The Option Investor Newsletter Wednesday 10-02-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Conflicting Signals Index Trader Wrap: Weekly Fund Family Profile: Longleaf Partners: Managed by Southern Asset Management, Inc. Options 101: Looking for Odd Clues Updated on the site tonight: Swing Trader Game Plan: Four Billion Dollar Mistake Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 10-02-2002 High Low Volume Advance/Decl DJIA 7755.61 - 183.18 7969.37 7742.02 1912 mln 362/1513 NASDAQ 1187.30 - 26.42 1222.72 1183.76 1741 mln 456/1269 S&P 100 415.93 - 9.81 428.37 414.96 totals 818/2782 S&P 500 827.91 - 20.00 851.93 826.50 RUS 2000 360.22 - 7.87 369.68 360.18 DJ TRANS 2135.21 - 89.97 2225.71 2131.64 VIX 43.36 + 3.23 43.78 40.10 VIXN 58.15 + 0.91 59.45 56.35 Put/Call Ratio 0.83 ******************************************************************* Conflicting Signals We're starting to see the first conflicting signals in some time. In fact, since August 22, when the end of summer rally ran out of steam at 9077, the signals have been pretty clear that we would be re-testing the July lows. If they weren't evident immediately on the rollover from that level, they were at least consistent on the way down. The first real sign came on September 3, when the Dow dropped 355 points. While a big drop can signal a change in sentiment, the size of the drop was not as significant as the level it reached. It marked the first lower low since the rally from a low of 7532 on the morning of July 24 took the Dow back over 9000 by the end of August. The Dow then found support and rallied up to September 11. The significance of the September 11 high is that is was a lower high, following the lower low. This was followed by a textbook head and shoulders pattern, with a neckline break at 8300 that signaled the continued drop. As of right now we have still not seen a higher high in the Dow or Nasdaq. However, we have come awfully close and certain levels that now bear watching. In the Dow, I am watching the intraday high of 8012.42 on 9/26, and the closing level of 7997.12. Today's rally fell short of both of these levels, with an intraday high of 7969.37 and close of 7755.61. However, now that we have tested the July low and rebounded, we need to watch for signs of a true bottom, or a false one. A break above these levels, and a close above the psychological 8000 barrier, could be the first sign of a turnaround. This may be premature, since we actually found a lower low than we did in July, but there has been an awful lot of activity between 7500 and 8000 and there are plenty of signs to watch for. After today's warnings after the bell, we may be closer to re-testing the low by the end of the day Thursday, after failing at the high the last couple of days. Something to keep in mind when looking at technical levels of these indices is that they are made up of many stocks, so minor breaks in support and resistance levels should not be viewed as exactly as those in an individual stock, which requires and attracts more focused buyers and sellers. Chart of the Dow In the Nasdaq, we are closer to the center of the high/low range, but given the large swings in the index recently, we could test these levels on any day soon. Chart of the Nasdaq Dell's announcement after the bell on Tuesday, that it was raising revenue forecasts and earnings guidance, indicated that we would be seeing a follow through rally this morning. That follow through did not materialize, and we were unable to set a higher high. However, the Semiconductor Sector Index (SOX.X), which tracks companies with a heavy interest in Dell's business, did hit a higher intraday high today. It also looks to be forming higher lows, although just barely. That intraday level did not hold up and by the end of the day, the closing price, in contrast, did not reach a higher high. So how much stock do we put in the intraday high? What it does is throw up a red flag. While I look at closing prices as a more significant measure, since they represent what traders are willing to take home overnight, the fact that the intraday range gave a signal tells me that a level where sellers were previously strong does not show the same strength as it once did. The same is true for support, where buyers are not as committed as they once were, when we see a lower intraday low. Now that we have seen a higher intraday high, I will be more cautious with shorts in the sector. Chart of the SOX After the bell, Advanced Micro Devices (AMD) warned of a substantial operating loss and revenues far below expectations for the third quarter. The company said it would lose $0.49 per share and see revenues of $500 million, down from expectations of $614 million. The company said that it had cut inventories of its processors for the PC market, due to persistent weak PC demand. This takes some of the shine off of the Dell announcement and may make the intraday high a distant memory. However, until we see a break below the low of 231, we are still in a range. After a massive rally of almost 350 points in the Dow yesterday, some type of pullback could be expected. That makes it hard to tell whether the failure under 8000 is a significant sign of weakness from a failed rally, or a normal pullback. Until we cross one of the levels described above, we may not know which direction we are ultimately headed. That being said, there is still a 500-point range in which to trade, and we know that the trend is still down. There has been talk of a surprise rate cut by the Federal Reserve prior to their next meeting on November 6. That seems to have been the catalyst, along with the Iraq news, for yesterday's rally. However, that news wore off and we gave back about half of yesterday's gain. A warning from Dow Chemical seemed to be the catalyst for today's drop. The company warned that its 3rd quarter earnings would be just over half of previous forecasts. Dow said the decrease was due to higher feedstock costs, which is directly related to higher oil prices. In a downward trending market, we still have to assume bearishness and today's drop was the reminder not to get too excited until we see a decisive break in the opposite direction. One indication that all was not necessarily well after yesterday's rally, was the Market Volatility Index (VIX.X). In an upward trending market, implied volatility, as measured by the VIX, generally drops. The one exception to this rule was the internet boom, when volatility increased as stocks gapped up $20 a day, and the risk seemed as significant to the upside as the downside. With those days behind us, however, we are back to the old rules. Implied volatility is higher to the downside because stocks generally fall quickly and go up slowly. This can be seen in the implied volatility skew of options on almost any listed equity, with downside strikes holding more relative premium than upside strikes. A 5-year weekly moving average of the VIX shows a reading of 26.75. A reading of 40 is an increase over that average of almost 50%, and is considered very high. The fact that yesterday's 346-point rally in the Dow was not able to push the VIX below 40 indicated continuing fear of a sell-off. The VIX closed at 40.13 on Tuesday, and today ran back up to 43.36. Some traders see this as a trailing indicator and some see it as a contrarian indicator, but I've seen many institutions come into the pits selling premium when they consider it to be too high. The fact that there was not enough individual and institutional pressure to lower these levels is an indication that the institutions are not large sellers of premium at these levels, and are not believers in a big rally on the near horizon. A rally would shrink premiums and earn profits for those sellers. As for the contrarians, they tell us that VIX spikes usually foreshadow a market rally. While this is true in the sense that the VIX spikes heavily on market crashes and then falls on the rebound, a consistently high VIX, which increases in a series of higher highs and higher lows, should not be considered a spike, and therefore not a contrarian indicator. That is what we are seeing now - a series of higher highs and higher lows. Chart of the Market Volatility Index (VIX.X) The West Coast port lockdown has continued to get press, as the National Association of Manufacturers appealed to the unions to reopen the ports. The group president said, "An extended shutdown will have a negative and cascading impact on economic growth, rob retailers of product, spoil food, shut down assembly lines, and eventually lead to layoffs." My guess is that the U.S. President will get involved in plenty of time for the holiday shopping season, if an agreement cannot be reached. We keep hearing that it is costing the economy $1 billion a day, but if demand simply becomes pent up during that period, at least the non-perishable goods should be able to make up a significant portion of the losses when the gates re-open. Additional warnings came after the bell from the Bank of New York (BK) and Guess (GES). The BK warning followed a similar warning at Comerica (CMA) this morning, which echoed the sentiment heard a couple of weeks ago from J.P. Morgan (JPM). Bad business loans are eating into the bank's bottom lines. BK saw problems similar to those of JPM, which stemmed from non-performing loans to the telecom sector. CMA blamed its restatement on problem loans to the retail automotive and manufacturing sectors. The pattern is disturbing, as a second wave of bad news stems from the economic downturn in many industries. These companies have either gone bankrupt or on their way there, and the banks that financed their growth are now taking the hit for a double dose to the market. There are likely many other banks facing the same problems, and if the banking sector tanks as the problems mount, any market recovery could be a long way off. The Guess warning just reiterates what we have already heard from other retailers: that September sales were terrible, following poor sales over the summer months. Heading into the holiday season, it is becoming apparent that a spending turnaround is not happening, as consumers are worried about jobs, and the layoffs of the last couple of years have caught up to consumer spending. Ever hit the wrong button on the remote and turn off the T.V. instead of turning up the volume? Well, a Bear Stearns clerk apparently hit the wrong button and almost turned off the S&P this afternoon. At 3:40 p.m., Bear Stearns entered orders to sell $4 billion worth of S&P securities, rather than $4 million worth. They were able to cancel all but $622 million of the orders prior to execution. This would have been an easy excuse for the end of day drop, had it not been 20 minutes before the close. There may be a bounce in the morning in some of those issues that were hit by mistake, however, the overall market direction should only be affected slightly, as the Dow gave up only 25 points in the last 20 minutes of trading. I would look for continued selling in the morning after the end of day warnings. However, if we approach the recent lows, expect to see a slowdown once again. We have bounced in the same area in the Dow on several occasions, so there are some buyers out there around that level. If those bulls go into hibernation, we may see 7000 fairly soon. ******************** INDEX TRADER SUMMARY ******************** What the heck was that? At 03:15, things were "little changed," but by 04:00 PM and the closing bell, it appeared that a bull's nose ring got jerked and his eyes swelled with tears. I know the feeling all too well. No, not getting my nose ring pulled, but getting punched right in the nose and the tearing of the eyes that follows. So what happened? It turns out that a clerk at Bear Stearns' entered an S&P sell order at around 03:40 PM EST for $4 billion worth of S&P instead of $4 million, which was marked on the ticket. When the trade began to execute other traders and computerized sell programs began to execute some risk management, sending the major averages lower. So, as a "point of order" I do think index traders need to take today's late session decline with a grain of salt as the market action was really driven by an erroneous sell program of $4 billion, compared to a smaller sell order of $4 million. Hey, what's a few bucks between friends. Right? Tonight's "news" that may impact the markets has semiconductor maker Advanced Micro Devices (NYSE:AMD) $5.37 +1.89% falling to $4.30 (-19% from its close) after the company warned on earnings. I've noted before that anytime AMD gives guidance, it is suspect at best as the company has a history of not giving good guidance (bullish or bearish). However, the company now expects Q3 sales of $500 million versus consensus of $615.1 million (from prior AMD guidance) and says that they now anticipate "a substantial operating loss" for the quarter, citing continuing weakness in the PC markets. Other news that will get some attention is Bank of New York's (NYSE:BK) $26.76 -7.9% warning that it will take a combined after-tax charge of $260 million to recognize deterioration in a number of telecom loans as well as a valuation adjustment against it equity portfolio. In New York Instinet trading, shares of BK fell to $23.51 (-12% from its close). The reason I think BK's news will get attention is the weakness noted in today's 01:00 PM EST update regarding weakness in the banks, which was brought on by Comerica's (NYSE:CMA) $40.00 -20% announcement that it would have to record a $328 million charge ($213 million after-tax) related to incremental provision for credit losses and goodwill impairment for the company's Munder Capital Management subsidiary. For S&P and even Dow traders, look for the CMA and BK "write- downs" and "loss provisions" to have financial bulls wondering "who's next" and further questioning the financial/banking stocks. This puts my profiled bullish trade (partial positions) in the Dow Diamonds (AMEX:DIA) $77.92 -2.6% from today's market monitor (12:46:42) at DIA $79.70 partially at risk, as Citigroup (NYSE:C) $29.60 -4.5% and JP Morgan (NYSE:JPM) $18.25 -5.9% are both "banking stocks" and Dow components. Dow Industrials Chart - Daily Interval When I profiled the DIA bullish trade, the Dow Industrials were breaking to a session high and getting leadership from my "key stock" in Johnson & Johnson (NYSE:JNJ) $58.30 +3.5%. If a trader took this bullish trade in the DIA's and did NOT over leverage and hold expiration calls from November or longer, I'd continue to hold that position (if YOU are comfortable with holding it). I would NOT be comfortable holding October expiration right now as I do not yet have any type of bullish reversal in the Dow Industrials Bullish % ($BPINDU). In today's 03:15 PM EST update, I did think that index bears could implement bearish trades in the S&Ps and NASDAQ-100. The 03:15 bearish trade profile was based on the work we did in last night's wrap and observations I thought a trader might make into today's close. S&P 500 Index (SPX) Chart - Daily Interval The SPX's session high of 851.93, was a 0.47% gain from yesterday's close of 847.01 and this was within my "2% gain limit" I felt a bearish SPX trader would want to see for a bearish trade into today's close. I've placed a "risk averse" stop at 840 for those subscribers that shorted/put the SPY/SPX that are not willing to risk more capital than the 38.2% retracement would allow. For those traders willing to give a bearish trade more time to work, I'd follow the trade with a trailing stop using the 21-day SMA as my maximum stopping point. The "first test" for a bear is to break back below our mid-point of regression near 815, with first bearish target of 800, then 777 and finally 765. If I were an options trader that couldn't watch the markets on a more frequent basis, I'd take a lunch break, see if the SPX has broken below 815. If so, then I'd lower my stop to just above 845. Then after a nap, I check to see if the SPX has traded 800. If it did, then I could lower my stop to just above 815, or break-even. Then, just before the close, I'd look to see if the SPX has traded 777. If it has, then I might lower my stop to 805. Please note. The lower trending regression channel on the SPX chart above is what I consider LONGER-TERM and much wider regression dating back to the March highs. On the S&P 100 Index (OEX.X) 415.93 -2.3% chart below, we're using a SHORT-TERM regression channel from the August 22nd relative high. Test our scenario.... "If the commercials don't like the economic data, they'll be shorting back near 420-430." This was a scenario we laid out in Monday's wrap, then revisited last night, to set up today's late session bearish entry. S&P 100 Index Chart - Daily Interval Evidently, one subscriber is still trading bearish in the indexes, or at least I think he/she is as I got an e-mail today asking about the bearish targets based on our 09/12/02 Index Wrap http://members.OptionInvestor.com/itrader/marketwrap/091202_1.asp and the potential head and shoulders top pattern that was developing. On 09/17/02, the neckline was broken and put into play the 380 level (based on our calculation from neckline=430 to head=480). That ties in nice with our fitted retracement bracket and 0% near 380.42. As the lower part of our regression channel is extended, I get a crossing point with 0% on October 14th. I will also note that on 09/12/02, we also discussed the OEX point and figure chart and bearish vertical count of 390. Combined, the head and shoulders pattern and bearish vertical count give OEX bears a target range of 380-390. I'd also have to say that today's inability of the OEX to put in much of a move higher has a bear starting to believe that commercials may indeed have been putting on some short positions in the 420-430 range. S&P trader's note: We now know that there was an erroneous S&P sell program triggered by a Bear Stearns trade entry error. As such, it makes it a little difficult to tell how stocks with S&P 500 exposure will trade in the first hour of trading. When the sell programs were triggered, computer generated sell programs kicked in and there was perhaps some selling that took place in the final 20-minutes of trading that shouldn't have. Just be aware that there may be some partial positions bought back near the open tomorrow morning. NASDAQ-100 Index Tracking Stock (AMEX:QQQ) - 60-minute intervals The QQQ's closed a little "stronger" than I would have liked to see. I would have preferred a more decisive close back below the $21.10 level. However, a bear does like the fade of bullishness near the $22.21 level and rolling MACD. Look for a break below today's low of $20.97 to eventually have the Q's trading a new 52-week low and my near-term target of $20.20. I played the October $21 puts (QAVVT) at $0.90, and look to cover at least 1/2 of the position on a trade near $20.20 to remove some risk from the trade (if a trade near $20.20 should take place). For those outright short the QQQ, then I'd use a trailing stop just above today's high or the $22.21 level, whichever level of risk you are more comfortable with. Advanced Micro Devices (NYSE:AMD) is NOT a NASDAQ-100 component, but it doesn't sound as if business has been booming and that tonight's news may weigh on technology stocks. Head and Shoulder Targets Here's a quick computation of potential bearish targets from the head and shoulders tops that were also present in the S&P 100 (OEX.X). Dow Industrials : head= 8,960 / neckline= 8,200 ; target=7,440 Note: The Dow has traded a low of 7,460 on 09/30/02 SPX : head= 950 / neckline= 860 ; target= 770 Note: The SPX has traded a low of 800 on 09/30/02 NASDAQ Comp: head=1,400 / neckline= 1,240; target= 1,080 Note: The COMPX has traded a low of 1,160 on 09/30/02 QQQ : head= $25.50 / neckline= $22.00; target= $18.50 Note: The QQQ has traded a low of $20.47 on 10/01/02 NASDAQ-100 : head= 1,025 / neckline= 875; target= 725 Note: The NDX.X has traded a low of 824 on 10/01/02 Quickly revisit the XAU.X For those trader using last night's thoughts on using the Gold/Silver Index (XAU.X) 67.16 -0.68% in their trading, here's a quick update. Gold/Silver Index (XAU.X) Chart - Daily Interval With 10-minutes left in trading, the XAU.X was actually showing a gain, but got hit lower into the close. It may have been partially attributed to the sell programs, but I'm not sure. However, I would think that with some banks "warning" of write- downs that "gold" would find some bidders. I do think our scenario for a "trap" in gold is in play, but we will have to wait until tomorrow to find out. (thinking is that gold is a hedge against financial concerns) One way a trader that used the XAU.X scenario outlined last night might continue to use this index of gold stocks going forward is this. If bearish the Dow Industrials, SPX, OEX or NDX then ideally a bear would like to see the XAU.X rally higher to signal that market participants are "worried" about something (bank write- downs, etc). If gold stocks don't rally then..... A Dow, SPX, OEX and NDX bear can become ALERT that maybe all this bad news (earnings, economic data, you name it) has already been factored into things and be more cautious in their bearish Dow, SPX, OEX and NDX trades by not being complacent and following any bearish action in their index trades with some disciplined stops. You will note that I did redraw my downward trend on the XAU.X when compared to last night's update. The reason I did this is to remind myself that the XAU.X has broken an upward trend and that the overriding trend is down right now. I will say this. I did attempt some short-term bullish trades near XAU.X and looked for gaps higher in stocks the following mornings, but there seemed to be willing sellers in gold stocks at that level. One advantage a bearish trader in the major market indexes may have in the near future is that if the index your trading gets close to your target and the XAU.X begins to find resistance at downward trend, then it may be signal to be locking in some gains near your bearish index targets. Don't let the XAU.X trading action in the coming sessions be the OVERRIDING influence to your trading. It's just one piece of a puzzle that traders may be able to use. A piece of the puzzle that tends to DIVERGE from the major market averages from time to time. Jeff Bailey ************************Advertisement************************* WINNER of Forbes Best of the Web Award _ optionsXpress voted Favorite Options Site by Forbes _ Easy screens for spreads, collars, or covered calls _ Free streaming quotes _ Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Longleaf Partners: Managed by Southern Asset Management, Inc. Southern Asset Management, Inc. ("SAM"), investment advisor to the Longleaf Partners Funds, is an independent, employee-owned investment firm founded in 1975. The Memphis-based firm has a unique "code of ethics" requiring all employees to limit their equity investments to Longleaf Partners Funds - unless granted clearance by a compliance committee. Also, all employees must report their securities transactions quarterly. Due to this partnership approach, SAM employees and affiliates are collectively the largest shareholders across the Longleaf Partners Funds. Southeastern does this to align its interests with those of shareholders and prevent conflicts of interest. Being the largest shareholders also means that the funds are managed simply, conservatively, effectively and with cost and expense in mind to maximize total return. All three Longleaf mutual funds are offered on a true no-load basis meaning no sales loads, 12b-1 or exit fees. The firm's flagship product, Longleaf Partners Fund (LLPFX), and sibling Longleaf Partners Small Cap Fund (LLSCX) have current expense ratios of just 0.91% and 0.95%, respectively, a roughly 0.50% annual expense advantage versus the average U.S. equity fund. Longleaf Partners International (LLINX) has a current expense ratio of 1.70%, which isn't cheap but is on par with its peer group. Note that the Longleaf small-cap product is currently closed to new investors, with some exceptions. Per the company website (www.longleafpartners.com), Longleaf Partners (LLPFX) is the largest of three funds with more than five billion dollars in net assets today. Longleaf Partners Small Cap (LLSCX) has $1.9 billion in assets (why it's closed), while Longleaf Partners International (LLINX) has roughly one billion dollars in assets today. Southeastern manages another $10+ billion in separately managed accounts for institutional investors. Total assets under management are over $18 billion today. Investment Style/Strategy Southeastern's investment team, approach and process are spelled out in the About Southeastern section of the fund website. They currently have eight portfolio managers/analysts composing their investment team, including O. Mason Hawkins, the firm's chairman, CEO and all-star portfolio manager. All three funds are managed using a value-oriented investment approach, while the investment process buzzwords are "unanimous decisions" and "team approach." Southeastern is a true value investor. The mutual funds seek to achieve superior long-term performance by purchasing equities of financially strong, well-managed companies at market prices that are significantly below SAM's assessment of their business value. Equity holdings are sold when they approach the firm's appraisal. Like other value-oriented money managers, Southeastern believes that equities purchased at prices substantially less than their intrinsic worth protect capital from significant permanent loss and can appreciate substantially once the market recognizes the company's economic value. A company's market price must be 60% or less of their appraisal to qualify for investment, according to the company website. Southeastern is a deep-value investor. What does being a deep-value manager mean for shareholders? It means Southeastern won't invest unnecessarily in stocks just to be fully invested. They would rather let the fund's cash level rise (and play it safe) than invest in an equity security which isn't trading well below their analysts' appraisal of the stock. Morningstar's Russ Kinnel wrote an article a few weeks ago that cited Mason Hawkins, Staley Cates, and John Buford and Longleaf Partners Fund (LLPFX) as among the best "cash-heavy funds" with approximately 18% of assets in cash recently. Because Southeastern is so picky in its stock selections, their mutual funds have had low downside volatility compared to their respective broad peer group. Per the Lipper Leaders website at www.lipperleaders.com all three Longleaf Partners funds are 1's or Lipper Leaders for "preservation of capital" in down markets. Longleaf Partners Fund and Longleaf Partners Small Cap Fund are also Lipper Leaders for expense, which permits them to employ a more conservative equity approach and still remain competitive. In the next section we see how well Southeastern's disciplined philosophy and process have translated into superior long-term performance, the firm's primary investment objective. Investment Performance Our performance analysis begins with the Lipper Leaders website, which ranks funds against their broad peer group over the latest 36-month period. Two funds, Longleaf Partners Fund and Longleaf International Fund, are Lipper Leaders (1's) for "total return." Their international fund, which applies the flagship product's value-oriented discipline to international equities, is also a Lipper Leader for "consistent return." Both are Lipper Leaders for "preservation," giving them strong return-risk profiles in relation to similar funds. In Lipper's system, Longleaf Partners Small Cap Fund's relative grades are not as strong as its siblings. While it is a Lipper Leader for preservation, the small-cap product is rated towards the bottom for "total return" and "consistent return." That is most likely the result of swelled assets, which caused capacity constraints. In the small-cap market you have to guard against chasing your own tail, and that may have hurt fund performance over the past three years. The fund's trailing 5-year numbers are still relatively strong compared to all U.S. equity funds. Relative to their Morningstar category peer group, all three of Longleaf Partners' funds are rated 4 stars (above average) or 5 stars (highest). Morningstar's star ratings are based on total return performance, as adjusted for risk and sales charges over various time periods with greater importance given to long-term performance. Below is a summary of the three funds' return and risk ratings per Morningstar. Longleaf Partners (LLPFX): Morningstar Category: Mid Cap Value Morningstar Star Rating: 4 Stars Morningstar Risk Rating: Average Morningstar Return Rating: Above Average Longleaf Partners Small Cap (LLSCX): Morningstar Category: Small Cap Value Morningstar Star Rating: 4 Stars Morningstar Risk Rating: Low Morningstar Return Rating: Above Average Longleaf Partners International (LLINX): Morningstar Category: Foreign Stock Morningstar Star Rating: 5 Stars Morningstar Risk Rating: Below Average Morningstar Return Rating: High A few things to add. Longleaf Partners Fund has a 5-star rating for the trailing 10-year period, based on "high" return relative to its mid-cap value category. In Lipper's system, the flagship fund is classified as "multi-cap value," perhaps a more accurate description of its investment style. For the trailing 3-year period ended October 1, 2002, Longleaf Partners Fund produced an average total return of 6.4% for its shareholders, 17.4% better than the S&P 500 index's 11% annual average loss and ranking in the 26th percentile of the mid-cap value category per Morningstar. The fund's 10-year annualized total return of 14.7% is 5.7% above that produced by the stock market (S&P 500 index), ranking it in the category's top 5%, a superior long-term performance achievement. Longleaf Partners International Fund (LLINX), an international multi-cap value version of the flagship Longleaf Partners Fund, doesn't have a 5-year history, but it's 3-year return and risk ratings suggest the value-oriented strategy has worked well in international markets also. Even with some of the fund's gains given back in recent months, Longleaf Partners International Fund sports a 3-year annualized return of 3.9% through October 1, 2002, outperforming its index benchmark (MSCI EAFE) by an average of 19.5% a year. Over the past three years, the MSCI EAFE index of developed markets has declined by 15.6% on an annual-equivalent basis. According to Morningstar, the fund's 3-year performance ranked in the top 2% of all foreign stock funds. While the long-term performance of Longleaf Partners Small Cap Fund (LLSCX) is still fine on a risk-adjusted basis versus its small-cap peer group, you have to acknowledge that the fund is currently closed to new investors, and that rising assets have possibly hurt the fund's short-term performance in relation to other small-cap value funds. Note that while Longleaf Partners Small Cap Fund's 3-year return of 2.9% on an annualized basis may be considered "subpar" within the small-cap value category (89th percentile), the fund's total return was 14.7% greater than the S&P 500 large-cap index, using Morningstar's numbers. Before assets swelled, this small-cap product was a top quartile performer, ranking in the 14th percentile of the small-cap value category for the trailing 3-year and 5-year periods according to Morningstar. The fund's 3-year annualized return of 5.2% topped the S&P 500 large-cap index by 6.5%, while the fund's return for the last five years has averaged 13.4%, 4.4% better than the S&P index benchmark. That is "significant" outperformance, what you would expect from a small-cap fund (greater return potential vs. large-cap funds). Conclusion There is a lot to like about Southeastern Asset Management and the Longleaf Partners Funds. They remind of other great value money managers such as Capital Research & Management (American Funds) and Dodge & Cox (Dodge & Cox Funds). Warren Buffet got wealthy following this conservative and disciplined value path. Since value and growth outperform at different times, Longleaf Partners fund shareholders should recognize that their "value" oriented style may sometimes lag the market and other types of stock funds. Same with large-cap and small-cap stocks (funds), which can outperform at different times. Likewise for foreign stock funds, which have the potential to outperform U.S. stock funds but don't always, so it's best to have a long-term view. With the interests of firm's employees aligned with those of mutual fund shareholders, you can count on Longleaf Partners Funds to apply prudent investment strategies in an efficient manner, limiting downside volatility and controlling expense. The end result is the potential for superior long-term total return performance for both fund employees and shareholders. For more information or a fund prospectus, log on to Longleaf Partners' website at www.longleafpartners.com. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** Looking for Odd Clues by Mark Phillips mphillips@OptionInvestor.com Plunge, Bounce, Zoom, Crash! That pretty much defines the action in the broad markets so far this week and it's only Wednesday. Traders who are trying to put on a directional trade in this volatile market have been frustrated by the lack of directionality. This week's strong moves in both directions are simply a microcosm of what has been happening over the past few months. Most days start out with a gap, sometimes with the trend and sometimes against it, but always difficult to trade. Lest you think you are missing something important, let me propose that there are a lot of traders that just can't seem to make sense out of the recent market action. There are plenty of traders that are playing the expectation that we are near an important market bottom, but there are just as many that are acting like they expect the bottom to fall out, just like we saw in late July. One clue to this bifurcated expectation is the CBOE Volatility index, which has been whipping around between 36-47 for the past month. The VIX remains high like this when there is a lot of uncertainty in the market, and that is definitely the case right now. Looking at a daily chart of the VIX this afternoon, I noticed that the VIX hasn't been below 30 since the first week in July. That's nearly 3 whole months where the VIX has refused to dip into its historically normal range between 20-30. My VIX chart only goes back to 1994, but in that timespan, late-1998 is the only period that presents a picture of such sustained volatility. Then we saw the VIX holding above 30 from late-August until the end of October, or roughly 8 weeks. We've been at these elevated levels for about 50% longer than in 1998, and judging by the action in the markets this week, the volatility doesn't appear likely to let up any time soon. What I find particularly interesting about this behavior is that while the VIX has remained high, the Bullish Percent PnF charts on all the major indices have cycled from Bear Confirmed in oversold to Bull Confirmed back to Bear Confirmed in Oversold. There are some slight variations between the different indices, but let's focus on the Dow Industrials for this discussion. In early July, the Bullish percent for the DOW was Bear Confirmed near the 30% level, and then proceeded to fall as low as 4% as the index fell as low as 7532 on July 24th, with the VIX printing an intraday high of 56.74. That was followed by an impressive rally (albeit a volatile one) that took the DOW briefly above 9000 before the late August through September plunge that dropped the DOW as low as 7460. What was interesting about the rally off the lows is that the VIX only dropped to just above 30, even while the Bullish Percent Chart went from Bear Confirmed to Bull Alert, all the way to Bull Confirmed with a high of 60%. The most recent decline has dragged the Bullish Percent chart all the way back down to 10%, although it is still in Bull Correction mode. The Bullish Percent would have to drop all the way to 2% (due to the extremely low reading in July) in order to go back into Bear Confirmed status. Throughout these wild swings in the market, the VIX has remained stubbornly high. So what does all this mean? I honestly don't know, but I'm trying to piece it all together into an actionable plan. According to my analysis, all of the major indices have bearish price objectives below their recent lows, but trying to game the downside right here carries with it a higher level of risk (as seen in yesterday's 346 point DOW rally) due to the depressed levels of the Bullish Percent charts. Here's where the Bullish Percent readings currently reside: DOW - Bull Correction at 13% S&P 500 - Bear Confirmed at 28% S&P 100 - Bear Confirmed at 23% NASDAQ 100 - Bear Confirmed at 21% NASDAQ Comp - Bear Confirmed at 29% Based on these metrics, it is clear that the bulk of the risk in the broad markets is to the upside, due to the fact that the Bullish Percent charts have a lot more upside potential than downside. But the bears still appear to be in control as all but the DOW are in Bear Confirmed. From a purely technical standpoint, I note that the Weekly oscillators (RSI, MACD and Stochastics) on the major indices are all trying to round higher, but haven't been able to pull it off just yet. My gut feel says that we are near an important bottom, but there is still some significant work to do before that expectation becomes reality. That thesis would play nicely in conjunction with the historical pattern of the markets to put in important bottoms in October, but that still leaves us with 4 weeks of continued volatile trade. Coming back to the topic of volatility, I took a look at the PnF chart of the VIX this afternoon and noticed an interesting pattern. Remember that the PnF chart format helps to remove a lot of the noise that we normally see on the bar and candle charts. So let's take a look at that chart and see what it tells us. Volatility Index (VIX) - Point and Figure Chart I normally don't look to the VIX for trading signals, but recognizing that we are clearly not in 'normal' market conditions, I'm looking for all the help I can get. The sideways consolidation of the VIX on the PnF chart tells me that the broad market is getting ready to make a big move and when it occurs, I think the VIX will confirm that it is THE MOVE by breaking out of its recent range. It is interesting that the low on the VIX on yesterday's huge rally was 39.77. It will take a print at 39 or below to put the VIX on a Sell signal, and nullify the current bullish target of 61. My gut feel is that we'll get one more push lower in the broad markets (possibly setting new lows for the year), which will be accompanied by one more blowoff in the VIX above 50. That would make sense given the still-gloomy fundamental picture as we head into what is likely to be a dismal earnings season. But then we ought to see a confluence of factors lining up to give us a very nice rally into the end of the year. Here are the factors that I'm looking for to confirm my bullish view between now and the end of October: 1. VIX pushing above 50 again with the broad markets slightly breaking their lows for the year. 2. Bullish Percent charts for the major indices reversing from oversold condition below current levels. 3. Successful upturn in multiple oscillators (MACD, RSI and Stochastics) on weekly charts of all the major indices. While I know my musings today don't necessarily provide an actionable trading plan over the near term, it does provide some benchmarks that we can use to evaluate the progress of the markets over the next few weeks. As an added bonus for my bullish thesis for the last 2 months of the year, I'd like to see the S&P 500 testing the bottom of that long-term descending channel (between $700-725) that I spoke about in the LEAPS column last weekend. That would give me added confidence that the bulls have enough fuel (due to a deeply oversold market), so that they can stage a solid rally off the lows like we saw at the end of July. One thing I think we can rely on, is that October is likely to be an exciting month! Have a great week! Mark ************************Advertisement************************* VOTED one of "Best Online Brokers" (4 stars)--Barron's _ optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's _ 8 different online tools for options pricing, strategy, and charting _ Access to options specialists via email, phone or live chat online _ Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. 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The Option Investor Newsletter Wednesday 10-02-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: BAX, FLIR Dropped Calls: none Dropped Puts: none Play of the Day: Put - FLIR Big Cap Covered Calls & Naked Puts: Market Bears Regain Control! Updated on the site tonight: Market Posture: I Thought The Calender Changed Market Watch: The Pull of Gravity ************************Advertisement************************* Quit paying fees for limit orders or minimum equity _ No hidden fees for limit orders or balances _ $1.50 /contract (10+ contracts) or $14.95 minimum. _ Zero minimum deposit required to open an account _ Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** STOP-LOSS UPDATES ***************** BAX - put Adjust from $33.50 down to $30.00 FLIR - put Adjust from $39.00 down to $38.00 ************* DROPPED CALLS ************* none ************ DROPPED PUTS ************ none ************************Advertisement************************* optionsXpress has "...a lot of bang for the buck."--Barron's _ $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees _ Easy screens for spreads, collars, or covered calls! _ Contingent, Stop Loss, Trailing stop, or OCO _ 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ********************* PLAY OF THE DAY – PUT ********************* FLIR – FLIR Systems $34.55 -0.44 (-3.10 this week) Company Summary: FLIR is engaged in the design, manufacture and marketing of thermal imaging and stabilized camera systems for a wide variety of commercial, industrial and government applications. The company's products are divided into two categories, which include the thermography products and imaging products. In the Thermography division, FLIR manufactures products that are sold to commercial, industrial, research and machine vision customers. For industrial customers, FLIR has developed thermography systems that feature accurate temperature measurement, storage and analysis. The Imaging division caters to military, law enforcement, surveillance and security customers. Most Recent Write-Up: Along with it being one of the worst months for equity bulls, October also ushers in tax-loss selling season for many funds, as they look to balance gains against losses in their portfolios. Clearly there aren't a lot of stellar winners this year, and even stocks that have failed to rally strongly may be candidates for October sales. FLIR is one such stock due to the fact that it hasn't fallen apart over the past 12 months. While it hasn't fallen apart, neither has it been a strong stock, as it has been trapped under a descending trendline since April of this year, posting one lower high after another. The $35 level has provided consistent support throughout the past year, but today's intraday plunge to just above $33 broke that support and generated a fresh PnF Sell signal. The vertical count is pointing to an eventual target of $29, so clearly the downside appears to be limited. Following the recent breakdown, (despite the intraday rebound), resistance looks firm at $36 and impenetrable in the $38-39 range. Due to the sharp recovery from today's low, we want to be very careful about entering on a breakdown. It is easier to manage risk in this play by fading a failed rally. A rollover near $36 makes sense for initial positions, although a bullish failure near $39 certainly looks attractive. Not only is this the site of significant resistance over the past month, but it is also the location of the long-term descending trendline and the 50-dma. After taking a position, target $29 to the downside and set stops initially at $39. Why We Like It: FLIR never experienced the rebound we were looking for as an entry point. Instead it showed extreme weakness. The fact that it opened at $35 and was immediately hammered from that level shows an abundance of sellers there. The intraday chart shows its attempts to hold $34 were strong throughout the afternoon, but eventually gave in to selling pressure at that level as well. With a new level of resistance at $35 and possibly at $34 as well, we feel confident the ceiling has been lowered. New entries can look for a failed rebound at $35 for entry, in order to maximize the play down toward our target of $29. BUY PUT OCT-35*FFQ-VG OI=260 at $2.80 SL=1.40 BUY PUT OCT-30 FFQ-VF OI=154 at $0.80 SL=0.00 Average Daily Volume = 300 K ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Market Bears Regain Control! By Ray Cummins The major equity averages retreated today as investors adopted a "wait-and-see" attitude with regard to the economy and corporate profits. The Dow was down 178 points to 7,760 on weakness in conglomerate, financial and chemical issues. Johnson & Johnson (NYSE:JNJ) was the blue-chip standout after news of a rival drug company's legal setback with the stock up $2.19 to $58.49. In the hi-tech group, early gains in the semiconductor and hardware segments faded as selling resurfaced in all but a few select issues and networking stocks were among the worst performers. The NASDAQ Composite fell 26 points to 1,187. In the broader market, banking and automobile stocks slumped and oil shares consolidated while gold and utility issues generally moved higher. The S&P 500-stock index slid 19 points to 827. Volume came in at 1.66 billion on the NYSE and at 1.74 billion on the NASDAQ. Market breadth was negative as losers outpaced winners by roughly 2 to 1 on both the Big Board and the technology exchange. Treasury instruments moved higher with the decline in equities. The 10-year Treasury note advanced 10/32 to yield 3.68% and the 30-year bond was up 18/32 to yield 4.72%. *************** SUMMARY OF CURRENT POSITIONS *************** (As of 10-01-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield AMGN OCT 35 33.15 44.56 $0.85 6.1% CHTT OCT 35 34.50 42.07 $0.50 4.3% CCMP OCT 30 28.90 37.86 $1.10 8.1% INTU OCT 40 38.60 47.42 $1.40 6.9% COF OCT 30 29.30 36.32 $0.70 6.5% EASI OCT 50 49.00 56.70 $1.00 5.1% INVN OCT 25 24.45 31.30 $0.55 6.3% LLL OCT 47 46.65 53.75 $0.85 4.7% MIK OCT 40 39.35 45.55 $0.65 4.6% ROOM OCT 40 39.25 50.39 $0.75 5.1% BSTE OCT 20 19.65 25.84 $0.35 5.6% ESRX OCT 45 44.50 51.28 $0.50 4.0% GD OCT 75 73.65 83.98 $1.35 5.3% INVN OCT 25 24.45 31.30 $0.55 7.8% NOC OCT 110 108.55 122.80 $1.45 4.0% XAU OCT 60 59.25 67.62 $0.75 4.6% AZO OCT 70 69.30 81.28 $0.70 4.0% BSTE OCT 22 22.10 25.84 $0.40 8.3% ESRX OCT 45 44.45 51.28 $0.55 5.6% FRX OCT 70 69.20 89.85 $0.80 4.7% LLL OCT 50 49.45 53.75 $0.55 4.5% ROAD OCT 30 29.65 37.42 $0.35 5.8% SCHL OCT 40 39.55 46.27 $0.45 4.6% Cognizant Technology Group (NASDAQ:CTSH), although currently positive, has been closed to protect gains and/or limit losses. Naked Calls Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield QLGC OCT 40 41.20 25.25 $1.20 9.7% INTU OCT 50 51.50 47.42 $1.50 6.8% EBAY OCT 65 66.20 53.51 $1.20 5.5% QLGC OCT 45 45.45 25.25 $0.45 4.9% XL OCT 80 81.25 76.36 $1.25 4.6% DIA OCT 86 87.15 80.00 $1.15 4.0% MUR OCT 90 91.75 84.67 $1.75 6.2% BZH OCT 70 70.70 63.46 $0.70 5.5% MUR OCT 90 91.35 84.67 $1.35 6.7% Beazer (NYSE:BZH) will likely test the sold strike ($70) in coming sessions thus conservative traders may want to take a small profit now rather than risk a potential loss. A close above $86 in Murphy Oil (NYSE:MUR) will indicate a renewed upward trend, thus suggesting an early exit in the bearish position. Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status PDCO 52.63 51.17 OCT 45 50 0.65 49.35 $0.65 Open? MBG 32.46 35.09 OCT 27 30 0.30 29.70 $0.30 Open APOL 43.48 45.30 OCT 35 40 0.50 39.50 $0.80 Open ETM 48.45 49.25 OCT 40 45 0.65 44.35 $0.65 Open Previously closed positions in Lowe's Companies (NYSE:LOW) and Stryker (NYSE:SYK) remain positive while H&R Block (NYSE:HRB) is slightly negative. Patterson Dent remains on the early-exit watch-list and a close below the sold strike at $50 will signal our departure from the position. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status JNJ 55.48 56.30 OCT 65 60 0.50 60.50 $0.50 Open? MSFT 48.58 46.23 OCT 60 55 0.55 55.55 $0.55 Open PHM 48.46 43.45 OCT 60 55 0.60 55.60 $0.60 Open WFT 39.37 38.74 OCT 50 45 0.60 45.60 $0.60 Open APA 56.57 59.34 OCT 65 60 0.70 60.70 $0.70 Closed WY 49.78 45.97 OCT 60 55 0.60 55.60 $0.60 Open LEN 55.07 57.55 OCT 65 60 0.70 60.70 $0.70 Open? PII 65.02 64.00 OCT 75 70 0.50 70.50 $0.50 Open TOT 63.74 70.04 OCT 75 70 0.50 70.50 $0.46 Closed With the current oversold conditions and Tuesday's sharp rally, traders should monitor closely any positions which are near the sold strike prices. Apache (NYSE:APA) and Total Fina (NYSE:TOT) benefited from the upside activity in oil industry shares and conservative traders should consider closing these positions to protect profits and/or limit losses. Johnson & Johnson (NYSE:JNJ) and Lennar (NYSE:LEN) are also on the list of potential early-exit candidates as they have both moved to the top of recent trading ranges on increasing volume. Credit Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month &Price Basis Price (Loss) Mon. Yield INTU OCT 50C 51.50 47.42 $1.50 6.8% INTU OCT 40P 38.60 47.42 $1.40 6.9% GILD OCT 35C 36.45 34.77 $1.45 9.8% GILD OCT 30P 28.50 34.77 $1.50 10.4% BBBY OCT 27P 27.05 32.43 $0.45 6.2% BBBY OCT 37C 38.30 32.43 $0.80 7.1% CAI OCT 30P 29.55 36.31 $0.45 5.0% CAI OCT 40C 40.55 36.31 $0.55 5.3% WFMI OCT 40P 39.45 42.79 $0.55 4.2% WFMI OCT 50C 50.50 42.79 $0.50 3.6% CCMP OCT 50C 50.30 37.86 $0.30 4.7% CCMP OCT 30P 29.65 37.86 $0.35 5.5% EBAY OCT 60C 61.00 53.51 $1.00 6.5% EBAY OCT 50P 49.20 53.51 $0.80 6.3% Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (I monitor the positions marked with ***). *************** BULLISH PLAYS - Premium Selling All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. *************** AZO - Autozone $81.40 *** Solid Earnings Outlook! *** AutoZone (NYSE:AZO) is a specialty retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. The company operated over 3,000 auto parts stores in the United States and 21 in Mexico. Each store carries an extensive product line for cars, vans and light trucks, including new as well as re-manufactured automotive hard parts, maintenance items and car accessories. The company also has a commercial sales program in the United States that provides commercial credit and prompt local delivery of parts and other products to repair garages, dealers and service stations. AutoZone does not sell tires or perform automotive repair or installation. In addition, the company sells automotive diagnostic and repair information software through its ALLDATA subsidiary, and diagnostic and repair information through alldatadiy.com. AZO - Autozone $81.40 Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 70 AZO VN 2,309 0.40 69.60 3.5% "TS" SELL PUT OCT 75 AZO VO 1,061 0.95 74.05 6.7% *** SELL PUT OCT 80 AZO VP 620 2.15 77.85 12.3% *************** FRX - Forest Laboratories $89.25 *** Rising Sales = Rally! *** Forest Laboratories (NYSE:FRX) and its many subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. Forest's most important United States products consist of branded ethical drug specialties marketed directly, or detailed, to doctors by the firm's Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare and Forest Specialty Sales sales forces. Such products include Celexa, Forest's SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, Forest's once daily diltiazem for the treatment of hypertension and angina, and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Laboratories $89.25 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 80 FHA VP 1,119 0.70 79.30 4.9% *** SELL PUT OCT 85 FHA VQ 743 1.40 83.60 8.1% *************** WLP - WellPoint Health $76.59 *** Health Sector Rally! *** WellPoint Health Networks (NYSE:WLP) is a managed healthcare firm. As a result of the January 2002 completion of its merger with RightCHOICE Managed Care, the company has over 12 million members. The company offers a broad spectrum of network-based managed care plans, including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), as well as point-of-service (POS) and other hybrid plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The firm also provides an array of specialty and other products, including pharmacy, dental, workers' compensation managed care services, utilization management, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. WLP - WellPoint Health $76.59 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 72.5 WLP VV 793 0.70 71.80 4.9% *** SELL PUT OTC 75 WLP VO 945 1.50 73.50 9.3% *************** BULLISH PLAYS - Credit Spreads *************** UNH - UnitedHealth Group $89.50 *** Bullish Sector! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The firm's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes the UnitedHealthcare and Ovations businesses; Specialized Care Services, and Ingenix. UNH - UnitedHealth Group $89.50 PLAY (moderately aggressive - bullish/credit spread): BUY PUT OCT-80.00 UHB-VP OI=2497 A=$0.55 SELL PUT OCT-85.00 UHB-VQ OI=3546 B=$1.15 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$84.30 *************** Speculation Plays - 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. *************** THC - Tenet Health Care $51.55 *** Awesome Earnings! *** Tenet Healthcare Corporation (NYSE:THC) is an investor-owned healthcare services company in the United States. The firm's subsidiaries and affiliates own or operate over 100 domestic general hospitals with approximately 28,000 licensed beds and related healthcare facilities, serving a range of communities in 17 states. Tenet also owned one general hospital and related healthcare facilities in Barcelona, Spain, and held investments in other healthcare firms. The related healthcare facilities included a small number of rehabilitation hospitals, specialty hospitals, long-term care facilities, a psychiatric facility and medical office buildings located on the same campus as or nearby its general hospitals, physician practices and various ancillary healthcare businesses, including outpatient surgery centers, home healthcare agencies, occupational and healthcare clinics in rural areas and health maintenance organizations. THC - Tenet Health Care $51.55 PLAY (conservative - bullish/synthetic position): BUY CALL NOV-55.00 THC-KK OI=708 A=$0.80 SELL PUT NOV-46.62 THG-WX OI=857 B=$0.65 INITIAL NET-DEBIT TARGET=$0.00-$0.05 TARGET PROFIT=$0.85-$1.10 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $1,650 per contract. *************** EXPE - Expedia $46.06 *** Elevator Going Down! *** Expedia (NASDAQ:EXPE) is a provider of travel-planning services. The firm's global travel marketplace includes direct-to-consumer Websites offering travel-planning services located at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl and Expedia.it. The firm also provides travel-planning services through its site, Voyages-sncf.com, as part of a joint venture with the state-owned railway group in France. In addition, the company provides travel planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is a division of Travelscape, one of the company's subsidiaries. In February 2002, a controlling stake in the company was acquired by USA Networks. EXPE - Expedia $46.06 PLAY (aggressive - bearish/synthetic position): BUY PUT NOV-35 UED-WG OI=67 A=$1.50 SELL CALL NOV-55 UED-KK OI=92 B=$1.45 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.60-$0.75 Note: Using options, the position is similar to being short the stock. The initial collateral requirement for the sold call is approximately $1,100 per contract. *************** Neutral Plays - Credit Strangles Here is another candidate for traders who favor neutral-outlook premium-selling strategies. The issue has a relatively stable chart pattern and robust option prices, however current news and market sentiment will have an effect on this position, so review the play thoroughly and make your own decision about its outcome. *************** RNR - RenaissanceRe Holdings $37.49 *** Trading Range? *** RenaissanceRe Holdings (NYSE:RNR) offers reinsurance and insurance coverage that is subject to the risk of natural as well as man-made catastrophes. The firm's principal business is property catastrophe reinsurance, which it engaged in through its subsidiary, Renaissance Reinsurance. The firm provides reinsurance to insurance companies and other reinsurers, primarily on an excess-of-loss basis, meaning that it begins paying when its customers' claims from a catastrophe exceed a certain retained amount. Through these coverages, the firm is subject to claims arising from large natural catastrophes, such as earthquakes and hurricanes, and it is exposed to claims arising from other natural and man-made catastrophes, such as winter storms, freezes, floods, tornadoes, fires and explosions. The company also writes property catastrophe reinsurance on behalf of joint ventures, including Top Layer Re and DaVinci Reinsurance. RNR - RenaissanceRe Holdings $37.49 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 40 RNR JH 397 0.50 40.50 7.3% SELL PUT OCT 35 RNR VG 1,438 0.55 34.45 8.0% *************** BEARISH PLAYS - Naked Calls Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** SNPS - Synopsys $34.60 *** Multi-Year Low! *** Synopsys (NASDAQ:SNPS) is a supplier of unique electronic design automation (EDA) software to the global electronics industry. The company's products are used by designers of integrated circuits, including system-on-a-chip ICs, and the electronic products (such as computers, cellular phones and Internet routers) that use such ICs to automate significant portions of their chip design process. ICs are distinguished by the speed at which they run, their area, the amount of power they consume and the cost of production. The company's products offer its customers the opportunity to design ICs that are optimized for speed, area, power consumption and production cost, while reducing overall design time. Synopsys also provides consulting services to assist customers with their IC designs, as well as training and support services. SNPS - Synopsys $34.60 PLAY (moderately aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 35 YPQ JG 94 2.40 37.40 28.8% SELL CALL OCT 40 YPQ JH 257 0.70 40.70 14.6% *** SELL CALL OCT 45 YPQ JI 1,255 0.20 45.20 5.3% "TS" *************** BEARISH PLAYS - Credit Spreads All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** ATK - Alliant Techsystems $69.25 *** Premium Selling *** Alliant Techsystems (NYSE:ATK) is a supplier of aerospace and defense products to the U.S. government, America's allies and major prime contractors. ATK also is a supplier of ammunition to federal and local law enforcement agencies and commercial markets. ATK designs, develops and produces rocket propulsion systems for a wide variety of U.S. Government and commercial applications. The firm is also the sole supplier of the reusable solid rocket motors used on NASA's Civil Manned Space Launch Vehicles. ATK designs, develops and manufactures small, medium and large caliber conventional munitions for the U.S. and allied governments as well as for commercial applications. The company manufactures and develops small-caliber ammunition for the U.S. military and its allies, federal and local law enforcement, and commercial markets. ATK - Alliant Techsystems $69.25 PLAY (conservative - bearish/credit spread): BUY CALL OCT-80 ATK-JP OI=66 A=$0.25 SELL CALL OCT-75 ATK-JO OI=461 B=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$75.45 *************** FNM - Federal National Mortgage $64.62 *** Interest Rate Hedge *** Federal National Mortgage Association (NYSE:FNM), commonly known as Fannie Mae, is a company that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. Fannie Mae does not directly lend money to homebuyers, but works with lenders to ensure that there is no shortage of funds available for mortgage loans. The method in which Fannie Mae accomplishes this is by purchasing mortgages from a variety of institutions that make up the primary mortgage market. Primary market lenders include mortgage companies, savings and loans, commercial banks, credit unions and state and local housing finance agencies. These are the businesses where the mortgages are originated and the funds are loaned directly to the borrower. Fannie Mae then purchases the mortgage, thus allowing the primary market lender to replenish their funds and lend more money to homebuyers. FNM - Federal National Mortgage $64.62 PLAY (conservative - bearish/credit spread): BUY CALL OCT-75 FNM-JO OI=3674 A=$0.10 SELL CALL OCT-70 FNM-JN OI=8644 B=$0.60 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$70.55 ************** MARKET POSTURE ************** I Thought The Calender Changed To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/100202.asp ************ MARKET WATCH ************ The Pull of Gravity To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/100202.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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