The Option Investor Newsletter Sunday 09-29-2002 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: October Preview? Index Trader Wrap: Holding the lows, but by a thread Editor’s Plays: Little Brother is Watching Market Sentiment: Third Time's a Charm Ask the Analyst: Coincidentally Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Ready To Rumble? Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 9-27 WE 9-20 WE 9-13 WE 9-06 DOW 7701.45 -284.57 7986.02 -326.67 8312.69 -124.51 -236.30 Nasdaq 1199.08 - 22.00 1221.08 - 70.28 1291.36 - 3.94 - 19.76 S&P-100 413.22 - 10.68 423.90 - 20.34 444.24 - 2.43 - 14.13 S&P-500 827.36 - 18.03 845.39 - 44.41 889.80 - 4.12 - 22.16 W5000 7872.54 -150.63 8023.17 -417.71 8440.88 - 40.32 -172.84 RUT 361.77 - 5.51 367.28 - 22.70 389.98 - 40.32 + .61 TRAN 2185.17 + 1.15 2184.02 - 62.85 2246.87 - 10.20 - 8.56 VIX 43.14 - 1.41 44.55 + 5.24 39.31 - .73 + 4.24 VXN 57.86 - 1.22 59.08 + 3.23 55.85 - .69 + 1.56 TRIN 2.09 0.86 1.53 0.93 Put/Call 0.90 1.16 0.89 0.79 ****************************************************************** October Preview? by Jim Brown They tried. They really tried to rally the markets on Friday but the bad news was simply too widespread for buyers to handle. The GE news and Phillip Morris warning were only two of the headliners but there were plenty more that followed the same story line. The end of quarter window dressing turned into a strip show and traders in shorts watched as bulls lost the shirts off their backs. Dow Chart Nasdaq Chart The recovery possibilities took another series of hits on Friday with the results of warnings from GE, SBC, MO, DAL, WYE and PLCE. The semiconductor sector was hit again after TSM and United Semi announced cuts in capex spending. New downgrades hit AMCC, BRCM, CNXT, PMCS, TUNE, TXCC and VTSS. This set the tone for the day and it was ugly. Still the markets tried to rally off the opening dip and were somewhat successful until about 11:30 when the bottom fell out of the Dow. Once the support at 7900 and 7850 broke it was just a bet to see how far the red ink would run before the close. The final Q2 GDP numbers came in slightly higher than expected at 1.3% growth but nobody seemed to care. That is ancient history in the markets. More importantly was the negative growth rate for the current economy as reflected by the ECRI Weekly Leading Indicators. After suggesting a +2% growth rate back in early August the numbers have slowly declined to the -0.1% rate for last week. This, along with the multiple warnings from a very broad spectrum of companies, points to the very real possibility of a double dip in progress. The final revision of the September Consumer Sentiment came in at 86.1, down -1.5 points from August and the lowest level since last November. The current conditions component fell to 95.8 with more respondents commenting on wealth fears than any time in the history of the survey. Even the great market crash in 1987 failed to worry consumers as much as the current economy. The expectations component fell to 79.9 on fears that jobs are not stable and layoffs could continue to worsen. This continued drop in confidence is causing analysts to reevaluate the outlook for more auto sales and new home sales. With jobs tight, confidence low and debt levels high there is not a lot of pent up demand. Those that can afford to buy toys and houses already have and those that cannot afford it don't count for future expectations. This predicts lowered spending habits over the next few months, not increased spending. The holiday retail buying binge may be sedate with unemployment at 5.9% and growing. At only 3.9% two years ago the money was flowing freely. It is time to pay the piper and with the market setting four year lows there are no savings accounts to draw on for spending cash. The fund reporting companies said today that August was another month of net outflows but not nearly as bad as the -$50 billion in July. September has already gone on record as another outflow month. Small wonder when Lipper reported that only 62 of 8200 funds tracked were positive for the quarter. How long will the herd continue to keep funds in accounts that are negative quarter after quarter? After five weeks of losses the markets are right back to the closing lows from July and multiyear lows in come cases. Using the Art Cashin analogy, Jill and Jane Doe will open the paper this weekend and see that their 200% to 400% gains from the last four years have turned into losses instead and decide that bonds suddenly look like good investments until the economy recovers. That phone will ring on Monday at their fund headquarters and money will flow out again. The talking heads were discussing tax loss selling on Friday. This is an October event because most funds have October year ends. They will add up their winners and losers and decide how much they can sell for a profit to offset the tax loss. In a perfect world they would sell a stock for a profit that had a good run and they felt had topped to offset losses on investments that failed and they sold for a loss. This minimizes the overall taxable event and prevents huge tax loss carry forwards. The problem this year is lack of winners. Who are they going to sell? While this may be a problem on the surface there may be more winners than you think. Looking at a six-year chart as an example MMM was only $70, PG in the $40s, MO $20, JNJ $30, MSFT $25, Dell $10, AMGN $15, BGEN $20, ERTS $20, EBAY $20, ESRX $10, INTU $15, IBM $35, UTX $30, WMT $20, HD $15, QCOM $6. In fund years these prices were last week. With the fertile field of winners there should be lots of selling to offset losers. Unfortunately the majority of these stocks are key components to the major indexes. This means the Dow/Nasdaq may be very susceptible to October tax selling. It is one thing for the mutual funds to tell you they lost 25% more of your money and another thing to realize that it will take years to benefit from those losses on your taxes. Funds trying to escape more investor flight will be trying to mitigate those losses as much as possible. Will there be tax loss selling in October? You can bet on it! The current quarter is almost certainly to go down as the worst quarter ever for the Dow. It is down over -16% with one day to go. The S&P dropped -23% during the 4Q of 1987 and is also down -16% already this quarter. It would have to drop below 762 on Monday to equal the 1987 record. The indexes closed at critical levels on Friday, 7701 for the Dow and 1199 for the Nasdaq. Each only one point from critical support. September has long been know as the setup month for October lows. It could not have occurred any more perfectly if you had been able to script it. The Dow is only 169 points from the July lows and the Nasdaq only 30 points above the lows for the year. With one day left in September a new low in October may only need to be a drop of a single point at the open on Tuesday if Monday follows Friday's pattern. The economic calendar next week is crucial to the continued market movement. Monday starts with Personal Income/Spending and the Chicago PMI. If income/spending shrinks then fears of the double dip will increase. PMI is expected to drop from 54.9 to 53.0 but without a serious miss this report should be ignored. It is more watched for evidence of inflation than recession. Tuesday will focus on the ISM survey for September. Bulls had better hope the number comes in at the 50.6% forecast because a number under 50 is recessionary and we are very close to that trigger. Construction Spending will also be released. Wednesday has no releases and will continue to be a reaction day for the ISM. Thursday we get the non-manufacturing ISM and Factory Orders. Both of these could be very detrimental. Friday is the trump card with the September Payroll Report. If jobs decreased and it seems very unlikely that they didn't, then the July market lows, if not already broken, will be toast. This is the critical week for the month economically. This is the yardstick for the economy in precise terms. If orders are falling and jobs are being lost then the hand writing is on the wall. The main point I got from last weeks news events was that CEOs seemed to be even more worried than in the past. Knowing that earnings are 2-3 weeks away and the end of quarter sales were not shaping up well, they were using very cautious terms to describe the outlook. John Chambers tripped over his tongue several times trying to be cautious in his presentation but get across the concern that companies had even less visibility than before. (translation = significantly fewer orders than expected) It appears to me that the economy hit a wall in August/September but nobody wants to admit it. Corporate America, economists and the Fed are all hoping that seasonal holiday buying will somehow rescue the economy from the double dip. Treasury bond yields are still dropping like a rock as investors go for value but corporate bonds are soaring as worries over corporate profits are increasing. The bond markets tend to lead the stock market and the economy and they are telling us that our economic troubles are not over. Enter Very Passively, Exit Very Aggressively! Jim Brown "A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss, that is what does the most damage to the wallet and the soul" - Jesse Livermore Reader comments are always welcomed. If this commentary helped you please let us know. comments@OptionInvestor.com ********************* SPECIAL LIMITED OFFER ********************* Dual 20" Flat Panel Trading System. The dual flat panel trading systems we offered last week were all sold. We are trying to locate some more of the 20" NEC flat panel monitors to complete the extra orders we received. If you wanted one but failed to act quickly enough then click the link below to add your name to the waiting list. http://www.OptionInvestor.com/systemdeal/ ******************** INDEX TRADER SUMMARY ******************** Holding the lows, but by a thread It was a down day on Wall Street as early technology bullishness faded into the sunset as troubles lurked among Dow components. What started out as a mixed session has the markets seeing red by sessions end. My observations made from stocks I was following during the day was that of market makers and specialists backing away from solid bids and letting the bulls sell what they would into today's close. In Thursday night's wrap, we thought a move lower in the markets might be triggered with a move below the $78.40 level in the Dow Diamonds (AMEX:DIA) $76.85 -3.7%, which would equate to Dow Industrials (INDU) 7,840. When the Dow broke that 7,840 level, all heck broke loose with the Dow loosing an additional 139 points (-1.7%) to close 7,701.45 (-3.69% on the session). One subscriber asked that I attempt an update that is "simplistic" and perhaps not so cluttered with observations and intra-day trigger points. I think that's a great idea! I really wanted to whip out a point and figure chart and just look at the supply/demand levels, but then I figure not everyone is familiar with the interpretation of the point and figure charts, which are primarily used by institutions in their options strategies to assess risk/reward in their portfolios/inventory However, I am going to draw some "simple" levels that correlate against the point and figure charts of the indexes where potential buy and sell signals would be generated. Dow Industrials Chart - Daily Intervals Today's reversal lower in the Dow Industrials from the 8,000 level now puts in place resistance at 8,000. It would take a trade at 8,050 to generate a "buy signal" on the INDU chart ($50 box is conventional scale). A trade at 7,650 would generate another "sell signal" on the point and figure chart. I've market 7,665 on the above chart to mark the monthly lows. A break lower at 7,665 and 7,650 then has the 52-week low of 7,532 in play. The Dow Industrials point and figure chart has exceeded its bearish vertical count of 8,150, which was initially triggered after a triple-bottom sell signal at 8,750 on August 28th. While Professor Davis' probabilities study was focused on stocks, not indexes and sectors, his study did reveal that in a "bear market" (as depicted by the bullish % charts) the triple-bottom sell signal was profitable in a bearish trade 93.5% of the time, for an average gain of 23% in 3.4 months. From Dow 8,750, a bear might be targeting 6,738 in 3.4 months from the August 28 date. I've decided to be more "conservative" and used the Dow Diamonds (AMEX:DIA) $76.85 -3.7% point and figure chart's ($1 box scale) bearish vertical count of $74, to derive a target of 7,400 for the Dow Industrials. According to www.stockcharts.com, the Dow Industrials Bullish % ($BPINDU) is currently in a "bull correction" market at 16.67% bullish, after reversing from "bull confirmed" status in late August at 60%. How telling was the August 28th 01:00 EST Update? http://members.OptionInvestor.com/archive/intraday/2002/082802_3.asp In our past market wraps, I've attached the bottom of our retracement to $74.55, or approximately 7,455 INDU. This is to mark an early alert that if traded, the Dow Diamonds (DIA) would be getting close to the point and figure chart's bearish vertical count of $74.00. S&P 500 Index Chart - Daily Intervals Today's reversal lower in the SPX now has resistance looking formidable between 860 and 880. It would currently take a trade at SPX 860 to negate the current bearish vertical count of 715. A break lower at 815 generates another sell signal in the SPX point and figure chart ($5 box scales) and puts into play the previous lows of 776. However, compared to the 52-week lows, the S&P 500 Bullish % ($BPSPX) from www.stockcharts.com hints there is still some bullish risk that could be reduced, when comparing the current 32% bullish reading against the old low's reading of 12%. Traders that may have established a partial bearish position can monitor a potential upward trend I've placed on the chart. Should the SPX break below 815, a bear could leg in further, with a trailing stop above 860. 09/27/02 SPX Contracts - Sorted by Oct&Dec Open Interest Volatility? As a follow on to our September 22nd discussion regarding potential support/resistance levels for current month and quarter. Today I'm looking at this WEEK'S RANGE. Using the same math from the 09/22 update, traders can eyeball potential support/resistance level, but using this week's range to build an "average." Again, we can't say for certain that this week's trading in the October 800 puts is a true weekly average of $17.30, which might hint at October support of SPX 782, but it's interesting nonetheless that this "782" isn't too far off from our 09/22 calculation using this contract of 780.75. Also interesting to note some of the growth/decline in open interest among the various contracts (compare back to 09/22 update). The December 750 puts (spzxj) continue to draw interest, with potential quarterly support being calculated from this week's range as 723. Hey! That right about what we calculated a week ago in the Dec. 750's. If your trading October expiration, I think its important to understand how the 60-minute intervals help define IMPORTANT action points. If you like to trade in options and view them as an opportunity to control risk and expose less capital in a trade, but don't like the volatility, note the WEEKLY ranges between October and December expirations. Be honest with yourself with regards to how volatility impacts YOUR emotions. We all get "big eyes" when we understand an option went from $4 to $12 in a week, but get a shrinking stomach when the trade goes the other way. S&P 100 Index Chart - Daily Interval I don't have much to add to the OEX that I didn't say in the SPX. Resistance now looks formidable from 435-440 and traders will be using the 21-day SMA, currently at 438.40 as a trailing stop. A break below 405 generates another sell signal on the point and figure chart. It's interesting and perhaps useful to and SPX trader that the OEX bearish vertical count is ABOVE the recent lows at 390 OEX. While an SPX bear may have his/her eye's set on 715 longer-term, it might be worth monitoring the OEX and your SPX trade should the OEX fall to 390. Please remember, the bullish and bearish vertical counts are used to help assess potential longer-term upside and downside. Some can be exceeded, some are traded almost to a dime, while some are never reached. Well... my q-charts froze up on me and now I've lost my bar charts for the NASDAQ-100 Index (NDX.X) 860 -1.53%. So let's look at the NASDAQ-100 Index Tracking stock (AMEX:QQQ) $21.31 -1.34%. I spent some time in today's market monitor outlining a bearish trade in the QQQ and then again in today's 01:00 PM EST Update. While the QQQ fell just -1.34% on the day, but from market monitor profile at $21.87 (12:48:44) and close of $21.39, the 2.19% decline wasn't too bad. The question now is will the decline continue. I think so, but will follow with a stop just above $22.33 to be safe. NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval I view today's close back below our $21.44 level of retracement support as negative and now has the lows of $20.65 in play and target of $20.20 also in play. There were a lot of stocks that really saw some downside movement after the Dow Industrials broke below the 7,840 level and really hints that market makers and specialists really backed off their bids. Oh they kept the bids large enough to provide some liquidity to selling bulls, but there wasn't a lot of size available. It wasn't until about 30-minutes before the close that I did notice several NYSE listed stocks "firm up," but there also wasn't a lot of selling hitting bids either. To me this late-day action depicted a market that was selling into the weekend, especially when the Dow started losing support as of to say... "we'll get them next week." But then... that's what bull's might of thought last Friday. Here's a look at this week's major market index and various sector action. I need to make note that last week's "Since 12/31" was incorrect. I calculate the various % declines in Microsoft Excel and didn't change that column's formula to properly reflect the year-to-date change. I've double checked this week's spreadsheet and believe it to be accurate. Weekly Index / Sector Changes Networking (NWX) and Fiber (FOP), two of my most "loved-to-hate" sectors in the past year (on the thought that telecom services companies as depicted by the IXTCX and XTC won't increase spending), got hammered hard this week, especially today when telecom service provider and Dow component SBC Communications (NYSE:SBC) $20.15 -7.99% said it was going to further cut jobs along with capital expenditures. That news had Cisco Systems (NASDAQ:CSCO) $11.23 -1.13% undercutting its 52-week low of $11.14 by a penny on an intra-day basis and an old friend from the past in Ciena (NASDAQ:CIEN) $3.18 -8.09% closing at a new 52-week low. Airlines got hammered once again on a weekly basis and really weighed on the Dow Transportation Index (TRAN) 2,185 -3.71%. Semiconductors (SOX.X) performed relatively well on a weekly basis as well as today. This index has traded "inside days" for two consecutive sessions. A break above today's highs of 257 could drive some bullish tech action, while a break below today's lows of 245, could have the proverbial plug being pulled for a flush lower. These "inside days" are similar to little "triangles" on a point and figure chart, but depict that supply and demand are battling it out. Sometimes, on the break of direction from the short-term consolidation, one side gives in (bulls or bears) and a powerful moved can take place from the break of consolidation. Jeff Bailey ************************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 ************************************************************** ************** Editor's Plays ************** Little Brother is Watching Last week I profiled INVN and ADRX as longer-term plays. INVN had a nice week despite the negative market conditions and ended up +2.00 for the week despite a profit taking dip on Friday. This play got off to a nice start. ADRX also rose dramatically after an early week dip with the market. This is a long term play that is waiting on a pending drug patent decision that would make Prilosec available as a generic. ***************** CPS - ChoicePoint $32.75 Today I want to highlight another recovery candidate. The company specializes in background checks. Yawn! This is exactly what I thought until I heard Ron Baron, President of Baron Capital on Rukeyser on Friday night. Baron manages $5.5 billion and has the number two midcap growth fund out of 700 and the number one small cap growth fund out of 200 tracked by Morningstar over the last nine months. He said this company has gathered more information about individuals than the FBI, CIA and all the government organizations together. They have court records, criminal records, gun permits, drivers licenses, traffic tickets, credit reports, tax liens, etc on almost every individual and company in America. This is scary. However scary the thought of having an individual company accumulate these records on everyone the bottom line is that they are charging everyone including the FBI and CIA, which are their biggest customers, to access them. With the increased security environment we are moving into this company is in the right place at the right time. Ron Baron said they get an average of $15 a background check now but as more critical record elements are added to their files he expects them to get as much as $100 for a comprehensive check later. I did some research on my own and despite not being able to find out why the bottom fell out of the stock on Friday I was amazed by all they do. They provide insurance scores on you for homeowners insurance as well as auto insurance. This is the big thing that was discussed on CNBC last week. Insurance companies charging more for insurance based on an overall score that includes credit reports, insurance claims, criminal history, etc. While I personally don't like the idea that this information is available to anyone with a credit card OR even the government for that matter, I can't argue with their future. They have quietly gathered an enviable amount of data and a method for organizing it for immediate retrieval. In the big brother world of airline hijackers and terrorist infiltration this instant background info would go a long way toward preventing the bad guys from being in the right place at the wrong time. I said earlier that the bottom fell out of the stock on Friday. I could not find anything anywhere that would account for the selling. Considering this company was less than $10 five years ago it could be profit taking by funds for tax loss purposes as I mentioned in the market wrap this weekend. This is just a guess and I would want to see some rebound before jumping blindly into the stock. The April-2003 $35 call was the lowest strike you could get a quote on Friday night. CPS-DG was ask at $3.30. The $30 strike CPS-DF was showing on Qcharts but with no price so I assume it will be available on Monday. I wish this company had leaps but it doesn't. The stock hit a session low at 2:24 on Friday and then traded sideways the rest of the day despite the market crash. It is entirely possible a fund was liquidating profits and was trying to raise money before month end. With 1.8 million shares traded (six times average volume) I am surprised it did not drop more than the -3.75. I think this shows there were buyers waiting. Remember the Dow was down -295. Ron Baron was pounding the table on this stock on Friday. Doomsayers will say he was protecting his position from further drops. I believed him enough to think this was a buying opportunity. I would like to watch it for a couple days and only buy if there is an uptick. When the unexplained happens it is best to see if a reason appears. If we watch for $2-$3 it will not matter that much in the long run. With the markets likely to go lower I could see ALL stocks going lower including this one. My preferred entry point would be a limit order at $30 for the $35 April call option. That allows seven months for a small rebound if we are lucky enough to get filled at $30. If a $30 put strike appears on Monday for November I would buy it in a heartbeat as a hedge against a drop through $30. I would then put in my order for an April $35 call at $30 and hope for a drop. The profit in the put over the next two weeks could pay for the April call. That is exactly where I would close the put. When the profit paid for the call. Pigs get fat, hogs get slaughtered. There is strong support at $30 so I would not expect it to fall much further. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Third Time's a Charm by Steven Price Boy, that was quick. This morning's economic data wasn't that bad. GDP slightly came in slightly above expectations, at 1.3% and Consumer Sentiment was basically in line with expectations, at 86.1. While the Sentiment reading of 86.1 was down for the fourth straight month, it just barely missed the preliminary reading of 86.2. Most of the drop was focused in consumers' economic outlook, with the current conditions index falling from 98.5 in August to 95.9 in September. The Dow opened down only slightly. This was quite a surprise after Philip Morris' warning last night after the bell was accompanied by SBC's layoff announcement. After looking for a big drop on the open, it appeared the day would be just another boring, low volume Friday. Of course, there hasn't been a boring, low-volume, non-holiday in months, so I should have known better. The Consumer Confidence number came out mid-morning, and was followed by a slight rally. However, the news from several sources began to overwhelm the bulls and it was slowly downhill from there. GE reaffirmed its guidance, but CFO Keith Sherin said that 2003 was looking more challenging than had been expected previously. This sounds as though a warning for next year may not be far off. Apparently investors agreed, as the stock sold off $1.92 (7%) to close at $24.47. Delta Airlines then warned, stating that it would lose $350 million in the third quarter and would layoff 1,500 flight attendants. It said travel in September was worse than even the lowest forecasts and fueled bankruptcy speculation. Delta finished the day down $2.81 (24%) at $8.69. Retailers took a tumble after Children's Place (PLCE) warned that 3rd and 4th quarter earnings would fall short of estimates, due to weak sales in September. Same store sales had fallen 30% for the month of September and 22% for the quarter, so far. Analysts were expecting a profit of 0.57 for the third quarter and 0.72 for the fourth. The company now said it would only break even, at best. The stock lost $4.99 (31%) to close at $11.15. One bright spot, if you can consider a 0.71% loss a bright spot, was the semiconductors. I've been beating up on this sector for some time now, but it appears to have found at least a temporary bottom. The index lost a third of its value between the August 22 and September 23, when the Semiconductor Sector Index (SOX.X) closed at 236. The index rebounded over 250, and has held steady in that range, closing today at 246.58. While it was still in the red, it showed great relative strength. It may simply be compressed to the point where the sellers are exhausted for the time being and I'm not ready to get long this group just yet. The HMOs and Health Providers showed a gain, as well. This is likely due to recent news from Tenet HealthCare that its earnings would beat estimates by $0.05. Higher patient fees are expected to give hospital profits a boost this quarter, and this was reflected in the increase of the Morgan Stanley Health Provider Index (+0.59 %) and the Morgan Stanley Health Care Index (+0.25%). In addition, a Thursday court decision, which allowed 600,000 physicians to bring a class action fraud suit against U.S. HMOs, also denied class-status to approximately 145 million patients served by the providers. This may be contributing to the sector's strength, as well. Today's near 300-point drop in the Dow all but erased the gains of the last two days. The only bullish (and I use this term loosely) sign that can be found is the rebound back over 7700 at the close. The index finished down 295.67, to close just off its lows, at 7701.45. We have now landed near the July closing lows twice this week. Tuesday saw a close 19 points below that level, and today we ended 1 point below. What seems equally significant is that the bounce after the first test was turned back soundly at 8000. Because we have now tested support on three occasions at this level, my guess is that a drop through it will be severe. The next target to the downside is 7532, which is the intraday low from July 24. There is some support around 7400 from 1997 and 1998, as well. However, I think if we can get through 7500, we will be testing 7000 rather soon. At the same time, the other silver lining can be found in my earlier statement, is that we have tested SUPPORT here on three occasions. If we are going to bounce, this looks like the level at which it will happen. If we follow through with the current drop on Monday, I will be short ASAP. If not, I will be watching 8000 as the pivot point to the upside. A tick above 8000 is not going to be enough, however, as it will take a close above that level to push me out of the way. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7532 Current : 7701 Moving Averages: (Simple) 10-dma: 7978 50-dma: 8419 200-dma: 9538 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 827 Moving Averages: (Simple) 10-dma: 849 50-dma: 886 200-dma: 1038 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 843 Current : 860 Moving Averages: (Simple) 10-dma: 873 50-dma: 932 200-dma: 1251 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): I think I need to quit beating up on this sector, as it has been flexing a little muscle lately. The index gave up less than 1% on a day when the Dow was down almost 300 points. After bouncing at 230, the SOX seems to have found a home around 250. If these stocks have truly been sold down to proper valuations, they could be laying the groundwork for a turnaround. The broader markets will need to find a bottom first, but these gave us the first signs of underlying weakness in the middle of August, and now they are showing some strength. 52-week High: 657 52-week Low : 236 Current : 246 Moving Averages: (Simple) 10-dma: 252 50-dma: 305 200-dma: 464 ----------------------------------------------------------------- Market Volatility The VIX is still over 40, and looks to be headed much higher. If the current level of support, dating back to July, breaks down, then we could see 50 very soon. The trend of higher lows and higher highs is the reverse of the broader indices. While VIX spikes are usually followed by market rallies, right now we are seeing a slow progression upward, which doesn't seem very bullish. CBOE Market Volatility Index (VIX) = 43.14 +3.02 Nasdaq-100 Volatility Index (VXN) = 57.86 –1.23 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.88 448,972 397,334 Equity Only 0.67 347,236 232,143 OEX 1.19 23,059 27,382 QQQ 0.46 45,041 20,853 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 33 - 1 Bull Correction NASDAQ-100 22 + 0 Bear Confirmed Dow Indust. 17 + 0 Bull Correction S&P 500 30 + 0 Bear Confirmed S&P 100 25 + 0 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.54 10-Day Arms Index 1.59 21-Day Arms Index 1.49 55-Day Arms Index 1.34 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 690 2034 NASDAQ 978 2200 New Highs New Lows NYSE 31 121 NASDAQ 13 201 Volume (in millions) NYSE 1,777 NASDAQ 1,437 ----------------------------------------------------------------- Commitments Of Traders Report: 09/24/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials reduced long and short positions, however ended up with a net 10,000 fewer short contracts. Small traders reduced both positions, as well, but shortened up their net long positions by 14,000 contracts. Commercials Long Short Net % Of OI 09/03/02 431,755 468,529 (36,774) (4.1%) 09/10/02 426,230 470,537 (44,307) (5.0%) 09/17/02 476,224 503,268 (27,044) (2.7%) 09/24/02 425,276 442,661 (17,385) (2.0%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 09/03/02 158,262 80,130 78,132 32.8% 09/10/02 166,696 85,259 81,437 32.3% 09/17/02 182,243 116,377 64,866 21.7% 09/24/02 124,232 73,506 50,726 25.7% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials reduced long and short positions, but got decidedly shorter, by a total of 4700 contracts. Small traders also reduced positions, however stayed close to flat overall. Commercials Long Short Net % of OI 09/03/02 46,712 53,287 (6,575) ( 6.6%) 09/10/02 53,309 58,745 (5,436) ( 4.9%) 09/17/02 72,522 75,815 (3,293) ( 2.2%) 09/24/02 46,637 54,613 (7,976) ( 7.9%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 09/03/02 11,150 7,720 3,430 18.2% 09/10/02 14,024 10,494 3,530 14.4% 09/17/02 15,288 14,142 1,146 3.9% 09/24/02 11,163 9,421 1,742 8.5% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials reduced positions dramatically on a percentage basis, but got longer overall, by 3200 contracts. Small traders also reduced positions, but flipped from the long side to short overall. Commercials Long Short Net % of OI 09/03/02 21,161 13,792 7,369 21.1% 09/10/02 22,946 14,936 8,010 21.1% 09/17/02 26,863 21,187 5,676 11.8% 09/24/02 18,951 10,074 8,877 30.6% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 09/03/02 6,395 7,966 (1,571) (10.9%) 09/10/02 7,568 10,129 (2,561) (14.5%) 09/17/02 13,393 11,637 1,756 7.0% 09/24/02 7,939 9,453 (1,514) ( 8.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************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 ************************************************************** *************** ASK THE ANALYST *************** Coincidentally by Steven Price Steven, Can you please give me a hand evaluating QLGC. I am holding the Oct 35 puts. After a huge drop yesterday it is holding up remarkably well today. On the bearish side it just gave descending triple bottom alerton a PnF chart, and the next historical support level is under 20.00. On the bullish side it is, for the most part, ignoring today's downdraft. I have a stop in place such that any significant up move would leave me flat, but I struggle with taking profits here or letting things play out. How would you evaluate the situation? I would look at several different aspects of QLogic (QLGC). First of all, I'd look and see what else is going on with the chip stocks, since it falls under that heading. A look at the Semiconductor Index (SOX.X) will give you a snapshot of the environment you're trading in. Since you've already referred to the point and figure chart, I would look at where the stock stands in relation to its targets and support on that chart. I would also look at the daily chart to determine obvious trends and channels, as well as support and resistance lines. A look at the point and figure chart shows something interesting. The current bearish count was just achieved at $27, the same point it held up today. The next sell signal comes at $26.00, but you have earlier support at $27, as well. As far as the descending triple bottom breakout, I'm not sure I see that as clearly as the double bottom it is in right now. There is a succession of lower lows and certainly a pattern of breakdowns from the double and triple bottom formations. A look at the SOX also shows the chip stocks finding support as a whole. The index had been hammered, losing 35% of its value since August 21. It seems to have found some support, whether from current valuations, or an exhaustion of sellers. Now that you've seen support on the point and figure and in the sector, let's look at the daily chart. On the daily Qlogic is at the bottom of a descending channel. It looks like today's rebound was pretty close to the bottom trend line, which indicates some support there as well. If the market breaks down again on Monday, the support levels above may all fall. A trade of $26 is a breakdown on the daily chart and a sell signal on the point and figure and would signal more weakness. However, the stock is currently up against three different types of support. Because I still think the sector has more downside, I would probably either close 1/2 the position and let the other half ride with a tight stop, or tighten the stop above today's high of $27.65. In looking at all of these charts together, you get a better idea of what you are up against and can use that information in determining whether or not to close the position. Please send your questions and suggestions to: Contact Support ************* COMING EVENTS ************* ================================================== Market Watch for the week of September 30th ================================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- WAG Walgreen Mon, Sep 30 -----N/A----- 0.25 ------------------------- TUESDAY ------------------------------ PBG Pepsi Bottling Group Tue, Oct 01 Before the Bell 0.61 SVU Supervalu Tue, Oct 01 After the Bell 0.44 ----------------------- WEDNESDAY ----------------------------- ATYT ATI Technologies Wed, Oct 02 -----N/A----- 0.02 CM Coles Myer Wed, Oct 02 After the Bell N/A FDO Family $ Stores, Inc. Wed, Oct 02 Before the Bell 0.24 THC Tenet Healthcare Wed, Oct 02 Before the Bell 0.65 ------------------------- THURSDAY ----------------------------- EMMS Emmis Communications Thu, Oct 03 -----N/A----- 0.02 MAR Marriott Int’l Thu, Oct 03 -----N/A----- 0.42 ------------------------- FRIDAY ------------------------------- AA ALCOA Fri, Oct 04 -----N/A----- 0.28 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable None -------------------------- Economic Reports This Week -------------------------- Next week is packed with economic reports. Income and spending numbers come out on Monday. Auto sales and construction spending on Tuesday. ISM services on Thursday and more employment reports on Friday. Despite these reports the biggest market moving events will continue to be earnings warnings and misses. ============================================================== -For- Monday, 09/30/02 ---------------- Personal Income (BB) Aug Forecast: 0.5% Previous: 0.0% Personal Spending (BB) Aug Forecast: 0.5% Previous: 1.0% Chicago PMI (DM) Sep Forecast: 53.0 Previous: 54.9 Tuesday, 10/01/02 ----------------- Auto Sales (NA) Sep Forecast: 6.1M Previous: 6.6M Truck Sales (NA) Sep Forecast: 7.8M Previous: 8.8M ISM Index (DM) Sep Forecast: 51.0 Previous: 50.5 Constrction Spending(DM)Aug Forecast: -0.1% Previous: 0.0% Wednesday, 10/02/02 ------------------- None Thursday, 10/03/02 ------------------ Initial Claims (BB) 09/28 Forecast: N/A Previous: 406K ISM Services (DM) Sep Forecast: 51.4 Previous: 50.9 Factory Orders (DM) Aug Forecast: -1.5% Previous: 4.4% Friday, 10/04/02 ---------------- Nonfarm Payrolls (BB) Sep Forecast: 15K Previous: 39K Unemployment Rate (BB) Sep Forecast: 5.9% Previous: 5.7% Average Workweek (BB) Sep Forecast: 34.1 Previous: 34.1 Hourly Earnings (BB) Sep Forecast: 0.3% Previous: 0.3% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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 ************************************************************** ********************* SWING TRADE GAME PLAN ********************* Ready To Rumble? The worst month of the year is ahead of us and the economy may be headed into a double dip recession. War worries are everywhere and oil is over $30 a barrel. The markets closed exactly on the edge of the proverbial cliff. There is one day left in September. Are you ready for October? To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 09-29-2002 Sunday 2 of 5 In Section Two: Stock Pick: FLEX - Flextronics International Daily Results Call Play of the Day: LLL Put Play of the Day: KSS Dropped Calls: ABT Dropped Puts: BGEN, FISV ************************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 ************************************************************** ********** Stock Pick ********** FLEX - Flextronics International - $7.20 Strategy: Long stock with put insurance As the Technology bubble has deflated over the past 2 years, demand for virtually everything technology-related has waned, from business IT equipment to consumer electronics. The Networking, Semiconductor and Storage sectors have all been pummeled to new multi-year lows recently. Against that backdrop, it should come as no surprise that FLEX is currently resting near multi-year lows. That said, it is impressive that the stock is still holding above its July lows, which is in sharp contrast to much of the Technology market. FLEX appears to have found a bottom from which it can rally once signs of a rebound in demand begin to appear. As the largest assembler of other companies' Technology products, this is one company that will roar higher once the recovery begins. Fellow EMS company SLR was upgraded by Thomas Weisel last week due to better than expected earnings, and this could be a leading indicator that FLEX will likewise begin to show a better earnings picture when it reports its Q3 results on October 24th. The forthcoming earnings season will provide an opportunity to gauge how close or distant any recovery in the EMS sector is by listening to what the CEOs of the major Semiconductor, Networking and Wireless product manufacturers have to say about demand in their particular industries. FLEX won't start to move upwards until investors can see the evidence of increasing order flow. But once it starts, FLEX will likely have an impressive run. Apparently we aren't the only ones to notice the value here, as the stock continues to find buying interest every time it nears the $6.50 level, which is just above the $5.85 July lows. Use dips near this support level to enter the play, targeting the $10 level (near the August highs) initially. Once clear of that resistance level (which will require that evidence of improving demand), eager technology bulls will be setting their sights on the $12.75 resistance level, and then $15. The play is to go long FLEX stock at our target of $6.75-7.00 and go long one contract of the Jan-2003 $5.00 puts QFL-MA at $0.55 for each 100 shares you are long. There is no requirement to go long the put but it does prevent all but a very minimal loss should something unexpected happen to FLEX. Option 1: If FLEX is not above $9.00 by Jan 2nd, close both positions and exit the play. Option 2: If FLEX is below $6 on Jan 2nd then you have the option of closing the put for a slight profit and lowering your basis in the long stock play by the amount of the put premium received or closing both positions and exiting the play. Option 3: If FLEX is above $10.50 by Jan 2nd then close the put position for any remaining premium and set a stop loss on the stock at your entry point of $6.75-7.00 plus any short fall on the put premium. ($8.00 max) *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week ABT 40.35 -0.11 0.40 1.30 -1.90 -1.46 Drop,blame WYE LLL 54.91 1.10 0.69 -0.91 –0.94 -0.09 support PUTS BGEN 29.39 -1.35 -0.31 0.76 0.06 -1.35 Drop,slow BSC 56.46 0.39 -1.21 0.07 1.00 -0.54 bear rally CI 71.96 -0.98 -2.04 –0.80 2.70 -0.64 lower premium FDX 50.45 1.05 -0.45 0.80 2.30 2.70 New,out of gas FISV 28.54 -0.62 -0.99 –1.07 0.68 -2.67 Drop, pattern FNM 61.51 1.15 -1.40 -0.38 0.92 -2.84 New, big risk GM 39.79 -0.97 -2.73 1.39 1.95 -2.76 pension probs KSS 64.09 -1.15 -1.45 -0.44 0.29 -4.51 New, breakdown SPC 28.79 0.48 -0.02 -1.23 0.35 -0.88 New,floor gone TECD 27.24 -0.75 -0.28 0.51 –1.64 -3.31 heavy ************************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: ********************* LLL - L-3 Communications Holdings $54.91 (-0.04 last week) See details in play list Put Play of the Day: ******************** KSS - Kohls Stores - $64.09 -3.20 (-5.46 for the 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 ^^^^^ ABT $40.35 (-1.55) Abbott suffered a double dose of bad news the last couple of days. The downgrade on Thursday drove the sock to just below $42. The hold at the PnF breakout level convinced us to give it another day. Unfortunately, Wyeth warned that earnings would fall below estimates this morning, without giving specific guidance. It based this warning on falling sales of its hormone replacement product Premarin, and disappointing results in its vaccine and animal health business. Wyeth gave up $7.35, and dragged the sector down with it. There were not enough buyers willing to step up and keep ABT out of its previous consolidation pattern, so we will drop the play as the trend we were looking to capture has been broken. PUTS ^^^^ BGEN $29.39 -1.01 Biogen has taken the brunt of several downgrades, and yet held its current level for several days. While it gave up $1.01 today, the breakdown we were looking for has not materialized. We have not had the play on very long, and have decided to close out near where we started. If BGEN breaks below $28.50 on Monday, traders may want to consider holding the play, but we are closing it as an official OI selection due to lack of movement. --- FISV $28.54 -0.24 FISV has dropped just over a dollar since we picked it. While this is a move in the right direction, we have noticed a pattern that we do not find encouraging. The last two days the stock has reached higher intraday highs and experienced higher intraday lows. The market suffered a major breakdown today, and FISV lost only -$0.24. At this point we will take our profit on the play and invest it elsewhere. The relative strength is not what we look for in an OI Put Play, as we would have expected a bigger drop, given the activity of the overall market. *********** 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 09-29-2002 Sunday 3 of 5 In Section Three: New Calls: (See Note) Current Calls: LLL New Puts: FNM, KSS, FDX, SPC ************************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 ************** Our current market sentiment is still down, so we are not adding new calls at this time. However, for those readers looking for new call plays, we will place some possibilities on this weekend's Watch List. If you are looking for new calls, please review these selections. ************************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 ****************** LLL - L-3 Communications Holdings $54.91 (-0.04 last week) Company Summary: As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Why We Like It: Beginning on a bearish note on Friday following more negative earnings news, the broad markets drifted lower through midday when it really took a turn for the worse. Most sectors ended the day in the red, and the Defense Industry index (DFI.X) shed nearly 3% by the closing bell, coming right back to the $560 support level. LLL continued to consolidate on Friday, slipping back by a bit more than 2%, and once again finding support near the $54 level. Recall that the $53.50 level has provided strong support recently, and with the 2-month ascending trendline now resting at $54, the 200-dma at $53.44 and the 20-dma at $54.47, this could prove to be a solid level we can use for new entries early next week. Look for a dip to and rebound from this area of support before initiating new positions, and make sure to confirm renewed strength in the DFI index before playing. Our stop remains at $53.50. Traders looking for confirmation before entering will want to wait for LLL to push back above the $56 level first. Keep in mind that part of our basis for this play is that the stock (and sector) should continue to benefit from escalating war tensions, and any uptick in those tensions should have the bulls focusing their attention here next week. BUY CALL OCT-55*LLL-JK OI=2138 at $2.60 SL=1.25 BUY CALL OCT-57 LLL-JY OI=2815 at $1.50 SL=0.75 BUY CALL NOV-55 LLL-KK OI= 32 at $4.20 SL=2.50 BUY CALL NOV-60 LLL-KL OI=1150 at $2.00 SL=1.00 Average Daily Volume = 1.80 mln ************* NEW PUT PLAYS ************* FNM - Fannie Mae - $61.51 -3.36 (-3.09 for the week) Company Summary: Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation's largest source of financing for home mortgages. Fannie Mae is working to shrink the nation's "homeownership gaps" through a $2 trillion "American Dream Commitment" to increase homeownership rates and serve 18 million targeted American families by the end of the decade. Since 1968, Fannie Mae has provided $4 trillion of mortgage financing for more than 45 million families. (source: company release) Why We Like It: While much of America has rejoiced over low interest rates and the ability to refinance mortgages, Fannie Mae has not been so lucky. As homeowners refinance and buy in old loans, those loanholders are left trying to replace high interest payments with low interest payments. Not a very good equation from their standpoint. There is speculation that Fannie Mae will have to purchase as much as $100 billion worth of ten year bonds, which has resulted in an Intermediate Treasury rally over the last week. The speculation is that FNMA needs to balance its $750 billion risk portfolio, which has ballooned due to mortgage refinancings, as FNMA's mortgage assets have shrunk relative to its liabilities. As rates continue to drop, and refinancing steams ahead, FNMA takes on more risk that it will eventually need to hedge. That risk hedge could cost it plenty of money. On Thursday, worries about Fannie Mae's difficulty in managing its interest-rate risk prompted a large 10 basis point widening in agency debt spreads over Treasuries. With two for the FOMC Fed governors now leaning toward further rate cuts, the likelihood of a reversal of interest rates to the upside becomes less likely. In addition to the immediate portfolio risk, there has been talk of privatizing the agency completely, erasing its current quasi- government status. This would subject FNMA to the same audits, SEC rules and risk requirements as other lenders and could inflict more damage on the already troubled institution. Investors and institutional holders have taken notice and piled on, with the stock dropping from a recent high of $77.00 on September 9 to today's close at $61.51. The stock has bounced off the $61.50 level on three occasions this week, with today's close of $61.51 its weakest recovery yet from that point. The stock is in a descending channel on the point and figure, and a trade of $60 will provide a fresh sell signal on a descending triple bottom breakdown. The current bearish vertical count is $50, but if the risk problems continue to mount, that goal may be conservative. We will be looking to go short at the current level. This trade is a somewhat volatile one, and not for the faint of heart. However, there are several scenarios for more conservative traders, as well. OI sees either a trade of $60, or a close below $61.50 as additional trigger points. If the market gets a bounce after today's big drop, a failed rally under $65 would also provide an ideal entry point. We will use a stop loss of $65, as well. Although this may seem to give us a lot of room to the upside on a short play, we feel the current volatility in the stock justifies such a range. BUY PUT OCT-65 FNM-VM*OI= 5697 at $5.30 SL=2.50 BUY PUT NOV-60 FNM-WL OI= 575 at $4.20 SL=2.00 Average Daily Volume = 4.95 mil --- KSS - Kohls Stores - $64.09 -3.20 (-5.46 for the week) Company Summary: Based in Menomonee Falls, Wis., Kohl's is a family-focused, value-oriented specialty department store offering moderately priced national brand apparel, shoes, accessories and home products. The company operates 420 stores in 32 states. Why We Like It: Kohl's has suffered the same fate as its brethren in the retail business. There has been a sales slowdown in the month of September after Wal-Mart and Federated had previously reported sales to be on track with guidance. For the last several months, retailers have guided downward as each month has worn on, and this month looks to be more of the same. The biggest problem with retail sales still being slow is that the holiday shopping season is just around the corner. If the trend toward lower consumer spending does not turn around, the effects will be felt much more severely in the next few months. Most retailers derive an inordinate portion of their revenue from sales in the last couple of months of the year. Therefore, without signs of an economic turnaround any time soon, it may be a year before they have a chance to recoup this year's losses. KSS had flirted with support at $65 since the beginning of August. It also had been on a series of higher highs and higher lows, making shorts a bet against the tide. That pattern has reversed itself in what appears to be a double top formation on the daily chart. The stock recently broke down below its 10, 50, 100 and 200 dmas, after setting the second lower top. The breakdown below $66 led to a new double bottom point and figure sell signal and the intraday trade of $64 placed the stock right on top of its bullish support line. A trade of $63 would constitute a break in bullish support and can be used as a trigger point for more conservative traders. We like the trade below $65 as a signal to short the stock, and will initiate the position here. Today saw a big drop in the stock, as well as the Dow, so a "dead cat bounce" is a possibility on Monday. If the market does bounce, a failed rally below $66, the point of previous PnF support, may provide an additional entry point as well. The current bearish vertical count is $52, but that could wind up even lower, as the current column of "O"s is defining that count. Our initial target on the play will be the PnF support level of $57, however, if consumer spending does not improve, we may let the position ride if it reaches that level. Place stops at $67, above today's high. BUY PUT OCT-65 KSS-VM*OI= 4558 at $3.50 SL=1.75 BUY PUT NOV-65 KSS-WM OI= 1240 at $4.80 SL=2.50 Average Daily Volume = 10.1 mil --- FDX " FedEx Corporation $50.45 (+2.70 last week) Company Summary: FedEx Corporation is a global provider of transportation, e-commerce and supply chain management services. Services offered by FedEx companies, through over 215,000 employees and contractors, include worldwide express delivery, ground small-parcel delivery, less-than-truckload freight delivery, supply chain management, customs brokerage, and trade facilitation and commerce solutions. Why We Like It: Last week's brief rally attempt helped drag the Transports ($TRAN) up for a couple nice days of gains. But like so many prior attempts in recent months, this one was doomed to failure, right at the 50-dma ($2275). With the broad market weak on Friday, the sector was already under pressure and then came the earnings warning from DAL. While this wasn't unexpected, it did further pressure the overall group. We played the downside in shares of FDX in mid-September ahead of the company's earnings report, and it looks like it is time for a repeat performance. FDX handily beat estimates on September 19th and after reaffirming estimates for 2002 and 2003, the stock shot significantly higher in the intervening time. But that momentum seems to have waned, as the stock reversed sharply from its 200-dma on Friday, losing nearly 3%. This is clearly a higher-risk play, as we're trying to pick a top in the stock. But with the overall market looking to be headed south and the knowledge that shipping volumes are falling, it appears that the odds are in our favor. With major resistance overhead in the $52.50-53.00 area, and daily Stochastics just beginning to roll over in overbought territory, risk appears easy to manage here with a $53 stop. Use a rally failure below the 200-dma to initiate new positions, or else wait for a decline under the $50 level. Confirm continued weakness in the $TRAN before entry. BUY PUT OCT-55 FDX-VK OI= 600 at $4.90 SL=3.00 BUY PUT OCT-50*FDX-VJ OI=2048 at $1.65 SL=0.75 BUY PUT OCT-45 FDX-VI OI=4697 at $0.50 SL=0.25 Average Daily Volume = 1.84 mln --- SPC - The St. Paul Companies, Inc. $28.79 (-0.87 last week) Company Summary: SPC is an insurance organization, based in the United States. The company is a management company principally engaged, through its subsidiaries, in providing commercial property-liability insurance and non-life reinsurance products and services worldwide. SPC also has a presence in the asset management industry through its 77% majority ownership of The John Nuveen Company. As a management company, SPC oversees the operations of its subsidiaries and provides them with capital, management and administrative services. Why We Like It: Beginning with the recent downgrade by Fitch of a basketful of life insurance stocks, the entire Insurance sector (IUX.X) has been having a rough go of things lately. Sure there was a bit of artificial buying to prop up the group in the middle of last week, but that fell apart on Friday, with the IUX sliding 3.74% by the close. That got us to looking at some of the weaker Insurance stocks, one of which appears to be SPC. While it hasn't broken down yet, it appears that selling pressure in the overall sector as well as the broad market will accomplish that for us. Note the stock's loss of more than 5% on Friday? That dropped SPC back to just above the $28 support level, but the more important level is $27. When SPC prints $27, it will put the PnF chart back on a Sell signal, opening the door for a decline all the way to the $20 level. Until we get that confirmation though, we need to play cautiously. Failed rallies below the $30 level should make for solid entries into the play, but those waiting for confirmation will want to see SPC drop below $27 before initiating new positions, ideally with the IUX index falling back under the $236 level that provided support last week. Due to the tenuous nature of this play (at least until we get that breakdown), we are setting our stop tight at $31. BUY PUT OCT-30*SPC-VF OI=176 at $2.10 SL=1.00 BUY PUT OCT-25 SPC-VE OI=101 at $0.40 SL=0.00 Average Daily Volume = 2.12 mln ************************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 09-29-2002 Sunday 4 of 5 In Section Four: Current Put Plays: BSC, CI, GM, TECD Leaps: (See Note) Traders Corner: If At First You Don’t Succeed... At Least Learn Something! Traders Corner: Title Here ************************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 - $56.46 -1.46 (-1.26 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: BSC $56.46 Bear Stearns rebounded with the rest of the brokers as the Dow surged on Wednesday and Thursday. It approached our stop loss of $59, which was the top of its current descending channel, and promptly rolled over. While the sector got a break from the recent sell-off, it didn't last long. The problems in the sector haven't changed. A sagging market has all but put a stop to IPOs and investment banking revenues are down significantly. Merger and acquisition activity has declined 44% from the $247 billion worth of deals in the third quarter of 2001. Year to date deal volume has seen a similar decline. Investors have pulled their money out of the market at a record pace. August saw "only" a $5 billion drain on stock funds, after July's record $50 billion. That $5 billion came out during a month when the market was up, the first time that has happened in 14 years. After the September swoon, those numbers should get even worse. Trading revenues are down for the sector, leading to a big earnings warning from J.P. Morgan and Lehman Brothers missing estimates. All bear markets have some bounces on the way down and Wednesday and Thursday's gains appear to be just that. The Securities Broker Dealer Index (XBD.X), which finished the day down 13.94 to close at 366.34, rolled over below its 50-dma to continue its series of lower highs and lower lows. It has not yet reached the intraday lows it saw in July and August (330- 340), but with the Dow and Nasdaq both below those levels, it probably won't be long. New entries in BSC can look for a trade below $55 for signs of a continuing breakdown, or a possible rollover on a rally below $59. BUY PUT OCT-60 BSC-VL OI= 5231 at $4.60 SL=2.30 BUY PUT OCT-55 BSC-VK OI= 2757 at $1.95 SL=1.00 Average Daily Volume = 1.22 mil --- CI - CIGNA Corporation $71.96 (-0.81 last week) Company Summary: CIGNA is an employee benefits organization in the United States. The company and its subsidiaries are major providers of employee benefits offered through the workplace, including healthcare products and services, group life, accident and disability insurance, retirement products and services and investment management. Why We Like It: After a couple days of end-of-quarter buying, the broad markets took another big tumble on Friday, wiping out most of the intra-week gains. Just as Financials and Insurance stocks led the way higher on Wednesday and Thursday, they led on the way back down on Friday. After pushing up near the $250 level at the close on Thursday, the Insurance index (IUX.X) did an about face, losing 3.74% on Friday and coming to rest just above the $240 support level. CI caught our attention again last week after its big breakdown under the $75 level, and just as expected, the stock saw a bit of an oversold bounce from the $71 level. But it didn't last long as, the sellers were back in control on Friday, driving the stock back down to the $72 level and erasing all of Thursday's gains. Traders that took advantage of the double-top near $74.50 on Friday are looking good right here ahead of a probable breakdown on Monday. While we might get one more bounce before the end of the quarter, it is clear that the trend is down, both for the stock and the sector. Look for another failed rally in the $73-74 area to provide for attractive entries ahead of the breakdown. Those preferring to enter after the violation of support will need to look for a decline under $69.75 before initiating new positions. Note that $69.86 was the intraday low last November, and once below that level, should quickly fall to next support near $65. Keep stops set at $76. BUY PUT OCT-75 CI-VO OI=322 at $4.70 SL=2.75 BUY PUT OCT-70*CI-VN OI=632 at $2.35 SL=1.25 Average Daily Volume = 982 K --- GM – General Motors $39.79 (-3.14 last week) Company Summary: Maintaining its position as the world's #1 maker of cars and trucks, GM has managed to diversify its business so that it is more than just a car company. Its automotive business encompasses the Buick, Cadillac, Chevrolet, GMC, Oldsmobile, Pontiac and Saturn brands, as well as others through its affiliations with Suzuki, Saab, and Isuzu. Non-automotive operations include Hughes Electronics (satellites, communications), Allison Transmission (medium and heavy-duty transmissions), and GM Locomotive (locomotives, diesel engines). GM has successfully spun off Delphi Automotive Systems, the world's #1 auto parts maker. Why We Like It: Sputter, sputter, stall. That's what happened to GM's attempted rally on the heels of Wednesday's mildly positive comments about the European division still targeting breakeven for 2003. With negative comments surfacing about major companies on Thursday and Friday, the bulls just didn't have the conviction going into the weekend, as window dressing became window undressing. The DOW slid back sharply on Friday, with only KO ending the day in the green. After last Tuesday's dip to just above $38, the PnF vertical count grew to $27. Without enough of a bounce to give a 3-box reversal, that target could actually fall further next week. But first things first. GE ran out of steam right at the 10-dma ($41.83) on Thursday, and the continuous selling pressure on Friday had the stock dropping under the $40 level in late afternoon trade. It is hard to imagine what will motivate buyers next week with the end-of-quarter buying coming to an end, and evidence continuing to mount that the consumer is losing interest in going further into debt, even at zero percent. Use any brief rally in the $41-42 area as an attractive entry into the play or else wait for a breakdown under $39.50. We need to be careful with momentum based entries in the $38-36.50 region as there is significant historical support here dating back to 1993-1995. Keep stops set at $43.50. BUY PUT OCT-40*GM-VH OI=7471 at $2.60 SL=1.25 BUY PUT OCT-37 GM-VU OI=3066 at $1.70 SL=0.75 Average Daily Volume = 5.34 mln --- TECD – Tech Data Corporation $27.25 (-3.46 last week) Company Summary: Tech Data Corporation is a provider and distributor of information technology products, logistics management and other value-added services. The company distributes microcomputer hardware and software products to value-added resellers, direct marketers, retailers corporate resellers and Internet resellers. TECD and its subsidiaries distribute to more than 80 countries and serve over 100,000 resellers in the United States, Canada, the Caribbean, Latin America, Europe and the Middle East. The company's broad assortment of vendors and products meets the customers' need for a cost-effective link to those products through a single source. Why We Like It: So much for getting a dead-cat bounce for an entry. Following its breakdown under the $30 level, TECD had the odds stacked against it going into the weekend. Add in the heavy selling pressure that materialized in the broader market, and the stock never had a chance. After a brief push up to just below $29 early in the day, it was all downhill from there, with TECD shedding another 4% on the day to close just above $27, and looking like our initial $25 target is a sure thing. We now have to go all the way back to April of 2001 to find any support under current levels. That support is staggered between $27, and the January-2001 low at $25. A drop near that level will make for a good opportunity to harvest at least partial gains on the play, as it will more than likely get at least a mild bounce from there. Because of the support between here and $25, we want to look for the next failed rally to enter new positions. A mild rebound could give us an entry near $28, but the better entry would come from a rollover near the $29 level, which now appears to be significant resistance. Lower stops to $30 this weekend. BUY PUT OCT-30 TDQ-VF OI=1047 at $3.70 SL=2.25 BUY PUT OCT-25*TDQ-VE OI= 161 at $1.35 SL=0.75 Average Daily Volume = 718 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 ***** Due to technical difficulties, LEAPS will be posted on Monday ************** TRADERS CORNER ************** If At First You Don’t Succeed... At Least Learn Something! By Mike Parnos, Investing With Attitude Between Liz Taylor and Mickey Rooney there were more than 12 failed marriages. They’re probably not done yet. What do repeated failures tell you? How many times do people have to repeat a pattern and suffer the consequences before they stop that behavior? Believe me. It’s amazing how good it feels when you stop banging your head against the wall. Couch Potato Trading Institute students are taught reality in the form of disciplined trading. The realities of life are harsh, but they have to be dealt with. If you ignore them, you pretty much deserve whatever happens. Hence the saying, “Fool me once, shame on you. Fool me twice, shame on me.” _____________________________________________________________ Mike, Six months ago I sold a strangle. I planned to wait to option expiration benefiting from premium decay, not knowing a better time to exit the position. When is the best time to close the position (any strangle) if your opinion on the stock does not change despite the swings in the stock and in the market? The position has had both paper profits and losses. I plan to let the calls expire worthless and would like to continue to sell puts and potentially benefit from future decay in time value. Also selling the call side for another strangle is an option. There is no significant time value premium remaining now so there is a disadvantage to remain in the same position and not entering into another where there is time value decay. The question is what are worthwhile reward/risk strategies for follow up action on the puts when they become deep in the money? I remain optimistic on the stock, but believe that all stocks may suffer from deflated PE ratios if the July lows or 1997 - 1999 lows are tested. I am not married to this stock and am willing to close the position at a loss. Losses are potentially more acceptable if one learns from them and has better strategies in the future!!!!!!! IDPH -- Sold Strangle: 20 October $75 calls at $5.30 & 20 October $55 puts at $7.10, Total premium received: $24,800 Response: I consider exiting a position once the position achieved about 75% of the target profit – and there is still a significant amount of time remaining before expiration. In the 6-month position you describe, you’re aiming for a profit of $12.40. If I could buy back the two short positions for $3.10 with two or more months to go, I’d jump at it. It’s not worth the additional two months of exposure for the $3.10. Unfortunately, IDPH didn’t cooperate. When this response was written, IDPH was trading at $37.71. It’s a pretty good bet that the October $75 calls will expire worthless. IDPH would have to more than double in less than a month for you to be concerned. You can buy them back at $.05 if you’re concerned. The October $55 puts are $17.29 in the money. The longer you hold them, the more risk you have of being assigned the stock prior to expiration. Right now, to buy them back, would cost you $17.50. That’s only $.21 of time value. Stranger things have happened. Do you want to own 2,000 shares of IDPH? I don’t think you do. Now I’m going to scold you. You didn’t have a plan when you entered the trade. Any _______ (you fill in the blank) can sell a put or a call. But, the CPTI credo tells you – mierde happens. You have to know when to hold em and know when to fold em – before you ever hit the “buy” or “sell” button. If you don’t know how to cover your ass-ets, don’t moon the market. IDPH recently broke below its 30-day moving average. You may be positive on the stock, but do you think it’s going to magically reverse trend and regain over $17 of value? That’s almost a 50% increase from current levels. What can you do? Fortunately, you said you’re not married to the stock. Apparently, you’re not married to your money either. How can you stop the bleeding? You wrote that you took in $24,800. At this level, it would cost you $35,000 ($17.50 x 2,000) to buy back your 20 contracts of the $55 IDPH puts. That’s a $10,200 haircut and lesson. Do you think you have a better chance of making back the loss in IDPH or with another vehicle? If you truly believe in IDPH (along with the Easter Bunny), you could buy some insurance in the form of a November $35 put for $3.50. That would cost $7,000 ($3.50 x 20 contracts), but it will protect you on any loss below $35 and give IDPH two more months to move back up. If, when IDPH broke below $55, you shorted 2,000 shares of stock, you could have nipped the problem in the bud. You may want to review my past columns in Option 101 and Traders Corner in which we have tracked a hypothetical Iron Condor trade of BBH. That is not too unlike a sell straddle and the choices of action when a strike price is violated are similar. Mike, For the IDPH strangle I was thinking of letting the calls expire and buying the puts at a loss and making up the loss by rolling into another option contract: I would buy the 20 October $55 puts IDKVK at 17 paying 34,000 manifesting a 10,000 loss and selling 100 January 20 puts IDKMD at 1. I could sell many more than 100 if this a good investment to try to convert the loss beyond a neutral carry forward roll into a profit? Should IDPH be higher than $20 on January expiration, I would then convert the carry forward loss into no loss. If I sell the January $65 IDPH calls at $.35 to make another strangle, the return would be an additional $3,500. Response: You certainly can roll your puts from 20 October contracts to 100 January contracts and that would make up your loss. Being $18 out of the money, your chances are pretty good. You are dramatically increasing your exposure and you are tying up a bunch of margin for about four months. If the size of your account can handle it, then you're in better shape than most. Your selling the calls is a good idea too. I'd consider selling the $22.50 puts instead of the Jan. 20s. They're selling for $1.40 and then sell the $60 January calls for $.70. That way you can take in a total of $2.10 and would have to sell only about 50 contracts of each instead of 100 of each and IDPH could trade between $22.50 and $60. That’s a nice big comfort zone. Your exposure would be significantly less. Another Alternative: If you continue to be neutral to bearish on IDPH, you might want to sell the calls one or two months out, at slightly lower strikes, to generate a little more income while you’re waiting for January expiration. For instance, you could have picked up about $.60 for the November $55 calls. IDPH hasn’t traded anywhere near $55 since April, so your chances of the Nov. $55 calls are excellent. Then, at Nov. expiration, you could sell the January $55 calls for another $.60. Obviously, the strike that you sell in January could be adjusted up or down depending on where IDPH was trading. The point is, that by selling the near term calls instead of the January calls, you could conceivably take in a total of $1.20 on the short calls. If you only sold the January calls, you would have brought in only $.70. That extra $.50 x 100 contracts is $5,000. That’s a down payment on your new Rolls. ______________________________________________________________ Mike, I closed half my straddle position on Q's last week (Oct $26 Puts) and have a cost basis of $.15 in the Oct $24 Calls. I am still long the Oct $25Puts and $23Calls . I need another $.60 cents out of the $25P's to cover the cost of the entire position. Response: So you now are rooting for the QQQs to go up so your Oct. $24 calls will appreciate. At the same time, you want the QQQs to go down so you can sell your Oct. $25 puts and then be long the $23 calls. When the QQQs dipped below $20 recently, didn't that give you a chance to liquidate the $25 puts at a good price? That would have left you with both the $23 and $24 long October calls and you could be rooting for only one direction -- long. _____________________________________________________________ Iron Condor Update: BBH finished this week at $79.59. We got bounced around plenty this week. We thought BBH had finally picked a direction – down. But it made up ground and touched $81.99 today (Friday). So, once again we’re short the 1,000 shares. Our profit is intact (less a few more commissions). Life goes on. ______________________________________________________________ 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 ************** Chart Gaps: At Trend Reversal Tops & Bottoms - By Leigh Stevens firstname.lastname@example.org As I indicated in my earlier Trader’s Corner article – 9/26 at: http://www.OptionInvestor.com/traderscorner/092602_2.asp “common” chart gaps occur frequently enough so that you may stop noticing them after a while, as highlighted on the chart below – Circles are drawn around most of the “common” gaps in the chart above and as you can see, they are quite numerous - at least for this stock during the period shown. The sometimes numerous nature of gaps should not obscure the important pattern information provided by gaps. Sometime, after there is a trend already established, a stronger, more accelerated move begins and a bigger gap may occur that qualifies as a breakaway gap – this is showing that one side or the other (buyers or sellers) is now more firmly in control. There may be more chart gaps seen around the early part of a trend phase that has accelerating momentum either up or down. Accelerating momentum refers to prices going up or down at a faster and faster rate; e.g., a stock were going up about 10% a year, but along comes a year or years where it starts averaging a 20% year over year gain. Or the stock or an index starts falling at an increasing rate – chart gaps often develop at these junctures and a often of the breakaway type gap when trends go from up to down or vice versa. Looking at downside moves and the periods where prices accelerate downward at a faster and faster rate, the nature of bear markets is such that they can tend toward steeper losses, in percentage terms, in a shorter time span than bull markets. Bear markets are much compressed in terms of time. In terms of price, a bear market may not go down much more than a bull market goes up, but it will do it faster most times. I would have to say that the current bear market is drawn out much longer however than the typical 18 month average. After the trend is moderately to well-developed, there may again be a bigger price gap or gaps that could qualify as the “runaway” variety such as in the chart below. The trend shown in the chart begins (the trend reversal) with an “exhaustion” gap which I will describe a bit further on in this Trader’s Corner article – Gaps at this “middle” stage are important, as it suggests in stocks anyway, that a second wave of possible new sellers (or buyers, in the case of upside runaway/measuring gaps) are coming in and are more convinced about the staying power of the trend. In the case of the bear trend shown above, we could say that investors who were convinced that the stock would come back are now more discouraged about the prospects for an earnings recovery, etc. and now exit the stock. In fact, the runaway or “measuring” gap often is brought about by an earnings release that is confirming a deeper slide for the company – in the case of an index it is a deeper slide in the overall economy. In stocks in a bull trend, traders and investors are reacting to news that is increasing favorable to an uptrend – enough so that they are willing to pay up for the stocks they’re interested in and this includes willingness to pay up for an opening where prices gap higher. Action in individual stocks may be part of a general market upswing. The overall up volume numbers published by the exchanges will start to surge on days with the kind of big moves where gaps are also often occurring. The willingness is buy on up ticks is what is shown in the up volume numbers. Gaps come from this kind of thrust, a result of increasing bullish sentiment. EXAUSTION GAPS – The exhaustion gap, which tends to be even more common in the futures markets, occurs only after a trend has been underway for some time. It typically stems from a final last burst of buying or selling activity that “exhausts” the participants or depletes their accounts. Sometimes, the action that follows such a exhaustion gap is another gap in the opposite direction that leaves a single bar or cluster of bars isolated, with gaps before and after, that lead to the further description of this pattern as an island formation or island reversal pattern. Without subsequent price action that suggests a top or bottom is forming, an exhaustion gap would initially be hard to distinguish from a common or runaway gap. This type gap is the most likely to “signal” a trend reversal, especially in conjunction with a subsequent gap that forms an island pattern as in my next chart – ISLAND REVERSALS – The chart above is an example of an island top – an island bottom is a formation where prices gap lower after an extended downtrend (an exhaustion gap), then trade for one or more days below the low end of the gap, leaving the chart space of the gap open. This activity is followed by a gap higher that again leaves open space above the single bar or cluster of bars and results in the appearance of an island formation that is underneath the subsequent uptrend – in stocks the island type formation is a little more “irregular” than in commodities, as is provided by the example in the chart below – The more “pure type” island bottoms and tops tend to be a feature in the futures markets, but there are many island/gap patterns that are seen in stocks, especially the more volatile ones – however in stocks, a looser interpretation is required for these formations. One key to a true island top or bottom is that they need appear near the top of an uptrend or the bottom of a downtrend, as proven by subsequent market action. The best strategy before concluding that an island top or bottom reversal pattern has formed is to wait a few days to see if the gap or gaps created during the island reversal formation, get “filled in” – If a gap or gaps remain after a period of 2-3 days to 2-3 weeks, the probability of there being a final top or bottom in place increases substantially. In stocks, you also see these reversals occurring on the way down or way up, rather than at the closer to the absolute highs or lows, more often than in other markets – An island top is the opposite of the island bottom and occurs when prices gap higher (an exhaustion gap) after an uptrend has been underway for some time, then trade for one day or for several days where the lows remain above the gap, leaving this space completely “open”. This price action is then followed by a gap down that results in open space below the single bar or bars or there will be gaps on either side of the cluster of bars making the formation resemble an “island” as in the next chart - A new trend begins from a area of the island top, making this a reversal pattern. The island top is typically left intact and prices do not fill in the gap(s) that created the isolated bar(s), at least during the duration of the trend that follows over the next weeks. Months or years later of course, the gaps may “filled in”. At the end of the current bear market, “exhaustion” gaps and island bottom formations is definitely something to look for as the beginning stages of a market reversal. ************************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 09-29-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Are Covered-Calls Right For You? Naked Puts: Options 101: Terms and Definitions Spreads/Straddles/Combos: Another One-Day Wonder! 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: Are Covered-Calls Right For You? By Mark Wnetrzak One of our readers asked for some information on the historical success of this section and the suitability of the covered-call strategy for new investors. Attn: Questions@OptionInvestor.com Subject: Option Trading Strategies Hello, I've been getting the Option-investor newsletter on a free trial basis and after looking through the different sections, it seems that one of the most conservative strategies you promote is the sale of "covered" calls. I know that covered calls involve buying stock and selling calls against it to collect a small income, but what I have noticed in your approach is that you end up selling the stock for less than you paid for it. I assume the loss is offset by the money from the sold call but can you really be profitable in the long run by severely limiting your upside potential? I guess a better question would be, how successful have you been with this method? I'm just trying to decide if it is right for me, since I own a number of different stocks, or if I should search for another conservative strategy. Thank You, RD Regarding our approach to covered-calls: Our primary goal in this section is to provide positions that make acceptable returns while still receiving an above-average amount of downside protection. We use a simple approach to uncover a variety of covered-call candidates to supplement your search for profitable trading plays: technical scans and option sorts. I personally scan through hundreds of charts each week looking for technically strong stocks with favorable call-option premiums. I then sort through several "over-priced" option lists, looking for stocks with favor- able technicals. The strategy we use in selecting these positions is based on a conservative covered-write using the "total return" concept that Lawrence McMillan adeptly describes in his original book, "Options: As a Strategic Investment." With this conservative approach, an investor considers the covered write as a single entity and is not interested so much in stock ownership or bullish movement, but in obtaining a consistent (monthly) return on investment. Based on this approach, our target is generally in the range of 3%-6% per month (6%-12% on margin), and in all but a few cases, the stock is called away or sold after one strike period. Of course, it is still good advice not to purchase an issue you wouldn't mind owning, as there is always that possibility with a covered-write. We favor a short-term approach, which isn't predicated on forecasting a stock's (or the market's) directional movement. Still, whether the covered write strategy is applied short-term or longer term, it requires a neutral to slightly bullish outlook on the underlying equity and the overall market. Obviously, covered-calls do hedge against downside movement, but they are not a remedy for protracted bearish activity. We prefer the higher probability of making a consistent, low return but some investors prefer to strive for higher potential returns with an aggressive outlook, writing "out-of-the-money" calls on stocks in their portfolios. These (OTM) positions offer greater rewards but also have less downside protection. The maximum potential profit of an OTM position, while greater than that of an "in-the-money" (ITM) position, will always require an increase in price by the underlying stock. Thus, by utilizing an OTM option, the success of the overall position depends more on the movement of the stock price and less on the benefits of writing the call. Since the premium generated from the sale of the call is much smaller, the overall position will be more susceptible to loss if the stock's price declines. ITM plays are plainly more conservative, offering less risk but also smaller reward potential. Though our strategy is less aggressive, there is risk of loss in all trading. As far as the success of this section, the percentage of winning plays, with minimum target returns above 8% per month (on margin), averages around 75%, depending on the character of the market. On some occasions, we have enjoyed perfect results with no losers in a specific expiration period. At other times, during extremely bearish months, we have labored to achieve a 50% success rate. But, there are some things that these statistics don't reveal. One, we offer the same number of plays each week, regardless of whether the market is conducive to a bullish strategy, which in many cases recently, it is not. Another important fact is that one or two catastrophic losers can (and historically do) greatly affect the annualized return for this type of strategy. There are also a few problems that new investors encounter when using this strategy (mostly related to the human emotions of hope, greed and fear) and one of them is that you won't get rich quick. Sadly, that effect can alter the performance of this technique because after you have a few winning plays, the desire to achieve slightly better returns becomes almost overwhelming. And, after that first big loser (that you fail to close because "it can't go much lower" etc.) eliminates most of your gains, it's easy to change and look for something more exciting and (potentially?) profitable. For those of us who think we know the game, it is really a very hard way to participate in the options market. You almost have to be less experienced to succeed in this manner -- trading strategies based on a high probability of limited return -- because most us will simply not limit the losses to that which is required to be profitable in the long run (most experienced players try to trade out of the losing play or "double-down" and so on). Option guru Lawrence McMillan noted years ago that on average, the technique yields 3-6% monthly (annualized 36% not on margin) returns yet it is not among his favored strategies because it requires tedious amounts of mental stamina to manage correctly. The incredibly small profits simply require that you have very few "preventable" losers. Of course, a few of the losses are not preventable, however those have always been averaged into the overall return. So, it really comes down to your ability as a trader and how you exit or adjust positions without emotion. It isn't easy and many people become discouraged if they are undisciplined. There isn't any free money and a technique that allows one loser to cancel a number of winners is just not for everyone. 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 CRY 2.94 2.74 OCT 2.50 0.75 *$ 0.31 15.4% AES 2.92 2.46 OCT 2.50 0.75 $ 0.29 14.5% OSTE 9.45 9.47 OCT 7.50 2.50 *$ 0.55 5.7% GNSS 8.73 7.59 OCT 7.50 1.60 *$ 0.37 5.6% CVC 9.48 9.94 OCT 7.50 2.50 *$ 0.52 5.4% RSTO 5.70 4.77 OCT 5.00 1.20 $ 0.27 5.2% QCOM 28.08 28.61 OCT 25.00 4.20 *$ 1.12 5.1% BSTE 29.40 28.42 OCT 25.00 5.70 *$ 1.30 4.8% NOK 13.95 13.70 OCT 12.50 2.20 *$ 0.75 4.6% NWRE 15.97 13.75 OCT 12.50 4.10 *$ 0.63 4.6% PPD 21.80 20.24 OCT 17.50 5.00 *$ 0.70 4.5% FLE 6.02 6.61 OCT 5.00 1.30 *$ 0.28 4.3% CMLS 16.85 17.58 OCT 15.00 2.55 *$ 0.70 4.3% UDI 22.58 24.25 OCT 20.00 3.30 *$ 0.72 4.1% PRX 28.20 28.20 OCT 25.00 4.30 *$ 1.10 4.0% LMNX 7.53 6.93 OCT 7.50 0.60 $ 0.00 0.0% MACR 8.49 7.02 OCT 7.50 1.45 $ -0.02 0.0% *$ = Stock price is above the sold striking price. Comments: The dark shadow of "October" cools the bullish heat once again as the end-of-quarter mark-up is washed away. That sounds better than saying we're still in a bearish environment and October tends to be a bearish month. The horrid ending to this week is lending little credence to the double-bottom theorists. Once the markets establish a fairly long lateral base, then I'll listen to the bullish case! Ok, enough cliche's. The covered-call portfolio is holding up relatively well in this adverse climate. Neoware Systems' (NASDAQ:NWRE) correction is holding above its 150-dma and the technicals remain bullish. Luminex (NASDAQ:LMNX) stopped right at $6.50 mid-week but needs to move above $7.50 to move out of danger. Restoration Hardware (NASDAQ:RSTO) dropped fairly quickly early this week and anyone who decided to enter the position should have a much better cost basis than shown here. Moving below $4.00 (closing basis) will be an exit signal for this portfolio. Pre-Paid Legal Services (NYSE:PPD) could come under some pressure soon and should be monitored closely. Friday's heavy volume is a bit unsettling. Still, most of the stocks listed above remain in lateral trends and above technical support. Remember, lost opportunity is easier made-up than lost capital. Note: Conexant Systems (NASDAQ:CNXT) will not be posted in the portfolio summary as the additional stock purchase requirements, due to the past merger of a business unit with Alpha Industries (NASDAQ:AHAA), altered the components of the published position. This information was not discovered until after the publishing deadline. The new contract specifications for CZI options can be found here 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 ISIS 9.15 OCT 7.50 QIS JU 1.95 347 7.20 21 6.0% KDE 23.39 OCT 22.50 KDE JX 1.55 180 21.84 21 4.4% NWRE 13.75 OCT 12.50 QQA JV 1.90 201 11.85 21 7.9% PLMD 26.25 OCT 25.00 PM JE 2.35 1232 23.90 21 6.7% RTIX 8.00 OCT 7.50 RQK JU 0.75 60 7.25 21 5.0% SYMC 34.30 OCT 30.00 SYQ JF 5.20 2052 29.10 21 4.5% UTSI 16.25 OCT 15.00 UON JC 1.80 3081 14.45 21 5.5% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield NWRE 13.75 OCT 12.50 QQA JV 1.90 201 11.85 21 7.9% PLMD 26.25 OCT 25.00 PM JE 2.35 1232 23.90 21 6.7% ISIS 9.15 OCT 7.50 QIS JU 1.95 347 7.20 21 6.0% UTSI 16.25 OCT 15.00 UON JC 1.80 3081 14.45 21 5.5% RTIX 8.00 OCT 7.50 RQK JU 0.75 60 7.25 21 5.0% SYMC 34.30 OCT 30.00 SYQ JF 5.20 2052 29.10 21 4.5% KDE 23.39 OCT 22.50 KDE JX 1.55 180 21.84 21 4.4% 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). ***** ISIS - ISIS Pharmaceuticals $9.15 *** Building A Base *** ISIS Pharmaceuticals (NASDAQ:ISIS) is a biopharmaceutical company focused on delivering RNA-based drug discovery technologies to identify and commercialize novel drugs to treat diseases. The company has a strong proprietary position in RNA-based drug discovery technologies. With its primary technology, antisense, ISIS creates inhibitors designed to bind with high specificity to their RNA target and modulate protein production. With its Ibis technology, the company uses its discoveries in RNA to design small-molecule therapeutics that bind to RNA. ISIS also uses its antisense technology in collaborations with other companies to identify and prioritize attractive gene targets for their drug discovery programs. ISIS has been forging a Stage I base over the last few months in an old historical trading range. We simply favor the recent technical trend and this position offers a great way to speculate on the future movement of the issue in a conservative manner. OCT 7.50 QIS JU LB=1.95 OI=347 CB=7.20 DE=21 TY=6.0% ***** KDE - 4Kids Entertainment $23.39 *** Breaking Out! *** 4Kids Entertainment (NYSE:KDE) is a children's entertainment company. The company acquires, with representation agreements, intellectual property rights to children's properties from around the world. Through its subsidiaries, the company seeks to maximize the economic returns on the properties through TV production and distribution and merchandise licensing. 4Kids also provides media buying/planning, toy design/development, and Website development. The company operates through five wholly owned subsidiaries: 4Kids Entertainment Licensing, 4Kids Entertainment International, The Summit Media Group, 4Kids Productions, and Websites 4Kids. 4Kids' share price rallied strongly this week on speculation that a new show, "Yu-Gi-Oh" from Japan, could offer property rights bigger than Pokemon. Technically, this unique issue appears to be successfully completing a year-long consolidation phase and we expect the share value to benefit significantly from the next market rally. OCT 22.50 KDE JX LB=1.55 OI=180 CB=21.84 DE=21 TY=4.4% ***** NWRE - Neoware Systems $13.75 *** Pullback = Entry Point? *** Neoware Systems (NASDAQ:NWRE) provides software and solutions to enable appliance computing, a web-based computing architecture targeted at business customers that is designed to be simpler and easier than traditional personal computer-based computing. The company's software and management tools power and manage a new generation of smart computing appliances that utilize the benefits of open, industry-standard technologies to create new alternatives to PCs used in business and a variety of proprietary business devices. Neoware Systems provides its software on top of a number of embedded operating systems, including Microsoft's Windows CE and NT Embedded, as well as an embedded version of the Linux operating system. The company reported sharply higher revenue and earnings for its 4th-quarter and fiscal year ended June 30, 2002. Neoware is gaining market share with growing profitability, a strong balance sheet and no debt. Neoware has been in "rally mode" since last November with the issue moving from $2 to $18 in only 10 months and the recent consolidation may be offering a second chance entry point. Investors looking for a long-term portfolio holding can use this position to obtain a low risk entry point in the issue. OCT 12.50 QQA JV LB=1.90 OI=201 CB=11.85 DE=21 TY=7.9% ***** PLMD - PolyMedica $26.25 *** Is The Bad News Priced-In? *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer medical products and services, conducting business through its Chronic Care, Professional Products and Consumer Healthcare segments. The company sells diabetes supplies and products, and provides services to Medicare-eligible seniors suffering from diabetes and related chronic diseases through its Chronic Care segment. Through its Professional Products segment, it provides direct-to-consumer prescription respiratory supplies and services to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease. It also markets, manufactures and distributes a broad line of prescription urological and suppository products. PolyMedica sells prescription oral medications not covered by Medicare to its existing customers through its Professional Products segment. PolyMedica is the target of criminal and civil investigations by federal agencies, including the U.S. Attorney's Office for the Southern District of Florida, for alleged health-care fraud, improper revenue recognition and obstruction of justice. The company recently forecast second-quarter earnings between 62 cents and 66 cents per share due to costs associated with the investigations. Without the legal and related costs from the investigations, the company forecast earnings between 82 cents to 84 cents per share for the quarter, compared with 74 cents a year ago. Based on the recent technicals, the bad news appears to be already priced-in and this position offers speculators a reasonable risk-reward profile for speculative investors. OCT 25.00 PM JE LB=2.35 OI=1232 CB=23.90 DE=21 TY=6.7% ***** RTIX - Regeneration Tech. $8.00 *** Breaking Out: Part II *** Regeneration Technologies (NASDAQ:RTIX) is engaged in the use of natural tissue and technologies to repair and promote the natural healing of human bone and other human tissues. RTIX processes human musculoskeletal and other tissue, including bone, cartilage, tendon, ligament, pericardial and cardiovascular tissue in producing its allografts. Surgeons then use these tissues to repair and promote the healing of bone and other tissue defects, including spinal vertebrae repair, musculoskeletal reconstruction, fracture repair, repairs to the jaw and related tissues, urinary incontinence and heart valve disorders. RTIX rallied sharply this week after the company announced that it had finalized and signed definitive agreements with Medtronic Sofamor Danek (NYSE: MDT) and Exactech (NASDAQ:EXAC). We simply favor the bullish move above the April high which suggests further upside potential. Investors who agree can use this position to speculate on the future movement of the issue in a conservative manner. OCT 7.50 RQK JU LB=0.75 OI=60 CB=7.25 DE=21 TY=5.0% ***** SYMC - Symantec $34.30 *** Trading Range *** Symantec Corporation (NASDAQ:SYMC) provides a broad range of content and network security software and appliance solutions to enterprises, individuals and service providers. The company is a provider of client, gateway and server security solutions for virus protection, firewall and virtual private network, vulnerability management, intrusion detection, Internet content and e-mail filtering, remote management technologies and security services to enterprises and service providers around the world. Symantec views its business in five primary operating segments: Enterprise Security, Enterprise Administration, Consumer Products, Services and Other. Last week, J.P. Morgan Securities analyst Sterling Auty shifted to a positive near-term outlook on Symantec heading into the company's quarterly report next month. Shares of Symantec moved to the top of a recent trading range on the news and the technical support area near $30-$31 provides an excellent margin of safety for traders who wish to speculate on its near-term share value. OCT 30.00 SYQ JF LB=5.20 OI=2052 CB=29.10 DE=21 TY=4.5% ***** UTSI - UTStarcom $16.25 *** Historic Support Area *** UTStarcom (NASDAQ:UTSI) designs, manufactures and markets wireline and wireless broadband access and switching equipment that enables migration to next generation Internet protocol (IP)-based networks. Substantially all of UTSI's sales have been to service providers in China, however, the company is expanding to markets outside of China. UTSI's integrated suite of products provides migration to next generation networks and allows service providers to offer efficient and expandable voice, data and Internet access services. UTStarcom stock has rallied sharply this week after news that the company landed a contract to deploy its equipment in Southern China. We simply favor the historic support area (two-year chart) near our cost basis and this position offers a low risk entry point for investors who wouldn't mind having UTStarcom in their long-term stock portfolio. OCT 15.00 UON JC LB=1.80 OI=3081 CB=14.45 DE=21 TY=5.5% ***** ***************** 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 TERN 2.51 OCT 2.50 TUN JZ 0.30 189 2.21 21 19.0% CRY 2.74 OCT 2.50 CRY JZ 0.50 77 2.24 21 16.8% CKFR 11.50 OCT 10.00 FCQ JB 1.95 33 9.55 21 6.8% V 12.40 OCT 10.00 V JB 2.80 294 9.60 21 6.0% MDCO 10.61 OCT 10.00 MQL JB 1.00 388 9.61 21 5.9% VRTS 15.12 OCT 12.50 VIV JV 3.10 3994 12.02 21 5.8% ISSX 12.72 OCT 10.00 ISU JB 3.10 5 9.62 21 5.7% RFMD 6.37 OCT 5.00 RFZ JA 1.50 732 4.87 21 3.9% ***************** NAKED PUT SECTION ***************** Options 101: Terms and Definitions By Ray Cummins Some of our new readers have expressed a desire to learn more about two concepts an option trader must understand to be profitable on a consistent basis: volatility and probability. Traders without knowledge of the way volatility and probability affect option pricing and potential risk-reward have little chance of surviving in the derivatives market. Volatility is one of the most important factors in option trading because it measures the amount by which the underlying asset fluctuates in a given period of time. Before you can estimate the future volatility of an issue, or the probability of the issue reaching a certain price, you must understand how a stock's movement is quantified from a statistical standpoint. Historical volatility is calculated by using the standard deviation of an underlying asset's price changes (from close of trading each day) for a certain time period. In simple terms, the standard deviation is basically the "mean of the mean," and it can often help you find the story behind the historical data. To understand this unique concept, you must learn about what statisticians call "normal" distribution. A normal distribution of data means that most of the examples in a set of data are close to the "average," while relatively few examples tend to one extreme or the other. If you depicted normally distributed data on a graph, it would look something like this (the infamous bell-curve): Normal Distribution Chart: The x-axis (the horizontal one) is the value in question, and the the y-axis (the vertical one) is the number of data points for each value on the x-axis. Not all sets of data will have graphs that look this perfect. Some will have relatively flat curves, while others will be steeper. Sometimes the mean will lean a bit to one side or the other. However, all normally distributed data will have something like this same bell-curve shape. The standard deviation is a statistic that tells you how tightly all the various examples are clustered around the mean in a set of data. When the examples are fairly tightly bunched together and the bell-shaped curve is steep, the standard deviation is small. When the examples are spread apart and the curve is relatively flat, that suggests a relatively large standard deviation in the data. Computing the value of a standard deviation is complicated but here what a standard deviation represents graphically: Standard Deviations Chart: One standard deviation away from the mean in either direction on the horizontal axis (the red area on the above graph) accounts for somewhere around 68% of the possible outcomes in this group. Two standard deviations away from the mean (the red and green areas) account for roughly 95% of the outcomes. Three standard deviations (the red, green and blue areas) account for about 99% of all the possible outcomes. If this curve were flatter and more spread out, the standard deviation would have to be larger in order to account for the number of possible outcomes. That is why the standard deviation can tell you how spread out the results in a set are from the mean. Without going into a complex study of probability analysis, you can use a simple probability calculator (or preferably, a "monte-carlo" style calculator) to determine the likelihood of the issue trading above or below a specific number or within a given profit range. Of course, the fact that it "should" remain in a particular range doesn't mean it will and that's the reason traders have to learn to manage losing plays effectively -- so they don't create catastrophic draw-downs on one's portfolio. To learn more about this subject, read the bible of volatility by by Sheldon Natenburg: Option Volatility and Pricing Strategies. The book is available in the OIN bookstore. One more comment... Volatility is indeed a very important piece of the puzzle, not only for assessing an issue's potential for price movement but also for analyzing an option's fair value. Although prices for exchange-listed options are established in the marketplace by computerized pricing models, buyers and sellers do exert a strong influence on the actual market value. More importantly, pricing models are based upon the mistaken assumption that all stock price movement is "random." Clearly, there are always stocks that are moving in well-defined price trends, as opposed to moving randomly, and if you can identify those stocks whose price trends are likely to continue, you can achieve an edge against the option-pricing model. Much of our effort at the OIN is devoted to finding stocks that will continue moving in such trends, so our subscribers can profit from buying undervalued options, selling overvalued options, or initiating limited-risk spreads on these issues. 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 RGLD 18.70 18.36 OCT 15.00 0.45 *$ 0.45 11.6% PPD 21.41 20.24 OCT 15.00 0.60 *$ 0.60 10.7% ABFS 27.53 28.81 OCT 25.00 0.90 *$ 0.90 10.4% ULAB 18.83 20.75 OCT 15.00 0.40 *$ 0.40 10.4% RGLD 18.05 18.36 OCT 15.00 0.50 *$ 0.50 9.3% RMCI 25.80 24.11 OCT 22.50 0.60 *$ 0.60 8.6% UTHR 16.50 16.05 OCT 15.00 0.55 *$ 0.55 8.5% GILD 33.56 33.56 OCT 25.00 0.55 *$ 0.55 8.2% MDG 20.40 18.15 OCT 17.50 0.55 *$ 0.55 8.2% BSX 30.18 31.48 OCT 27.50 0.85 *$ 0.85 7.2% AMZN 16.61 17.01 OCT 12.50 0.30 *$ 0.30 7.2% UTHR 17.01 16.05 OCT 15.00 0.30 *$ 0.30 6.4% COF 38.92 34.70 OCT 27.50 0.60 *$ 0.60 6.2% TTWO 26.20 29.45 OCT 20.00 0.30 *$ 0.30 5.9% FDS 25.95 26.50 OCT 22.50 0.35 *$ 0.35 5.2% INVN 35.76 32.89 OCT 25.00 0.45 *$ 0.45 5.1% STN 14.15 16.96 OCT 12.50 0.25 *$ 0.25 5.1% IDE 25.50 20.91 OCT 22.50 0.75 $ -0.84 0.0% *$ = Stock price is above the sold striking price. Comments: The threat of war with Iraq and Islamic terrorism, concerns over recent corporate scandals and the continued decline in quarterly earnings have conspired to keep investors fearful of the stock market. Based on the technical outlook for the major equity averages, that's probably a good choice and we will continue to closely monitor all of the current plays in the portfolio. One position that warrants an early departure is Integrated Defense Technology (NYSE:IDE). Positions on the early exit watch-list include Meridian Gold (NYSE:MDG) and Right Management Consultants (NASDAQ:RMCI). 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 AG 22.63 OCT 20.00 AG VD 0.45 700 19.55 21 9.5% BYD 18.61 OCT 17.50 BYD VW 0.40 215 17.10 21 8.6% CVC 9.94 OCT 7.50 CVC VU 0.25 1534 7.25 21 16.2% MMSI 20.14 OCT 18.00 MRU VY 0.35 3 17.65 21 8.1% PRX 28.20 OCT 22.50 PRX VX 0.25 102 22.25 21 6.1% SYMC 34.30 OCT 25.00 SYQ VE 0.30 3603 24.70 21 6.1% TTWO 29.45 OCT 25.00 TUO VE 0.35 416 24.65 21 6.6% UDI 24.25 OCT 20.00 UDI VD 0.30 276 19.70 21 7.6% 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 CVC 9.94 OCT 7.50 CVC VU 0.25 1534 7.25 21 16.2% AG 22.63 OCT 20.00 AG VD 0.45 700 19.55 21 9.5% BYD 18.61 OCT 17.50 BYD VW 0.40 215 17.10 21 8.6% MMSI 20.14 OCT 18.00 MRU VY 0.35 3 17.65 21 8.1% UDI 24.25 OCT 20.00 UDI VD 0.30 276 19.70 21 7.6% TTWO 29.45 OCT 25.00 TUO VE 0.35 416 24.65 21 6.6% PRX 28.20 OCT 22.50 PRX VX 0.25 102 22.25 21 6.1% SYMC 34.30 OCT 25.00 SYQ VE 0.30 3603 24.70 21 6.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AG - Agco $22.63 *** Testing 2002 Highs! *** AGCO Corporation (NYSE:AG), headquartered in Duluth, Georgia, is a global designer, manufacturer and distributor of agricultural equipment and related replacement parts. AGCO's products are distributed in 140 countries. AGCO offers a full product line including tractors, combines, sprayers, forage equipment and implements through more than 7,350 independent dealers and other distributors around the world. AGCO's products are distributed under the brand names AGCOSTAR, Ag-Chem, Challenger, Farmhand, FENDT, Fieldstar, GLEANER, Glencoe, Hesston, LOR*AL, Massey Ferguson, New Idea, SOILTEQ, Spra-Coupe, Tye, White Planters and Willmar. AGCO provides retail financing through AGCO Finance in North America and through Agricredit in the UK, France, Germany, Ireland, Spain and Brazil. Goldman Sachs recently raised its rating on AGCO and on the farm equipment sector to reflect higher grain prices, which should result in increased capital spending. Apparently, investors agree with the bullish assessment as the issue is trading near 2002 highs and this position offers a low risk entry point in a fundamentally sound company. OCT 20.00 AG VD LB=0.45 OI=700 CB=19.55 DE=21 TY=9.5% ***** BYD - Boyd Gaming $18.61 *** Own This One! *** Headquartered in Las Vegas, Boyd Gaming Corporation (NYSE:BYD) is a leading diversified owner and operator of casinos and various entertainment properties located in Nevada, Illinois, Indiana, Mississippi, and Louisiana. The company conducts substantially all of its business through eight wholly owned subsidiaries: California Hotel and Casino, Boyd Tunica, Boyd Kenner, Boyd Louisiana, Par-A-Dice Gaming, Boyd Indiana, Boyd Atlantic City, and Boyd Louisiana Racing. Boyd Gaming is also developing "The Borgata," a $1 billion entertainment resort in Atlantic City, through a joint venture with MGM MIRAGE. The gaming sector is "hot" and Boyd Gaming is one of our favorite stocks in the group. Investors who wouldn't mind owning the issue can establish a cost basis near $17 with this position. OCT 17.50 BYD VW LB=0.40 OI=215 CB=17.10 DE=21 TY=8.6% ***** CVC - Cablevision Systems $9.94 *** Media Sector Speculation *** Cablevision Systems Corporation (NYSE:CVC) is a cable operator in the United States through its wholly owned subsidiary, CSC Holdings. Cablevision also has investments in cable programming networks, entertainment businesses and telecommunications firms. Through Rainbow Media Holdings, the company owns interests in and manages numerous national and regional programming networks, the Madison Square Garden sports and entertainment business, and cable television advertising sales companies. Through Lightpath, the company provides switched telephone services and high-speed Internet access to the business market. The company also owns or has interests in a number of complementary businesses and companies that include The WIZ, a chain of consumer electronics stores; Clearview Cinemas, a chain of movie theaters; and also Northcoast Communications, a wireless personal communications services business. The media sector has been one of the better performing groups in recent weeks and investors who want to speculate on a recovery in one of the industry's past darlings should consider this position. OCT 7.50 CVC VU LB=0.25 OI=1534 CB=7.25 DE=21 TY=16.2% ***** MMSI - Merit Medical Systems $20.14 *** Trading Range! *** Merit Medical Systems (NASDAQ:MMSI) produces single-use medical products for use in diagnosis and treatment of cardiovascular disease. The firm's products are designed to provide physicians and other healthcare professionals with devices that enable them to perform interventional and diagnostic procedures safely and effectively. Inflation devices are large, specialized syringes used in interventional catheterization procedures to inflate balloon-tipped catheters. The company's Inflation Devices and Angioplasty Accessories include IntelliSystem 25, IntelliSystem II color monitor, The Monarch disposable inflation device and Basix 25 and the new BasixCOMPAK disposable inflation syringes. The firm's MBA, Passage, AccessPlus, Double Play and Inspector hemostasis valves are used in conjunction with other inflation devices and as a component of its angioplasty packs. MMSI has established a very stable trading range near our cost basis and last week's high-volume rally to a recent high suggests future upside potential in the issue. OCT 18.00 MRU VY LB=0.35 OI=3 CB=17.65 DE=21 TY=8.1% ***** PRX - Pharmaceutical Resources $28.20 *** Own This One! *** Pharmaceutical Resources (NYSE:PRX), a holding company, develops, manufactures, and distributes generic pharmaceuticals through its wholly owned subsidiary, Par Pharmaceutical. Through its FineTech unit, PRX also develops and utilizes synthetic chemical processes to design and develop intermediate ingredients utilized in the production of finished products for the pharmaceutical industry. PRX currently manufactures and distributes over 139 products representing various dosage strengths of 58 drugs. PRX recently said it expects to exceed analysts' consensus earnings estimates for the third quarter due to strong sales across both its core product portfolio and its key new products. The steady upward momentum in the company's share value suggests that investors are bullish on its underlying business and a cost basis near $25 is a favorable price for the issue. OCT 22.50 PRX VX LB=0.25 OI=102 CB=22.25 DE=21 TY=6.1% ***** SYMC - Symantec $34.30 *** Trading Range *** Symantec Corporation (NASDAQ:SYMC) provides a broad range of content and network security software and appliance solutions to enterprises, individuals and service providers. The company is a provider of client, gateway and server security solutions for virus protection, firewall and virtual private network, vulnerability management, intrusion detection, Internet content and e-mail filtering, remote management technologies and security services to enterprises and service providers around the world. Symantec views its business in five primary operating segments: Enterprise Security, Enterprise Administration, Consumer Products, Services and Other. Last week, J.P. Morgan Securities analyst Sterling Auty shifted to a positive near-term outlook on Symantec heading into the company's quarterly report next month. Shares of Symantec moved to the top of a recent trading range on the news and the technical support area near $30-$31 provides an excellent margin of safety for traders who wish to speculate on its near-term share value. OCT 25.00 SYQ VE LB=0.30 OI=3603 CB=24.70 DE=21 TY=6.1% ***** TTWO - Take-Two Interactive $29.45 *** All-Time High! *** 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 bullish trend, despite the slump in hi-tech issues, and Friday the stock traded at a new "all-time" high. Traders who believe the rally will continue can speculate on that outcome with this position. OCT 25.00 TUO VE LB=0.35 OI=416 CB=24.65 DE=21 TY=6.6% ***** UDI - United Defense $24.25 *** Defense Sector Speculation *** 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 recently started with a "buy" rating by J.P. Morgan as analysts said the company's prospects are strong despite the recent loss of the Crusader program. A J.P. Morgan analyst said 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. Defense stocks are likely to rally if the U.S. starts a war with Iraq and this position offers a favorable cost basis in the issue. OCT 20.00 UDI VD LB=0.30 OI=276 CB=19.70 DE=21 TY=7.6% ***** ***************** 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 AFCO 10.75 OCT 10.00 UOF VB 0.40 5 9.60 21 14.7% RTIX 8.00 OCT 7.50 RQK VU 0.25 0 7.25 21 12.3% MCHP 20.91 OCT 17.50 QMT VW 0.40 816 17.10 21 10.8% CMLS 17.58 OCT 15.00 UUC VC 0.35 80 14.65 21 10.6% MATK 16.75 OCT 15.00 KQT VC 0.30 5 14.70 21 8.3% NBR 32.86 OCT 27.50 NBR VY 0.40 524 27.10 21 7.1% PLMD 26.25 OCT 20.00 PM VD 0.25 113 19.75 21 6.6% EMMS 19.62 OCT 17.50 QMJ VW 0.25 3 17.25 21 6.1% UNFI 22.40 OCT 20.00 JQN VD 0.25 10 19.75 21 5.3% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Another One-Day Wonder! By Ray Cummins The major equity averages plunged Friday, giving back almost all of their recent gains after blue-chip bellwethers Philip Morris, General Electric and SBC Communications disgorged a glut of negative news. The Dow Jones Industrials slid 295 points to 7,701 amid a profit warning from Philip Morris (NYSE:MO), massive job cuts at SBC Communications (NYSE:SBC), and a downgrade of General Electric (NYSE:GE). Coca-Cola (NYSE:KO) was the only Dow component that gained during the session. Technology stocks also finished lower with the NASDAQ Composite down 22 points to 1,199 after holding in the black for much of the day. Telecom stocks and wholesale electronic suppliers were among the worst performers. The S&P 500-stock index fell 27 points to 827 as pharmaceutical, airline and retail issues declined. Trading volume was average at 1.49 billion on the NYSE and at 1.46 billion on the NASDAQ. Breadth was terrible with losers tripling winners by 3 to 1 on the NYSE while declining stocks outnumbered advancing stocks more than 2 to 1 on the technology exchange. Government bonds soared as stocks fell with the 10-year Treasury note up 27/32 to yield 3.68% while the 30-year bond gained 22/32 to yield 4.68%. On the fund flow front, Trim Tabs estimated that all equity funds had outflows of $7.3 billion over the past week compared with outflows of $4.6 billion in the prior week. ***************** PORTFOLIO SUMMARY ***************** (As of 09-27-02) PUT CREDIT SPREADS ****************** Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status BLL 53.75 50.91 OCT 45 50 0.70 49.30 $0.70 Open OEX 446.00 413.22 OCT 395 400 0.45 399.55 $0.45 Open OHP 42.62 39.34 OCT 33 35 0.30 34.70 $0.30 Open NOC 124.54 126.76 OCT 105 110 0.35 109.65 $0.35 Open Ball Corporation (NYSE:BLL) and the bullish portion of the OEX credit-spread strangle are both on the early exit watch-list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status PHA 40.86 38.24 OCT 50 45 0.60 45.60 $0.60 Open OEX 446.00 413.22 OCT 500 495 0.45 495.45 $0.45 Open SLAB 19.66 18.57 OCT 30 25 0.40 25.40 $0.40 Open BRL 63.65 61.45 OCT 75 70 0.50 70.50 $0.50 Open LXK 43.49 48.49 OCT 55 50 0.50 50.50 $0.50 Open MMM 119.46 112.55 OCT 135 130 0.40 130.40 $0.40 Open WFC 46.89 48.45 OCT 55 50 0.55 50.55 $0.55 Open Lexmark (NYSE:LXK) has rebounded strongly in recent sessions and despite Friday's sell-off, the issue is testing a near-term resistance area. A move through $50 on heavy volume would signal a potential exit (or adjustment) in the position. SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V (G/L) Status BYD 17.71 18.61 DEC 20 15 (0.15) 0.90 0.75 Open CVC 9.48 9.94 DEC 15 5 (0.10) 0.60 0.50 Open? TARO 32.55 34.90 OCT 37 27 0.10 0.40 0.50 Open All of our bullish synthetic positions have yielded favorable short-term profits. SYNTHETIC (BEARISH) ******************* Symbol Pick Last Month L/P S/C Credit M/V (G/L) Status MET 25.25 22.96 JAN 20 30 0.05 0.65 0.70 Open PFE 30.75 28.58 JAN 25 35 0.15 0.70 0.85 Open BRCD 12.33 7.83 JAN 10 15 (0.05) 2.60 2.55 Open MRK 45.74 46.26 OCT 40 50 0.10 0.15 0.25 Open Brocade Communications (NASDAQ:BRCD) was the big winner this week with a closing credit of up to $2.55 as the issue traded at a new 2002 low. BULL CALL SPREADS ***************** Symbol Pick Last Month L/C S/C Debit M/V B/E Status LUME 5.80 3.88 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 21.74 JAN-27.5C OCT-27.5C 0.80 0.75 Open LEH 49.69 49.13 JAN-40P OCT-40P 1.90 1.75 Open SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit M/V Status AES 2.92 2.46 J04-7.5 J03-2.5 4.50 4.25 Open CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V (G/L) Status ADRX 24.65 22.65 OCT 40 15 1.10 0.35 0.75 Open ISIS 8.97 9.15 OCT 15 8 1.50 0.80 0.70 Open QCOM 28.58 28.61 OCT 32 22 1.50 0.75 0.75 Open TKTX 34.41 32.13 OCT 45 25 1.55 1.00 0.55 Open PPD 21.80 20.24 OCT 25 17 1.95 1.15 0.80 Open STJ 36.29 36.68 OCT 40 30 1.00 0.90 0.20 Open Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* Today's list of candidates will be significantly reduced as I am working with limited capabilities on a notebook computer. My desktop PC crashed last week (motherboard problems) and, after a lengthy diagnostic examination, the technician said it might be best if I simply purchased a new unit (ARGHH!). So, I apologize for the effects of this untimely event and I hope that things get back to normal very soon. ************** 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. ***** UOPX - University of Phoenix Online $32.11 *** Strong Sector *** University of Phoenix Online (NASDAQ:UOPX) is a provider of accessible, accredited educational programs for working adults. It began operations in 1989 by modifying courses developed by University of Phoenix's physical campuses for delivery via modem to students worldwide. University of Phoenix Online offers 11 accredited degree programs in business, education, information technology and nursing. Students can log on to their online classes anytime via the Internet by using basic technology such as a Pentium-class personal computer, a modem and an Internet service provider, thereby enhancing the accessibility of and the potential market for its programs. As of 8/31/2001, University of Phoenix Online had approximately 29,000 students and 2,600 faculty members. PLAY (conservative - bullish/credit spread): BUY PUT OCT-25 UBY-VE OI=13 A=$0.30 SELL PUT OCT-30 UBY-VF OI=0 B=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$29.40 ***** ASD - American Standard Companies $64.56 *** Earnings Play *** American Standard Companies (NYSE:ASD) is a global, diversified manufacturer of high-quality, brand name products in three major product groups: air conditioning systems and services, bathroom and kitchen fixtures and fittings and vehicle control systems for heavy and medium-sized trucks, buses, trailers, luxury cars and sport utility vehicles. American Standard operates in three main business segments, which are Air Conditioning Systems and Services, Plumbing Products and Vehicle Control Systems. The firm's brand names include Trane and American Standard for air conditioning systems, American Standard, Ideal Standard, Standard, Porcher, Jado, Armitage Shanks, Dolomite, Meloh, Venlo and Borma for plumbing products and Wabco for vehicle control systems. The company also conducts significant non-United States operations through subsidiaries. The company's quarterly earnings are due on October 16. PLAY (moderately aggressive - bearish/credit spread): BUY CALL OCT-75 ASD-JO OI=4121 A=$0.30 SELL CALL OCT-70 ASD-JN OI=1170 B=$0.90 INITIAL NET CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$70.65 ******************* S - Sears $40.62 *** New 2002 Low! *** Sears, Roebuck and Company (NYSE:S) is a North American retailer. The company is organized into four principal business segments: Retail and Related Services, Credit and Financial Products, Corporate and Other, and Sears Canada. The domestic business segments are Retail and Related Services, Credit and Financial Products and Corporate and Other. The Sears Canada segment consists of similar retail, credit and corporate operations conducted through a majority-owned subsidiary in Canada. Retail and Related Services consist of 867 full-line stores located primarily in malls nationwide. The firm's Credit and Financial Products segment manages Sears' domestic portfolio of credit card receivables. Sears' Corporate and Other operations include activities that are of an overall holding company nature. The company conducts similar retail, credit and corporate operations in Canada through Sears Canada, a consolidated subsidiary of Sears. PLAY (conservative - bearish/credit spread): BUY CALL OCT-50 S-JJ OI=8777 A=$0.20 SELL CALL OCT-45 S-JI OI=14335 B=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$45.50 ******************* 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. ***** DIAN - Dianon Systems $46.10 *** Recovery In Progress *** Dianon Systems (NASDAQ:DIAN) provides a full line of anatomic pathology testing services and a number of genetic and clinical chemistry testing services to patients, physicians and managed care organizations throughout the United States. The company's principal physician audience for these services includes over 50,000 clinicians engaged in the fields of medical oncology, urology, dermatology, gynecology and gastroenterology. Dianon is a specialized provider of anatomic pathology testing services in the United States. Strategy Explanation: Here is a way to capitalize on an anticipated stock movement without spending as much money as you would when purchasing the issue in the open market. If you buy stock you are considered "long" the stock, as you own it, and you participate in all of its upward movement. In this case, you buy an out-of-the-money call to take advantage of this possible upward movement, and you sell an out-of-the-money put to pay for the call. Selling an OTM put limits the potential downside risk, however you should use trading stops or be willing to own the stock in the event of a significant trend reversal. Of course, you have a reasonable cushion under the current stock price as move sideways or decline a small percentage and you will not lose money. But, be careful when using other stocks as portfolio collateral. If the market collapses, the stocks that were going to be your collateral might be worth a lot less. As with any position, do not risk more than you can afford to lose in a worst case scenario. Strategy Benefits: 1. The results can be similar to owning the underlying stock and the potential gain is unlimited. 2. Portfolio collateral can be used to finance the play. PLAY (speculative - bullish/synthetic position): BUY CALL NOV-60 UID-KL OI=7 A=$0.75 SELL PUT NOV-35 UID-WG OI=200 B=$0.55 INITIAL NET-DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $990 per contract. ***** ERTS - Electronic Arts $67.73 *** New Trading Range? *** Electronic Arts (NASDAQ:ERTS) is a global software company that operates in two principal business segments. EA's Core business segment comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed primarily of the creation, marketing and distribution of entertainment software that can be played or sold online, ongoing management of subscriptions of online games and advertising. EA also owns Pogo Corporation, which operates an ad-supported games service that reaches a broad consumer market. Pogo's unique Internet-based family games focus on easy-to-play card, board and puzzle games. PLAY (speculative - bullish/synthetic position): BUY CALL NOV-75 EZQ-KO OI=607 A=$1.70 SELL PUT NOV-60 EZQ-WL OI=183 B=$1.85 INITIAL NET-CREDIT TARGET=$0.25-$0.40 TARGET PROFIT=$0.90-$1.40 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $2,100 per contract. ***** PGR - Progressive Insurance $50.96 *** Failed Recovery? *** The Progressive Corporation (NYSE:PGR) is an insurance holding company for 73 subsidiaries, one mutual insurance firm affiliate and one reciprocal insurance company affiliate. The company's insurance subsidiaries and affiliates provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States. Progressive's property-casualty insurance products protect its many customers against collision and physical damage to their motor vehicles and liability to others for personal injury or property damage arising out of the use of those vehicles. The firm's quarterly earnings are due October 16, 2002. PLAY (speculative - bearish/synthetic position): BUY PUT NOV-45.00 PGR-WI OI=464 A=$0.95 SELL CALL NOV-56.62 PGR-KY OI=217 B=$0.60 INITIAL NET-DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being short the stock. The initial collateral requirement for the sold call is approximately $1,550 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. ***** OMC - Omnicom Group $55.86 *** Premium Selling! *** Omnicom Group (NYSE:OMC) is a worldwide marketing and corporate communications company. Omnicom has grown its strategic holdings to over 1,500 subsidiary agencies operating in more than 100 countries. The company's wholly and partially owned businesses provide communications services to clients on a global, national, and pan-regional basis. The firm's agencies provide an extensive range of marketing and corporate communications services such as advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, direct marketing, directory and business-to-business advertising, employee communications and environmental design. Omnicom also provides field marketing, healthcare communications, marketing research, media planning and buying, multi-cultural marketing, non-profit marketing, promotional marketing, public affairs, public relations, recruitment communications, specialty communications and sports and event marketing. PLAY (conservative - neutral/credit strangle): SELL CALL OCT-65 OMC-JM OI=3171 B=$0.45 SELL PUT OCT-40 OMC-VH OI=1599 B=$0.40 INITIAL NET-CREDIT TARGET=$0.85-$0.95 PROFIT(max)=7% UPSIDE B/E=$65.85 DOWNSIDE B/E=$39.15 ******************** ************************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 ************************************************************** ************ MARKET WATCH ************ Bullish Suggestions To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/092902.asp ************** MARKET POSTURE ************** Pivot Point To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/092902.asp ********** 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
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