The Option Investor Newsletter Wednesday 09-25-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Not Convinced Index Trader Wrap: Weekly Fund Family Profile: Bernstein Funds: A Unit of Alliance Capital Management L.P. Options 101: Back To The Basics Traders Corner: If It Sounds Too Good To Be True Updated on the site tonight: Swing Trader Game Plan: Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 09-25-2002 High Low Volume Advance/Decl DJIA 7841.82 + 158.69 7891.28 7665.66 1930 mln 1509/415 NASDAQ 1222.29 + 40.12 1209.72 1177.41 1684 mln 1438/213 S&P 100 417.38 + 6.52 1227.23 1184.12 totals 2947/628 S&P 500 839.66 + 20.37 844.22 818.46 RUS 2000 365.14 + 8.56 365.18 356.58 DJ TRANS 2167.08 + 69.91 2167.08 2097.65 VIX 42.41 - 2.97 46.23 41.84 VIXN 56.69 - 2.71 61.80 56.67 Put/Call Ratio 0.77 ******************************************************************* Not Convinced by Steven Price Have we found a bottom? This is the question on the minds of investors, OI readers and my own. It's going to take a lot more than a 158.69 point gain, after the Dow gave up over 1300 points over the last month, to convince me that we have found a bottom. That being said, all bear markets experience some bounces, and after a 1300-point drop, this bounce could still tack on a few hundred more points without changing my overall sentiment. That bounce could provide some great long opportunities, as well. I looked back at recent head and shoulders reversal patterns in the Dow to see just how accurate the downside projections were. It was difficult to find a pattern that looked as textbook as the recent pattern, but I found a few that fit the description, nonetheless. It was surprising to see just how accurate the downside measuring objectives have been. The measuring objective is taken from the top of the head to the neckline, and then that distance is projected downward. Below is a copy of the chart I put in Monday's Market Wrap showing the minimum downside objective of the current pattern. It is followed by recent head and shoulders patterns in the Dow. Chart of the Current Dow and Nasdaq Pattern In the following charts, the distance between the head and neckline is in red, the neckline is in black and the projection downward is in blue. The following chart follows a broad pattern from the end of last year to the beginning of this year. The minimum downside objective was achieved, and then some. Chart of Dow H&S from 2001-2002 This chart from the end of 2000 to the beginning of 2001 is not as well defined, but still fits the H&S criteria. The downside objective is also achieved in this pattern. Chart of Dow H&S from 2000-2001 If we go back a couple of months from this point, to July-October 2000, we see the pattern repeat itself. The market continues downward and bounces when it hits the downside measuring objective. Chart of H&S from July-October 2000 Moving back to the summer and fall of 1999, once again the downside objective of a head and shoulders pattern is achieved, and provides a bounce point. Chart of H&S from July to October 1999 By now you get the point. The recent consistency of the pattern suggests to me that today's rally was just a minor bounce on the way down. Tuesday's close brought the Dow down below the closing low of July 23(7702.34). On July 24, the Dow sank 170 points, to 7532, before staging a 658-point intraday turnaround. This bounce was the beginning of a rally that took the average back over 9000. If there was going to be a similar bounce, this double bottom point seemed like the logical place for it to happen. We did get a bounce, but I'm not sure it was terribly convincing, especially given the patterns highlighted above. Remember that the July low was achieved on the tail end of the 2000-2001 H&S pattern, shown above. A double bottom is usually portrayed with the second dip being higher than the first. It can be argued that yesterday's intraday low of 7666 was higher than the intraday low of 7532 on July 24. However, the other side of the argument is that yesterday's end of day close, 7683.13, was actually lower than that of 7702 on July 23. Today's rebound did take out yesterday's resistance level of 7800. Intraday resistance had been appearing at successively lower round numbers over the last several days. Today broke that daily trend, but was turned back decisively below Monday's resistance level of 7900. While a recovery will most likely take place in small steps, today's bounce was hardly a reversal in the larger trend. However, it could be the first small step after finding support right around the July 23 closing low. Chart of Dow resistance levels Over the last several years, the techs have led the market. One of the sectors that has been dragging the Nasdaq down is the semiconductors. With constant warnings, and lower earnings and revenue guidance becoming almost a daily event, a look at the Semiconductor Index (SOX.X) provides quite a bit of insight as to where the broader markets are headed. Today the group rebounded, showing a gain of almost 7%. However, the index had lost 35% of its value in the month between August 21 and September 23. So while today's rally was nice, the sector still remains in a strong down trend. The only silver lining seems to be that the last two rebounds have come from the center of the descending channel, as opposed to the bottom. While I wouldn't call this bullish, it is an improvement from a technical standpoint. The 7% gain, however, has not broken the series of lower highs and lower lows. Chart of the SOX The International Monetary Fund (IMF) has dialed down its expectations for global growth. It had projected global growth at 4% in 2003 just 6 months ago. It now predicts growth of only 2.8% in 2002 and 3.7% in 2003. The outlook stated, "Concerns about the pace and sustainability of the recovery have risen significantly... The recovery is still expected to continue, but global growth in the second half of 2002 and in 2003 will be weaker than earlier expected and the risks to the outlook are primarily on the downside." These numbers are still an improvement from the 2.2% growth in 2001, but that came during a U.S. recession. Chief IMF economist Kenneth Rogoff cited problems in Iraq, uncertainty about when investment will recover and investor risk tolerance as the major unknowns. The IMF also reduced its growth targets for the U.S. from 2.3% to 2.2% in 2002 and from 3.4% to 2.6% for 2003. One of the big problems facing the world economy is still Japan, whose economy is expected to shrink 0.5% this year, its third recession in the last decade. The IMF also said falling equity prices in the advanced nations would have negative effects on the global economy and should cut spending in the U.S. by about 1% over the year, negating the stimulating effects of the weaker dollar and lower interest rates. In another bearish sign, the housing market is continuing its cool down. One of the props holding up consumer spending is the ability to refinance and lower mortgage payments. While mortgage applications and refinancings are still high historically, home resales did fall 1.7% in August, in spite of interest rates still heading lower. The August resale rate was also down 3.8% from a year ago. The rates were reported by the National Association of Realtors, whose chief economist said, "It's still a very healthy pace, but certainly we are winding down from the boom." With mortgage foreclosures at an all time high, and housing starts dropping, I can't help but feel like the housing bubble isn't so much bursting, as developing a slow leak. Some positive news came after the bell from Bed, Bath and Beyond (BBBY). The past few days have brought cautious comments from Wal-Mart, Target and Federated, indicating that we are seeing a slowdown in consumer spending. However, Bed, Bath and Beyond beat estimates by 0.02 and posted a 39% increase over the year ago quarter. The company said same store sales were up 10.4%, after a 4.6% gain a year ago. This may be a result of the strength over the last few months of the housing market, as the company focuses on home furnishings. The slowdown in home sales, however, could affect them negatively in the future. Still, a retailer that beats the street is a positive sign. Qualcomm said last week that it expects strong chip demand in its current fourth quarter and upped their shipping estimates from 19 million phone chips to 20 million. Today after the bell, they reiterated those expectations and said that they are also seeing an increase in fourth quarter bookings, which is a positive for a sector that has seen its book-to-bill ratio slide for the past few months. However, Qualcomm has failed to raise earnings guidance along with either of these announcements. One of the problems plaguing the chipmakers has been falling prices; so increased production does not necessarily mean they will be increasing earnings projections. Ford also had some good news. After claiming recently that the market was undervaluing its earnings potential, Chairman Bill Ford said the company would be raising production in the fourth quarter. Since vehicles are booked as sold when shipped to dealers, this increase may help Ford turn a profit for the year. This would be a change from their losses of a year ago. General Electric (GE) came out and reaffirmed their guidance for the quarter. This was one of today's market catalysts. However, I found interesting Jim Brown's Market Monitor comment that a reader emailed him with information that employees at a plant in Bangor, Maine were told this week that 50-75 workers would be cut by Christmas if business did not pick up. Former WorldCom controller David Myers has agreed to plea guilty to two felony counts. Expect the case against WorldCom to heat up now that one of the high-ranking executives has apparently agreed to provide information to the prosecution. This quarter, with the Dow and S&P 500 down 15% and the Nasdaq down 16%, is shaping up as the worst quarter since the fourth quarter of 1987. Today's bounce from the July lows may be the first step in another rally. However, it seems that expectations have been dialed down so dramatically that we have a long way to go, as far as consumer and capital spending, before we can consider ourselves healthy again. A CFO survey released today showed that the boys/girls in charge are not yet convinced. Their level of optimism has dropped, due to concerns about consumer spending, business capital spending and global unrest. If they are less convinced that things might turn around, then my feeling that the worst is not yet over seems justified. Of course, the cliché that "it always seems darkest before the dawn" usually applies to the stock market, as well. Since we are now into earnings warning season, we can expect the market to be extremely jittery, as we have also hit critical support levels. Today's rally eased fears a little, but the market Volatility Index (VIX.X) still remains over 40, which is considered high. For the moment I am very cautious about short positions, as a bear market rally could still have some room to run. However, until we see signs of the pace of economic recovery picking up, I still think above outlined downside measuring objectives in the Dow and Nasdaq have a good chance of being tested. ********************* SPECIAL LIMITED OFFER -- ONLY ONE SYSTEM LEFT! ********************* 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/ We are down to just ONE system LEFT!!! 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 ******************** Coincidence? Maybe, but then again... maybe not In last night's wrap, I discussed my "only" fear as a bear. That discussion was simply based on the thought that a bearish trader might be facing a near-term asset allocation shift with profits being taking in bonds and some of those profits then rotating toward stocks. The "technicals" sure didn't hint all that much that buyers would be around, except perhaps that the Dow Industrials (INDU) 7,841 +2.06% has just tested its 52-week closing low from July 23 at 7,702. While our "Beetles Balanced Fund" is only based on an equally distributed 8,000 hypothetical dollars among 8 different "assets" the trader/investor that thinks like an institution and multiplies that amount by millions if not billions of dollars, gets a very different feel for profits and losses. When I brokered for a living, I'd put my mutual fund investing clients on a quarterly review, and offered them the opportunity to look at their various holdings and systematically "rebalance" their accounts, especially if market conditions dictated a rebalancing was necessary. Asset classed held at various times were things like Treasury bond funds, corporate bond fund, large cap value stocks, large cap growth stocks, small cap value, small cap growth....etc. Rebalancing by itself and done systematically forces an investor/trader to take some profits (if properly diversified) where there are gains, and dollar cost averaging into those asset classes that have under performed. I tried to take this to a higher level, where I'd allocate into sectors groups of stocks that had just reversed up on their bullish % charts, and take profits from groups where the bullish % charts had reversed lower from a higher level of bullish %. For an index trader like you and I, this type of "asset allocation" thinking is really nothing more than the difference between stocks and bonds. For many institutions, its the exact same. Here's a quick look at how the "Beetle's Balanced" fund did today. I'm not going to show this every night, but just as we "wowed" at the gains found in the Lehman 20+ Treasury bond Ishares from our 07/31/02 benchmarking, think about today's -1.2% decline as it relates to a 20+ year investment, with current 30- day SEC YIELD as of 5.0% annualized (data as of 08/31/02). Beetle's Balanced Benchmark - from 07/31/02 close My mindset in a very generalized sense is that "bonds" are PERCEIVED as being "less risky" than equities. Within the scope of bonds, shorter-term maturities in Treasuries are "less risky" than longer-dated maturities. In the Beetle's Balance fund, the shorter-term would be the SHY and longer-term would be TLT. The little "red arrow" just points to today's action, with the TLT falling 1.21%, but still up 8.54% from our July 31 benchmarking. Was today's rally in stocks and selling in treasuries, especially the longer-dated a "coincidence" or the beginning of some asset allocations taking place just prior to the end of the third- quarter? I "developed" the Beetle's Balanced fund ONLY to get a feel for risk/reward as it relates to the MARKET'S perception of risk and reward and to get a feel for where money is flowing. Right now, I don't think this morning's "reaffirming" of guidance by General Electric (NYSE:GE) $27.00 +4.24% was would have had the markets acting like they did today. Nope... I think we're seeing some asset allocation and will be the basis of my near-term scenario and trading strategies. For me personally, I'm not overly aggressive with bullish trades when the bullish % are in column's of O's like they are right now. Nor am I aggressive with bullish trades when the major market averages have either hit new 52-week lows, or close to hitting them. My current BIG picture of risk to a stop begins with the current lows found yesterday. That's it, plain and simple. My main goal in ANY BULLISH TRADE is to control risk, and not necessarily FOCUS on potential gain. True.... while there's a greater potential for gain in the QQQ than the OEX, or SPX or DIA, there's also greater risk in the tech-laden QQQ. When markets are hitting new 52-week lows, a bull should be focusing on risk, and weighing it against a secondary variable of potential reward. If you think about it.... it what every trader/investor should do regardless of the security traded. So lets start tonight's technical update with the Dow Diamonds (NYSE:DIA) $78.66 +2.06% as some traders may have taken a bullish trade I profiled today in the market monitor (12:19:17) near $77.70. I looked at the October $77 calls (DAVJY), but just couldn't bring myself to pay $3.30, when my near-term target is $80.00. Dow Diamonds (AMEX:DIA) Chart - 60-minute interval Since I'm in the mind-set of short-term bullish in the DIA, I'm showing our DIA chart with the lower-trending "short-term" regression channel. We "know" what the longer-term looks like from last night's wrap. I wouldn't be a bit surprised to see the DIA dip back near $77.50, just undercutting the 21-hour (pink) SMA, similar to that period highlighted in the upper-left corner of the chart. With stochastics "overbought" on the 60-minute interval, a pullback near $77.50 is an entry point, with a stop just under the lows of $76.60. I've underlined the word "trader" as to a DIA trader loving a rally to $82. Remember, I'm still looking for a BEARISH entry between $80.45 and $82.28. If the bugger is going to go there based on a scenario of "asset allocation" then a TRADER looks to trade it. However, I'm starting out conservatively with an $80.00 target. My thinking here is based off of past observation. As a BEAR, I was targeting the $80.45 level of retracement and the DIA fell to $76.60. When an index or stock exceeds to the downside my prior bearish target, I think its a bit foolish to begin thinking Dow 10,000 at this point. "Baby steps folks... baby steps." Are "bears" worried from their July 12th opening short? Nope. But today's break back above the 19.1% retracement in the INDU of 7,747 is an alert and risk becomes 8,043 near-term. Do you see how a TRADER simply "flips" from bear to bull on a shorter-term basis, but still keeps the view of longer-term bearishness. You and I (Jeff Bailey) have been trading the indexes for just a couple of weeks. Hopefully you're getting the feel that once you book a gain, you've got some "padding" in the account, and can flip to the other side of things. If things work in our favor to the upside and risk is properly managed to the downside, then an "asset allocation" rally back near Dow 8,000 may then bring out the bear in you. How about them OEX's? These buggers found resistance below 418.50 for the better part of the morning, but when the break higher came, they too were on the move! I'm going to show the OEX on 60-minute timeframe also. I got several e-mails from DIA traders today that I was "jumping the gun" and bullish too soon in a DIA bullish profile below its 21- hour SMA. Remember our past discussions on monitoring other indexes to hint of bullishness/bearishness. I count about 3-bars trading above the 21-hour in the DIA, but check out the OEX. S&P 100 Index Chart - Daily Interval I got an "upside alert" that I had set on my q-charts trading station at retracement of 418.53, which may have had bears from 09/12/02 stopping out. The 60-minute bar chart sure hints that this might have been the case with other trader's too. For an "ideal" bullish entry and the weakness we've seen lately in the OEX, I'd like to see a gradual drift back lower, into the 21-hour (pink) SMA of 416. Let the SMA flatten out a bit. Then, on a move back above 418.53, go long and target 430. Yuck! The October OEX 415 calls (OXBJC) are currently offered $20.70, thanks to the higher market volatility and $VIX.X of 42.41. Ballpark guess is they would be about $16-$17 on a pullback to OEX 416. I don't like trying to trade call options in a downward trending index, when volatility is high like it is. It has the option's trader paying higher premiums and trading against trend. Extreme bullishness is then needed for the underlying index to offset deteriorating premium should the index move higher, while volatility falls and erodes some of the premiums. As such, I'd rather trade the underlying equity. SPX option traders are faced with the same "problem" of higher volatility and jacked up premiums in their calls. Again, the OEX and SPX look technically identical, so lets look at the SPDRS (AMEX:SPY) $84.35 +2.47% as an equity trade for S&P Index bulls. SPDRS Chart - Daily Interval The SPY rallied right up to the mid-point of our "short-term" regression channel. What I "envision" is something similar to the upper left corner of the chart (See this!). As such, I think a SPY bull can look for a pullback near, or under the 21-hour SMA of $83. I've also tried to "envision" the oscillators under such a scenario. Should the SPY break above today's high and mid-point regression, then a trader holding long from today's break above $84 or looking to play some momentum tomorrow, could trade bullish, but the 21-hour SMA becomes your trailing stop and target is above $86. I'd try and show some patience and discipline and look for bullish entry on a pullback, reduce some risk in a bullish trade with stop under the recent lows of $81.85 (say, $81.74). NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval I "hate to admit it," but the little old QQQ looks to be technically stronger on a 60-minute chart that any of the other major indexes we cover. Note how the QQQ broke above its 21-hour SMA first, then broke our 38.2% retracement next, cleared out our profit stop at $21.52, then traded above and closed above the 50- hour SMA. Do you kind of see the "domino" theory at work in the indexes. The QQQ now becomes the "stronger" index and OEX, SPX and DIA traders can perhaps monitor their trades as it relates to the 60- minute charts. I think that's an ADVANTAGE for OEX, SPX and DIA index traders. A bullish trader in these has the mindset of "look for leadership or continued strength in the QQQ to provide signs of upside aggressiveness." For a QQQ bullish trader, you're mindset is that of a "rising tide lifts all boats" where the QQQ is the boat, and wants the index action in the DIA, OEX and SPX to act as a "tide of enthusiasm" that has bears wanting to cover short positions and assess risk to a bullish target of $22.75 and upper end of the regression channel. Anticipating a question.... Jeff: You always have taught that it's best to trade bullish where strength is found, so why haven't you been bullish the QQQ? My answer would be. I do teach that. But remember, it was the QQQ that just took out a new 52-week low, not the DIA, OEX or SPX. These 60-minute charts we're looking at tonight are SHORT- TERM and that's my view from the bullish side right now. When trading bullish in downward trends, be patient and look for entry points on pullbacks, where the pullback in itself helps reduce risk in the trade. Excluding the last 2-days, every prior bull in the QQQ is at a loss is my mindset. At the same time, if we're seeing some asset allocation, then buying can be broad-based under such a scenario. Combine that with some short-covering thrown in, a nice little rally can be had. Since our short-term levels of resistance were all broken to the upside today, I'm willing to "turn the tables" and look for some upside action, but want to keep risk to a minimum with disciplined stops. Jeff Bailey ************************Advertisement************************* WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Bernstein Funds: A Unit of Alliance Capital Management L.P. This week, we look at Sanford C. Bernstein & Company and the Bernstein Funds, now part of the Alliance Capital Management family of funds. Founded in 1967 to manage investments for private families and individuals, Bernstein's operations have since grown to include investment research and institutional asset management, as well as mutual funds, but their private clients remain the firm's central focus today. As of June 30, 2002, the Fifth Avenue (New York) firm managed over $40 billion for private clients, institutional investors, and the Bernstein Funds. Bernstein's website touts that its private clientele includes some of the nation’s most prominent families and individuals. Because it has its roots in private asset management, Bernstein has always been sensitive to "tax" implications, becoming a leader in "investment-tax management." This tax-managed philosophy permeates to the Bernstein Funds, making them well suited to taxable and non-taxable investors. Like other prominent investment shops, research is the core to Bernstein's investment management process - their calling card. Collectively, Bernstein has one of the largest research teams in the investment management industry, with analysts based in many nations around the world. The firm believes it is the depth of their fundamental research capabilities that distinguishes them from all other money managers. Bernstein’s recent combination with Alliance Capital Management L.P. in October 2000 brought together Bernstein's expertise in "value" investing with Alliance's "growth" investing expertise. In addition to the original set of no-load Bernstein Funds, the month of March 2001 saw the introduction of a new family of load funds in March 2001 called AllianceBernstein Value Funds. These funds offer investors a wide range of value choices from straight value, to global and international value, to small cap value, and come in Class A, B and C shares, which vary in fees and expenses. Only the original Bernstein Funds are rated by Morningstar since the AllianceBernstein Value Funds haven't been around for the 36- month minimum time period necessary to do meaningful comparisons. While the AllianceBernstein Value Funds are new, they're managed the same way that Bernstein has always managed investments for its private clients and separate accounts. In the next section, we tell you what that means. Investment Style/Strategy Bernstein's philosophy is to manage portfolios "actively" through security selection and sector rotation based on their fundamental research to achieve consistent returns and to preserve capital in down markets. Their approach utilizes detailed security analysis coupled with a disciplined decision-making process. Bernstein developed its reputation as a "value" investor, seeking out stocks with temporarily depressed prices due to undue, short- term pessimism about a firm's ability to recover from its current problems. Bernstein Strategic Value portfolio was the investment firm's flagship product, and it embodied this "value" philosophy. Note, Bernstein has since introduced a Strategic Growth portfolio product. As time went on, Bernstein added portfolios in international and emerging markets to further diversify client accounts and mutual funds by geographic region. Bernstein's fixed income portfolios cover both municipal and taxable issues, primarily in the short- to-intermediate duration range. Twelve Bernstein mutual funds show up in Morningstar's database, as follows: Bernstein Taxable Bond Funds: Government Short Duration (SNGSX) Short Duration Plus (SNSDX) Intermediate Duration (SNIDX) Bernstein Municipal Bond Funds: Duration Diversified Municipal (SDDMX) Duration New York Municipal (SDNYX) Duration California Municipal (SDCMX) Diversified Municipal (SNDPX) New York Municipal (SNNYX) California Municipal (SNCAX) Bernstein International Stock Funds: Tax-Managed International Value (SNIVX) International Value II (SIMTX) Emerging Markets Value (SNEMX) There are seven AllianceBernstein Value funds offered today, as follows: AllianceBernstein Value Funds: Disciplined Value (ADGAX, ADGBX, ADGCX) Global Value (ABGAX, ABGBX, ABGCX) International Value (ABIAX, ABIBC, ABICX) Real Estate Investment (AREAX, AREBX, ARECX) Small Cap Value (ABASX, ABBSX, ABCSX) Utility Income (AUIAX, AUIBX, AUICX) Value (ABVAX, ABVBX, ABVCX) The NASDAQ symbols for the AllianceBernstein Value funds reflect their Class A, B or C designation. On August 23, 2002, Alliance International Fund merged into AllianceBernstein International Value Fund. Bernstein's fund offerings are designed to meet the needs of all types of investors. All portfolios share a common foundation in Bernstein's proprietary research, and are managed with an eye to investment taxability. The byproduct of Bernstein's approach is strong, reliable long-term performance. Our Favorite Funds Starting first with the original no-load Bernstein mutual funds, we like all three of their international stock funds, including International Value (SNIVX), International Value II (SIMTX) and Emerging Markets Value (SNEMX). Note: International Value Fund is now called Tax-Managed International Value Fund. The $2.7 billion Bernstein Tax-Managed International Value Fund (SNIVX) seeks to produce total return by normally investing at least 65% of assets in at least three foreign countries, though it may invest in as many as 20 countries that comprise the MSCI EAFE index. Fund manager Andrew Adelson (since June 1992) seeks to achieve the fund's total return objective by investing mainly in equities such as ADRs and EDRs and direct foreign securities. In security selection, Adelson uses a bottom-up approach, which seeks undervalued securities as evidenced by low P/E and price- to-book ratios. This fund also seeks to control currency risk through such techniques as forward currency hedge transactions. For the trailing 3-year period through September 24, 2002, the fund had a negative average annual total return of 9.3%, which was 5.8% better than the benchmark MSCI EAFE index, and strong enough to rank the fund in the top quartile of the Morningstar foreign stock fund category. For the same period, the average foreign stock fund produced an annual-equivalent loss of 12.5%. Compared to all international stock funds, International Value Fund is a Lipper Leader for total return, consistent return and preservation. In other words, it holds Lipper's highest rating in three performance categories. Morningstar awards it 4 stars out of five based on "above average" returns and "below average" risk relative to its category peers (foreign stock funds). For the trailing 10-year period as of August 31, 2002, the fund generated a positive annualized total return of 6.9%, outpacing the MSCI EAFE index by a full 3% and the average foreign equity fund by about 1.9% a year applying its value style to developed foreign markets. Those that want exposure to emerging markets can get that through the Bernstein Emerging Markets Value Fund (SNEMX). Adding to the fund's appeal is its below average expense ratio (1.25% versus 1.69% for the category average) and low turnover ratio (44%). The fund's cautious approach keeps it out of the more risky international markets, while relying on fundamental research to produce great stock picks. Long-term investors in need of a large-cap value driven international stock fund will like what they see in Bernstein Tax-Managed International Value Fund. Regular accounts require a $25,000 investment initially, but there is no minimum for IRA accounts. The municipal and taxable bond funds offered through Bernstein Funds have delivered competitive performance for investors too. Bernstein's diversified municipal fund product is rated 4 stars by Morningstar while its New York and California municipal bond fund products hold Morningstar's highest 5-star rating based on risk-adjusted relative performance. Collectively, these three funds represent $3.2 billion in assets under management today. The $2.1 billion Bernstein Intermediate Duration Fund (SNIDX) is our favorite of the three taxable bond fund products and offers the most total return potential over the long run for investors. It seeks total return consistent with safety of principal. The fund typically invests at least 65% of assets in debt securities rated AA or higher, and tends to stay at the conservative end of the intermediate-term bond fund group in terms of portfolio risk. The fund's management team may invest in fixed income securities of any maturity, but normally will maintain an effective average duration of three to six years. Up to 20% of assets may be held in debt securities of foreign issuers. Over the last three years (through September 24, 2002) the fund produced an annual average total return of 6.5%, ranking in the bottom quartile of the intermediate-term bond fund category per Morningstar. Long-term returns are average compared with peers, with "below average" relative risk. The fund may not shoot the lights out, but it won't shoot you in the foot either. Current income investors seeking a conservatively managed, fixed income fund may want to have a closer look at Bernstein's Intermediate Duration Fund. Conclusion Considering the new AllianceBernstein Value funds are marketed and sold through financial advisors, how well they fare versus similar funds on a risk-adjusted and cost-adjusted basis isn't clear yet. They should do relatively well on a "gross" return basis, given the strength and reliability of Bernstein's value investing process, but the effects of sales charges and higher operating expenses may limit some of Bernstein's "net" return. A financial advisor can help you decide what AllianceBernstein Value fund class shares may be right for you based on your own situation. As with other load funds, the more assets you have and the longer you hold your investment will determine how much you ultimately bear in terms of fees and expenses. For more information on the Bernstein Funds, you can log on to www.bernstein.com. AllianceBernstein Value Funds' information may be found on the www.alliancecapital.com website. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** Back To The Basics by Mark Phillips mphillips@OptionInvestor.com The simplest and safest option trading strategy is that of the Covered Call, yet it continues to amaze me how often I speak with traders that have failed to capitalize on this cash-generation tool in their portfolios. Every weekend, Mark Wnetrzak writes a great column highlighting attractive covered call trades, focusing on the strategy of buying stock and then selling a covered call on that stock to generate a steady monthly income. Without stepping on Mark's toes, I want to focus on the use of this strategy for those traders that are still holding onto stocks that are significantly under water. For whatever reason, you didn't sell the stock at a higher level, and don't want to take the loss at today's depressed prices. We need to keep in mind that the simple strategy of selling covered calls can start us on the path to recovery by reducing our cost basis in a depressed stock. I know there are always new traders that are unfamiliar with some of the strategies we talk about here. Rather than re-invent the wheel, let me encourage you to review some of Mark's Covered Call Basics articles, which can be found by clicking on the Covered Calls link under the Strategies header on the OIN main page. The basic strategy employed in that column is to buy stock and sell a covered call with the eventual goal of having the stock called away for a profit. What I want to talk about here is a slightly different approach. Assume you have 1000 shares of CSCO, with a cost basis of $20 per share, and you have watched in frustration as the stock has continued to post a series of lower highs over the past 9 months, reaching down near the $11 level again yesterday. Don't despair, as there is a method to get you back near break even, regardless of whether CSCO in fact approaches that level over the next year or so. All we have to do is take advantage of each rally to sell a front-month call with a strike slightly higher than the nearest resistance that we expect to hold through the end of the current expiration cycle. I know that is a mouthful, but I think we can best illustrate the concept with a detailed example. Just remember this one fine point of the strategy -- we DO NOT want to have the underlying stock called away, because that will result in locking in the loss that we are busily trying to mitigate. Let's go ahead and use the CSCO example we started with, assuming we have 1000 shares with a cost basis of $20. With the stock currently sitting just below $12, we are sitting on a 40% paper loss. Let's look back at the past few months and show how we could have steadily reduced that loss. Each time price action topped out near resistance in combination with the daily Stochastics rolling over from overbought, we could have taken that opportunity to sell a call with roughly one month until expiration. Shorter-term calls would have worked as well, but given the low price of the stock, would have provided insufficient premium to achieve our goal. The first opportunity to sell calls would have been in mid-May as the stock rolled over from the $17.50 level. We would have sold 10 of the June $17.50 Calls for $0.75 each, taking in a total of $750. Those calls expired worthless in June, allowing us to keep our CSCO shares and then prepare to do it all over again. Then we could have repeated that process both in July as CSCO rolled over from the $15 resistance level, using the August $15 Calls, which were then trading near $1.00. Net credit to the account for that transaction was $1000, and once again they expired worthless in the third week of August. Finally, in August, we got another opportunity as Stochastics rolled over from overbought, with CSCO once again unable to push through the $15 resistance level. Selling the September $15 calls at that time netted another $800 ($0.80 per contract) into the account, which we got to keep as expiration arrived with CSCO trading down in the $12 area. Adding up those credits gives us a total credit of $2550 into our account. In just 4 months, we would have reduced our cost basis for the long CSCO position from $20000 to $17450, and that would reduce our 40% paper loss to 31.2%. Clearly we aren't going to get rich employing this strategy, but it is a solid and reliable method of repairing a stock position that is underwater, but appears to be consolidating prior to a resumption (hopefully) of an uptrend. Of course, not every expiration cycle will be as kind to the covered call trader as those we highlighted here. Sometimes the stock will trade sideways or even move upwards. Initiating the trade as the stock rolls over from overbought helps to skew the odds in our favor, but as they say, "Stuff Happens!" We need to monitor the trade throughout the month, and if the price of the option moves above the credit taken in, then prudent risk control instructs us to buy back the calls and then look for another entry at a higher price. Recall that our objective here is to improve our cost basis in a stock position that is underwater. Key to achieving that goal is to not generate further losses by holding onto a related option position that is moving against us. Sounds like a perfect endorsement for using stop loss orders, doesn't it? I realize this is a pretty short summary of how the Covered Call strategy can be utilized to repair a losing stock position, but hopefully it gets you thinking about what is possible. If you held the stock through the most recent decline, then you obviously have a long-term focus. Apply this strategy over a year or more and you may find that you can turn a losing stock position into a winner. Questions are always welcome. Mark ************** Traders Corner ************** If It Sounds Too Good To Be True . . . By Mike Parnos, Investing With Attitude “R-I-I-N-N-G-G!” -- “Good afternoon, sir. Congratulations! You have been chosen as one of the lucky winners of a three-day, two- night all expense paid stay in exciting Las Vegas, Nevada or beautiful Orlando, Florida – the vacation capital of the world.” Be still my beating heart. Sounds too good to be true, doesn’t it? Well, as many Couch Potato Trading Institute students know, it IS too good to be true. There’ll be a high-pressure time-share presentation in your future or, at the very least, a travel club membership offer you can’t refuse. The same is true for option strategies. On the surface, they often seem so good that you’re out the door, on the way to pick up that new 55-inch high definition home theater five minutes after you put on the position. You better cool your jets. There are no option strategies that guarantee success. It’s crucial that traders examine strategies thoroughly, from every conceivable angle, inside and out – BEFORE you dive in. Analyze all potential scenarios and spend the necessary time in the land of “What If.” If all the “what ifs” are within reason and in line with your risk tolerance, then go for it. But don’t go get that TV just yet. Profit is never guaranteed. All you can do is try to put the percentages in your favor. So, don’t hold your breath waiting for Ed McMahon to show up on your doorstep with a check just because you subscribed to Playboy and Humpty Dumpty. Do the work! It may be painful, but it’s necessary. Options are incredible tools – if you know how to use them. If you don’t, ask. If you’re not sure, ask. That’s why we’re here. _______________________________________________________________ Mike: I have a question about an options strategy and I want to run it by you. What I'm thinking about is selling a put and a call, covering, and closing the position at the end of expiration. For example, say a stock is selling at $30 and the $30 strike put is bid at $2.50 and the $30 strike call is bid at $3.00. So, let's say I sell two call contracts and two put contracts. I take in $1,100. I immediately buy 200 shares of the stock and sell 200 shares of the stock. I close the position at the end of the month. Is there any risk in this position? It looks like whatever the stock does, I'd be covered and all I have to do is collect my $1,100 bucks at the end of the month. A couple of other things I don't quite understand. If the stock is put to me, does that mean the position is closed? In other words, the put I sold is history. If you sell a call, is that only settled at the end of the month? I haven't heard of people selling calls and ending up with the stock in their account if the stock moves against them. I know I can't quit my day job for $1100 a month. But that's $13,200 a year just for conducting two transactions a month. Thanks. Response: Sounds pretty good, doesn’t it? But let’s take a closer look and see if we can find those irritating flaws that always seems to turn up and end up costing us big money. Let’s do it before you enter the strategy. First, let’s venture into the land of “what if.” We’ll examine a few different scenarios and see how we end up. 1. What happens if XYZ stock is at $33 at expiration? a) Your $30 call is exercised and your 200 shares of XYZ stock are called away. b) Your $30 put expires worthless and your short 200 shares have gone up and you are $3.00 in the hole. Result: You only took in $1.10, so you are down $1.90 ($3.00 – $1.10). 2. What happens if XYZ stock is at $28.75 at expiration? a) Your $30 call will expire worthless and your 200 shares will be worth only $28.75 -- $1.25 less than the $30 you paid for the stock. b) Your $30 put will be exercised and you will be assigned 200 shares of XYZ at the price of $30. The 200 shares you were just assigned are used to replace your 200 short shares. Result: You only took in $1.10, so you are down $.15 ($1.25 – $1.10) The only way you can make out well is if XYZ finishes at $30. Then, both options will expire worthless and you will still be long and short the stock – which you can close, if you hadn’t already done so on expiration Friday. In the above examples, relatively small moves were used. If the stock moves up to $38 or down to $22, you will experience significant losses. If the stock is put to you, that means the put option was exercised and is no longer an open position. When you sell the call, or the put for that matter, you don’t have to wait until the end of the month. You can buy them back at any point prior to expiration and close out your position. Calls are rarely exercised if the stock moves against you (below the sold strike price). Why would the option holder want to exercise the call and buy the stock from you at the $30 strike price, when he can go out onto the open market and buy the same stock for less than $30? The Bottom Line: Don’t quit your day job. But keep analyzing the strategies. Break them down to their most basic elements. Make a list, like I did above, on what would happen with each stock and/or option when the underlying is at different levels. Then add it all up and see how you stand – and if you can stand the risks involved with the particular strategy. _________________________________________________________ Mike, Regarding your PDLI example (from Thursday, Sept. 19th Column in Traders Corner), what happens if PDLI drops to $6.00 (and you’ve sold an uncovered $10 put)?? Response: If PDLI falls to $6.00, you should be long gone. Initially, in this put-selling strategy (Traders Corner, September 5th, “Seven Deadly Sins – Plus One), the decision has already been made that you would like to own the stock. Hopefully, that was based on some technical analysis -- on a support level of some kind. Once the support level is violated, the prudent move would be to admit you chose a turkey of a stock, suck it up, take your lumps and buy back the put. That should all take place a lot closer to $10 than waiting till the stock gets to $6. There are those who would be frozen like deer in the headlights. Instead of making a decision, they would prefer to take assignment of the stock and pay $10 for a stock that's trading at $6. I want to play poker with these people. You can't spend your trading life drawing to an inside straight. If You Still Believe . . . If you still believe in the stock, there is an interesting adjustment you can do. With the stock at $6, it would cost you about $4 to buy back the put. On 10 contracts that's $4,000. Look at the $7.50 put for the next month out. You could probably sell that for $2. If you sold 20 contracts of the $7.50 put, you would replace the $4,000 you just spent to buy back the $10 put. If the stock rebounds to finish over $7.50, you would break even. You could look at the $5.00 puts and calculate how many contracts you would have to sell, and how many months out, to make up for the $4,000. If the size of your brokerage account permits, you can continue to roll out the puts indefinitely, adjusting the strike price, the month, and increasing the number of contracts to cover the cash outlay to buy back the previously sold puts. You will be increasing your exposure because of the higher number of contracts, but the stock will have to stop going down sooner or later. When it does, you're out from under. As long as your account can withstand the margin requirements, you should be OK. I would recommend exploring other stocks (or indexes) that might have a better chance of rebounding. Once PDLI (hypothetically) has broken down so significantly, it may time to get a divorce and look for a new opportunity. _______________________________________________________________ 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 ************************Advertisement************************* VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Forgotten What Up Looks Like? This was an example of an up day. Newer traders may not have seen one before. These days happen when bears and shorts take the day off at the same time. 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The Option Investor Newsletter Wednesday 09-25-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: ABT, FISV Dropped Calls: None Dropped Puts: BRL, JCI Play of the Day: Call - ABT Big Cap Covered Calls & Naked Puts: Another Selling Opportunity? Updated on the site tonight: Market Watch Market Posture ************************Advertisement************************* Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** STOP-LOSS UPDATES ***************** ABT - call Adjust from $38.25 up to $40 FISV - put Adjust from $32.50 down to $31.25 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ BRL $63.44 +2.37 (-0.21) Just as we feared, BRL was primed for a bounce today and the buyers piled in when it became clear that selling pressure was going to be insufficient to break the $60 support level. The stock's resilience earlier in the week provided the clue that a bounce might be coming and that prompted us to lower our stop to $62 last night. By 1pm ET today, BRL pushed through that level (stopping out the play) and never looked back as it ran right up to the $64 level late in the afternoon. Given the strength of the rally today and our stop being violated, it should be clear why we are dropping BRL tonight. JCI $77.03 +4.02 (-0.01) The most beaten-down stocks saw the heaviest buying in Wednesday's short-covering rally and JCI was no exception. After a strong open, the stock confirmed support at $74 before posting a strong 5.5% rally. Following a nice drop since we picked the play, we didn't want to risk giving those gains back, so last night we lowered our stop to $75 in anticipation of just such a snap-back rally. Our lowered stop was triggered by the end of the second hour of trading today and the bulls never looked back. All open positions should have been exited on the strong rally today, but if you are still holding on, then look to exit on any early weakness tomorrow. ************************Advertisement************************* optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** ABT - Abbott Laboratories $43.80 +1.70 (+2.00 this 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 held steady as the market has given up its gains and fallen through previous levels of support. The recent news that its Vysis PathVysion® fluorescence in situ hybridization (FISH) test was approved as a means for determining whether breast cancer patients will benefit from Herceptin, has no doubt kept investors happy and prevented a sell-off during the broad market decline. The fall is generally the best time of year for drug stocks, as there is a plethora of medical conferences, which give them the opportunity to offer up data in support of their products. The stock has held up ever since its gap up on July 25, which is more than the broader markets can say. Abbott got some recognition today as one of the top users of information technology in its field from Information Week magazine, for the third year in a row. While this probably does not mean much to the bottom line, it at least lets investors know the company is at the leading edge in this area. ABT will also be presenting some new data showing the effectiveness of a new Quinolone (class of antibiotic) against several different microbes this weekend at the ICAAC conference in San Diego. The recent triple top point and figure breakout has held in ABT and in spite of the sag in the Pharmaceutical Index (DRG.X) and Biotech Index (BTK.X), ABT just keeps adding green candles to its chart. The PnF pattern also looks like a bullish flag breakout. More conservative investors may want to wait for a break in the bearish resistance line, which would require a trade of $43, to initiate long entries. However, OI sees the current level as a long entry point and we will keep the long position open on ABT. Why This is our Play of the Day The bulls are back in town! Just one day after the DOW posted a new 4-year low, buyers propelled the broad market to its best gain in over a month. That move provided the impetus for ABT to finally solidify its breakout over the $42 resistance level. Adding credence to the breakout was the fact that volume ran more that 20% above the daily average, allowing ABT to close right at the high of the day. This brings the stock right up to the $44 resistance level, the bottom of the early June gap lower. With the broad market advance likely to stall a bit before heading higher, we could get a pullback in ABT to confirm the $41.50-42.00 level as support before the bulls take a serious run at the $44 resistance level. Use a bounce from that level to initiate new positions ahead of the expected breakout. With the PnF chart pointing to an advance to the $53 level, ABT still looks like it has plenty of room to run. Momentum traders will want to wait for a breakout over the $45 level before adding new positions. Raise stops to $40 tonight. BUY CALL OCT-42 ABT-JV OI=3449 at $2.50 SL=1.25 BUY CALL OCT-45*ABT-JI OI=2745 at $1.05 SL=0.50 BUY CALL OCT-47 ABT-JW OI= 898 at $0.55 SL=0.25 BUY CALL NOV-45 ABT-KI OI=6112 at $1.70 SL=0.75 BUY CALL NOV-47 ABT-KW OI= 640 at $0.85 SL=0.40 Average Daily Volume = 5.05 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Another Selling Opportunity? By Ray Cummins A rally among industrial stocks helped spur a broad-based recovery in the market today. The Dow Jones Industrial Average jumped 158 points to 7,841 amid solid gains in blue-chip shares. Dow giant General Electric (NYSE:GE) was one of the main catalysts for the bullish activity, telling investors its third-quarter numbers are "on track" at an analyst meeting. International Paper (NYSE:IP) was also in the news, saying it expects third-quarter earning to be "approximately in line" with the current consensus estimates. In the technology segment, semiconductor shares led the ascent as investors searched for downtrodden issues with the best long-term potential. The NASDAQ Composite ended 40 points higher at 1,222. In the broader market groups, virtually all sectors rallied with biotechnology, natural gas, chemical, pharmaceutical and utility stocks among the best performers. The S&P 500-stock index added 20 points to close at 839. Volume came in at 1.66 billion on the NYSE and at 1.65 billion on the technology exchange. Breadth was positive, with advancers outpacing decliners by 8 to 3 on the Big Board and 2 to 1 on the NASDAQ. In the bond market, the 10-year note slid 28/32 to yield 3.75% while the 30-year bond fell 1 14/32 to yield 4.72%. Despite today's spike in share values, most experts believe this is simply a necessary technical bounce -- from extremely oversold levels -- that will quickly fade due to weak corporate earnings and the uncertainty surrounding the U.S.-Iraq situation. Popular market analyst Elliot Spar commented, "What we need to sustain a move for more than one day is the realization that you can make money on the long side as opposed to just the short side of the market." If that is the case, traders should remain cautious when initiating bullish positions and continue to balance their portfolios with plays that benefit from downside activity, until there is a significant change in the primary trend. *************** SUMMARY OF CURRENT POSITIONS *************** (As of 09-24-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield AMGN OCT 35 33.15 42.07 $0.85 6.1% CHTT OCT 35 34.50 38.71 $0.50 4.3% CCMP OCT 30 28.90 37.42 $1.10 8.1% INTU OCT 40 38.60 43.44 $1.40 6.9% COF OCT 30 29.30 34.25 $0.70 6.5% CTSH OCT 50 49.25 53.70 $0.75 4.6% EASI OCT 50 49.00 60.80 $1.00 5.1% INVN OCT 25 24.45 31.82 $0.55 6.3% LLL OCT 47 46.65 56.79 $0.85 4.7% MIK OCT 40 39.35 44.81 $0.65 4.6% ROOM OCT 40 39.25 46.23 $0.75 5.1% BSTE OCT 20 19.65 28.44 $0.35 5.6% ESRX OCT 45 44.50 52.47 $0.50 4.0% GD OCT 75 73.65 82.33 $1.35 5.3% INVN OCT 25 24.45 31.82 $0.55 7.8% NOC OCT 110 108.55 126.33 $1.45 4.0% XAU OCT 60 59.25 75.47 $0.75 4.6% Cognizant Technology Group (NASDAQ:CTSH) has reversed to a bearish trend and traders should consider closing the position to protect profits. Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield QLGC OCT 40 41.20 28.10 $1.20 9.7% INTU OCT 50 51.50 43.44 $1.50 6.8% EBAY OCT 65 66.20 55.77 $1.20 5.5% QLGC OCT 45 45.45 28.10 $0.45 4.9% XL OCT 80 81.25 72.28 $1.25 4.6% DIA OCT 86 87.15 77.07 $1.15 4.0% MUR OCT 90 91.75 79.55 $1.75 6.2% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status HRB 51.30 46.99 OCT 40 45 0.45 44.55 $0.45 Closed LOW 45.20 40.61 OCT 35 40 0.50 39.50 $0.50 Closed PDCO 52.63 50.63 OCT 45 50 0.65 49.35 $0.65 Open? SYK 60.03 55.43 OCT 50 55 0.50 54.50 $0.50 Closed MBG 32.46 32.39 OCT 27 30 0.30 29.70 $0.30 Open With the renewed downtrend in equity values, we suggest traders consider closing any positions whose underlying stocks have less than outstanding technical indications. Among the credit spread positions, Mandalay Resort Group (NYSE:MBG) is the only issue with an extremely bullish outlook. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status JNJ 55.48 53.61 OCT 65 60 0.50 60.50 $0.50 Open MSFT 48.58 45.68 OCT 60 55 0.55 55.55 $0.55 Open PHM 48.46 41.65 OCT 60 55 0.60 55.60 $0.60 Open WFT 39.37 34.32 OCT 50 45 0.60 45.60 $0.60 Open APA 56.57 55.39 OCT 65 60 0.70 60.70 $0.70 Open WY 49.78 43.79 OCT 60 55 0.60 55.60 $0.60 Open Credit Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month &Price Basis Price (Loss) Mon. Yield INTU OCT 50C 51.50 43.44 $1.50 6.8% INTU OCT 40P 38.60 43.44 $1.40 6.9% GILD OCT 35C 36.45 33.09 $1.45 9.8% GILD OCT 30P 28.50 33.09 $1.50 10.4% BBBY OCT 27P 27.05 32.33 $0.45 6.2% BBBY OCT 37C 38.30 32.33 $0.80 7.1% CAI OCT 30P 29.55 34.01 $0.45 5.0% CAI OCT 40C 40.55 34.01 $0.55 5.3% WFMI OCT 40P 39.45 43.55 $0.55 4.2% WFMI OCT 50C 50.50 43.55 $0.50 3.6% Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status PDX 34.15 30.40 NOV40C/30P 0.40 29.60 0.20 Closed As noted last week, a move below $32 was our signal to close the bullish position in Pediatrix Medical (NYSE:PDX). Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (I monitor the positions marked with ***). *************** BULLISH PLAYS - Premium Selling All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. *************** AZO - Autozone $79.27 *** Awesome Earnings! *** AutoZone (NYSE:AZO) is a specialty retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. The company operated over 3,000 auto parts stores in the United States and 21 in Mexico. Each store carries an extensive product line for cars, vans and light trucks, including new as well as re-manufactured automotive hard parts, maintenance items and car accessories. The company also has a commercial sales program in the United States that provides commercial credit and prompt local delivery of parts and other products to repair garages, dealers and service stations. AutoZone does not sell tires or perform automotive repair or installation. In addition, the company sells automotive diagnostic and repair information software through its ALLDATA subsidiary, and diagnostic and repair information through alldatadiy.com. AZO - Autozone $79.27 Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 70 AZO VN 2,352 0.70 69.30 4.0% *** SELL PUT OCT 75 AZO VO 633 1.40 73.60 6.4% *************** BSTE - Biosite $29.80 *** Entry Point! *** Biosite (NASDAQ:BSTE) is a research-based diagnostics company dedicated to the discovery and development of novel protein- based tests that improve a physician's ability to diagnose disease. The firm combines separate, yet integrated, discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new approaches to diagnosis. In March 2002, Biosite entered into a multi-year collaborative agreement with Amgen (NASDAQ:AMGN). BSTE - Biosite $29.80 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 22.5 BQS VX 158 0.40 22.10 8.3% *** SELL PUT OCT 25 BQS VE 347 0.60 24.40 10.3% SELL PUT OCT 30 BQS VF 380 2.40 27.60 21.9% *************** ESRX - Express Scripts $54.18 *** Back In A Comfort Range! *** Express Scripts (NASDAQ:ESRX) is a pharmacy benefit management company in North America. The company is independent from any pharmaceutical manufacturer ownership, which allows it to make unbiased formulary recommendations to its clients, balancing both clinical efficacy and cost. The company provides a full range of pharmacy benefit management services, including retail drug card programs, mail pharmacy services, drug formulary management programs and other clinical management programs for approximately 19,000 client groups that include HMOs, health insurers, third-party administrators, employers, sponsored benefit plans and government health programs. As of January 1, 2002, some of the company's largest clients included AARP, Aetna U.S. Healthcare and Blue Cross of Massachusetts. ESRX - Express Scripts $54.18 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 45 XTQ VI 508 0.55 44.45 5.6% *** SELL PUT OCT 50 XTQ VJ 494 1.35 48.65 9.5% SELL PUT OCT 55 XTQ VK 328 3.10 51.90 16.0% *************** FRX - Forest Laboratories $80.20 *** Rally Mode! *** Forest Laboratories (NYSE:FRX) and its many subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. Forest's most important United States products consist of branded ethical drug specialties marketed directly, or detailed, to doctors by the firm's Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare and Forest Specialty Sales sales forces. Such products include Celexa, Forest's SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, Forest's once daily diltiazem for the treatment of hypertension and angina, and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Laboratories $80.20 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 70 FRX VN 1,324 0.80 69.20 4.7% *** SELL PUT OCT 70 FRX VO 1,699 1.60 68.40 9.0% SELL PUT OCT 70 FRX VP 887 3.00 67.00 15.9% *************** LLL - L-3 Communications $57.09 *** Defense Sector *** L-3 Communications Holdings (NYSE:LLL) is a merchant supplier of sophisticated secure communication systems and other specialized products. The company derives all of its operating income and cash flow from its wholly owned subsidiary, L-3 Communications. The company produces secure, high-data-rate communication systems, training and simulation systems, engineering development and integration support, avionics and ocean products, fuzing products, telemetry, instrumentation, space & guidance products and various microwave components. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's systems and specialized products are used to connect a variety of airborne, space, ground- and sea-based communication systems, and are used in the many transmission, processing, monitoring and dissemination functions of these communication systems. LLL - L-3 Communications $57.09 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 50 LLL VJ 2,300 0.55 49.45 4.5% *** SELL PUT OCT 52.5 LLL VX 2,078 0.85 51.65 5.9% SELL PUT OCT 55 LLL VK 1,272 1.70 53.30 10.0% *************** ROAD - Roadway $37.21 *** Earnings Rally? *** Roadway Corporation (NASDAQ:ROAD) is a holding company with two primary operating entities, Roadway Express, and Roadway Next Day Corporation. REX is the primary operating subsidiary of the Company. REX and its primary subsidiaries provide long-haul, less-than-truckload freight services on city-to-city routes in North America, and on international routes to and from North America. Roadway Next Day Corporation, formerly known as Arnold Industries, was acquired in 2001, and provides regional next-day LTL and truckload freight services in North America in two major business segments. At the beginning of 2002, REX owned a total of 8,555 tractors and 25,175 trailers. The company also operated 2,130 tractors and 9,349 trailers under long-term leases. The average age of the intercity fleet was six years. New Penn and ATS together operate 2,100 tractors and 5,800 trailers. ROAD - Roadway $37.21 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 30 EJQ VF 386 0.35 29.65 5.8% *** SELL PUT OCT 35 EJQ VG 42 1.50 33.50 14.0% *************** SCHL - Scholastic Corporation $46.04 *** Revenues On Target! *** Scholastic (NASDAQ:SCHL) is a global children's publishing and media company. It is a publisher and distributor of children's books. The company creates educational and entertaining materials and products for use in school and at home, including children's books, textbooks, magazines, technology-based products, teacher materials, television programming, videos and toys. Scholastic distributes its products and services through a variety of channels, including school-based book clubs, school-based book fairs as well as direct-to-home continuity programs, retail stores, libraries, television networks and the Internet. The company's new web-site, Scholastic.com, is a site for teachers, classrooms and parents and a destination for children. SCHL - Scholastic Corporation $46.04 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 40 USC VH 55 0.45 39.55 4.6% *** SELL PUT OCT 45 USC VI 51 1.70 43.30 11.8% *************** BULLISH PLAYS - Credit Spreads *************** APOL - Apollo Group $43.48 *** Bullish Sector *** Apollo Group (NASDAQ:APOL) provides higher education to working adults. The company operates through its many subsidiaries, The University of Phoenix, Institute for Professional Development, The College for Financial Planning Institutes Corporation and Western International University. The firm offers various programs and services at 58 campuses and 102 learning centers in 36 states, as well as Puerto Rico, and Vancouver, British Columbia. The firm's combined degree enrollment was approximately 124,800 at August 31, 2001. APOL - Apollo Group $43.48 PLAY (conservative - bullish/credit spread): BUY PUT OCT-35.00 OAQ-VG OI=299 A=$0.35 SELL PUT OCT-40.00 OAQ-VH OI=1662 B=$0.80 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$39.50 *************** ETM - Entercom Communications $48.45 *** Media Sector Rally *** Entercom Communications (NYSE:ETM) is a radio broadcasting company in the United States. The company has assembled, after giving effect to the pending acquisitions of three stations in the Denver market and two stations in the Greensboro market, a nationwide portfolio of 100 stations in 19 markets. Entercom operates a wide range of formats in geographically diverse markets across the United States. The company's largest markets are Seattle, Boston, Kansas City, Sacramento, Portland, New Orleans and Denver. ETM - Entercom Communications $48.45 PLAY (conservative - bullish/credit spread): BUY PUT OCT-40 ETM-VH OI=10 A=$0.25 SELL PUT OCT-45 ETM-VI OI=50 B=$0.85 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=14% B/E=$44.35 *************** Neutral Plays - Credit Strangles Here are some new candidates for traders who favor neutral-outlook premium-selling strategies. Both issues have relatively stable chart patterns and robust option prices, however current news and market sentiment will have an effect on these positions, so review each one thoroughly and make your own decision about its outcome. *************** CCMP - Cabot Microelectronics $40.54 *** Basing Pattern? *** Cabot Microelectronics is a supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit devices, within a process called chemical mechanical planarization. CMP is a polishing process used by integrated circuit (IC) device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is the polishing process that levels and smooths, and removes the excess material from the surfaces of these layers. CMP slurries are unique liquid formulations that facilitate and enhance this polishing process and usually contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $40.54 PLAY (conservative - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 30 UKR VF 1,060 0.35 29.65 5.5% SELL CALL OCT 50 UKR JJ 978 0.30 50.30 4.7% *************** EBAY - eBay Inc. $56.63 *** Trading Range? *** eBay (NASDAQ:EBAY) is a Web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. EBAY - eBay Inc. $56.63 PLAY (moderately aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 50 QXB VJ 8,842 0.80 49.20 6.3% SELL CALL OCT 60 QXB JL 13,769 1.00 61.00 6.5% *************** BEARISH PLAYS - Naked Calls Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** BZH - Beazer Homes $61.57 *** Housing Sector Slump? *** Beazer Homes (NYSE:BZH) designs, builds and sells single family homes in various locations within the United States: Florida, Georgia, North Carolina, South Carolina, Tennessee, Arizona, California, Colorado, Nevada, Texas, Maryland, Pennsylvania, New Jersey and Virginia. The company designs its homes to appeal primarily to entry-level and first time move-up homebuyers. The company's objective is to provide its customers with homes that incorporate quality and value while seeking to maximize its gain on invested capital. The company's homebuilding and marketing activities are conducted under the name of Beazer Homes in each of its markets except in Colorado (Sanford Homes) and Tennessee (Phillips Builders). BZH - Beazer Homes $61.57 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 70 BZH JN 168 0.70 70.70 5.5% *** SELL CALL OCT 65 BZH JM 602 2.00 67.00 11.4% *************** MUR - Murphy Oil $82.43 *** Profit-Taking Underway! *** Murphy Oil Corporation (NYSE:MUR) is a worldwide oil and gas exploration and production company with refining and marketing operations in the United States and the United Kingdom. The company's operations are classified into two primary businesses: Exploration and Production; and Refining and Marketing. The company's principal exploration and production activities are conducted in the United States, Ecuador and Malaysia by wholly owned Murphy Exploration & Production and its subsidiaries; in western Canada and offshore eastern Canada by Murphy Oil Ltd. and its subsidiaries; and in the U.K. North Sea/Atlantic Margin by wholly owned Murphy Petroleum Limited. Murphy Oil USA, a wholly owned subsidiary, owns and operates two refineries in the United States. MOUSA markets refined products through a network of retail gasoline stations and branded and unbranded wholesale customers in a 23-state area of the southern and Midwestern United States. MUR - Murphy Oil $82.43 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 90 MUR JR 1,183 1.35 91.35 6.7% *** SELL CALL OCT 85 MUR JQ 1,265 3.30 88.30 12.9% SELL CALL OCT 80 MUR JP 274 5.70 85.70 18.3% *************** BEARISH PLAYS - Credit Spreads All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** LEN - Lennar $55.07 *** Housing Industry Bubble? *** Lennar Corporation (NYSE:LEN) is a homebuilder and a provider of residential financial services. Their homebuilding operations include the sale and construction of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through its partnerships. Lennar's financial services operations provide mortgage financing, title insurance and closing services for both its homebuyers and others, resell the residential mortgage loans originated in the secondary mortgage market and also provide high-speed Internet access, cable television and alarm monitoring services to residents of its many communities and others. In 2002, Lennar acquired Patriot Homes, a homebuilder in the Baltimore marketplace, and expanded into the Carolinas with the acquisition of Don Galloway Homes and the assets and operations of Sunstar Communities. LEN - Lennar $55.07 PLAY (less conservative - bearish/credit spread): BUY CALL OCT-65 LEN-JM OI=853 A=$0.35 SELL CALL OCT-60 LEN-JL OI=2435 B=$1.05 INITIAL NET-CREDIT TARGET=$0.70-$0.75 POTENTIAL PROFIT(max)=16% B/E=$60.70 *************** PII - Polaris Industries $65.02 *** Retail Sector Slump! *** Polaris Industries (NYSE:PII) designs, engineers and manufactures all terrain vehicles (ATVs), snowmobiles, motorcycles and personal watercraft (PWC) and sells them, together with related replacement parts, garments and accessories (PG&A), through dealers and other distributors principally located in the United States, Canada and Europe. ATVs are four-wheel vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland. In the early 1950s, a predecessor to the firm produced a gas-powered sled that became the forerunner of the snowmobile. Snowmobiles have been manufactured under the Polaris name since 1954. The company entered the worldwide motorcycle market in 1998, with an initial entry product in the cruiser segment. PWC are sit down versions of water scooter vehicles, and designed for use on lakes, rivers, oceans and bays. PII - Polaris Industries $65.02 PLAY (conservative - bearish/credit spread): BUY CALL OCT-75 PII-JO OI=1455 A=$0.45 SELL CALL OCT-70 PII-JN OI=83 B=$0.90 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$70.50 *************** TOT - TOTAL Fina Elf $63.74 *** Oil Sector Speculation! *** TOTAL Fina Elf (NYSE:TOT) operates with its subsidiaries and affiliates as an integrated oil and gas company, with operations in more than 120 countries. The firm's worldwide operations are conducted through three business segments: Upstream, Downstream and Chemicals. The Upstream segment includes TOT's exploration, development and production activities, as well as their coal and gas and power operations. The Downstream segment sells most of the crude oil produced by the company, purchases most of the oil required to supply its refineries, operates the refineries and markets petroleum products worldwide through both retail and non retail activities, and conducts TOT's bulk trading. The Chemicals segment includes Petrochemicals and plastics, which are linked to the company's refining activities, Intermediates and performance polymers, as well as Specialties, which include rubber processing, resins, paints, adhesives and electroplating. TOT - TOTAL Fina Elf $63.74 PLAY (very conservative - bearish/credit spread): BUY CALL OCT-75 TOT-JO OI=48 A=$0.25 SELL CALL OCT-70 TOT-JN OI=8 B=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$70.45 *************** SEE DISCLAIMER *************** ************** MARKET POSTURE ************** Out of the Way To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/092502.asp ************ MARKET WATCH ************ Looking for better entries on the bounce To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/092502.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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