08 OCT 25.00 AAW JE 4.20 5705 23.88 28 5.1% PPD 21.80 OCT 17.50 PPD JW 5.00 147 16.80 28 4.5% UDI 22.58 OCT 20.00 UDI JD 3.30 765 19.28 28 4.1% *** OTM speculation play, stock price remains unchanged. 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). ***** AES - AES Corp. $2.92 *** Cheap Speculation Plays: Part I *** The AES Corporation (NYSE:AES) is a global power company comprised of 4 lines of business. The contract generation segment includes generating plants that have entered into contracts with initial durations of five years or greater, accounting for at least 75% of the company's estimated revenue stream. The competitive supply segment includes both wholesale and retail sales of electricity directly to end users such as commercial, industrial, governmental and residential customers. The utility segment is characterized by distribution businesses of significant size that often combine generation, transmission and distribution capabilities, and are subject to extensive local, state and national regulation. The growth distribution segment includes distribution facilities facing particular challenges relating to operational difficulties that are located in emerging markets and offer significant potential for improved financial and operational performance. AES is flirting with resistance around $3.50 as the stock continues to forge a Stage I base. This position offers speculators who believe in the long-term prospects of AES a favorable entry point in the stock. OCT 2.50 AES JZ LB=0.75 OI=564 CB=2.17 DE=28 TY=16.5% ***** CNXT - Conexant Systems $1.26 *** Oh Boy, an OTM Play! *** Conexant (NASDAQ:CNXT)) provides semiconductor system solutions for communications applications. The Company's expertise in mixed-signal processing allows it to deliver integrated systems and semiconductor products that ease communications worldwide through wireline voice and data communications networks, cellular telephony systems and emerging cable, satellite and fixed wireless broadband communications networks. Conexant operates in two business segments: the Personal Networking business and Mindspeed Technologies, the company's Internet infrastructure business. Do you want to own Conexant shares under 85 cents a share? Do you believe the company will be one of those that survive? If so, this position offers a great risk-reward potential even if the share price remains unchanged. OCT 2.50 CZI JT LB=0.45 OI=929 CB=0.81 DE=28 TY=60.4% ***** CRY - CryoLife $2.94 *** Cheap Speculation Plays: Part II *** CryoLife (NYSE:CRY) preserves human tissues for cardiovascular, vascular and orthopaedic transplant applications. Additionally, the company develops and commercializes implantable medical devices, including BioGlue Surgical Adhesive, glutaraldehyde- fixed stentless porcine heart valves, and tissue-engineered SynerGraft porcine heart valves and bovine vascular grafts. CryoLife uses its expertise in biochemistry, cell biology, immunology and protein chemistry and its understanding of the needs of the cardiovascular, vascular and orthopaedic surgery medical specialties, to continue expansion of its preservation business and to develop or acquire complementary implantable products and technologies for these surgical specialties. Last month CryoLife was ordered by the FDA to recall some tissues and halt further shipments until concerns over infection prevention could be resolved. Earlier this month, CryoLife said it had reached an agreement with the FDA that will allow the resumption of some shipments. Investors who believe a cost basis near $2.25 is a reasonable entry point from which to speculate on the company's future should consider this position. OCT 2.50 CRY JZ LB=0.75 OI=49 CB=2.19 DE=28 TY=15.4% ***** GNSS - Genesis Microchip $8.73 *** A Chip In A Base *** Genesis Microchip (NASDAQ:GNSS) designs, develops and markets integrated circuits that receive and process digital video and graphic images. The company's ICs are typically located inside a display device and process incoming images for viewing on that display. Genesis is targeting the flat-panel computer monitor, flat-panel television and progressive scan cathode ray tube (CRT) television markets and other potential mass markets. Genesis operates through subsidiaries and offices in the United States, Canada, China, India, Japan, South Korea and Taiwan. Genesis rallied on Friday the 13th (omen?) after it was upgraded by Pacific Growth Equities to "equal weight" from "underweight" following the company's mid-quarter conference call the day before where Genesis raised fiscal second quarter and revenue expectations. We simply favor the 3-month base with a trading range near $7.50. Reasonable speculation for investors who are ready to "bottom-fish" in the semiconductor segment. OCT 7.50 QFE JU LB=1.60 OI=576 CB=7.13 DE=28 TY=5.6% ***** PPD - Pre-Paid Legal $21.80 *** Riding The Storm Out! *** 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 recently, 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 boasting about the recommendation but the release didn't disclose that PPD paid more than $30,000 to the publication. PPD always seems to be doing something wrong, but the stock is still managing to lure investors and move higher. A speculative play for traders who favor aggressive "premium-enhanced" positions. OCT 17.50 PPD JW LB=5.00 OI=147 CB=16.80 DE=28 TY=4.5% ***** QCOM - Qualcomm $28.08 *** A Positive Surprise *** Qualcomm (NASDAQ:QCOM) is a developer and 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. Qualcomm threw the 'Street' a bone on Friday after the company said strong demand for next-generation chips for wireless phones prompted it to raise its shipment guidance for the fiscal fourth quarter. We continue to favor the stable trading range Qualcomm has been in for the last several months and this position offers speculators a reasonable short-term reward at the risk of owning the company at a favorable cost-basis. OCT 25.00 AAW JE LB=4.20 OI=5705 CB=23.88 DE=28 TY=5.1% ***** UDI - United Defense $22.58 *** Unleash The Dogs Of War *** United Defense Industries (NYSE:UDI) is a leader in the design, development and production of combat vehicles, artillery, naval guns, missile launchers and precision munitions used by the U.S. Department of Defense and allies worldwide. The company is America's largest non-nuclear ship repair, modernization and conversion company. UDI was started with a "buy" rating this week by J.P. Morgan as analysts said the company's prospects are strong despite the recent loss of the Crusader program. J.P. Morgan analyst Joe Nadol noted that the company has no commercial aerospace exposure and Crusader's replacement weapon, the Army's non-line-of-sight cannon, should easily make up for the loss of Crusader. If the Dogs of War are to be unleashed, United Defense should move in sympathy with a broader defense-stock rise. This position offers a favorable cost basis for those investors looking for a broad-market hedge against the threat of war. OCT 20.00 UDI JD LB=3.30 OI=765 CB=19.28 DE=28 TY=4.1% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield MDCO 10.29 OCT 10.00 MQL JB 0.95 382 9.34 28 7.7% AEG 10.24 OCT 10.00 AEG JB 0.90 6260 9.34 28 7.7% GILD 33.56 OCT 30.00 GDQ JF 5.20 305 28.36 28 6.3% BSTE 28.44 OCT 25.00 BQS JE 4.80 561 23.64 28 6.2% METHA 10.07 OCT 10.00 QME JB 0.60 203 9.47 28 6.1% MATK 16.30 OCT 15.00 KQT JC 1.95 5 14.35 28 4.9% FDS 25.95 OCT 25.00 FDS JE 1.95 10 24.00 28 4.5% ADRX 22.91 OCT 17.50 QAX JW 6.10 25 16.81 28 4.5% GM 42.93 OCT 40.00 GM JH 4.50 75 38.43 28 4.4% STN 15.67 OCT 15.00 STN JC 1.25 69 14.42 28 4.4% AMLN 13.90 OCT 12.50 AQM JV 1.85 945 12.05 28 4.1% ***************** NAKED PUT SECTION ***************** Options 101: Questions Concerning Trading Stops By Ray Cummins One of the most common questions we receive concerns the use of trading stops in option positions. Attn: Contact Support Subject: Trading Stops - Mental or Mechanical Do you use hard (mechanical) stops or mental? Do you base them on the price of the stock or the option? Thanks, I appreciate your help FR Hello Again, Regarding trading stops: both mental and mechanical stops are useful tools. Which method you utilize depends on a number of factors including the type of strategy and the time frame for the play, the position size (number of contracts) and liquidity in the underlying market (open interest) and of course, your personal trading style. The more important issue (than which type to use) is the need to always have a plan to manage losses, before a trade is initiated. The key to long-term profits in the market is to remove your emotions and the pressure of a decision under duress, thus a successful trader always has a predetermined exit point before he/she enters a position. As I mentioned before, most methods for preventing losses (as well as making adjustments or rolling to new positions) fit into one of two categories: a pre-arranged target profit or loss limit; or a technical exit based on the chart indications of the issue. Using a mechanical or mental (closing) stop can be a part or either technique and if you choose to use a technicals-based technique, there are many different indicators available to establish the target exit point such as moving averages, trend-lines, previous highs/lows, etc. Again, the decision to use a particular method will depend on your personal trading style as well as your skills and strengths in the various types of technical and fundamental analysis. There's lots of information on trading techniques (including the use of stops) in our archives of strategy commentaries -- Options 101 and Traders Corner: http://dev.OptionInvestor.com/indexes/options101.asp and http://dev.OptionInvestor.com/indexes/traderscorner.asp Also, there is a wealth of self-directed option trading information available at the Options Institute Online Learning Center: http://www.cboe.com/LearnCenter/ My personal suggestions... Read the newsletter, especially the back issues on the OIN site, and any other worthy publications so you will have access to good candidates and the most successful strategies for the current market conditions. Study all you can about option trading and consider buying a copy of the bibles of option trading: "Options as a Strategic Investment" and "Option Pricing and Volatility." Other good books include: "Options: A Personal Seminar", "Secrets For Profiting in Bull and Bear Markets", "Trading for a Living" and "Martin Pring on Market Momentum". Learn the "Golden Rules" and live by them. Keep it simple -- don't bother with exotic strategies until you become an experienced trader. Last, but not least, repeat whatever you do successfully. Good Luck! Editors Note: One of our long-time subscribers had a unique way of handling directional trades without the use of stops once they became profitable. When investors want to avoid getting stopped out in a midday move: If they have a profitable trade at a given strike price, and they don't want to lose their investment in a downturn but also want to stay in the trend of the stock; they should consider simultaneously selling their current option and buying another option, which is further out-of-the-money and preferably expires one or two months in the future. This allows you to take the original investment (and usually more) off the table while using only profits to buy the longer-term OTM option. This accomplishes two things. First, you are risking only gains and as a result, you are less concerned about short-term reversals, and second, you are still in a position which you believe will continue in a profitable direction. No stop losses are needed. Of course, to do this in fast moving issues you may need to set the sell price of the lower strike slightly below the current bid and the buy price slightly above the current (i.e., Don't get greedy as you don't want to be out of one position while the other one runs away from you. Typically, since both strike's will move somewhat in accordance with the underlying issue, you will either sell/buy for a little lower or a little higher price). One negative to this strategy is that you usually pay for more time premium with the OTM strike price buy -- but that is usually offset by taking the original capital off the table and playing with profits. Obviously, one can also simply sell the portion of contracts of the original position that represent the initial cash investment and hold the balance of contracts for additional gains, but in a directional market, you will often enhance your percentage returns with the adjusted position due to the extended time frame and the increased leverage and relative potential of a (further) out-of-the-money option. 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 27.60 SEP 25.00 0.75 *$ 0.75 17.5% ADRX 24.00 22.91 SEP 17.50 0.40 *$ 0.40 16.7% TYC 15.69 14.96 SEP 12.50 0.30 *$ 0.30 13.3% JDEC 13.05 10.00 SEP 10.00 0.45 $ 0.45 12.8% PPD 20.67 21.80 SEP 15.00 0.35 *$ 0.35 11.9% MRVL 22.21 18.45 SEP 17.50 0.50 *$ 0.50 11.0% NWRE 14.00 13.01 SEP 10.00 0.40 *$ 0.40 10.9% CIMA 22.99 23.16 SEP 20.00 0.30 *$ 0.30 10.0% RGLD 14.86 18.70 SEP 12.50 0.25 *$ 0.25 9.9% AMLN 13.00 13.90 SEP 10.00 0.40 *$ 0.40 9.7% IMDC 23.45 22.31 SEP 20.00 0.40 *$ 0.40 9.6% INVN 28.36 30.85 SEP 22.50 0.85 *$ 0.85 9.4% JDEC 13.40 10.00 SEP 10.00 0.25 $ 0.25 9.3% FDRY 8.99 7.45 SEP 7.50 0.35 $ 0.30 8.8% ICOS 27.49 21.99 SEP 20.00 0.75 *$ 0.75 8.7% WMGI 20.49 19.15 SEP 17.50 0.45 *$ 0.45 8.6% CVTX 26.01 20.08 SEP 20.00 0.70 *$ 0.70 8.6% ITMN 24.87 27.60 SEP 20.00 0.30 *$ 0.30 8.5% UOPX 28.78 31.50 SEP 25.00 0.45 *$ 0.45 8.4% CCMP 43.60 39.94 SEP 35.00 0.35 *$ 0.35 8.3% PPD 21.95 21.80 SEP 15.00 0.35 *$ 0.35 8.0% ENZN 24.13 20.00 SEP 17.50 0.60 *$ 0.60 8.0% VIA 41.70 40.30 SEP 37.50 0.45 *$ 0.45 7.6% ADRX 24.63 22.91 SEP 15.00 0.25 *$ 0.25 7.3% AU 25.20 28.20 SEP 22.50 0.25 *$ 0.25 7.1% TTWO 23.40 26.20 SEP 17.50 0.40 *$ 0.40 6.8% LNCR 33.38 30.65 SEP 30.00 0.80 *$ 0.80 6.5% NPSP 23.06 17.83 SEP 15.00 0.45 *$ 0.45 6.4% PPD 22.23 21.80 SEP 12.50 0.35 *$ 0.35 6.3% HD 33.25 31.23 SEP 30.00 0.30 *$ 0.30 6.3% IVGN 35.60 33.52 SEP 30.00 0.35 *$ 0.35 5.9% HD 32.93 31.23 SEP 30.00 0.40 *$ 0.40 5.7% LOW 44.03 42.39 SEP 40.00 0.35 *$ 0.35 5.5% KMX 19.02 16.65 SEP 17.50 0.35 $ -0.50 0.0% HGSI 17.87 11.69 SEP 12.50 0.30 $ -0.51 0.0% *** HGSI 17.59 11.69 SEP 12.50 0.25 $ -0.56 0.0% *** IMN 33.05 28.82 SEP 30.00 0.55 $ -0.63 0.0% *** SIE 22.88 16.16 SEP 17.50 0.40 $ -0.94 0.0% *** CLS 23.80 15.36 SEP 17.50 0.30 $ -1.84 0.0% PPD 21.41 21.80 OCT 15.00 0.60 *$ 0.60 10.7% RGLD 18.05 18.70 OCT 15.00 0.50 *$ 0.50 9.3% UTHR 16.50 17.01 OCT 15.00 0.55 *$ 0.55 8.5% MDG 20.40 19.82 OCT 17.50 0.55 *$ 0.55 8.2% IDE 25.50 23.94 OCT 22.50 0.75 *$ 0.75 8.2% BSX 30.18 29.30 OCT 27.50 0.85 *$ 0.85 7.2% AMZN 16.61 15.86 OCT 12.50 0.30 *$ 0.30 7.2% COF 38.92 34.85 OCT 27.50 0.60 *$ 0.60 6.2% INVN 35.76 30.85 OCT 25.00 0.45 *$ 0.45 5.1% STN 14.15 15.67 OCT 12.50 0.25 *$ 0.25 5.1% *$ = Stock price is above the sold striking price. Comments: Stocks continued lower this week after a sharp technical breakdown in the major equity averages. Index values moved below important support levels and other indicators, such as equity-only put-call ratios and the volatility index confirmed the bearish trend. Now the question is whether the July lows will hold, and if so, for how long. Most analysts believe there is very little chance of a sustained upward move from the current levels, so be prepared for more downside activity. The fall of Celestica (NYSE:CLS) started Monday and although news of a profit warning did not surface until Wednesday, there were plenty of signals to indicate the bearish trend reversal. After the company lowered its third-quarter sales and earnings forecasts due to a reduction in business from some of its largest customers, the stock gapped down to the $15 range and never recovered. Looking forward, all of our October plays are in good shape but with the potential for a sizeable downdraft on any unpleasant news, traders are forewarned to the have their stops in place and be diligent in position management. *** Positions on the watch-list that were closed during Thursday's unexpected sell-off (for smaller than published losses) include: Human Genome Sciences (NASDAQ:HGSI), Imation (NYSE:IMN) and Sierra Health Services (NYSE:SIE). 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 ABFS 27.53 OCT 25.00 FDQ VE 0.90 29 24.10 28 10.4% FDS 25.95 OCT 22.50 FDS VX 0.35 30 22.15 28 5.2% GILD 33.56 OCT 25.00 GDQ VE 0.55 313 24.45 28 8.2% RGLD 18.70 OCT 15.00 MJQ VC 0.45 379 14.55 28 11.6% RMCI 25.80 OCT 22.50 UHU VX 0.60 246 21.90 28 8.6% TTWO 26.20 OCT 20.00 TUO VD 0.30 124 19.70 28 5.9% ULAB 18.83 OCT 15.00 HQZ VC 0.40 0 14.60 28 10.4% UTHR 17.01 OCT 15.00 FUH VC 0.30 0 14.70 28 6.4% 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 RGLD 18.70 OCT 15.00 MJQ VC 0.45 379 14.55 28 11.6% ABFS 27.53 OCT 25.00 FDQ VE 0.90 29 24.10 28 10.4% ULAB 18.83 OCT 15.00 HQZ VC 0.40 0 14.60 28 10.4% RMCI 25.80 OCT 22.50 UHU VX 0.60 246 21.90 28 8.6% GILD 33.56 OCT 25.00 GDQ VE 0.55 313 24.45 28 8.2% UTHR 17.01 OCT 15.00 FUH VC 0.30 0 14.70 28 6.4% TTWO 26.20 OCT 20.00 TUO VD 0.30 124 19.70 28 5.9% FDS 25.95 OCT 22.50 FDS VX 0.35 30 22.15 28 5.2% 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). ***** ABFS - Arkansas Best $27.53 *** Transport Sector *** Arkansas Best (NASDAQ:ABFS) is a diversified holding company engaged through its subsidiaries primarily in motor carrier and intermodal transportation operations. The main subsidiaries are ABF Freight System, Clipper Exxpress and related companies. ABFS' less-than-truckload (LTL) motor carrier operations are conducted through ABF Freight System, ABF Freight System (B.C.), ABF Freight System Canada, ABF Cartage, and Land-Marine Cargo. Clipper operates through Clipper Freight Management and Clipper LTL, and offers domestic intermodal freight services. The rally in ABFS shares began when Consolidated Freightways, the nation's third-largest LTL carrier, said it would shut down operations and file for Chapter 11. This reduction in the competition is likely give a boost to rival trucking companies Yellow (NASDAQ: YELL), Roadway (NASDAQ:ROAD) and Arkansas Best by reducing the industry's excess capacity and allowing them to raise prices. On Friday, ABFS was listed among the highest-rated stocks, based on analyst comments contributed within the past month to First Call's database. Investors appear to agree with the bullish assessment and this position offers a great way to speculate, in a conservative manner, on the future share price of ABFS. OCT 25.00 FDQ VE LB=0.90 OI=29 CB=24.10 DE=28 TY=10.4% ***** FDS - FactSet Research Systems $25.95 *** Bottom Fishing! *** FactSet Research (NYSE:FDS) supplies financial intelligence to the global investment community. The company combines more than 100 databases, including data from tens of thousands of companies as well as multiple stock markets, research firms and governments, into a single online source of information and analytics. Through FactSet's exclusive proprietary communication and software tools, clients obtain access to the company's mainframe centers and its aggregated data library using a private wide area network. This secure and reliable network provides a direct, high-speed data transmission link between the firm's mainframes and the client's personal computers or computer network. An annual subscription fee allows clients to use the FactSet system. The firm recently reported that its quarterly earnings rose 28% from last year as the online financial information provider added new clients. The company's revenues rose to $54 million from $47 million last year and revenue in the coming quarter is expected to be $54 million to $56 million. The chart pattern indicates the issue has made a successful test of a historical support level near $22 and traders who like to speculate on trend reversals should consider this play. OCT 22.50 FDS VX LB=0.35 OI=30 CB=22.15 DE=28 TY=5.2% ***** GILD - Gilead Sciences $33.56 *** Range-bound? *** Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases. The company has five products that are marketed in the United States and in other countries worldwide. These are Viread, a drug for treating HIV infection; AmBisome, a drug for treating and preventing life-threatening fungal infections; Tamiflu, a drug for treating and preventing influenza; Vistide, a unique drug for treating cytomegalovirus (or CMV) retinitis in AIDS patients, and DaunoXome, a drug for treating AIDS-related Kaposi's sarcoma. GILD is an excellent candidate for speculative "premium-selling," based on the underlying issue's technical background. GILD has a relatively stable trading range and those who believe there will be no significant changes to its technical character prior to the October expiration can profit from that outcome with this position. OCT 25.00 GDQ VE LB=0.55 OI=313 CB=24.45 DE=28 TY=8.2% ***** RGLD - Royal Gold $18.70 *** 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 a favorable candidate for a broad-market hedge and traders who want to profit from a decline in the major equity averages should consider this position. OCT 15.00 MJQ VC LB=0.45 OI=379 CB=14.55 DE=28 TY=11.6% ***** RMCI - Right Management Consultants $25.80 *** Stock Split? *** Right Management Consultants (NASDAQ:RMCI) is the world's largest career transition and organizational consulting firm. It offers services to corporations of all sizes through a global network of more than 300 service locations and the Internet. The company is a worldwide leader in customized career transition solutions and also offers a wide range of organizational consulting services, including talent management, leadership development and business organizational performance services. In combination, the firm's two lines of business enable Right to help customers manage the entire life cycle of their employees. Right Management's board recently authorized another 3-for-2 stock split in an effort to increase liquidity and trading volume. In a press release last week, the company said the stock split, which increases shares outstanding to 22.7 million from 15.1 million, goes into effect 10/15 through a 50% stock dividend for shareholders of record on 10/1. Right Management also noted that it remains positive for fiscal 2002 on the strength of its career transition business. OCT 22.50 UHU VX LB=0.60 OI=246 CB=21.90 DE=28 TY=8.6% ***** TTWO - Take-Two Interactive $26.20 *** Solid Earnings! *** Headquartered in New York City, Take-Two Interactive Software (NASDAQ:TTWO), is an integrated global developer, marketer, distributor and publisher of interactive entertainment software, games and accessories for the PC, PlayStation, PlayStation2, Xbox, Nintendo GameCube, and Nintendo Game Boy Advance. The company publishes and develops products through its wholly owned subsidiary labels: Rockstar Games, Gotham Games, Gathering of Developers, Joytech and Global Star. The firm maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland. Shares of video game publisher Take-Two Interactive Software have remained in a relatively bullish trend, despite the slump in technology issues, in the wake of the company's favorable quarterly earnings report. TTWO recently posted a quarterly profit, driven by sales of its hit "Grand Theft Auto 3," and raised its financial forecast for the current year on prospects for the holiday season. Investors who want to own a popular stock in the entertainment software industry can use this play to establish a low risk cost basis in the issue. OCT 20.00 TUO VD LB=0.30 OI=124 CB=19.70 DE=28 TY=5.9% ***** ULAB - Unilab $18.83 *** Quest Acquisition! *** Unilab (NASDAQ:ULAB), an independent clinical laboratory, provides comprehensive laboratory testing services to physicians, managed care groups, hospitals and other healthcare providers. The firm offers over 1,000 different tests that help physicians diagnose, evaluate, monitor and treat disease by measuring the presence, concentrations or composition of chemical and cellular components in human body fluids and tissue. These tests range from simple tests, such as glucose monitoring and complete blood count to highly specialized tests, such as those designed to measure HIV infection and hepatitis C. Unilab has a pending merger agreement with Quest Diagnostics (NASDAQ:DGX) but the deal has been delayed by the FTC on anti-trust concerns. Quest announced Friday that it now expects the settlement discussions with the FTC, and the proposed transaction completion date, to extend beyond 9/30/2002. Traders who like the outlook for Quest and believe the merger will be approved can speculate on that outcome with this position. OCT 15.00 HQZ VC LB=0.40 OI=0 CB=14.60 DE=28 TY=10.4% ***** UTHR - United Therapeutics $17.01 *** 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 technical indications should consider this position. OCT 15.00 FUH VC LB=0.30 OI=0 CB=14.70 DE=28 TY=6.4% ***** ***************** 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 NXTL 7.44 OCT 5.00 FQC VQ 0.35 2190 4.65 28 20.7% SGP 22.85 OCT 20.00 SGP VD 0.55 1107 19.45 28 8.7% TARO 32.60 OCT 30.00 QTT VF 0.80 75 29.20 28 7.7% MLHR 18.10 OCT 17.50 MHQ VW 0.50 5 17.00 28 7.6% WOR 18.00 OCT 17.50 WOR VW 0.50 10 17.00 28 7.5% ABT 41.80 OCT 7.50 ABT VU 0.60 881 6.90 28 7.3% GENZ 21.42 OCT 15.00 GZQ VC 0.30 8609 14.70 28 7.1% CPC 20.78 OCT 20.00 CPC VD 0.50 0 19.50 28 6.8% SCHL 45.00 OCT 40.00 USC VH 0.70 31 39.30 28 5.6% WMT 54.70 OCT 50.00 WMT VJ 0.90 4983 49.10 28 5.4% ************************ SPREADS/STRADDLES/COMBOS ************************ Looking For A Diamond In The Rough By Ray Cummins Stocks edged higher Friday as investors searched for bargains in a growing scrap-heap pile of past market bellwethers. U.S. equities found a smidgen of late buying support to close the day on an upbeat note after four consecutive weeks of losses. The Dow Jones Industrial Average rose 43 points to 7,986 on strength in materials stocks. Shares of Alcoa (NYSE:AA), DuPont (NYSE:DD), Honeywell (NYSE:HON), Walt Disney (NYSE:DIS), International Paper (NYSE:IP), and Boeing (NYSE:BA) were among the most popular issues. The NASDAQ Composite climbed 4 points to 1,221 after four days of losses amid a rally in Qualcomm (NYSE:QCOM). The cell-phone giant soared almost 10% after raising its forecast of chip shipments for mobile phones and reporting that it's seeing strong demand for the higher-end chips and brisk growth in China, a key market. In the broader market sectors, brokerage issues enjoyed a late-session surge after trading lower for most of the day and buying interest also emerged in defense, paper, chemical, biotechnology and drug issues. The Standard & Poor's 500 Index ended almost unchanged at 845. Trading volume was 1.78 billion on the NYSE and 1.80 billion on the technology exchange. Market breadth was narrowly positive, with advancers barely outnumbering decliners on both the NYSE and the NASDAQ. The quarterly "triple-witching" expiration of futures, options on individual stocks and options on stock indexes was less dramatic that expected, although the event was at the root of some additional volatility. The 10-year Treasury note slipped 1/32 to yield 3.78% while the 30-year government bond slid 21/32 to yield 4.74%. On the fund flow front, Trim Tabs said that equity funds had outflows of $4.6 billion in the week ending 9/18 compared with inflows of $1.8 billion during the prior week. ***************** PORTFOLIO SUMMARY ***************** (As of 09-20-02) PUT CREDIT SPREADS ****************** Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status MIK 48.35 44.86 SEP 40 45 0.35 44.65 $0.21 Closed BLL 53.75 51.17 OCT 45 50 0.70 49.30 $0.70 Open OEX 446.00 423.90 OCT 395 400 0.45 399.55 $0.45 Open OHP 42.62 40.18 OCT 33 35 0.30 34.70 $0.30 Open CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status RJR 52.58 47.22 SEP 60 55 0.70 55.70 $0.70 Closed PHA 40.86 38.40 OCT 50 45 0.60 45.60 $0.60 Open OEX 446.00 423.90 OCT 500 495 0.45 495.45 $0.45 Open SLAB 19.66 17.99 OCT 30 25 0.40 25.40 $0.40 Open SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V (G/L) Status BYD 17.71 17.41 DEC 20 15 -0.15 0.10 -0.05 Open CVC 9.48 10.25 DEC 15 5 -0.10 0.60 0.50 Open TARO 32.55 32.60 OCT 37 27 0.10 0.00 0.10 Open On Monday, Cablevision (NYSE:CVC) rallied to $11.90, offering a favorable "early-exit" credit for conservative traders. SYNTHETIC (BEARISH) ******************* Symbol Pick Last Month L/P S/C Credit M/V (G/L) Status MET 25.25 23.56 JAN 20 30 0.05 0.55 0.60 Open PFE 30.75 28.74 JAN 25 35 0.15 0.70 0.85 Open BRCD 12.33 10.62 JAN 10 15 -0.05 0.85 0.80 Open Brocade (NASDAQ:BRCD) and Pfizer (NYSE:PFE) have already achieved favorable "early-exit" profits and Met-life (NYSE:MET) offered a small gain for conservative traders. BULL CALL SPREADS ***************** Symbol Pick Last Month L/C S/C Debit M/V B/E Status LUME 5.80 4.41 JAN 5 7 1.00 0.90 6.00 Open CALENDAR SPREADS **************** Symbol Pick Last Long-Opt Short-Opt Debit M/V Status SGP 23.67 22.85 JAN-27.5C OCT-27.5C 0.80 0.75 Open DEBIT STRADDLES *************** Symbol Pick Last Month L/C S/C Debit M/V (G/L) Status ISSX 15.25 13.52 SEP 15 15 1.80 2.00 0.20 Closed The Internet Security Systems (NASDAQ:ISSX) straddle reached the downside break-even point twice this week and traders who sold the put for $1.80 or greater on Tuesday had a risk-free call to trade for profits during Wednesday's brief recovery. CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V (G/L) Status ADRX 24.65 22.91 OCT 40 15 1.00 0.75 0.25 Open ISIS 8.97 8.64 OCT 15 7 1.50 1.50 0.00 Open QCOM 28.58 28.08 OCT 32 22 1.50 1.50 0.10 Open TKTX 34.41 30.31 OCT 45 25 1.55 2.30 -0.75 Open Shares of Transkaryotic Therapies NASDAQ:TLTX) slumped Friday after the U.S. Food and Drug Administration said it postponed a meeting to review the company's experimental treatment for a rare disorder called Fabry Disease. An FDA advisory panel had been scheduled to meet next week to review the Transkaryotic medicine Replagel and a rival drug being developed by Genzyme General (NASDAQ:GENZ). Transkaryotic did not say when the new meeting would be held and FDA officials were not immediately available to comment on the matter, but it appears the delay was due to a conflict of interest among the members on the FDA's Endocrinologic and Metabolic Drugs Advisory Committee. Questions & comments on spreads/combos to Contact Support ***************************** READER'S WRITE E-MAIL REPLIES ***************************** Attn: Contact Support Subject: Credit Spreads - Collateral Requirements Ray When you do a credit spread, what does the broker hold in your account as security in case the trade goes against you? Do you think that debit spreads are as good as credit spreads? Thanks FR Regarding collateral requirements: A broker generally requires that you have enough collateral (cash or securities or ?) to cover the maximum possible loss in a spread position. Using an example from last week's newsletter: OHP - Oxford Health $42.62 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 PROBABILITY OF PROFIT (based on 100 Day HV)=94% The maximum possible loss in a credit spread is the difference between the two strike prices, minus the premium (credit) received in the position. In this case, the spread is $2.50 and the credit received is $0.30. Thus the maximum loss is $2.20 X 100 X number of contracts. If you traded 10 contracts in this position, the collateral requirement would be $2200. The maximum gain is $300, so the potential profit is 13.6% (300/2200) and the point at which the play starts to lose money (break-even) is at $34.70. Here is some additional information on this type of spread: Bull-Put (put-credit) Spread: The bull-put spread consists of the purchase of one put, and the sale of another put with a higher strike price. An investor would use this strategy when he thinks that the stock price will remain above the strike price sold at the end of the strike period. The position will yield a credit and this is the maximum amount of profit the investor can earn with this strategy. The risk-reward calculations are: Maximum profit = the net credit received Maximum risk (or collateral) = the difference between the strike prices - the net credit received. Break even point = the higher strike price - the net credit. Return On Investment = premium received / position collateral Advantages: Most option spread strategies take advantage of the laws of probability by enabling a trader to hold option positions over longer periods of time. They basically help to maintain profit potential while reducing short-term risk. While there is no perfect position in option trading, successful investors learn to "spread-off" risk in as many different ways as possible, minimizing the effects of undesirable market activity. You may not be able completely eliminate the risk, but you can reduce it much more than an inexperienced trader who does not use all of the available strategies. Concerning the differences between debit and credit spreads: First, I assume you are referring to vertical spreads such as the bull-call and bull-put, not calendar or time-selling strategies. In that case, the two approaches are very similar because the risk/reward outlook is the same and both techniques include one long and one short option. However, the ability to initiate both strategies with the same risk/reward outlook is vastly different when you move away from the "at-the-money" option. The two main obstacles are the large bid-ask spreads and the relative lack of premium in in-the-money options. A good example of that condition can be seen in a comparison of an "in-the-money" debit spread (bull-call) and an "out-of-the-money" credit spread (bull-put). Rarely can these two strategies be utilized with equal success in the derivatives market. Hope that helps, Ray ************* 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. ***************** SPECULATION PLAYS ***************** These positions are based on recent increased activity in the stock and underlying options. All 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. ***** AES - AES Corporation $2.92 *** Cheap Speculation! *** The AES Corporation (NYSE:AES) is a global power company comprised of 4 lines of business. The contract generation segment includes generating plants that have entered into contracts with initial durations of five years or greater, accounting for at least 75% of the company's estimated revenue stream. The competitive supply segment includes both wholesale and retail sales of electricity directly to end users such as commercial, industrial, governmental and residential customers. The utility segment is characterized by distribution businesses of significant size that often combine generation, transmission and distribution capabilities, and are subject to extensive local, state and national regulation. The growth distribution segment includes distribution facilities that are facing particular challenges with operational difficulties because they are located in emerging markets and offer significant potential for improved financial and operational performance. This speculative short-put combination utilizes Jim Brown's (OIN Founder/Chief Editor) popular technique of writing "in-the-money" Puts to profit from upward movement in the underlying issue. A near-term Put is also purchased to limit downside risk in the position, if the recovery does not begin in the next few months. More information on this unique strategy can be found at: http://members.OptionInvestor.com/editorplays/042201_1.asp PLAY (speculative - bullish/short-put combination): SELL PUT JAN04-$7.50 LGC-MU OI=1276 B=$5.30 BUY PUT JAN03-$2.50 AES-MZ OI=7282 A=$0.95 INITIAL NET CREDIT TARGET=$4.45-$4.50 TARGET PROFIT=$2.50-??? Note: There is a collateral requirement for the sold (short) Put, whether it is partially covered in the initial spread or exists "naked" when the long option expires. Please review the terms of the collateral requirements with your broker. **************** 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. ***** LEH - Lehman Brothers $49.69 *** Earnings Play! *** Lehman Brothers Holdings (NYSE:LEH) is a global investment bank serving institutional, corporate, government and high-net-worth individual clients and customers. The firm is engaged primarily in providing financial services and operates in three business segments: Investment Banking, Capital Markets and Client Services. Other businesses in which the company is engaged represent less than 10% of consolidated assets, revenues or pre-tax income. The company's business includes capital raising for clients through securities underwriting and direct placements, corporate finance and strategic advisory services, private equity investments, securities sales and trading, research and the trading of foreign exchange and derivative products and certain commodities. The firm acts as a market-maker in all major equity and fixed-income products in both the domestic and international markets. The company's earnings are due 9/24/02. Strategy Explanation: A less neutral and more bearish type of calendar or time spread is initiated when the current value of the underlying issue is some distance above the strike price of the options. This type of play is speculative with low cost and large potential profits. Two favorable outcomes can occur: the underlying stock drops 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 moves below 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 above 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 (speculative - bearish/calendar spread): BUY PUT JAN-40 LEH-MH OI=2366 A=$2.60 SELL PUT OCT-40 LEH-VH OI=4414 B=$0.80 INITIAL NET DEBIT TARGET=$1.70-$1.75 TARGET PROFIT=$0.70-$1.25 ************** 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. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** NOC - Northrop Grumman $124.54 *** Defense Sector *** 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. PLAY (conservative - bullish/credit spread): BUY PUT OCT-105 NOC-VA OI=838 A=$1.00 SELL PUT OCT-110 NOC-VB OI=2476 B=$1.45 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$109.50 PROBABILITY OF PROFIT (100-day HV)=89% ***** BRL - Barr Laboratories $63.65 *** Triple-Top At $70 *** Barr Laboratories (NYSE:BRL) is a specialty pharmaceutical company primarily engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. The company manufactures and distributes more than 100 different dosage forms and strengths of pharmaceutical products in its core therapeutic categories, including oncology, female healthcare (including some hormone replacement and oral contraceptives), cardiovascular, anti infective and psychotherapeutics. In addition, the company has a proprietary, novel vaginal ring drug delivery system it is using to develop products intended to address a variety of female health issues and unmet medical needs. In 2001, Barr Laboratories merged with Duramed Pharmaceuticals and in 2002, the company purchased certain assets of Enhance Pharmaceuticals including a proprietary, novel, vaginal ring drug delivery system. PLAY (conservative - bearish/credit spread): BUY CALL OCT-75 BRL-JO OI=48 A=$0.25 SELL CALL OCT-70 BRL-JN OI=236 B=$0.80 INITIAL NET CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$70.60 PROBABILITY OF PROFIT (100-day HV)=81% ***** LXK - Lexmark International $43.49 *** New 2002 Low! *** Lexmark International (NYSE:LXK) is a developer, manufacturer and supplier of printing solutions including laser and inkjet printers, multifunction products and associated supplies and services for offices and homes. The company also sells dot matrix printers for printing single & multi-part forms for business users and develops, manufactures and markets a broad line of office imaging products. Lexmark International is the surviving entity of a merger between itself and its former parent company, Lexmark International Group, consummated on July 1, 2000. PLAY (conservative - bearish/credit spread): BUY CALL OCT-55 LXK-JK OI=5374 A=$0.25 SELL CALL OCT-50 LXK-JJ OI=1980 B=$0.65 INITIAL NET CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$50.45 PROBABILITY OF PROFIT (100-day HV)=87% ***** MMM - 3M Company $119.46 *** An Old Favorite! *** 3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an integrated enterprise characterized by substantial intercompany cooperation in research, manufacturing and marketing of products. 3M's business has developed from its research and technology in coating and bonding for coated abrasives, the company's original product. Coating and bonding is the process of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper (repositionable notes). The company conducts business through six major operating segments: Industrial Markets; Transportation, Graphics and Safety Markets; Health Care Markets; Consumer and Office Markets; Electro and Communications Markets, and Specialty Material Markets. PLAY (conservative - bearish/credit spread): BUY CALL OCT-135 MMM-JG OI=3278 A=$0.40 SELL CALL OCT-130 MMM-JF OI=4875 B=$0.95 INITIAL NET CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$130.60 PROBABILITY OF PROFIT (100-day HV)=87% ***** WFC - Wells Fargo & Company $46.89 *** Up-trend At An End? *** Wells Fargo (NYSE:WFC) is a diversified financial services firm organized as a bank holding and financial holding company. The company's subsidiaries engage in banking and related financial services businesses in Alaska, Arizona, California, Colorado, Idaho, Illinois, Indiana, Iowa, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Washington, Wisconsin and Wyoming. Other financial services are provided by subsidiaries engaged in various businesses, such as wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, insurance agency services, computer and data processing services, trust services, mortgage-backed securities servicing and venture capital investment. Wells Fargo has three operating segments: Community Banking, Wholesale Banking and Wells Fargo Financial. PLAY (conservative - bearish/credit spread): BUY CALL OCT-55 WFC-JK OI=13316 A=$0.15 SELL CALL OCT-50 WFC-JJ OI=15036 B=$0.65 INITIAL NET CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$50.55 PROBABILITY OF PROFIT (100-day HV)=84% ******************* SYNTHETIC POSITIONS ******************* 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 momentum plays attractive. ***** MRK - Merck $45.74 *** Downtrend Intact *** Merck (NYSE:MRK) is a global, research-driven pharmaceutical firm that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. (Merck-Medco). Merck's operations are managed principally on a products and services basis and are comprised of two segments: Merck Pharmaceutical, which includes products marketed either directly or through joint ventures; and Merck-Medco. Merck Pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. The pharmaceutical benefit services provided by Merck-Medco include sales of prescription drugs through managed prescription drug programs as well as services provided through programs to manage patient health and drug utilization. PLAY (speculative - bearish/synthetic position): BUY PUT OCT-40.00 MRK-VH OI=2835 A=$0.85 SELL CALL OCT-50.00 MRK-JJ OI=10588 B=$0.70 INITIAL NET-CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.60-$0.90 Note: Using options, the position is similar to being short the stock. The initial collateral requirement for the sold call is approximately $1,475 per contract. *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. The recent high premium levels support "selling" strategies and these issues have robust options and relatively stable trading patterns. As with any suggested position, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ***** PPD - Pre-Paid Legal $21.80 *** 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. PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-25.00 PPD-JE OI=476 B=$1.10 SELL PUT OCT-17.50 PPD-VW OI=623 B=$0.90 INITIAL NET-CREDIT TARGET=$2.00-$2.10 PROFIT(max)=15% PROBABILITY OF PROFIT (100-day HV)=92% UPSIDE B/E=$27.00 DOWNSIDE B/E=$15.50 ******************** STJ - St. Jude Medical $36.29 *** Recent Volatility *** St. Jude Medical (NYSE:STJ) is engaged in the development and distribution of cardiovascular medical devices for the global cardiac rhythm management (CRM), cardiology and vascular access (C/VA) and cardiac surgery (CS) markets. The company's primary products in each of these markets are bradycardia pacemaker systems, tachycardia implantable cardioverter defibrillator (ICD) systems and electrophysiology (EP) catheters in CRM; vascular closure devices, catheters, guidewires and introducers in C/VA, and mechanical and tissue heart valves, valve repair products and suture-free devices to facilitate coronary artery bypass graft anastomoses in CS. St. Jude markets its products primarily in the United States, Western Europe and Japan. The company also sells its products in Eastern Europe, Africa, the Middle East, Canada, Latin America and the Asia-Pacific region through employee-based sales organizations and independent distributors. PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-40 STJ-JH OI=2426 B=$0.50 SELL PUT OCT-30 STJ-VF OI=162 B=$0.65 INITIAL NET-CREDIT TARGET=$1.10-$1.20 PROFIT(max)=13% PROBABILITY OF PROFIT (100-day HV)=80% UPSIDE B/E=$41.10 DOWNSIDE B/E=$28.90 ***** ************************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”. 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