The Option Investor Newsletter Sunday 10-06-2002 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 Madness Futures Market: October’s colors should be “Red” not Orange and Black Index Trader Wrap: Still bearish, but signs of a market rebound are present Editor’s Plays: Locked Out! Market Sentiment: Does a Flat Basketball Bounce? Ask the Analyst: Patience Pays Off Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Suck'em in and spit'em out Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 10-4 WE 9-27 WE 9-20 WE 9-13 DOW 7528.40 –63.58 7701.45 -284.57 7986.02 -326.67 8312.69 -124.51 Nasdaq 436.31 – 9.13 1199.08 - 22.00 1221.08 - 70.28 1291.36 - 3.94 S&P-100 403.22 – 4.03 413.22 - 10.68 423.90 - 20.34 444.24 - 2.43 S&P-500 800.28 –14.70 827.36 - 18.03 845.39 - 44.41 889.80 - 4.12 W5000 7598.62-175.00 7872.54 -150.63 8023.17 -417.71 8440.88 - 40.32 RUT 347.98 –14.29 361.77 - 5.51 367.28 - 22.70 389.98 - 40.32 TRAN 2137.68 –13.39 2185.17 + 1.15 2184.02 - 62.85 2246.87 - 10.20 VIX 46.28 + 3.14 43.14 - 1.41 44.55 + 5.24 39.31 - .73 VXN 60.28 + 2.42 57.86 - 1.22 59.08 + 3.23 55.85 - .69 TRIN 1.98 2.09 0.86 1.53 Put/Call 0.97 0.90 1.16 0.89 ****************************************************************** October Madness By John Seckinger jseckinger@OptionInvestor.com An initially hard-to-interpret September payroll report tried to give bulls some hope during trading on Friday. However, it was not long before the pattern of lower equity and higher Treasury prices took over once again. The Nikkei had closed above 9000 (9027), futures were mixed due to anticipated warnings from EMC and SGP, and November Federal Funds were showing a 100% chance of an ease by the Fed by the FOMC meeting on November 6th. Then the much-anticipated payroll report was released. . The Labor Department reported a decrease in payrolls by 43,000 during the month of September, much worse than the 6,000 expected by economists. However, August’s reading was revised much higher to 107k from the previous 39k increase. Also encouraging for bulls was a decrease in the unemployment, falling to 5.6% from 5.8, month prior. Economists were expecting a 5.9% unemployment rate, and it was only April when unemployment reached six percent. Since the jobs report household survey during 2002 has been extremely volatile, traders’ initial nervousness following the release was understandable. Therefore, did it make sense to simply follow the bond markets’ lead (higher yields) and send equities higher? Some equity traders apparently thought so. The December 30-year Bond (USZ2), at 9:30 a.m., was trading at 112-14 and lower by 1 full point (32/32). Furthermore, it seemed as though fixed-income traders were also rushing out of five-year notes, freeing up cash for more productive assets, possibly including equities. With the initial bid in stocks was unable to reach 7800 level (intra-day high of 7784) during the first few minutes of trading, traders evidently began to become nervous. This nervousness spread to the bond pits, as short covering quickly began to materialize. First 7000 in the Dow was taken out, then 7683, 7600, and then 7553. Selling pressure took place in the Nasdaq as well, with the index hitting new multi-year lows and solidly falling under the psychologically-important 1200 level. By sessions end, the Dow had lost 188.79 points to close at 7528 on volume of 1.8 billion. This was the lowest close in the blue chips since mid-November 1997. Down volume beat up volume by a 6:1 margin, while decliners easily outpaced advancers by a ratio of nearly 3:1. Also noteworthy was that 364 stocks hit new lows as only 35 managed to set a new high. Turning to the tech-laden Nasdaq, the Index shaved 25.67 points to close at 1139 on impressive volume of 1.6 billion. Down volume handily beat up volume by a 4:1 margin, and only 16 stocks set new highs while 365 companies recorded a new low. The S&P 500 Index closed lower by 18-points, or 2.2 percent, but did manage to remain above the psychologically important 800 level (closed at 800.58). With the Dow losing 2.5 percent during trading on Friday, sectors that underperformed the blue chips included Healthcare (-4.50%), Biotech (4.30), Utility (4.00), Airline (3.25), Semiconductor (2.90), and Banking (2.67) issues. Sectors showing strength included the Gold and Silver Index (+0.56%) and Treasury Bonds (0.16). As far as specific companies are concerned, EMC was halted after the close on Thursday and initially took the storage sector down with it (QLGC, BRCD, and NTAP). On Friday, shares closed down 23.55% at 3.83 on volume of almost 70 million. Other companies that entered the spotlight on Friday included SAP, FDC, AMAT, CI, UPS, and MO. Beginning with SAP AG, Lehman believes that the company should lower their annual guidance as overcapacity remains an issue while pricing in Europe continues to decline. Shares of this IT service provider fell 4.19% to 10.28. It was in mid-March when shares were near 40. First Data (FDC) made headlines when shares were downgraded to “underweight” from Morgan Stanley. Reasons included a material slowdown from Western Union within the next 12 months. Shares of FDC rallied on Friday from a low of 23.75 to close at 26.40 and higher on the session by 0.45 percent. Morgan Stanley was also responsible for getting AMAT into the spotlight, since the investment house cut estimates for semi equipment stocks due to weak seasonality readings, lower utilization rates, and reductions to capital expenditure plans. AMAT, after having estimates cut for 2002-2004, fell 1.47% on Friday to close at 11.33. Shares of Cigna (CI) lost over 10% to 62.18 after being downgraded by Salomon Smith Barney to “underperform”. Company’s 2003 estimates were cut to 8.10 from 8.90, while the price target on CI fell to 81 from 89. Salomon also cut 2003 estimates for United Parcel Service (UPS), worried about a weak retail sector and delayed profitability within their logistics unit. Shares of UPS fell 3.75% to 61.60. With a few hours left in Friday’s trading session, news hit the wire that a jury in the Los Angeles Superior Court ordered Philip Morris to pay 28 billion dollars as punishment for causing lung cancer of a California woman. At the announcement, shares were trading near 40. By the close, shares of MO had fallen 7.36% to 36.59 on massive late-day sell orders. One other noteworthy event occurred late in trading as well, centering on the West Port strike apparently costing the US at least 1 billion dollars a day. The news was actually a rumor that dockworkers were nearing a settlement. Before the rumor, the Dow was near 7500; however, word of a possible settlement sent equities higher and blue chips to 7636 within 25 minutes. It would have been interesting to see the Dow’s reaction to the rumor if stocks were significantly higher at the time. Speaking of the Dow, a look at a monthly chart shows prices actually outside a regression line beginning in January 2000. This should signal to bears that oversold conditions exist; however, it certainly does not mean that a “third standard deviation” lower cannot materialize. The nice thing for traders is that there is a proverbial line in the sand: 7442 (give or take a few points, since stops could be just underneath). Chart of Dow Jones Industrials, Monthly It would be nice to have an RSI Bullish Divergence (RSI remaining high as prices set a relative low); nonetheless, the current 30.71 reading should have bears analyzing risk/reward going forward. If 7442 is taken out, there is a good chance this area will become strong resistance and market pundits, including myself, will expect an explosive move to 7000. Note: To get back inside the Regression line, the Dow would have to rise above 7689 (a downward sloping trend line, so this level will continue to fall). Once back inside this channel, shorts should be forced to cover en masse. Turning to the tech-laden Nasdaq, new multi-year lows place the index solidly under 1200 and forcing technicians to use regression analysis for downside objectives (yes, the H&S formation on a daily chart can be used as well). Least resistance clearly remains lower for this tech index; however, the new relative low was accompanied by a relatively high RSI reading. This bullish divergence only means that shorts could potentially cover at any time. What level could be the catalyst for such a rally? I would look first at 1153 and then 1192. If such a rally fails to materialize and shorts remain aggressive, the downside objective according to the regression line comes in at 1000. Note: This 1000 level will decrease daily, since the regression line is downward sloping. Chart of the Nasdaq Composite, Weekly With earnings light next week and no real economic events due out until Friday, the catalyst during the second week of October may come from the Gold Index (XAU). Currently at a pivotal juncture, Gold is close to testing it 50% retracement from 54.67 to 77.34 (66) and currently under an intermediate support/resistance (read: pivotal) level of 67.48. On Friday, the XAU index rose 0.56% to 67.05. If 67.48 can be closed above during trading next week, enthusiasm in the commodity might pick up and a test of 72 (blue line) would become the near term objective. With the 22, 50, and 200 DMA’s all converging near 70, there is a good chance an explosive move will take place (could theoretically be higher or lower). Therefore, before entering a trade, take a look at this commodity (which trades inversely to the dollar) in order to gauge risk. Chart of Gold and Silver Index (XAU), Daily Speaking of earnings and a light economic docket, notable earnings next week includes PEP before the open on Tuesday, while RMBS, RBAK, and most-importantly YHOO is set to release earnings after the close on Wednesday. On Friday, GE is scheduled to report before the market opens. Estimates for GE’s 3Q Net Income is at 0.40 versus 0.33, year ago. Turning to the economic releases, the August Consumer Credit report is due out at 3:00 p.m. on Monday, and then there are no more releases until Thursday morning (only Initial Claims seems noteworthy). Friday’s economic releases should take center stage, as Retail Sales, PPI, and Preliminary Michigan Sentiment numbers will be released at 8:30 and 8:45 a.m., respectively. With the term “new multi-year low” becoming commonplace within financial publications, traders can continue to play the trend of lower equity prices; however, risk is certainly becoming high and tight stops have to be used effectively. Easier said than done, especially with the volatility index at 46.28 and bonds trading in a two-point range on Friday alone; nevertheless, as a trader, support/resistance lines have to be respected and used regardless of nervousness between market participants. Moreover, now could be the time to begin paying close attention to Intermarket relationships, especially bonds and gold issues. It only takes a second to pull up a chart of the December Bond (USZ2) or Gold Index (XAU) before pulling the trigger. This extra step could be the difference between capturing a sizable move or being caught in a vicious bear trap. Good luck. ************** FUTURES MARKET ************** October’s colors should be “Red” not Orange and Black Dow 7528 – 188 Comp 1139 - 25 SPX 800 - 18 OEX 403 - 9 QQQ 20 - .39 NYSE: Decliners 2415 to 820 Advancers New Lows of 375, New Highs 39 Down Volume of 1535 Million shares Up Volume of 261M NASDAQ: Decliners 2319 to 980 Advancers New Lows 365, New Highs 16 Down volume 1294M Up Volume of 280M This was the 5th week in a row of negative Index closes. New Yearly and Multi-year lows formed across the board this week. Market continues the trend of "Sell the Bad News, and Short the rally on any Good News". This was the lowest weekly close this year on : DOW, SPX, NDX, etc etc Recap of Last 24 hours (Thursday's close to Friday close) I am going to make a feeble attempt to cover the "Whyness" of the last 24 hours in this Recap. If you were gone Friday, or a portion of it; looking at a Dow or SPX chart will tell where prices traded, but not "Why" they traded there. Obviously, a great deal more happened, and this is simply my view. Thursday 4pm Market Close | Storage Stock EMC warns saying very bearish comments on business IT Spending; hurting IBM, CSCO, QLGC, BRCD, NTAP on Friday. SP Futures (SPoos) at 818-819 (its triple bottom on Thursday, and 50% retracement of Thursday’s low/high. Thursday 11pm | Drug stock SGP pulls a late-night "sneak warn" hurting the two Dow drug stocks JNJ and MRK on Friday, also causing Friday weakness in the BBH biotech index. Thursday evening: Japan’s Nikkei opens at 8850 to a new 19-year intraday low; however it does close at 9000 by day’s end off short-covering. Thursday 12am: SP Futures (SPoos) at 823 off the Nikkei rally Friday Oct 4th early morning: Nikkei’s rally is forgotten as Europe markets opened Flat, but sell all day, closing Red, and at day lows. Germany’s DAX index closes at new 5 year lows. 7am: SPoos at 818, following Europe lower, and at morning lows, closing the gap back to Thursday’s 4pm level. 8am: Dow component Alcoa (AA) reports non-impressive earnings 830am: Somewhat confusing, but important, Job Numbers are reported. 834am: The bullish portion of the Jobs Data very quickly rallies SP Futures 10 points to the 828-830 area (this is the same level that Thursday’s late-day rallied failed at). Not a typo, SPoos rallied 10 points in under 5 minutes. This 828-30 area will also become the day’s High; and a double-top when including Thursday’s 3pm rally at the same 828-830 level. 930am: Futures at open: SP 825, NDX 847, Dow 7750 (a gap up from Thursday’s close) off the bullish portion of the 830am Jobs Data. Trend from open was "fade the gap up" and once SPoos lost the 823 support, it quickly retested the 818 support but on this 5th test of that number in 2 days, it failed sending SPoos thru supports at 815, and 812 down to 809 support by 10:15am 10:15am: Dow cash 7650 support area, SPoos 809 : Short Cover bounce occurs off those known supports 10:45am: SPoos hits 815 from 809 but stalls at 815 as this now will act as resistance. Lots of chop between 812 and 815; and when it appeared the 815 wall remained, SPoos continued lower following the existing Trend; heading for the next lower supports of 809, 803, 798 11:am – 2pm: 11am News of a surprise speech by President Bush regarding Iraq on Monday night seemed to be the final catalyst to "sell stock" on War concerns straight through the lunch hour into the 2pm time frame. Taking the market lower are the usual suspects: Banks, Brokers, Insurance, SOX semi stocks, Networkers, Drugs, Biotech 145pm to 2pm: DOW Cash 7470, SP futures 793 (which is 5pts under Mon’s Low), NDX futures 812 (15 points under Mon’s low), OEX 400 : These levels will become Friday’s Lows; and Shorts taking profit caused the start of a Fridayday 2pm rally we’ve seen many times before. 2pm: Phillip Morris (MO) (a Dow stock) : received some bad news on what seems like an insane settlement. Bloomberg reports that a jury in the L.A. Superior Court ordered MO to pay $28 bln as punishment for causing the lung cancer of a California woman. [That's Billion with a B folks for one person, not a class- action] Approx 230pm: a rumor came from Lehman Bros (LEH) that the Westport dock strike would be ended this weekend. This week-long West Coast dock strike had very serious impact on everyone: car makers (GM), Retail stocks, Manufacturing sector, etc. This rumor added fuel to what had already been the start of a end-of-week Short Profit Taking trend. 3pm: SPoos 812, Dow cash 7630, NDX futures 835 The above 2 factors provided 60 min long rallies of : SPoos +15 pts, Dow +150 pts, NDX +20 pts. Retail stocks rallied the hardest (look at RLX retail index). Home Depot (HD), a Dow stock, rallied 1pt in just a few minutes. 305pm: Mirror copy of Thursday’s 305pm action (Down trend) SPoos 50% retracement of Friday’s low/high of 794/829=811.50. The SPoos rally failed at 812 at 305pm, and right at the above retracement level. Market rolled over when SPoos couldn’t get close to the 815-818 next-higher resistance area matching it’s price from 1030am 305pm-330pm: Hard selling took SPoos down 16pts in 25 minutes to 796. (Dow cash 7510). Shorts appeared to try and push SPoos under it’s lows of 793s to target a new daily low, but were not able to. This would match a Short attempt to get the Dow under 7500, but that attempt failed as well. 330pm to 4pm: Shorts covered again – taking SPoos from 796 up to the pivot resistance of 805, then back to 800, Dow cash 7510 to 7570 to 7528. NDX futures were much weaker: 817 to 824 to 819. The close seemed to be a great battle at the Dow cash 7500 level, SPX Cash 800, OEX 400 numbers. That is, would the close be above or below those psychological numbers. 353pm: A Rumor came out that Amgen (AMGN) would warn after-hours Friday or Mon. AMGN is the largest stock in the BBH bio-tech index, and a some-what large NDX component. AMGN traded 44.05 to 43.0 afterhours to finally close 43.50 Futures Close: from 4:00pm to their 4:15pm Close: SPoos rallied 6pts from 800 to their close at 806; DOW futures rallied about 50 points from 7515 to 7565, NDX futures upticked from 818 to 821 (weakest of the 3). I wouldn't read too much into the SP Futures going up 6 points into their 415pm close as I suspect some SPoos shorts stayed short to the bitter end, wondering if SPoos would lose that key 800 level and close down near 790 area; and when it got to be 4pm, cover buys came in sending it to 806. Also, it's possible some shorts had left for the day with an order to cover em on a buy-stop at the 805 privot which printed about 413pm. On the other hand, many double and triple bottoms were made Fridayday. Friday Afterhours News: 5pm Only item of note: AIG $52.70 – 1.92 (key Insurance stock) announces $4 billion Shelf Registration. While the amount is not that large given AIG’s revenues, it is interesting and possibly bearish. SUMMARY The banks BKX index (638.23) simply looks terrible. Over the last 3 days, they appear to have formed a bearish 'three black crows' formation. SOX SemiIndex (226.96) Having lost it’s 235 support, now makes a new yearly and multi-year low close. Bravo to whatever analyst came out with a 220 target on it over a month ago. CSCO $9.43 Seems no one was rushing in to buy the once beloved Cisco under 10 bucks. I’ve seen arguments made that based on its PE ratio, a price of $5 to $8 is fair value. When a key Index such as the Dow loses their yearly lows, it becomes more difficult to find the next lower support levels. I am not suggesting the Dow gets here, merely FYI on some numbers: September 1998 Dow low at 7400; October 1997 Dow low 6971; however, back then, MSFT INTC HD was not in the DOW. Thoughts for Monday As written in Thursday night’s wrap: the question still remains "As all the earnings news seems mostly rather bad to terrible, why be Long Stock during early October?" ....other than catching Short-Cover buying off Key Index Pivot points...About the only positive thing one could say about today's close was SPX Cash was over 800 (at 800.58); and DOW Cash closed over 7500. There's no important earnings until Thursday and Friday; but it's a very light earnings weak; the largest earnings report being General Electric (GE) next Friday pre-open. Japan’s Nikkei Cash on Friday closed at 9000 before the US market opened, the Nikkei futures trading during the US market day sold off all day to close about -200 at 8820; so it appears Nikkei Sunday night will open very weak, and we should watch to see if they get a 2nd day of Short cover buying. The US Monday open (assuming no early morning warns) will likely focus on two issues: 1) What happened, if anything, regarding the West Coast dock strike, and 2) Pres. Bush’s Monday 8pm speech from Cincinnati Ohio http://www.whitehouse.gov/news/releases/2002/10/20021004-6.html The above URL contains the full text of the 11:13am Friday daily Press briefing by the President’s Press Secretary Ari Fleischer. It’s an interesting read, just like how they do it on the TV show 'West Wing' (grins). I was surprised to discover Bush’s speech is not from the Oval Office, and according to the press briefing, they are not formally requesting TV time from the networks. It’s at 8pm, so I guess they didn’t wish to cut into American’s love for Monday Night Football (grin). So it appears President Bush will say 'something' regarding Iraq, but not likely to declare war for a speech of that nature would require a formal venue of the Oval Office. In other words, this speech may be no big deal market- wise as we’ve heard it all before; but read the above URL and form your own views. Numbers to watch for Monday: Dow 7500, SPX 800, OEX 400 all seem to be serious supports. Would suggest watching those levels to dictate new trades, either longs or shorts. Resistance areas Higher: Dow: 7650-7700, 7800, 7900-8000 SPX Cash and SPoos (SP Futures): 812, 818, 823, 828-30, 835, 843, 852 NDX Cash and Nasdaq futures: 835, 850, 880, 905 A technical note: SPX remains the only key index to NOT re-test it’s July 24th gap at 775. The lowest it as traded since then was Friday’s 793. Both the Dow and NDX, Compx, QQQs have either re- tested their July lows, or are trading UNDER them. Bottomline: Charts are very badly damaged. Tone remains very bearish as we head into October earnings. However, all traders realize from sometimes out of no where comes Buying – Motto of "Don't be Bearish, Don't be Bullish, just Trade the Tape" works every day. Alan Hewko ******************** INDEX TRADER SUMMARY ******************** Still bearish, but signs of a market rebound are present This morning's "conflicting" jobs data set the stage for a volatile session and that's exactly what traders got. If a bear "panicked" or a bull "flinched" and didn't show some discipline, then frustration was found by session's end. Who or what can a trader believe anymore? I the job market stable? Is the job market weak? Today's economic reports on the labor front revealed that what was reported as the preliminary August jobless data wasn't as "weak" as everyone thought (based on the preliminary report) as August's nonfarm payroll was revised higher to 107K from 39K. Traders that were bearish in equities found the upward revision having a positive effect on the September jobless rate, which then fell to 5.7%, instead of the 5.9% forecast and perhaps a real economic bear's hope for a 6% level of unemployment. But wait a minute! The September preliminary nonfarm payroll number was weaker than expected! Sell, sell, sell!!!! An index trader has to be thinking. Hold on. If the August payroll numbers were so skewed and such a large revision is was seen, what makes me want to put a lot of faith in the September number and accuracy of this preliminary data? My personal view on what happened today was that bearish traders had implemented a scenario based on preliminary August data that lead them to believe that it was a "sure thing" that the jobless rate would come in at 5.9% if not higher and pierce the 6% level. When that didn't happen, it was buy, buy, buy. Then, I think some committed bears said "hey, so what if August's data wasn't as weak as first reported, the September data was weak and that sets the stage for further equity weakness in October. When that thought occurred it was sell, sell, sell. I don't know about you, but when I look at the 60-minute charts that I discussed lat night, all I see is that some downside trading targets were achieved, but not one level of resistance was met to have a trader closing any positions from this morning's brief upside move at the open. Conversely, there wasn't one level of resistance broken to the upside that should have had a bull jumping to get long or add to any already open positions. I say this only because I got a few e-mails from "sick" bearish traders that did stop out this morning, only to watch the indexes trade lower into the close. DON'T get frustrated and now try and get even! One emotional "mistake" is enough. What you should do now is simply try and figure out what went wrong, and try not to duplicate the mistake again. Review points from last nights wrap would be... was I over leveraged and when the trade went against me at the open, I kind of panicked and had to close out the trade? Let's review once again the 60-minute charts as some levels were broken to the downside, that led to declines, where targets from retracement were achieved. What's evident in the 60-minute charts is that the retracement levels we identified WEEKS AGO were levels where computer buy programs were found today. The 60-minute bar charts do a very good job of actually showing you and I why it can be important to use retracement with the "fitting" technique we use. Yes, it seems "unconventional," but it is often times the only way an institution actually makes buy/sell decisions. It all starts with risk, and managing their inventory. For you and I, it's about managing risk, and the "inventory" that resides in our account and trades we have open. Let's start with the S&P 500 Index (SPX.X) 800.58 -2.24% as this is the "cash" market that trades against the S&P futures (sp02z) where our morning buy/sell premium levels are triggered against. Interesting how it comes right at/near our 19.1% retracement level, which coincidently marked the psychological 800 SPX. S&P 500 Index Chart - 60-minute interval A quick revisit of recent updates had traders looking bearish the SPX, OEX and NDX Wednesday afternoon in the 03:15 EST Update. Thursday saw a move lower and Friday morning's action found some volatility after the confusing jobs data. However, not one of our shorter-term SMA's (60-minute chart is shorter-term in my book) and selling took over. It wasn't until the SPX reached both the "psychologically round" 800 level and our 19.1% retracement that we started to see some "buy program" premium alerts get triggered. It's interesting that an offsetting "sell program" was triggered right near the mid-point of our "longer- term" regression. On Monday, what I'd look for from an "upside move" is or the SPX to find some early morning resistance at our mid-point of regression, maybe a couple of hours, then look for a break higher (just like that found in the middle of the chart) and potential rally to the 830 level. Traders still holding bearish positions, will want the mid-point of regression to continue to hold, get a break going below 793 to then target 762 sometime this week. HOWEVER!!!! Be careful of a "trap." For those that followed our discussion of "traps" from the 10/01/02 Index Wrap, the daily interval chart of the SPX shows a trap could be in play. As such, manage any new bearish entries accordingly on a break lower Monday morning. S&P 500 Index Chart - Daily Interval This is the EXACT chart shown above, but on daily intervals. It makes so much sense that there would be some buying near our 19.1% retracement as I'm guessing many institutions are using similar retracement and their computer programs to balance their stock inventory. It's the quick sell program right back near 811 that hints to me there's another leg lower to try and test the lows, if not slightly undercut them. I've marked the 775 level, on the above chart, which marks the old low. Traders using the past break of the neckline in the head and shoulders top have a target of 770 from that pattern calculation. On a break below Friday's low of 794, a bear can put the SPX with target range of 775-763, stop 812. If you're thinking about OVERLEVERAGING in a trade, then look to the left of the chart, understand the "trap" and how a beard SHOULD HAVE protected himself! Imagine you're a bear in the woods, slowly and methodically searching for food. Then you see a BIG side of beef just laying there in the clearing. The first thing a "smart" bear would do is stand up on his/her hind haunches, sniff around for danger and look for any "traps," then very carefully, begin easing into the clearing toward the food source, but still on the alert for danger. It's the "dumb" bears that just charge into the clearing and end up on some hunters den floor. As it relates to trading, is the "dumb" trader that OVERLEVERAGES, doesn't have an exit strategy, that sees the bottom line of his/her account dropping to the floor. I see some bearish SPX food at 775-770, but also have identified a potential "trap" and know what to look for. For bulls, make that "bear hunters".... understand there's some shorts in this market and how a break back above 812 could have bears scrambling and rally potential back into the 834-856 range. Later in the wrap, I'll discuss why I think it is entirely possible that we see some type of spike lower this week, but a quick reversal higher. An OEX trader SHOULD be using the SPX chart (SPX trader using OEX chart) and the retracement bracket and levels defined along with his/her OEX chart with "rolled lower" retracement to have an ADVANTAGE. S&P 100 Index Chart - Daily Interval OEX looks bearish. As I've said before, even after I "roll lower" a retracement bracket, I still keep another chart with my prior retracement still intact. The SPX chart we looked at had our old retracement on it, not the "rolled lower" one. The OEX chart above has our "rolled lower" retracement on it. Are you surprised that it too has a retracement racket level at 38.2% where we found some computer generated buy programs triggered? You shouldn't be. Why? Because this is how institutions trade. They trade levels. I simply LOVE the way our "rolled" lower OEX retracement fits in with our calculation from the head and shoulders top calculation of 380. A test of that 380 level would be a perfect "undercutting" of the July lows, with some nice rally potential after that. Just like the potential "trap" from the SPX chart, an OEX bear would protect a trade with a stop just above the 405 level on a break below 398 (the 09/30/02 low). I can envision stochastics reaching "oversold" and MACD falling to -20 (currently MACD -11.3) if the OEX falls to 380 where a bearish trader would be covering. Dow Industrials Chart - 60-minute interval Not to lecture, but I'm not sure why an index trader prefers to try and be bearish the Dow over the other indexes? Even when I look at the short-term 60-minute charts, its the Dow Industrials chart that tends to at least be able to reach its moving averages and test them as resistance. Sure... the Dow traded down and equal 2.4% on Friday when compared to the other indexes, but as a bear will eventually find out and witnessed Friday morning, its these 30-stocks that tend to find the bulk of institutional buying even under short-term "uncertainty." Over the years, I've see ENOUGH bearish targets from head and shoulders and point and figure bearish counts get traded that the potential REWARD to those targets aren't worth the RISK. Some will continue to argue, "but what if the stock/index I'm trading bearish DOES exceed the bearish counts?" My reply will always be... "but, what if those correlative targets ARE being traded?" Stick with weakness that has some DOWNSIDE targets that haven't been traded yet. If you're a trader that is trading the Dow short/put and got stopped out this morning, just try and understand "why" you did. Were you emotional? If so ... "why?" The most common answer is... "I simply had risked more in the trade than what I was really comfortable risking." Be honest with yourself. I'm willing to guess if you were trading the above technicals, and were NOT over leveraged, then you'd probably still be in the trade. For options traders. A $5,000 bet in an OEX/SPX/QQQ put option is the SAME amount of RISK as a $5,000 bet in a Dow Industrials put if done "at the money." However, measured against the potentials DOWNSIDE reward from targets calculated, the potential REWARD is less in a Dow Industrials trade. At least by my calculations. If the economy is going to heck in a hand basket, sure the Dow stocks are going to suffer, but think about all the other stocks, many of them technology, that DEPEND on many of the Dow components to SPEND MONEY on products and services that many of the technology companies provide. For a bear, it's the RISK that the economy isn't going to heck in a hand basket. NASDAQ-100 Tracking Stock (AMEX:QQQ) - 60-minute The QQQ and SPX broke there right shoulders at about the same time (09:52 AM EST). Then the OEX broke its right shoulder at 10:08 PM EST, and finally the Dow Industrials at 10:10 PM EST. Some say I'm a little "retentive," but one way I can check previous comments as it relates to "weakness leads lower" and how that weakness will pull "strength" along for the ride. In Friday's market monitor at 13:20:33, the QQQ was "darting to a session low" and nearing our target of $20.20 and 19.1% retracement. There were plenty of buyers in the QQQ Oct. $21 puts and traders were able to close out some positions at the offer for $1.25. I did, and so did some other happy QQQ bears. I'm still holding a partial position in the QQQ puts and with some gains taken off the table, I'd follow with a stop just above $20.75. The afternoon "buy program" had the QQQ trading $20.72. On a break to new lows, a trader can short/put the Q's again, stop $20.75 and begin a target of $19.40, which is just above the lower-end of our downward regression. On a rally, I'd check the Dow Industrials and see how they're trading at resistance levels. If resistance in the STRONGER Dow looks to hold, then I'd look to short/put the Q's again back near $21 and again select the Oct. $21 puts. Looking for any signs of a reversal? For the past couple of years, the first place to look for a potential reversal when ONLY looking at the INDU, SPX, OEX and NDX/QQQ is for some type of "firming" in the NDX/QQQ (when breaking to 52-week lows, not seeing that yet) or a lead higher in the Dow Industrials (holding its lows and close to bearish count targets). The other place is the bond market. As many well know, I'm a supply/demand trader and its CASH coming out of the bond market that might "switch" into bonds. For the first time in 8-weeks our weekly index and sector measurements show the benchmark 10-year Treasury YIELD ($TNX.X) 3.685% showing a slight move higher in YIELD (YIELD moves higher as price moves lower). There may be an explanation for this action after Tuesday's news from Fannie Mae (NYSE:FNM) that it had narrowed its duration gap (duration is a measure interest rate sensitivity) to 10-months by hedging, shortening their liability portfolio duration (selling off some newer mortgages in their portfolio to banks), and lengthening their asset portfolio duration. That news from FNM may have had bond bulls doing some selling if they had tried to "front run" potential hedging strategies by FNM. However, the marginal selling found in our weekly statistics (Friday close to Friday close) needs to be watched and understood by equity traders. In simplistic terms, it has been my thought for the past two years that when the bond market sees buying, that means cash is rotating to safety and can leave stocks starved for cash. As it relates to bonds seeing some selling, then the inverse is potentially true and cash can rotate back toward stocks that may be deemed "more attractive based on valuation." Weekly Index/Sector Changes For the first time in 8 weeks, the 10-year YIELD shows a slight increase. This is a hint of DIVERGENCE that I will want to monitor this coming week. Note that the week ended 08/23/02, the 10-year YIELD fell, but the market averages still put in a positive gain that week. However, that "lower YIELD" from 08/23/02 may have been the "heads up" that money was rotating back to safety and that stocks might suffer the consequences. How have the major indexes performed the last 7 weeks? Every bear, no matter how big his claws or teeth is now an the ALERT that there has been some selling in Treasuries. Is this the "heads up" for a rally in equities? We're never sure, but know what to be looking for. I've also outlined in green, the Gold/Silver Index. Do you see how the XAU.X between 08/30-09/13 DIVERGED from Treasuries? This makes "no sense" in terms of gold being a hedge against inflation. After all, under the scenario of inflation, bonds would have suffered. Yet during that time, Treasuries found continued buying. That combination (between gold/treasuries) was a VERY DEFENSIVE sign! This is why I mentioned the XAU.X this week. Despite some bearishness in the broader markets however, we didn't really see gold stocks do that well did we? This too may be sign that the MARKET isn't worried at this point. Again... an index bears would LOVE to see gold stocks bid and YIELD fall. This weeks action doesn't show either happening, so a bear in on the alert! I've also drawn a blue line that "goes out" of the 10-year and "goes into" the better performing Dow Industrials and various sectors. This perhaps shows where some money that came out of Treasuries may have actually flowed into. On a weekly basis, how is a Dow bear feeling? Did he/she get the most "bang" for his buck considering the $5,000 put option he/she bought? Remember, a $5,000 put option is the SAME amount of risk as a $5,000 put option in the SPX, OEX, QQQ. Yes, the NDX/QQQ is more volatile and that has to be considered when picking an index to trade, but even then, a bearish Dow trader would have been able to escape some NDX/QQQ volatility and be more bearish the SPX and OEX than the Industrials. Personally, I'm "not buying" the Wireless or Telecom move at this point. I do think these groups benefited from this weeks bullish call out of Goldman Sachs. I also think that the ability for this group to actually show gains from 3rd quarter's 20% decline and 60% year-to-date decline is hint that short covering is always a possibility in any sector. To try and pick a bottom in two sectors that are down 60% for the year takes some guts. Just as much "guts" as it did to try and pick the bottom in these two sectors on December 31st, 2001!!!!! I do find in interesting that two stocks I've mentioned as "bullish" in recent weeks in Forest Labs (NYSE:FRX) and Johnson & Johnson (NYSE:JNJ) are "drug stocks." Friday morning we talked about bullishness in FDX and UPS. Both of these stocks are "transports." UPS got hit with a downgrade Friday morning. I didn't know that at the time. Before I knew about the UPS downgrade, I did profile a bullish trader in FedEx (NYSE:FDX) $51.06 -1.84% in the market monitor at 11:13:02 at the $50.46 level. This week, index bears would LOVE to see YIELDS reverse back lower and Gold/Silver bid. Bulls would LOVE to see YIELDS continue higher and Gold/Silver fall apart and begin seeing INDU, SPX, OEX, NDX/QQQ levels of resistance start being broken. 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 ************** Locked Out! Last week Jim highlighted Choicepoint Inc (NYSE:CPS) as a recovery candidate. Yet looking at the chart one might think this stock needs to be rushed to the recovery room now that investors have done a little surgery on the stock price! Jim did point out that his preferred entry point would be a dip to the $30 level and this is exactly what the stock is presenting today. Of course a crucial part of the strategy was to buy a short-term put at the $30 strike to "protect" the longer-term April call. Fortunately, CPS now has a November $30 put CPS-WF with the Ask at $2.20. I'm guessing it is brand new as volume was zero on Friday and there is only one option in the open interest. The news on CPS is still strangely quiet regarding the falling stock price. What we did notice was the company and its shareholders have approved an increase in authorized shares from 100 million to 400 million shares. Initially one tends to think of an increase in the number of authorized shares a company can issue is a prelude to a stock split announcement but given the current stock price this is probably premature for CPS. The stock does have a history of splitting but usually when the share price is north of $50. I would encourage anyone interested in this play to revisit last week's Editor's Plays for more details on the CPS strategy. The short-term put is important and given the new bearish breakdown through the stock's ascending bullish support on the Point-and- figure chart this Friday. CPS is expected to announce earnings on October 17th, 2002. ------------------------------------------------------------------ Per our usual Friday-night research marathon the OptionInvestor.com staff looked over hundreds if not thousands of charts. Given the state of the U.S. markets it was a tough call on what to highlight for the editor's plays this weekend. I've chosen two stocks that are actually ADRs (or in Nokia's case an ADS) so there will be somewhat of a disconnect between how these stocks trade and the normal fluctuations in the U.S. indices. Our first play is Sony Corp (NYSE:SNE). They key to playing SNE will be watching a couple of different variables that influence the stock price and letting the price movement dictate which direction we play. As you are aware, the U.S. economy is slowing being starved of goods by the West Coast port lockout. One of the major overseas conglomerates that is being hit hard by the lockout is SNE. According to the reports, over 50% of all consumer technology products that come into the U.S. come through these ports. The timing for the lockout could not be worse. After a dismal back-to-school shopping season retailers are hoping for some sort of rebound in the upcoming holiday shopping season. Consumer electronics, like gaming consoles, DVD players, digital TVs and stereos had been one of the stronger sectors in the retailing group. This shipping delay could seriously hamper the available goods that need to be delivered across the U.S. Fortunately for SNE many of their products could be air-shipped through companies like UPS and FDX. We don't know if they have taken this route but it would be a lot easier to ship a crate of Play-Stations than a bunch of heavy automotive parts (think Toyota). Part of the problem with using air-delivery to get goods to the U.S. is the significantly higher transportation costs. In some cases it is 15 times more expensive than normal means. A weary U.S. consumer is not going to be happy if companies decide to pass these costs onto the end-user so it is reasonable to believe that SNE's profit margins could be squeezed this year if the lockout doesn't end soon. So far this sounds like a pretty bearish scenario shaping up for SNE. To make matters worse, the Japanese markets have been in free fall (much like our own) with the NIKKEI average hit 19-year lows earlier this week before bouncing into the weekend. If the Japanese markets are tanking and the U.S. markets are tanking, why are shares of SNE holding sideways above significant support at $40.00? My best guess is that the rebound in the Japanese Yen is propping up the stock. Investors know that if the Dollar continues to gain strength against the Yen, then Japanese products get cheaper to buy and Japanese companies will be able to sell more products here in the U.S. Looking at the chart of the Yen/U.S.$ one can see that the Yen bounced at support between 115-116 and is now approaching over head resistance near 126-127. Friday's close was $123.09 (or $1.00 U.S. buys $123.09 Yen). My strategy to play SNE would be the following: if the West Coast port lockout is solved by Monday (or early next week) as many were guessing it would be on Friday, then shares of SNE should rally on the news. My trigger to go long would be a move over the 50-dma currently at $43.25, which should break the short-term down trend. Keep an eye on the $45 and $46.50 levels, which represent overhead resistance. My target would be the 200-dma currently about $48.75. Considering the upcoming holiday shopping season I would probably favor the January calls over Novembers giving me more time to see how the season develops. Should the lockout continue or the Yen began to fail against the dollar then SNE is likely to fall below current support at $40.00. If this breakdown occurs the next serious support level is the October 2001 lows near $33.00. If the situation does turn more bearish and the lockout remains in effect, traders will need to use a stop loss. This is mandatory because the lockout will not last forever and the stock could rally sharply on the news. There were some additional observations that had me leaning to the bearish side but I would still not enter a trade until shares of SNE broke the $40 level. What I did notice was the PnF chart is still working on a bearish vertical count of $36.00. Plus, there was some negative news by Nintendo recently. The game- console rival said that their profits would be much lower than expected. It is very possible that Nintendo's GameCube is losing market share to Sony's Playstation but both Sony and Nintendo have to compete with Microsoft's X-Box which appears to be gaining some momentum. Nintendo did report that one of the negative factors impacting their fiscal year in profits was the previous decline of the Yen against the dollar. This is something that SNE can not avoid and it could hurt their year-end numbers. Locked Out! **************** MARKET SENTIMENT **************** Does a Flat Basketball Bounce? by Steven Price We got an up close and personal look at support levels in the Dow, Nasdaq, S&P 500 and S&P 100. There may be a difference of opinion as to whether or not the Dow held at support (I think it did), but the S&P 500 and S&P 100 clearly did hold those levels. The Nasdaq, however, failed its test miserably. This morning's jobs data was a little confusing, as August numbers were revised, skewing the September results. The unemployment rate actually fell to 5.6%, which was quite a bit under the 5.9% expectations. However, non-farm payrolls fell by 43,000 jobs. After market participants sifted through the conflicting data, more weight was given to the payroll number and the sell-off commenced. After an earnings warning last night from EMC, which said that the IT spending environment was "brutal" and that the spending environment had worsened at the end of September, a test of support at 1160 in the Nasdaq seemed almost a foregone conclusion. That level failed in the first half hour of trading, and acted as resistance shortly thereafter. By the end of the day, the index finished down 25.66, to close at 1139.90. The Nasdaq found intraday support at 1135, so that appears to be the next level for the time being. One of the groups to lead the Nasdaq down was the chip sector. The Semiconductor Sector Index (SOX.X) set yet another 4 year low, blowing through support at 231 to close at 227.00. If IT spending is worsening, then the chip stocks will be one of the main sectors to feel the pinch. The Dow actually started up on the day, jumping 67.62 to start the day, after hearing the initial unemployment rate data. It didn't take long, however, for the giddiness to wear off, and the banks led the broader markets down once again. There is a great deal of concern that if Brazilian leftist presidential candidate Luiz Inacio Lula Da Silva wins the presidency (he is the current front-runner), he will attempt to default on the country's $260 billion in debt. While it is not certain just how much exposure U.S. banks have to Brazil, estimates are high for large institutions, such as J.P. Morgan, Citibank, Goldman Sachs and several others. After more warnings this week regarding non- performing assets from Comerica and bank of New York, this was just the push the group needed to keep rolling downhill. The Dow once again re-tested its lows in the 7500 range. It actually closed at new recent lows, which I'm sure has the bears roaring louder than ever. As a most-of-the-time member of this club, I'd like to roar along with them. However, the index actually bounced right around the same point it did on September 30. On September 30, it bounced at 7460; today it bounced at 7472. The July 24 bounce was 7532, so we are without a doubt below the July lows. However, we continue to bounce in this range, and until we get a real breakthrough, I find myself getting out of the way of an intermediate rally and closing short positions at this level. A look at the S&P 500 confirms this possibility, as it closed at 800.58, which is a significant support level. Ditto the OEX at 400 (closed at 403.22). In addition, as you can see from our Arms Index data, the readings are indicating an oversold condition, which also points to the possibility of a bounce. While I have been leaning short throughout the recent move, we are once again at a pivotal point. All of the recent news looks negative, and if the Brazilian elections turn out for the worst, these levels may fall quickly on Monday. However, I will trade what I see, and right now I see the potential for a short-term bounce. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7528 Current : 7528 Moving Averages: (Simple) 10-dma: 7762 50-dma: 8392 200-dma: 9484 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 800 Moving Averages: (Simple) 10-dma: 828 50-dma: 885 200-dma: 1031 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 815 Current : 815 Moving Averages: (Simple) 10-dma: 850 50-dma: 923 200-dma: 1231 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX has left no doubt today that previous support has been breached. Although Thursday set a new 4 year closing low, the intraday low of 231 still hung below it, giving the impression of support. Today the group crashed through 231, after last night's warning from EMC emphasized that the horrible IT spending environment was still getting worse. The SOX finished the day at 227.00, after finding a new intraday low of 223.57. Every time it looks like we have found a bottom in this sector, it shows us that there is still more room to fall. Today's big loser in the sector was OI put play QLogic (QLGC), which lost $3.71 to close at $20.89. I am targeting 200 as the next logical level of support. Even I had to wonder if it ever traded at that level since it was created. The answer is yes, and it did serve as support back in the fall of 1998. 52-week High: 657 52-week Low : 227 Current : 227 Moving Averages: (Simple) 10-dma: 242 50-dma: 294 200-dma: 456 ----------------------------------------------------------------- Market Volatility The VIX actually increased less than I would have expected as the major market indices either broke or tested recent support levels. While it did tack on 1.32 to close at 46.28, its highest level since August 5, there were plenty of weekend premium sellers keeping it in check, as the Dow held support at 7500. If that level had been broken on a closing basis, we probably would have seen the VIX closer to 50. The VXN also added some points, but also was less than expected with the Nasdaq breaking through and closing below recent support. There will always be a few more sellers on a Friday, trying to capture weekend time decay, and I suspect both of these numbers would have been higher if the same market activity had occurred in the middle of the week. CBOE Market Volatility Index (VIX) = 46.28 +1.32 Nasdaq-100 Volatility Index (VXN) = 60.28 +2.07 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.97 580,683 562,623 Equity Only 1.75 152,346 266,033 OEX 1.41 36,501 51,510 QQQ 0.46 49,978 23,149 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 30 - 2 Bull Correction NASDAQ-100 17 - 3 Bear Confirmed Dow Indust. 7 - 3 Bull Correction S&P 500 24 - 3 Bear Confirmed S&P 100 20 - 2 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 1.54 21-Day Arms Index 1.47 55-Day Arms Index 1.37 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 633 2109 NASDAQ 932 2265 New Highs New Lows NYSE 27 299 NASDAQ 12 356 Volume (in millions) NYSE 2,082 NASDAQ 1,575 ----------------------------------------------------------------- Commitments Of Traders Report: 10/01/02 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 There has not been much change in the positions of Commercials, who reduced both longs and shorts by about 2,000 contracts each. Small traders are also relatively unchanged, with reductions of about 1,000 contracts to both the long and short sides. Commercials Long Short Net % Of OI 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%) 10/01/02 423,661 440,133 (16,472) (1.9%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 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% 10/01/02 123,371 74,704 48,667 24.5% 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 both longs and shorts, but by a relatively small percentage, giving up 600 long contracts and 1,700 shorts. Small Traders also made few changes to their overall positions, getting slightly longer overall, by about 600 contracts. Commercials Long Short Net % of OI 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%) 10/01/02 46,000 52,976 (6,976) ( 7.0%) 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 09/10/02 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% 10/01/02 11,896 9,575 2,321 10.8% 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 left long positions unchanged, while reducing shorts by 10%. Small traders reduced longs by 1,000 contracts, while adding the same amount to the short side. Commercials Long Short Net % of OI 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% 10/01/02 18,969 8,903 10,066 36.1% 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 09/10/02 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%) 10/01/02 6,809 10,503 (3,694) (21.3%) 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 *************** Patience Pays Off by Steven Price Guys, First of all, Thanks for the really good work - keep it up ! I have a stock I'd like you to take a look at : WLP : call play, is there upside to 86 ? WLP - Wellpoint Health Network - $77.62 Wellpoint has enjoyed some recent strength, along with other HMOs, as the health related stocks have been somewhat recession proof. While they have certainly taken an enrollment hit, with higher unemployment and more employers unable to swing the cost of benefits, profits for the nation's health insurers were up 25% in 2001. As many HMOs have shed members to save costs, companies such as WLP and ATH, which have Blue Cross Blue/Shield plans, have seen an increase in revenue from those plans of 12.8% in 2002 over the first half of 2001. Wellpoint does look to have some upside to $86, IF it can break $80. In fact a look at the charts appears as though a break back over $80 could wind up much higher than that. The stock has bumped up against $80 on several occasions recently, but been turned back each time. However, since falling below $80, to a low of $66 on August 5, the stock has put together a series of higher highs and higher lows, which looks bullish. The next higher high would correspond to the $80 resistance mark. A break above $80 would get the stock above resistance, along with achieving a new higher high. The oscillators are currently both on buy signals, but the stochastics have begun to rollover, in contrast to the MACD, which still looks strong. On the daily chart below, I have highlighted the recent swings. Daily Chart of WLP While $86 is the recent resistance mark, a look at the monthly chart shows an even greater significance at $80. The jump to $86 is simply a blip on the radar and the consolidation between $70 and $80 looks like the stock is getting ready for a bigger move. Based on a rectangle consolidation pattern, if the stock breaks above $80, the minimum measuring objective is $90. Monthly Chart of WLP The point and figure bullish vertical count is all the way up at $100. That is an eventual price target, but it is interesting that it is a round number and a $10 increment, which has worked well for WLP in the past. While the stock will need to achieve $80 before we can begin making lofty projections, it is just another piece of information in the puzzle. A trade of $80 will be a new point and figure buy signal, as well as the point at which a previous breakthrough of bearish resistance occurred. All of these signals add up to a strong buy signal at $80. While that may cost a trader $2.38 of potential upside, it is not much to pay for confirmation of a trend that could result in a $10 or $20 payday. The downside of the current formation is $70, so it is also not much to give up to avoid a potential loss of $7.62. Look for that break, and confirmation of a bounce in the broader markets (so as not to fight a sinking tide), for your signal to go long WLP. Please send your questions and suggestions to: Contact Support ************* COMING EVENTS ************* ======================================== Market Watch for the week of October 7th ======================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- AMB AMB Property Mon, Oct 07 After the Bell 0.58 ------------------------- TUESDAY ------------------------------ APOL Apollo Group Tue, Oct 08 Before the Bell 0.22 PEP Pepsico Tue, Oct 08 Before the Bell 0.55 RPM RPM Tue, Oct 08 After the Bell 0.37 RI Ruby Tuesday Tue, Oct 08 -----N/A----- 0.31 SDX Sodexho Alliance S.A. Tue, Oct 08 -----N/A----- N/A UOPX Un of Phoenix Online Tue, Oct 08 Before the Bell 0.14 ----------------------- WEDNESDAY ----------------------------- ABT Abbott Laboratories Wed, Oct 09 -----N/A----- 0.48 BRO Brown & Brown Wed, Oct 09 After the Bell 0.28 CBH Commerce Bancorp Wed, Oct 09 -----N/A----- 0.52 DNA Genentech Wed, Oct 09 After the Bell 0.23 INFY Infosys Tech Limited Wed, Oct 09 After the Bell 0.34 MTB M&T Bank Wed, Oct 09 -----N/A----- 1.27 STI SunTrust Wed, Oct 09 Before the Bell 1.21 WIN Winn-Dixie Stores Wed, Oct 09 After the Bell 0.24 YHOO Yahoo! Wed, Oct 09 After the Bell 0.04 YUM Yum! Brands, Inc. Wed, Oct 09 After the Bell 0.47 ------------------------- THURSDAY ----------------------------- CMH Clayton Homes Thu, Oct 10 Before the Bell 0.22 COST Costco Wholesale Corp Thu, Oct 10 Before the Bell 0.49 DORL Doral Financial Thu, Oct 10 4:00 pm ET 0.67 DJ Dow Jones Thu, Oct 10 Before the Bell 0.08 SSP E.W. Scripps Thu, Oct 10 -----N/A----- 0.60 FDC First Data Thu, Oct 10 Before the Bell 0.45 ISCA International Spdwy Thu, Oct 10 Before the Bell 0.56 IFIN Investors Finl Srvc Thu, Oct 10 Before the Bell 0.26 JNPR Juniper Networks Thu, Oct 10 After the Bell -0.02 MTG MGIC Investment Corp. Thu, Oct 10 Before the Bell 1.42 NET Network Associates Thu, Oct 10 Before the Bell 0.12 BPOP Popular, Inc. Thu, Oct 10 After the Bell 0.65 ------------------------- FRIDAY ------------------------------- BBT BB&T Fri, Oct 11 Before the Bell 0.70 BLK BlackRock Fri, Oct 11 Before the Bell 0.51 FAST Fastenal Fri, Oct 11 -----N/A----- 0.28 GE General Electric Fri, Oct 11 Before the Bell 0.40 MI Marshall & Ilsley Fri, Oct 11 09:00 am ET 0.55 SPOT PanAmSat Fri, Oct 11 Before the Bell 0.11 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable RMCI Right Management 3:2 10/14 10/15 RLI RLI Corp. 2:1 10/15 10/16 -------------------------- Economic Reports This Week -------------------------- TEASER HERE ============================================================== -For- Monday, 10/07/02 ---------------- Consumer Credit (DM) Aug Forecast: $10.5B Previous: $10.8B Tuesday, 10/08/02 ----------------- None Wednesday, 10/09/02 ------------------- None Thursday, 10/10/02 ------------------ Initial Claims (BB) 10/05 Forecast: N/A Previous: 417K Export Prices ex-ag.(BB)Sep Forecast: N/A Previous: 0.0% Import Prices ex-oil(BB)Sep Forecast: N/A Previous: 0.1% Wholesale Invntories(DM)Aug Forecast: 0.2% Previous: 0.6% Friday, 10/11/02 ---------------- Retail Sales (BB) Sep Forecast: -0.9% Previous: 0.8% Retail Sales ex-auto(BB)Sep Forecast: 0.2% Previous: 0.4% PPI (BB) Sep Forecast: 0.2% Previous: 0.0% Core PPI (BB) Sep Forecast: 0.1% Previous: -0.1% Mich Sentiment-Prel.(DM)Oct Forecast: 85.3 Previous: 86.1 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 ********************* Suck'em in and spit'em out After a quick pop at the open Friday on some "confusing" jobs data, some traders bought stocks after an upward revision to August's nonfarm payroll numbers, while another batch of traders sold stocks on the weaker than forecasted September nonfarm payroll numbers. 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. 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The Option Investor Newsletter Sunday 10-06-2002 Sunday 2 of 5 In Section Two: Stock Pick: AMLN - Amylin Pharmaceuticals Daily Results Call Play of the Day: GSK Put Play of the Day: PHM Dropped Calls: None Dropped Puts: QLGC, BAX, CI ************************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 ********** Vote of Confidence AMLN - Amylin Pharmaceuticals - $15.80 Strategy: Long stock with put insurance Amylin Pharmaceuticals, a biotech company based out of San Diego, has yet to show a profit. However, the company has begun to show some signs of life, and recently got a big vote of confidence. Ely Lilly recently invested $110 million to get in on Amilyn's new drug, AC2993. The experimental diabetes drug lowers levels of fructosamine in Type 2 diabetes patients. It affects about 90% of the 17 million diabetes patients in the U.S. Of the $110 million, $80 million is in cash, and $30 million in the form of a purchase of AMLN stock at a price of $18.69 per share. That is almost $3 higher than where the stock is currently trading. The drug will be packaged in cartridges that patients can plug into a pen, which is then used to inject the medicine at the waistline. Some current drugs carry side affects such as weight gain, which doctors try to avoid, since high weight contributes to diabetes. So far AC2993 has not put on weight in studies. It is also considered a "smart drug," which shuts itself down once it lowers the patient's blood sugar to normal levels. This also avoids the problem of low blood sugar, which can cause fainting spells. The deal with Lilly not only provides cash, but allows AMLN to keep 50% of all U.S. profit. Lilly pays for 80% of overseas drug testing costs, plus all non-U.S. marketing costs. Lilly will sell the drug overseas. The $110 million is just the start of Lilly's contribution, as it will be contributing up to a total of $325 million to Amilyn if the drug meets specific milestones. Amilyn entered a similar deal with Johnson and Johnson in 1998. J&J contributed $173 million to co-promote Symlin, another diabetes drug. The deal eventually fell apart, but Amilyn got to keep the $173 million. J&J never gave a reason for pulling out, but according to AMLN Chief Executive Joseph Cook, "I believe it was a portfolio decision within J&J. They gave us 100% of the rights, and we thanked them for their $173 million." Now, Amilyn has received an approval letter for Symlin from the FDA and could receive final approval in the second half of 2003, pending results of a current clinical trial. The Lilly deal will also help Amilyn develop a sales force ahead of the Symlin launch. Amilyn has a great deal of potential, as evidenced by Lilly's stock purchase at $18.69. The company, however, has yet to turn a profit and because of this, we highly recommend the purchase of a protective put along with the stock. The stock has found support at higher levels after each run, and this appears to be the case once again. The stock has been climbing steadily since the summer and has found support from its 50 and 200 day moving averages. There is some impressive support around $12, however, we don't want to let it re-test that level without some protection. The stock experienced a triple top point and figure breakout back in July, when it crossed the $12 mark, pulled back to support, and took off again. That pattern was followed by two double top breakouts, even as the broader markets have dropped. Because of the current extension, conservative traders may want to wait for a pullback to around $15, the point of the last double top breakout. Option 1: Purchase AMLN, along with 1 April $12.50 put (AQM-PV) for each 100 shares purchased. The April 12.50 puts are currently offered at $1.50 and will provide approximately 6 months of protection, which should give AMLN additional time to progress with trials of both Symlin and AC2993. As progress is made on AC2993, more cash should come their way from Lilly, boosting the stock further. Option 2: Purchase AMLN and April 15.00 for $2.65. This option gives the purchaser more immediate protection if there is a pullback, but at a higher cost. Option 3: Wait for a pullback to $15.00 and then purchase the stock and option listed in the above scenarios. Point and Figure Chart of AMLN Daily Chart of AMLN *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week GSK 40.65 -0.04 2.06 0.52 0.61 2.18 pullback ITMN 31.00 0.73 1.17 -0.73 –1.36 -1.09 200-dma PUTS BAX 26.89 -0.87 -0.93 -3.24 –1.23 -4.53 Drop, news out CI 62.18 -0.75 2.74 -1.74 –2.45 -9.32 Drop, profits FLIR 32.75 -2.77 -0.44 -1.03 –0.12 -4.91 still falling GM 36.42 -0.10 1.74 -1.92 –0.95 -2.58 On its lows MRK 44.26 -0.55 0.08 0.00 –0.56 -2.00 New, sector warnings PHM 39.14 -0.17 0.82 -0.43 –1.70 -3.66 New, sector breaking QLGC 20.89 -0.95 -0.79 1.07 –1.67 -5.61 Drop, profits TECD 25.53 -0.81 1.51 -0.77 –0.21 -1.68 $25 next break WHR 43.72 -0.59 1.95 -2.07 –0.97 -2.73 PnF breakdown ************************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: ********************* GSK - GlaxoSmithKline - $40.65 -0.97 (+1.79 for the week) See details in play list Put Play of the Day: ******************** PHM - Pulte Homes, Inc. $39.14 (-4.32 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ QLGC $20.89 -3.71 (-6.07 for the week) QLGC dove as storage giant EMC warned about the "brutal" IT spending environment. QLogic, which designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers, is likely looking at an environment similar to EMC, which said that the spending environment, which looked as though it could not get much worse, did exactly that at the end of the quarter. EMC said it expects IT spending to remain weak for the rest of the year, and does not expect a return to profitability in the fourth quarter. QLGC releases earnings on October 16 and it is hard to imagine why any investor would want to buy the stock ahead of that date. However, we will probably see support at $20 and with the Dow, S&P 500, and OEX all at support, there is a possibility of a bounce on Monday. The Semiconductor Index (SOX.X) did roll over to a new 52-week low, so there are still plenty of negative signs for QLogic. However, after entering the play at $25.25, we are going to close the play for a significant profit and move on. For traders who wish to keep the play on, I would suggest a new stop loss of $23.50. --- BAX $26.89 (-4.52) Since initiating coverage of BAX near the $30 level, we've gotten a nice downward move that was punctuated by the company's reduced guidance on Thursday. Just prior to that news release, the stock was trading just below $25, and buyers swooped in following the news, lifting the stock well off those lows. Since then, the stock has consolidated in an ever-tightening range, coming to rest on Friday just below $27. Given the stock's failure to sell off with the rest of the market on Friday, this seems a prudent time to lock in gains and close out the play. While it could drop again next week, any broad market rally could inject new life into the stock and we don't want to get caught in a short-covering rally. --- CI $62.18 (-9.78) Wow! What a ride! CI performed perfectly for us since we picked it north of $70. After a couple failed rallies near the $74 level, the bottom fell out in the past 2 days, with CI getting slammed for a 10% loss on Friday on very heavy volume. Driving Friday's decline was a Salomon Smith Barney downgrade and investors apparently couldn't get out fast enough. Recall that the PnF price target was $62, and since that level has been reached, we want to harvest gains and move on to the next winning play. CI could continue to fall, but there is a chance that bargain-hunters will start to buy near current levels. With a nearly $10 gain since we picked it, there's no sense in risking those gains while trying to squeeze out a bit more. *********** 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 10-06-2002 Sunday 3 of 5 In Section Three: New Calls: None Current Calls: ITMN, GSK New Puts: MRK, PHM ************************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 ************** None ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** ITMN - InterMune - $31.00 -0.88 (-0.73 for the week) Company Summary: InterMune is a commercially driven biopharmaceutical company focused on the marketing, development and applied research of life-saving therapies for pulmonary disease, infectious disease and cancer. Why We Like It: InterMune gave up some ground today, as it was a tough day for most long plays. In our initial write-up, we suggested new entries wait for a pullback above the 200-dma. We thought we got that pullback on Thursday, but were a little premature. The drop today, however, did find support above the 200-dma of $30.42, which is encouraging, considering the slew of recent warnings from the drug sector. The most recent warning came from Schering Plough on Thursday, and sent many of the drug and biotech stocks reeling. ITMN actually held up well and has outperformed the sectors the last couple of days. A look at the point and figure shows a possible bull flag forming, which would allow for a trade of $30 without breaking the formation. A trade of $29 would indicate a break in that formation, which coincides with our current stop loss on the play. ITMN recently announced collaboration with Array BioPharma to create small molecule therapeutics targeting hepatitis. This announcement added to the intrigue created by ITMN's Actimmune, which is so far the only drug that has shown life extension benefits for idiopathic pulmonary fibrosis treatment, a fatal disorder that causes lungs to fill with scar tissue. According to Dr. Robert Strieter, chief of pulmonary and critical care medicine at UCLA Medical Center, " if the Actimmune data holds true, the results will be very profound... We'll be medically obligated to treat all IPF patients with (Actimmune)." New entries should look to the broader markets for evidence of a bounce, before initiating a long play *** October contracts expire in 2 weeks *** BUY CALL OCT-30*IQY-JF OI= 3668 at $2.90 SL=1.50 BUY CALL OCT-35 IQY-JG OI= 1567 at $0.65 SL=0.00 BUY CALL NOV-30 IQY-KF OI= 24 at $4.00 SL=2.00 BUY CALL NOV-35 IQY-KG OI= 70 at $1.65 SL=0.00 Average Daily Volume = 1.46 mil --- GSK - GlaxoSmithKline - $40.65 -0.97 (+1.79 for the week) Company Summary: GlaxoSmithKline, with U.S. operations in Philadelphia and Research Triangle Park, NC, is one of the world's leading research-based pharmaceutical and healthcare companies committed to improving the quality of human life by enabling people to do more, feel better and live longer. (source: company release) Why We Like It: It was a tough day for calls, but GSK actually held up pretty well. After warnings this week from Schering Plough and Baxter, other drug/healthcare stocks gave up quite a bit of ground. In a show of great relative strength, however, GSK held above the $40 mark, after breaking through bearish PnF resistance at $41 on Thursday. $40 was the level at which GSK gave its most recent buy signal, and can now be viewed as a crucial support level. With the Dow, S&P and OEX all at pivotal support levels, which held up today, it is possible we could get a big bounce on Monday. If that is the case, we expect a strong stock, like GSK, to lead the rally. Last night GSK announced the results of a study, which showed that its herbal supplement, RemiFemin, could be used for menopausal symptom relief in women with a history of breast cancer. Unlike estrogen, RemiFemin didn't stimulate cancerous cell growth in the human-breast cell system studies. GSK has also recently announced results for two promising pipeline drugs, used in the treatment of HIV and Herpes. It also entered into a new collaboration to develop vaccines and antibiotics for use in the $4 billion per year fight against drug-resistant staphylococcal bacteria. New entries should look to the broader markets for evidence of a rebound, rather than fight a sinking tide. If this week's sell-off continues on Monday, then we suggest waiting for evidence of a bounce to enter new call plays. *** October contracts expire in 2 weeks *** BUY CALL OCT-40 *GSK-JH OI= 1260 at $1.80 SL=1.00 BUY CALL OCT-42.50 GSK-JV OI= 578 at $0.65 SL=0.00 BUY CALL NOV-40 GSK-KH OI= 2482 at $2.70 SL=1.40 BUY CALL NOV-42.50 GSK-KV OI= 1164 at $1.50 SL=0.00 Average Daily Volume = 1.15 mil ************* NEW PUT PLAYS ************* MRK – Merck & Company, Inc. $44.26 (-2.00 last week) Company Summary: MRK is a global, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures. Additionally, the company provides pharmaceutical benefit services through Merck-Medco Managed Care, LLC. The company's operations are managed principally on a products and services basis and are comprised of two business segments. Merck Pharmaceutical is involved in marketing products, while Merck Pharmaceuticals is focused on therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. The pharmaceutical benefit services provided by Merck-Medco include sales of prescription drugs through managed prescription drug programs as well as services through programs to manage patient health and drug utilization. Why We Like It: Earnings warnings have become a daily event as we enter the perilous month of October, and it seems that no sector has been immune. The big shocker on Friday came from LH, one of the principal laboratory testing companies. That warning knocked down most of the Health Care related stocks, with the Pharmaceutical index (DRG.X) losing more than 3% and the Health Care Payor index (HMO.X) sliding lower to the tune of 4.5%. For the most part, the DRG index has held up pretty well in recent weeks, but the selloff on Friday bodes ill for the sector. The $290 level has proved to be formidable resistance and if this rollover runs to conclusion, the DRG could very easily lose the $275 support level and tumble significantly lower next week. MRK is showing significant weakness relative to the DRG index and the breakdown under $44.50 on Friday opens the door for a decline down near the July lows. MRK is set to announce earnings on October 18th, which puts a 2-week fuse on the play. Another warning in the Drug sector could be all it takes to yank the legs out from under the stock. After reversing from the $54 level back in late August, MRK generated a fresh Sell signal on the PnF chart and the current vertical count hints at downside potential all the way to $35. Should that come to fruition, it would undercut the July lows near $38. Look for any short-term rebound to find firm resistance overhead in the $46-47 area, and a rollover near there would make for a great entry before the next leg down. Given the technical breakdown on Friday on solid volume, we may not be so fortunate. Look to initiate momentum-based positions on a drop under $43.75 (just below Friday's intraday low). Initial stops are set at $47. *** October contracts expire in 2 weeks *** BUY PUT OCT-45 MRK-VI OI=6603 at $2.25 SL=1.25 BUY PUT OCT-42 MRK-VV OI=4400 at $1.10 SL=0.50 BUY PUT NOV-42*MRK-WV OI= 708 at $2.25 SL=1.25 Average Daily Volume = 7.36 mln --- PHM - Pulte Homes, Inc. $39.14 (-4.32 last week) Company Summary: Pulte Homes is a holding company whose subsidiaries engage in the homebuilding and financial services businesses. The company's direct subsidiaries include Pulte Diversified Companies, Inc. (PDCI) Del Webb Corporation and others that are engaged in the homebuilding business. PDCI's operating subsidiaries include Pulte Home Corporation (PHC), Pulte International Corporation and other subsidiaries that are engaged in the homebuilding business. The company also has a mortgage banking company, Pulte Mortgage Corporation, which is a subsidiary of PHC. Why We Like It: There has been a lot of discussion in the press about whether or not the Housing market is in a bubble. Despite frequent denials of this possibility by economists and analysts, price action seems to indicate that investors are thinking it is a bubble and it is getting close to bursting. The Home Builders index ($DJUSHB) held up pretty well until fairly recently, but the price action this week was pretty discouraging for the bulls. Wednesday's aborted rally ran out of steam right at the converged 20-dma and 50-dma near the $317 level and plunged significantly at the end of the week, losing more than 11% between Wednesday's high and Friday's low. That brought the DJUSHB right down to major support at $280. If it gives way next week, then the bears will be altering their focus and targeting the next level of major support down near $240. Looking for weak stocks within this sector reveals PHM as one of the weakest, due to its significant breakdown on Friday. Rather than holding near the July low ($40.50), the stock plunged right through on heavy selling volume. That dropped PHM right to significant support near $39, which is even stronger at $38. That support could very well lead to an oversold rebound early next week, but given the picture portrayed by the PnF chart, that rebound is likely to fail, providing us with an attractive put entry opportunity. Look for a rollover near the $41 level to initiate new positions, rather than attempting to trade a breakdown from current levels. The bearish target generated by the PnF chart is $32, making for an attractive risk/reward ratio, as long as we manage the play with a judicious stop. We're initially placing our stop at $42. *** October contracts expire in 2 weeks *** BUY PUT OCT-40 PHM-VH OI=1899 at $2.55 SL=1.25 BUY PUT NOV-40*PHM-WH OI= 211 at $3.80 SL=2.25 Average Daily Volume = 826 K ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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 10-06-2002 Sunday 4 of 5 In Section Four: Current Put Plays: WHR, FLIR, GM, TECD Leaps: VIX Points The Way Traders Corner: If You Can’t Beat Them, Join Them Traders Corner: Volume: Confirming or diverging from price trends ************************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 ***************** WHR - Whirlpool - $3.72 -1.09 (-2.14 for the week) Company Summary: Whirlpool Corporation is the world's leading manufacturer and marketer of major home appliances. Headquartered in Benton Harbor, Michigan, the company manufactures in 13 countries and markets products under 11 major brand names in more than 170 countries. (source: company release) Why We Like It: Whirlpool gave in with the broader markets today, losing $1.09 on the day. In spite of the unemployment rate showing improvement, the non-farm payroll number was actually lower, indicating that the employment picture, although better than originally expected in August, is still deteriorating. This does not bode well for large consumer purchases, such as stoves and refrigerators. Investors agreed, sending Whirlpool down through two significant levels on the point and figure chart. The break through $44 created a new sell signal, and the trade of $43 added another "O" to the breakdown. The stock did bounce from its low of $42.64, but this does not appear to be a significant technical level, with the next obvious support at $40. After three straight days of significant losses for the company, as well as a technical breakdown, some bounce can be expected. The key is how high the bounce might be for possible new entries. I would look for a failure below $45 as a signal that new resistance is in place. One other concern is the Dow holding its 7500 level once again. If this support level remains in place, we may see a slowing of the recent downtrend, and be forced to reconsider shorts. New entries should look for failure below $45 if we get a broad market bounce on Monday. If the Dow continues its downward momentum, then look for a break below $42.50 to initiate short positions. Lower stops to $46.50, just above Thursday's high. *** October contracts expire in 2 weeks *** BUY PUT OCT-45 WHR-VI OI=227 at $2.90 SL=1.50 BUY PUT NOV-45*WHR-WI OI=201 at $4.00 SL=2.00 Average Daily Volume = 703 K --- FLIR – FLIR Systems $32.73 (-4.92 last 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. Why We Like It: There hasn't been much good news for the bulls lately, and it is a rare stock that hasn't broken to new lows in recent weeks. Shares of FLIR fell below the important $35 support level early last week and since then the weakness in the broad markets has driven the price ever lower. Friday's 2% loss knocked FLIR back to a fresh 52-week low. While there is some mild support near the $32 level, if the broad market continues to be weak, FLIR should continue to fall until finding more significant support near $29. One thing we need to be careful of is the fact that the stock is falling slower than the broad market and this could be hinting at a weakening of the downward trend. For this reason, we don't want to chase the stock lower. Those currently in the trade need to manage their positions by ratcheting their stop lower. We're lowering the coverage stop down to $35.25, as that level should provide strong resistance in the event of a short-covering rally. Look for a failed rally near $34, or possibly as high as $35 to initiate new positions on the rollover. Use a drop below $30 early next week as an opportunity to harvest gains on open positions, as a strong rebound from the $29 level could bring the play to an abrupt end. *** October contracts expire in 2 weeks *** BUY PUT OCT-35 FFQ-VG OI=248 at $3.30 SL=1.75 BUY PUT OCT-30 FFQ-VF OI=308 at $1.15 SL=0.50 BUY PUT NOV-30*FFQ-WF OI= 31 at $2.00 SL=1.00 Average Daily Volume = 309 K --- GM – General Motors $36.42 (-3.37 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: With the DOW posting its 6th consecutive weekly loss and ending at its lowest level since November 1997, it should come as no surprise that our GM play is looking better day by day. The bulls attempted a rebound early in the week, but that was simply good for the next attractive entry point into the play, as the stock rolled over just above the $40 level at the 10-dma (currently $39.31). Earnings warnings are still coming fast and furious and few stocks have been spared the resultant selling. GM broke to a new multi-year low on Friday, and may be finding support from the lows from 1993-1994. But once the $36 support level gives way, the bears will be setting their sights on the bearish PnF price target, which has now fallen to $23. This reflects investors pessimism about the future of the automotive industry, which has just come under greater pressure with the West Coast dock shutdown that is already closing some plants due to a lack of parts. Look for the stock to remain under pressure ahead of the company's earnings report, currently set for October 15th. Conservative investors may want to consider harvesting some gains near current levels, as the stock could be due for a short-covering rally next week. We really don't want to consider entering new positions on a breakdown here, but want to wait for the next failed rally in order to get in. Resistance is now building in the $38-39 area, and a rollover there would make for a decent entry. Lower stops to $39.50. *** October contracts expire in 2 weeks *** BUY PUT OCT-37 GM-VU OI=3764 at $2.75 SL=1.50 BUY PUT OCT-35 GM-VG OI=4049 at $1.60 SL=0.75 BUY PUT NOV-35*GM-WG OI= 737 at $2.90 SL=1.50 Average Daily Volume = 5.37 mln --- TECD – Tech Data Corporation $25.53 (-1.72 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: Another day, another multi-year low. While that comment applies to the NASDAQ, it also applies to a plethora of Technology-related stocks, and our TECD play is just one of the many. Bargain hunters tried to nibble on the stock early in the week, but the resulting rebound only resulted in giving us another attractive entry point as TECD rolled over obediently from the declining 10-dma (then at $28.71) on Wednesday. Since then, the action has been down. TECD is approaching major support at $25, and this level could either produce an oversold rebound or another breakdown. The resolution of this question will likely be driven by what happens in the broad market. Given its oversold status, a rally in the broader NASDAQ could stimulate some short-covering. Unless there is some significant follow-through (which we haven't seen for quite some time), that bounce will just set up the next entry opportunity for puts. Since the 10-dma has consistently provided resistance over the past several weeks, we're looking for it to continue to do so. Should price test the $25 level early next week, consider harvesting gains in open plays and look to re-enter at a higher level. That higher level is likely to coincide with the 10-dma (currently $27.89). Lower stops to $28 this weekend. *** October contracts expire in 2 weeks *** BUY PUT OCT-25 TDQ-VE OI=201 at $1.55 SL=0.75 BUY PUT NOV-25*TDQ-WE OI=350 at $2.55 SL=1.25 Average Daily Volume = 742 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 ***** VIX Points The Way By Mark Phillips mphillips@OptionInvestor.com I doubt there's a trader who is active in the market that won't tell you these are some tough markets to trade! I've personally traded very light lately due to conflicting signals to a degree I haven't seen in quite some time, if ever. Oscillators are virtually useless when the trend is measured in hours, not days. And dueling program trades whip the markets back and forth a couple times a day, sometimes without apparent reason. Rumors, innuendo, asset allocation shifts. These are the things that seem to be moving our market. The one over-riding concept that we must keep in mind throughout is "It's a Bear Market". Strange things happen in a bear market. And for some reason, the ugly underbelly of the market, as well as Corporate America gets revealed for all to see. The sight of that gruesome beast just whets the appetite of many a bear, as they know how the investing public will recoil in shock and fear. Scandals beget mistrust, which begets fear, which leads to selling, which leads to panic, which is inevitably followed by short covering. Once the short-covering runs its course, the cycle repeats itself. Right now, we are vacillating between panic and short-covering.. sometimes both are seen in the same day, and investors can't seem to make up their minds whether to panic or buy. Thursday was a perfect example of that as short-covering hit promptly at 10am, as Bear Stearns covered their inadvertent short position of the day before. But as soon as that rally failed to hold its lofty heights, the whole mess came crashing down and by the end of the day on Friday, you sense just a tinge of panic in the air. Not much, but there was a bit of it. How do I know this? The VIX gave me the clue. If you read my Options 101 article on Wednesday, you'll recall that I've been watching for the VIX to move out of its consolidation zone that has been defining its range for some weeks now. If you missed that article, here is the link: Looking for Odd Clues Towards the end of that article, I showed a Point & Figure (PnF) chart of the VIX, pointing out that the next directional market move would likely coincide with the VIX either dropping below 40 (actually it would need to print 39) or breaking out over 48. Well don't look now, but Friday's action led to the VIX actually moving as high as 47.17. Close, but no cigar. Watch those two levels on the VIX: 39 and 48, as I think the next significant directional move in the broad markets will be accompanied by one of those levels on the VIX being breached. While my gut feel is that we're due for another big downward move as I've pointed out in recent commentaries, I can't ignore the depth to which the Bullish Percent figures have plunged again. Just for reference, here's where they are, relative to how far they fell in July. Index Status Bullish % July Bullish % Low Dow Bull Correction 6% 4% S&P 500 Bear Confirmed 24% 12% S&P 100 Bear Confirmed 20% 8% NASDAQ 100 Bear Confirmed 17% 8% NASDAQ Comp Bear Confirmed 28 22% As you can see, all of the major indices' Bullish Percent readings are now in oversold, although still above the extreme readings posted back in July. There could still be some significant downside seen in the near future, but bears need to be very careful due to the degree to which this spring has been coiled. Remember July 24th? Remember that 650 point rally off the lows? That's what happens when the spring is released. The tighter it is coiled, the more energy will be released. So if we end up seeing the VIX top the levels seen in July in conjunction with the Bullish Percent readings being at or near the levels seen in July, we could be in for another powerful rally. There's no guarantee that it will play out this way, but if it does, it could make for some nice trading profits as we head into the end of the year. As to what happens next week, I must say I really have no idea. In all seriousness, I expect the broad markets to continue to weaken throughout most of the earnings reporting season, and then at some point investors will start ignoring the bad news. If I know what that point would be, I'd be a very wealthy man. Our job is to try to read the signs as they become visible, and the VIX and Bullish Percent readings are two of the biggies that have my attention right now. Of course there are support levels to contend with and depending on how you draw things, you could make a case for the DOW right at major support, or (using the descending channel I've written about in the past) you could make a case for the SPX needing to fall all the way to the 720-730 area before it will be ready for the next solid rebound. My gut feel is that the truth lies somewhere in between, as the market will do its best to confound as many of us as possible. Fortunately, I don't have to nail the turning point in the broad markets, because I'm focused on the technicals of a small group of stocks, in which hopefully I can judiciously pick solid entry points. Speaking of the plays, let's take a look at what's on the menu this week. Portfolio: SMH - That brief short-covering rally last week took the Semiconductor index (SOX.X) up to important resistance, and fortunately the bulls didn't have enough conviction to power through. With the warnings from AMD and EMC, the SOX traded to new multi-year lows on Friday and despite a couple of rebound attempts, closed very near its lows. Wednesday's intraday high on the SMH was just over our prior $21.25 stop, but the quick retracement down to new lows was enough to keep our play alive. Note that the SMH is now trading below the $19 level, and still looking weak. What is getting my attention though is the SOX approaching the $200 level, which I think could provide the basis for a decent rally. Since that doesn't provide much more downside in the play, I want to get really aggressive with the stop to keep the risk balanced against the additional reward potential. I would not advocate new positions at this juncture -- now we're just managing a play that is near its end. Conservative traders can use the currently depressed price to harvest gains. We're lowering the stop to $19 this weekend and any kind of rally that sticks next week ought to bring the play to a successful end. Watch List: MO - Proving that MO is now under some serious distribution, the bulls were thwarted in their attempt to push the stock back over the $40 level. After struggling back to that point (which is now significant resistance), they got handed a huge serving of bad news on Friday with the $28 billion judgment against the company from a California court. This environment is eerily reminiscent of what we saw with the Tobacco stocks in late 1999 and early 2000 when litigation risk was around every corner. Clearly, I'm early to this play, and that is why it remains on HOLD for the time being. But I expect the court decision to be overturned or at least substantially reduced in the future. That will likely coincide with the stock finding major support and rebounding strongly. While there is significant support near $35, the PNF chart isn't nearly so optimistic, with its target of $23. Bottom line is that I'm unwilling to remove MO from the Watch List at this point, but I also don't want to even consider new positions until the air begins to clear. BA - Finally! An earnings warning finally cratered BA down to our $32 target (actually $31.95) on Friday before the late-day short-covering bounce lifted the markets off their lows. This satisfies the PnF bearish vertical count of $32 and now we just need to see some technical strengthening in the chart to justify a new long position. The warning was significant, with the aircraft manufacturer taking a 3Q charge that will amount to the company falling 20 cents short when it reports earnings. That's a big blow, considering consensus estimates were for 66 cents per share. I considered adding BA into the Portfolio this weekend, but the rebound off the lows just looked a bit too weak for my tastes. Let's watch it for another week and look for a solid rebound off the $32 level before entering new positions. MSFT - We didn't get much movement in MSFT last week...that is until Friday's brutal selloff that drove the stock back under the $44 level. While we clearly aren't ready for new positions until we get closer to my $38-40 target, the weakness on Friday is encouraging to me. A few more points and we'll have an attractive opportunity setting up. MSFT is still looking strong relative to the broader market and when the next rally comes along (hopefully with MSFT trading near our target), the stock should be a leader to the upside due both to its relative strength and its prominent position in all the major indices. NEM - Despite the weakness in the broad markets, Gold really didn't move much last week, and that left gold stocks to trade in tandem with the equity markets. As such, NEM drifted lower throughout the week, coming to rest near the $26 level. We're getting closer to that major support near $24-25, and we need to wait for that level to be reached and then provide support. The primary reason that I'm not in a hurry here, is due to the Weekly Stochastics, which are only about halfway down to oversold. We have our target, and now we need to wait and see if it will indeed provide support for the next leg of the rally. As I said last week (and up above) I think this market is getting ready to make a large move, but I don't know if it will be up or down. Based on the signals I'm looking at, I expect it will be up, but I don't think there will be enough fuel to get that job done until we navigate this treacherous earnings season. Until then, keep those positions small and the stops tight. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: SMH 09/11/02 '04 $ 20 KBS-MD $ 3.40 $ 5.60 +64.71% $19 '05 $ 20 ZTO-MD $ 4.70 $ 6.50 +38.30% $19 LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $10.00 +16.28% $60 '05 $ 50 XFF-MJ $11.20 $13.50 +20.54% $60 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BA 06/30/02 $32 JAN-2004 $ 35 LBO-AG CC JAN-2004 $ 30 LBO-AF JAN-2005 $ 40 ZBO-AH CC JAN-2005 $ 30 ZBO-AF MO 08/25/02 HOLD JAN-2004 $ 45 LMO-AI CC JAN-2004 $ 40 LMO-AH JAN-2005 $ 50 ZMO-AJ CC JAN-2005 $ 40 ZMO-AH MSFT 09/29/02 $38-40 JAN-2004 $ 45 LMF-AI CC JAN-2004 $ 40 LMF-AH JAN-2005 $ 50 ZMF-AJ CC JAN-2005 $ 40 ZMF-AH NEM 09/29/02 $24-25 JAN-2004 $ 30 LIE-AF CC JAN-2004 $ 25 LIE-AE JAN-2005 $ 30 ZIE-AF CC JAN-2005 $ 25 ZIE-AE PUTS: New Portfolio Plays LEN - Lennar Corporation $56.71 **Put Play** While I didn't expect it to materialize quite so soon, LEN gave us a nice entry point on Wednesday on the failed broad market rally. The stock pushed up to just below $59 and then reversed right at that level of resistance from September. As the broad market rally failed, so did the rally attempt in the Housing stocks, with the $DJUSHB index pulling back from its 20-dma and 50-dma, converged near $318. That reversal turned out to be important as the index sold off sharply through the remainder of the week, breaking mild support near $290 and then coming to rest on major support at $280 as the week drew to a close. Despite its recent strength relative to its peers, LEN followed the group lower, falling below $54 and closing fractionally below its 200-dma ($53.69). We can't quite call this a breakdown yet, as LEN still needs to violate its 50-dma ($53.13) and more importantly trade below $52. A trade below $52 will generate a double-bottom breakdown on the PnF chart and start tilting the scales more in favor of the bears. Our entry point was triggered on the failed rally on Wednesday, making the Portfolio play live. We are starting with a stop at $60, just above the $59 resistance. Traders still looking to enter the play will want to do so on the next failed rally, ideally in the $56-57 area. But with both the daily and weekly Stochastics in full bearish decline, it looks like down is the direction of least resistance. BUY LEAP JAN-2004 $ 50 KJM-MJ $ 8.60 BUY LEAP JAN-2005 $ 50 XFF-MJ $11.20 New Watchlist Plays JNJ - Johnson & Johnson $56.95 **Call Play** It may come as a surprise to see a DOW stock on the Call list this weekend, with the Dow Jones Industrials breaking to their lowest closing level since November 1997, but a quick look at the JNJ chart should alleviate most of those concerns. Rather than heading down to retest its July lows with the rest of the market, the stock has been trading sideways for the past 2 months. It is interesting to note how the Pharmaceutical index (DRG.X) has failed to sell off with the rest of the market, as it consolidates above the $275 level. The latest bout of selling in JNJ ran its course near the $52 level, where buyers started to appear and pushed the stock right back to the $56 resistance level early last week. That set the stage for a bit of excitement when we got some important news out of the 'stent' market. JNJ, GDT and BSX are the 3 main players in this area of the market and a negative ruling for GDT was to the benefit of JNJ and BSX. That news propelled JNJ as high as $59.11 on Thursday, and that is important. Turning to the PnF chart, the trade at $57 created a Triple-top breakout and the additional 2 X's (up to $59) removes the risk of a bull trap. The current vertical count now points to $74 as a tentative upside target. As we head into the heart of earnings season, there is still the risk of more warnings, so we want to be patient about initiating new positions. With the daily Stochastics just starting to roll over, it looks like we could get an attractive entry into the play over the next week or two. Another measurement of the stock's relative strength is that the weekly Stochastics have just started to reverse upward without falling into oversold. There should be some mild support near $56, with that support building in strength by the time the $54 level is reached. Look to open new positions near the $54-55 level, and we'll set our stop initially at $51, which is just below the intraday low in late September. BUY LEAP JAN-2004 $60 LJN-AL BUY LEAP JAN-2004 $55 LJN-AK **Covered Call** BUY LEAP JAN-2005 $60 ZJN-AL BUY LEAP JAN-2005 $50 ZJN-AJ **Covered Call** Drops QQQ - $20.72 After a couple of attempts, the bears finally pushed the QQQ under our $21 stop on Monday, paving the way for further weakness. It took until Friday to really get the ball rolling, but by the end of the week, we could really see the NASDAQ starting to crumble. Sure, there was a short-covering rally at the end of the day, but I don't see this as a turning point just yet. There have just been too many warnings and a complete lack of good news in the marketplace. In hindsight, we might have done well to have a tighter stop, but from a technical standpoint, $21 certainly made sense. We may try another bullish play on the QQQ in the fairly near future, but for now, we need to let the bears have their way. Aggressive traders that want to give the play one more chance might look to re-enter on a dip near $20, with a tight stop at $19. But for now, the LEAPS column is idle the QQQ. ************** TRADERS CORNER ************** If You Can’t Beat Them, Join Them By Mike Parnos, Investing With Attitude It’s amazing how many traders are sitting with a stash of cash, bonds, and T-bills. They’re waiting for a sign from above that it’s OK to get back into the market. When will that happen? When pigs fly. Well, let’s see if we, at the Couch Potato Trading Institute (CPTI), can get some of these porkers airborne and make some money. At this writing, the OEX index is trading at $409.20. We believe that the downtrend is still intact. How can we take advantage of continued downward movement – and reduce our risk to almost nothing? Impossible you say? At the CPTI, almost anything is possible. If we can put a man on the moon, Hannibal Lecter into another movie, and Anna Nicole Smith into Spandex, we can move mountains (that may be redundant). The Position We like the OEX index because it’s a cash settlement. It’s not a stock. That means there is no risk of early assignment regardless of how deep in the money an option becomes. As usual, we will use a 10-contract position for our example. You should obviously adjust your position to accommodate your risk tolerance and account size. Sell a Nov. OEX $410 call @ $21.00 Buy a Nov. OEX $425 call @ $14.20 Credit: $6.80 Risk: $8.20 To make the math easier, let’s assume for a moment that you’re a shrewd trader and manage to shave an additional $.20 off the spread. That would make your credit an even $7.00 and your risk an even $8.00. I like round numbers better. I like a lot of round things . . . twinkies, bagels, pizza, Jennifer Lopez . . . The list goes on and on. This strategy requires a substantial sized account. There may be large margin requirements when placing the adjustments. The initial maintenance requirement on a 10-contract position is $8,000 (difference between the strikes -- $15 -- less the credit received -- $7.00 -- for the 10 contracts. Notice that, it’s the same as the initial risk. The Plan Now, I said that the risk would be reduced to almost zero. We’re going to accomplish this by having a plan (What a unique concept!) – a way to adjust the position should it go in the wrong direction. Here’s the plan: If the OEX cooperates and stays below $410, we’re in Fat City (I personally , live in Cholesterol City – which is conveniently located between McDonalds, KFC and Dunkin Donuts). No adjustments would be necessary and we all live happily ever after – with fries and a hot apple pie. If the OEX becomes a PIA and starts to trend in the other direction: 1. We wait until it gets to a point where it costs $14 to buy back the short call. At that point, we buy back the 10 short $410 call contracts for $14. We wait for that large of a movement because we hope, if the short strike is violated, that a new trend is starting. We don’t want to be whipsawed back and forth. 2. We were wrong about the initial direction. So what? It’s not the first time and certainly won’t be the last. It broke, the chart lied, but it’s fixable. If we can’t beat them, we’ll join them. Let’s look over to the put side of the option chain. We are now going to find a bull put spread, at or below the current OEX value, that will enable us to take in a credit of $7.00 – and sell 20 contracts – that will effectively replenish the $14 we just spent to buy back the short $410 calls. In order to achieve the $7.00 credit in the new bull put spread, it might be necessary to widen it a bit – thereby increasing your maintenance requirement. For example, instead of a $15 difference between strikes, it might require a $20 difference between strikes. If you took in $700 per spread, your risk would be $1,300 per spread. Ten contracts would require $26,000 in maintenance. Sounds like a lot, but it’s not really at risk – if you follow the plan. It’s just to give the broker some peace of mind. When we discuss maintenance, remember that maintenance does not have to be in the form of cash. If you have bonds, mutual funds, stocks or other securities, the maintenance can be applied against their marginable value. Make sure your bungee cord is attached before you jump – and confirm length of the cord, too. Call your broker and check out their margin policies. Note that, after our little flurry of trades, our original $7.00 ($7,000) credit is still intact – less a few commissions. Now, if the OEX continues trending up, everything is just dandy. However, if it reverses, we have to repeat the process – by going in the other direction. We’re hoping for a trend, and it doesn’t really matter what direction. It doesn’t have to last forever – four or five weeks is plenty. We’re willing to go with the flow and that’s how we position ourselves. You’ll never look more forward to option expiration. I guess we got those pigs to fly after all. At least we got them up in the air. If you don’t follow the plan, they may crash land – and that would be messy. Keep some white bread and mayo handy just in case. _________________________________________________________________ The Land of “What If . . .” When analyzing strategies and potential trades, it’s often difficult to take everything into consideration. At first, a strategy may seem foolproof, but there “ain’t no such thing.” If it looks too good to be true, someone (maybe even you) is pulling your chain. It requires a side trip – to the land of “What If . . .” Explore all potential scenarios and evaluate each one before entering a trade. Below is a reader question that shows the process. Do the work! It may save you a big surprise and possibly an even bigger loss. Hi Mike, First, I really appreciate your commentaryand that of all the OI crew. Please comment on this strategy. I have an IRA in which I am limited to writing covered calls and buying protective puts. Buy 100 shares of DIA @ $77.23 Sell October $64 Call @ $13.30 Buy January 04 $84 Put @ $14.20 Total Cost: $78.13 I’m thinking that, if DIA closes under $64, its profit is $19.17. The break even is $83.17, and the maximum loss is $.83 if it closes over $84. I would plan to repeat the process in succeeding months with the same Put. I guess I'm looking for verification that I'm approaching this correctly or if I'm all wet and where I'm going wrong. Thanks. Response: Thanks for the kind words. OK, let's travel into the land of "What If..." to see if this strategy works. Your cost is $78.13 ($77.23 + $14.20 = $91.43 - $13.30 = $78.13) Example 1: What if --- DIA is at $72 at October expiration? 1. DIA is called away at $64.00 2. Cost of DIA stock purchase was $77.23 -- resulting in a debit of $13.23 3. Value of Jan. 04 Put = $17.00. ($84.00 - $72.00) 4. Value of position: $64.00 + $17.00 = $81.00 5. Position ($81.00) less cost of establishing position ($78.13) = $2.87 Profit Example 2: What if -- DIA is at $84 at October expiration? 1. DIA is called away at $64.00 2. Cost of DIA stock purchase was $77.23 -- resulting in a debit of $13.23 3. Value of Jan. 04 84 Put = $13.00. (Appx. At-The-Money Value) 4. Value of position: $64.00 + $13.00 = $77.00 5. Position ($76.00) less cost of establishing position ($78.13) = $2.13 Loss Example 3: What if -- DIA is at $62 at October expiration? 1. Short Oct. $64 call expires worthless. 2. Cost of DIA stock purchase was $77.23 -- resulting in a debit of $13.23 3. Value of Jan. 04 84 Put = $24.50. (Est.) 4. Value of position: $62.00 + $24.50= $86.50 5. Position ($86.50) less cost of establishing position ($78.13) = $8.37 Profit You can only profit from this trade if: a) DIA tanks severely in the first option month (Example 3) and you close out the position for a small profit; or b) DIA gets called away in the first month (Example 1), then you re-establish the position for November, using the same long put. The problem is that, if you don't cash in your put, you take the chance of DIA moving back up. If DIA moves up, the value of the long put will go down. You can only make money if DIA continues down every month. Every month you continue to put on the position using the same long put, you are risking the total value of the long put. ______________________________________________________________ Iron Condor Update: BBH finished this week at $76.80. We got bounced around plenty this week on the BBH roller coaster. Maybe this time the silly index will stay below $80 and, preferably, really tank below $75 so we can make some serious money. Once again we’re short the 1,000 shares. Our profit is intact (less a few more commissions). “And the beat 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 ************** Volume: Confirming or diverging from price trends By Leigh Stevens lstevens@OptionInvestor.com The chart below, which is a daily bar chart of Cisco Systems (CSCO) for a period last year, shows the usual method of displaying volume along the bottom. Each day’s volume figure is directly under the bar, line (close) or candlestick that represents the same day’s price history. The display of volume bars, a type of histogram, is such that the top edge represents and is drawn at the level where that day’s total shares falls on the right hand volume scale. Weekly volume is the cumulative total for the week. Charles Dow made an observation that volume expands in the direction of the trend. That is, for volume to “confirm” the direction of the trend, daily trading volume should be increasing on up days when the trend is up and increasing on down days when the trend is down. The period above on the left side of the chart was a situation where the daily volume trend was increasing (noted by the dashed upward sloping on the volume bars) when the trend was declining – we can say then that volume is “confirming” (the trend). However, the period shown on the right in the chart above had daily volume DECLINING, on balance, when prices were trending higher. Volume was NOT confirming a new up trend and in fact, the volume “divergence” was suggesting to short/buy puts on the stock – of course today we have Cisco trading under $10 per the current chart below. This chart can be used to make some current points on the recent trend in this stock. While there were some periods when volume was expanding on an upswing, this situation did not generally last long and the last part of the rallies, noted by the up trendlines, started to see daily volume subsiding or contracting. For the most part we see volume increasing in the direction of the dominant trend, which is down. When there were divergences in volume relative to the tail end of the rallies shown, we could say that these instances were volume divergent sell indications or signals. ON BALANCE VOLUME (OBV)- There is another volume study that is important to study of the trend – sometimes this Indicator will best highlight a divergence in volume versus price. On Balance Volume or OBV is another way of measuring what is happening to the volume trend. OBV also uses daily stock trading volume for its construction and was devised by Joe Granville, a legendary market analyst who was especially well known in 60’s through the 1980’s. Granville is a very colorful trader/analyst who, at times, seemed to be more of a showman than an analyst and market advisor. However, his market knowledge was through and his market insights often very accurate. One such insight furthered Dow’s concept that volume should increase in the direction of the dominant trend. On balance volume provided some further assessment of this principle and enhanced volume analysis. To construct the OBV indicator, a running total of volume is kept. Assume we started with a stock that traded a million shares on day 1. This is a neutral starting point, as we have to start somewhere. If the stock closes higher the next day and trades 750,000 shares, day 2’s volume figure is added to the first day and assigned a positive number because our running total is a positive number; OBV is now a +1,750,000. [NOTE: OBV would be a negative number if our example stock closed lower on day 2, on 1,500,000 shares: OBV would be a minus 500,000.] On day 3 the stock closes lower on 500,000 shares and we subtract that day’s volume from our cumulative OBV total: on day 3, OBV is +1,250,000. When the stock is unchanged in price on day 4, we leave OBV unchanged at +1,250,000. This kind of calculation continues on into the future. If we graph the points, the resulting line will start moving upward or downward following the direction of the price trend of the stock for which OBV is being calculated. An example of OBV is provided in the chart below (VeriSign Inc – VRSN), with its corresponding on-balance volume (OBV) indicator. This example is useful in that it shows OBV when its cumulative total is both a negative and positive number. We are primarily concerned with the direction of OBV, or is the line moving up or down. If the direction is up, the OBV line is bullish, as there is more volume on up days than on days when the stock price is down. A falling on-balance volume line is bearish, as more stock is being traded on down days than on up days. If both price and OBV are moving up together, it is a bullish sign suggesting higher prices ahead. If both price and OBV are moving down together, this is a bearish indication for still lower prices. However, if prices move higher during a period of time when OBV lags or moves lower, this is a bearish divergence indicating diminishing buying activity and warns of a possible top or trend reversal – an upside reversal is forewarned by OBV above. A divergence in technical analysis of course being what occurs when one component to market activity goes in one direction and another related component goes in an opposite direction. The above chart has prices going in one direction (down) before the trend reversed and OBV going in an opposite direction (up). The bullish OBV divergence occurring in this downtrend indicates that the sellers are becoming less active. This concept also goes to the idea that volume activity can precede a change in price direction. I do not suggest taking action BEFORE price activity also confirms what volume activity has suggested. You can be on the alert however - ready to take appropriate action. The chart above, an example of an upturn in OBV preceding a reversal of a downtrend in VeriSign during the period shown, still looks to be a secondary uptrend, within a primary downtrend. But for a trader in the stock or its options, the OBV/price divergence prompted a profitable exit on puts and a trade in the calls. It could also have been the beginning of a reversal in the major trend in the stock but that would have to have been confirmed by subsequent PRICE action – a rally would have to exceed a prior significant upswing high and so on. The idea I mentioned that “volume ‘precedes’ price” might be better said as volume may sometimes move ahead of price trends. This goes back to what Dow talked about when some group with good insight into the probably end of bull or bear market start doing the opposite of the crowd. At first this activity will not cause much of a change in the trend. Over time this “smart money” group will do enough buying or selling that their buying or selling volume will cause prices to start to move opposite the major trend. As volume picks up and prices move according, this activity attracts more interest and attention and trading activity starts to snowball. In this sense, volume precedes price. We don’t see volume picking up on any key stocks on rallies on key bellwether stocks on any sustained basis currently. We did see a volume spike on at the July bottom in GE per it’s chart below, but notice what happened to the divergent volume trend after that low. With the lack of volume “confirmation” on pretty much the entire rally, a technical trader would have been licking their chops at the prospect of shorting the stock as soon as the rally stalled at the top or on the confirming trendline break. Notice that when GE started declining again in recent weeks, the tendency for increasing daily volume went back to “confirming” the primary price trend as both price and volume were going in the same direction. Volume analysis is obviously not a 1-2 day affair – the bear market we’re in there are many instances where volume spiked up, accompanying an apparent trend reversal. However, in the case of such a dominant downtrend, a continued rally in most stocks has not seen volume also increasing on any sustained basis. Rallies mostly influenced by short-covering can be easily spotted - prices go up as shorts buy back their positions and sellers hold off waiting for higher prices. Hence volume is lackluster due to the absence of substantial NEW buyers. In a bull market the declines will tend to have declining volume as early buyers take profits but sellers do not press the short side and potential buyers wait to buy a dip – when some news or event then sparks a rally, buyers jump in again and a next rally phase sees increasing volume. Note the divergent volume sell points (red arrows) on MO below, as volume either on a daily or on-balance basis, was not confirming the moves to new highs on the rallies highlighted. There was also a noteworthy volume or selling “climax” on the stock in late-June. This turned out merely to be an indication to cover shorts or buy back puts. The rally that followed in July- August was a short/put buy waiting to happen as suggested by the fact that volume was not also trending higher. Volume it should always be noted is a secondary indicator to price. Price is the dominant measure of trend in a stock or index. Volume will typically (or, “should”) confirm the direction of the price trend by larger volume activity on upswings in a bull market and larger volume in downswings in a bear trend. Traders need to respect the trend and not go against the trend just because of a volume divergence - until price action shows that the time is right to act. Dow considered the confirming volume rule to apply to the primary or major trends only and also indicated that volume does not “have to” confirm price activity, as price is the chief determinate of trend. I find validity in the rule of thumb about volume expansion as applied to intermediate or secondary trends or even minor trends also, but agree that the biggest volume will be in the direction of the primary trend. We should see the current bear market start to end when volume starts to taper off again on the further declines. The amount of liquidation we’re seeing as volume has picked up on declines, especially in the S&P stocks now that the S&P 500 P/E ratio is again a more “normal” 16 (down from 40 at the top), could suggest that the market is in a bottoming process. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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The Option Investor Newsletter Sunday 10-06-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Overcoming The Effects Of Human Nature Naked Puts: Investing 101: Market Cycles Revisited Spreads/Straddles/Combos: Stocks Tumble To New Lows! 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: Overcoming The Effects Of Human Nature By Mark Wnetrzak When it comes to money and investing, people are irrational. In fact, the notion of the irrational investor is the basis for many of the market strategies used by professionals. In trading more than any other vocation, we rely heavily on our instincts, either through unrealistic goals or expectations, based on our previous experiences. Rather than reasoning in the present, we often rely on acquired associations (the past) or idealistic perceptions (the future) to help make difficult judgments. With that in mind, it's easy to see why the ability to remain focused on the present, evaluating each play based on its current merits and assessing the trade as it unfolds, is one of the most difficult skills for a person to develop. Before a trader can learn to make timely and effective adjustments, he must understand his personality and know his individual faults and limitations. The stock market has a unique way of reflecting the fundamental emotions and character of humans and in addition to offering great financial rewards, it can also help us to know ourselves better. Before entering a position, you must recognize the anxiety it might produce and be prepared to base your trading decisions on sound ideas rather than impulses or "gut" reactions. Taking the emotion out of trading can be very difficult, however it is achievable if you have the discipline to develop and follow a trading plan. Just as a business plan describes in detail the establishment and development of a potential venture, a trading plan outlines the proposed structure for participation in the financial markets. In most venues, there are two primary requirements of a trading plan: a method of price prediction which signals if and when to initiate a position and a money management system which prescribes the maximum amount of portfolio capital to risk on any one trade. Strategies that involve stocks or options must also specify when to take profits and cut losses, and include a means to correctly position trading stops. Since the optimal management of winning plays is the key to success in any probabilities-based strategy, special attention must be given to techniques that protect gains once they are achieved. While adhering to the parameters of the trading plan is paramount to consistent profits, the system must also remain flexible in the sense that it should be constantly evaluated so as to improve its overall performance. Some of the most common suggestions for developing a successful approach to the market include: 1) Develop a clear profile of your unique personality, emotional traits and personal limitations. Realize that success will come when you create a favorable balance between hard work, sound judgment and patience. Too many traders give up after a few losing plays, long before they have time to learn and absorb the various methods required for profitable trading. 2) Learn fundamental and technical analysis methods that will help you understand the trends and cycles of the stock market. Know your strategy, its advantages and weaknesses and only use techniques that fit your trading style and portfolio outlook. Also, if the strategy is not appropriate for your financial condition, it must be avoided, regardless of how attractive it appears. 3) Trade a fully diversified portfolio and do not devote more capital to a specific position than is warranted by the size of your portfolio. Trade liquid markets as those with less than adequate volume can create excessive slippage when entering and exiting positions. 4) Devise a personalized system that is appropriate solely to your specific situation. Paper trade to safely gain valuable experience and avoid the tendency to jump from one scheme to another, particularly following a losing period, without thoroughly testing the new plan before adopting it. Remember, in all cases, the key to success is to limit losses, exploit winning positions and maintain a conservative outlook with regard to portfolio risk. 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 2.43 OCT 2.50 0.75 $ 0.24 11.9% NWRE 13.75 12.61 OCT 12.50 1.90 *$ 0.65 7.9% PLMD 26.25 27.24 OCT 25.00 2.35 *$ 1.10 6.7% ISIS 9.15 9.03 OCT 7.50 1.95 *$ 0.30 6.0% UTSI 16.25 16.20 OCT 15.00 1.80 *$ 0.55 5.5% CVC 9.48 7.49 OCT 7.50 2.50 $ 0.51 5.3% QCOM 28.08 29.26 OCT 25.00 4.20 *$ 1.12 5.1% RTIX 8.00 7.90 OCT 7.50 0.75 *$ 0.25 5.0% BSTE 29.40 27.29 OCT 25.00 5.70 *$ 1.30 4.8% NOK 13.95 13.03 OCT 12.50 2.20 *$ 0.75 4.6% NWRE 15.97 12.61 OCT 12.50 4.10 *$ 0.63 4.6% PPD 21.80 18.20 OCT 17.50 5.00 *$ 0.70 4.5% SYMC 34.30 30.05 OCT 30.00 5.20 *$ 0.90 4.5% KDE 23.39 23.77 OCT 22.50 1.55 *$ 0.66 4.4% FLE 6.02 6.40 OCT 5.00 1.30 *$ 0.28 4.3% CMLS 16.85 17.00 OCT 15.00 2.55 *$ 0.70 4.3% UDI 22.58 22.75 OCT 20.00 3.30 *$ 0.72 4.1% PRX 28.20 24.47 OCT 25.00 4.30 $ 0.57 2.1% GNSS 8.73 7.26 OCT 7.50 1.60 $ 0.13 2.0% MACR 8.49 7.05 OCT 7.50 1.45 $ 0.01 0.1% RSTO 5.70 4.50 OCT 5.00 1.20 $ 0.00 0.0% AES 2.92 1.98 OCT 2.50 0.75 $ -0.19 0.0% OSTE 9.45 5.52 OCT 7.50 2.50 $ -0.50+ 0.0% LMNX 7.53 6.15 OCT 7.50 0.60 $ -0.78 0.0% *$ = Stock price is above the sold striking price. Comments: The grind lower continues as the major averages fail to follow through on any rallies. Many of the positions in the covered- call portfolio are acting a bit weaker than expected or are at key moments. This week, Osteotech (NASDAQ:OSTE) was hammered after the company had to halt operations. Nimble traders could have exited the position for a break-even exit on the "dead-cat" bounce. Next week, we will also show Luminex (NASDAQ:LMNX) and Restoration Hardware (NASDAQ:RSTO) closed. As for AES Corp. (NYSE:AES), if the stock can hold around $2.00, the ability to sell new calls next month (or further out) seems viable relative the risk. $2.00 at risk verses say $30.00 - think Transkaryotic Therapies (NASDAQ:TKTX). With two weeks until expiration, money management remains imperative. The following stocks are acting a bit worrisome and should be monitored closely as they are on the CC early exit watch list: NWRE, ISIS, CVC, BSTE, PPD, SYMC, CMLS, and PRX. When everyone quits trying to find the bottom, we'll find it! 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 AMZN 16.55 OCT 15.00 ZQN JC 1.90 13453 14.65 14 5.2% BCGI 10.30 NOV 10.00 QGB KB 1.10 0 9.20 42 6.3% FDRY 6.02 NOV 5.00 OUJ KA 1.35 62 4.67 42 5.1% IMCL 7.77 OCT 7.50 QCI JU 0.75 1801 7.02 14 14.9% ISSX 13.65 OCT 12.50 ISU JV 1.70 445 11.95 14 10.0% MENT 6.17 OCT 5.00 MGQ JA 1.35 114 4.82 14 8.1% WWCA 2.71 NOV 2.50 WRQ KZ 0.50 17 2.21 42 9.5% 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 IMCL 7.77 OCT 7.50 QCI JU 0.75 1801 7.02 14 14.9% ISSX 13.65 OCT 12.50 ISU JV 1.70 445 11.95 14 10.0% WWCA 2.71 NOV 2.50 WRQ KZ 0.50 17 2.21 42 9.5% MENT 6.17 OCT 5.00 MGQ JA 1.35 114 4.82 14 8.1% BCGI 10.30 NOV 10.00 QGB KB 1.10 0 9.20 42 6.3% AMZN 16.55 OCT 15.00 ZQN JC 1.90 13453 14.65 14 5.2% FDRY 6.02 NOV 5.00 OUJ KA 1.35 62 4.67 42 5.1% 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). ***** AMZN - Amazon.com $16.55 *** Internet Retail Giant *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. Amazon.com in July posted a second quarter net loss of $94 million, or $0.25 per share, but boosted its full-year sales outlook. Last month, Moody's Investors Service raised one of AMZN's ratings, saying the Internet retailer has improved its ability to generate cash. Investors who wouldn't mind owning the Internet's retail leader near a cost basis of $14.50 should consider this position. OCT 15.00 ZQN JC LB=1.90 OI=13453 CB=14.65 DE=14 TY=5.2% ***** BCGI - Boston Communications $10.30 *** Own This One! *** Boston Communications Group (NASDAQ:BCGI), an S&P Small Cap 600 Index company and Russell 2000 Index company, is a leader in transaction processing solutions for real-time wireless subscriber management and payment services, delivering prepaid wireless, mobile commerce, ATM Recharge, and other billing services. In 1988, BCGI began providing solutions to carriers through a unique combination of industry-leading proprietary software applications, a scalable transaction processing platform, and its Intelligent Voice Services Network (IVSN). Through this nationwide real-time infrastructure, BCGI provides one or more of its services to over 70 wireless carriers and resellers, including four of the top six national carriers. The firm's software, transaction processing platform, and IVSN make up the company's Prepaid Wireless service offering, a market leader in one of the highest growth segments of the wireless communications industry. Shares of BCGI have been on the move in recent sessions and investors who like the outlook for the company can establish a low risk cost basis in the issue with this position. NOV 10.00 QGB KB LB=1.10 OI=0 CB=9.20 DE=42 TY=6.3% ***** FDRY - Foundry Networks $6.02 *** Bottom Fishing! *** Foundry Networks (NASDAQ:FDRY) is a provider of next-generation networking products. The firm offers high performance, end-to-end switching and routing devices for enterprises and network service providers. Foundry designs, develops, manufactures and markets solutions to meet the unique needs of high-performance network infrastructures for Layer 2-7 switching and routing and for LANs, Metropolitan Area Networks (MAN), Wide Area Networks (WAN) and the Web. Foundry offers global end-to-end solutions within and throughout a customer's networking infrastructure regardless of the geographically dispersed nature of the entire organization. Foundry shares enjoyed new buying interest last week after the firm indicated that its third-quarter results will be better than expected. The company CEO said that demand for Foundry's services does not seem to be falling off and that "Backlog going into the fourth quarter remains healthy as we concluded the third quarter with a book-to-bill ratio greater than one." That's good news for this downtrodden issue and traders who believe the recovery will continue can speculate on that outcome with this position. NOV 5.00 OUJ KA LB=1.35 OI=62 CB=4.67 DE=42 TY=5.1% ***** IMCL - ImClone $7.77 *** Martha's Bane In A Trading Range *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product candidate, Erbitux (cetuximab), is a therapeutic monoclonal antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. ImClone's next most advanced product candidate, BEC2, is a cancer vaccine. In addition to the development of its lead product candidates, the company conducts research, both independently and in collaboration with academic and corporate partners, in a number of areas related to its core focus of growth factor blockers, cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. On Friday, ImClone announced that they and Bristol-Myers Squibb (NYSE:BMY) are beginning a new round of clinical tests of Erbitux. With all the "bad" news surrounding ImClone, traders have been speculating on a near-term recovery in the stock. This position takes advantage of the over-priced options and the short-term trading range of an issue that shows support at our cost basis. OCT 7.50 QCI JU LB=0.75 OI=1801 CB=7.02 DE=14 TY=14.9% ***** ISSX - Internet Security $13.65 *** Computer Protection *** Internet Security Systems (NASDAQ:ISSX) is a security software company engaged in information protection solutions dedicated to protecting online assets. The company's security management solutions include software products, managed security services and professional services that are made up of both consulting and training services. The company offers a comprehensive line of products and services for enterprise, smaller enterprise, consumer and service provider customers. A Risk Impact Summary Report (IRIS) released by ISSX on Wednesday for the 3rd-quarter of 2002, revealed a 65% increase in computer system and program vulnerabilities compared to last year. That may prompt users to buy more of their products and we like the long-term technical support near the cost basis in this position. Investors who are interested in internet security stocks should consider this issue. OCT 12.50 ISU JV LB=1.70 OI=445 CB=11.95 DE=14 TY=10.0% ***** MENT - Mentor Graphics $6.17 *** Raised Estimates *** Mentor Graphics (NASDAQ:MENT) is engaged in electronic design automation (EDA), providing software and hardware design tools that enable companies to send better electronic products to market faster and more cost-effectively. Mentor manufactures, markets and supports EDA products and provides related services. Customers use the company's products in the design of automotive electronics, video game consoles, telephone-switching systems, cellular handsets, etc. Mentor exploded on Friday after the company said it expected 3rd-quarter revenue and earnings to exceed Wall Street expectations, helped by strong bookings in North America and the Pacific Rim. Mentor said bookings were up more than 25% and they plan to announce earnings on 11/29. Our outlook is also bullish, due to the technical break-out and this position offers a low risk cost basis in the issue. Try target-shooting a lower net debit on any pullback to lower the cost basis and raise the potential yield in the position. OCT 5.00 MGQ JA LB=1.35 OI=114 CB=4.82 DE=14 TY=8.1% ***** WWCA - Western Wireless $2.71 *** Cheap Speculation *** Western Wireless (NASDAQ:WWCA) is a leading provider of wireless communications services in the western United States and abroad. The company currently offers cellular service marketed under the Cellular OneŽ and Western Wireless name in 19 western states. Through its subsidiaries, Western Wireless is licensed to offer service in 10 foreign countries. Western Wireless has been trading in a narrow range around $2.50 after rallying in August on an upgrade by J.P. Morgan. Analysts believe the company won't falter on its lending agreements as its new roaming revenue from Verizon Wireless and Cingular would offset the rate impact of a three-year deal with AT&T Wirless (NYSE:AWE). We simply favor the basing formation which offers speculative traders a favorable risk-reward potential. NOV 2.50 WRQ KZ LB=0.50 OI=17 CB=2.21 DE=42 TY=9.5% ***** ***************** 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 TDY 17.62 OCT 17.50 TDY JW 0.75 178 16.87 14 8.1% ESPD 10.38 OCT 10.00 ENU JB 0.70 328 9.68 14 7.2% LGTO 2.78 NOV 2.50 EQN KZ 0.50 0 2.28 42 7.0% V 11.95 NOV 10.00 V KB 2.80 34 9.15 42 6.7% AG 23.28 OCT 22.50 AG JX 1.40 204 21.88 14 6.2% SKM 22.50 OCT 22.50 SKM JX 0.60 285 21.90 14 6.0% RFMD 6.36 NOV 5.00 RFZ KA 1.70 375 4.66 42 5.3% AZN 32.30 OCT 30.00 AZN JF 3.00 10262 29.30 14 5.2% XOMA 5.68 NOV 5.00 MBU KA 1.00 935 4.68 42 5.0% UTHR 16.14 OCT 15.00 FUH JC 1.40 200 14.74 14 3.8% LPNT 33.04 OCT 30.00 PUN JF 3.50 52 29.54 14 3.4% ***************** NAKED PUT SECTION ***************** Investing 101: Market Cycles Revisited By Ray Cummins With analysts clamoring for any historical trend or pattern that might help identify a market bottom, it is interesting that very few comments have been made about the possible effects of the upcoming pre-election year. Presidential elections have always been a part of the wavelike advances and retreats of the equity markets and understanding how they affect the long-term ebb and flow of aggregate stock prices is an essential component of successful investing. Historically, the four-year presidential term has perpetuated a well defined stock market cycle. Most bearish trends occur in the first or second year after elections. Then the market improves because each new administration usually does everything in its power to boost the economy so that voters are in a positive mood for the next election. History suggests the winning streak will continue and the market in pre-presidential election 2003 will gain ground long before year's end. Prospects improve considerably when the market has spent a long period moving sideways or experienced a correction, as it has in the past two years. It's also no small coincidence that the last two years (the pre-election year and election year) of the 42 administrations since 1832 produced a total net market gain of over 700%, well above the 235% gain for the first two years of these administrations. As well, the time spent in office coincides with many significant historical events. Wars, recessions and bear markets tend to start or occur in the first half of the term while prosperous times and bull markets usually follow in the latter half. The current period offers an excellent opportunity to compare present cycles with past trends and despite the prolonged bearish activity in stocks, many historians believe that equity values will flourish in 2003 as there hasn't been a down year in the third year of a presidential term since the war-torn era of 1939. In addition, the only severe loss in a pre-presidential election year (since 1914) occurred just after the Depression in 1931. Since 1914, the Dow's performance from a mid-term election year low to a pre-election year high, on average, is an amazing 50% gain. The smallest advance was 14.5% seen during the period from October 9, 1946 to July 24 1947, with the strongest advance of 87.6% posted between July 30, 1914 and December 8, 1915. Many of the mid-term lows also marked the end of bear markets. Of the 22 periods since 1914, 13 included long-term stock market bottoms, the last of which ended October 11, 1990. Given the current environment, it is difficult to imagine the Dow rising 50% in the next 12 months but that same rational was used by investors in previous bear markets that ended during mid-term election years. They failed to seize the opportunity and missed a chance to accumulate substantial wealth. One thing we know is that the complex facets of our economy that determine the overall financial health of the nation as well as key events that affect our country are anticipated by the emotion of the stock market. Any study that compares these historical events with the movement of the major indices will demonstrate how war, recession, and the election of a new president influence the current cycle. These activities have a profound impact on the economy and the market and that's why it is important to become familiar with repetitive cycles in stocks and apply this knowledge as a practical part of your long-term investment strategy. 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 CVC 9.94 7.49 OCT 7.50 0.25 $ 0.24 15.5% RGLD 18.70 19.37 OCT 15.00 0.45 *$ 0.45 11.6% PPD 21.41 18.20 OCT 15.00 0.60 *$ 0.60 10.7% ABFS 27.53 29.61 OCT 25.00 0.90 *$ 0.90 10.4% ULAB 18.83 19.67 OCT 15.00 0.40 *$ 0.40 10.4% AG 22.63 23.28 OCT 20.00 0.45 *$ 0.45 9.5% RGLD 18.05 19.37 OCT 15.00 0.50 *$ 0.50 9.3% UTHR 16.50 16.14 OCT 15.00 0.55 *$ 0.55 8.5% GILD 33.56 30.85 OCT 25.00 0.55 *$ 0.55 8.2% MMSI 20.14 21.42 OCT 18.00 0.35 *$ 0.35 8.1% UDI 24.25 22.75 OCT 20.00 0.30 *$ 0.30 7.6% BSX 30.18 35.14 OCT 27.50 0.85 *$ 0.85 7.2% AMZN 16.61 16.55 OCT 12.50 0.30 *$ 0.30 7.2% TTWO 29.45 27.95 OCT 25.00 0.35 *$ 0.35 6.6% UTHR 17.01 16.14 OCT 15.00 0.30 *$ 0.30 6.4% COF 38.92 30.38 OCT 27.50 0.60 *$ 0.60 6.2% PRX 28.20 24.47 OCT 22.50 0.25 *$ 0.25 6.1% SYMC 34.30 30.05 OCT 25.00 0.30 *$ 0.30 6.1% TTWO 26.20 27.95 OCT 20.00 0.30 *$ 0.30 5.9% FDS 25.95 22.57 OCT 22.50 0.35 *$ 0.35 5.2% INVN 35.76 30.51 OCT 25.00 0.45 *$ 0.45 5.1% STN 14.15 16.92 OCT 12.50 0.25 *$ 0.25 5.1% RMCI 25.80 22.23 OCT 22.50 0.60 $ 0.33 4.7% MDG 20.40 17.20 OCT 17.50 0.55 $ 0.25 3.7% BYD 18.61 16.99 OCT 17.50 0.40 $ -0.11 0.0% *$ = Stock price is above the sold striking price. Comments: With Friday's precipitous declines, all eyes are now on the S&P 500 index as it approaches the July 2002 lows near 775. Despite the oversold conditions, it is unlikely that renewed buying support will bring an end to the bearish activity. In fact, most experts now see a test of the low 700s, possibly even a dip to 695 in the near future. If further downside movement occurs, traders should consider closing positions in Boyd Gaming (NYSE:BYD), Factset Research Systems (NYSE:FDS), Capital One (NYSE:COF), Cablevision (NYSE:CVC), Meridian Gold (NYSE:MDG), and Right Management Consultants (NASDAQ:RMCI). Positions Closed: Integrated Defense Technology (NYSE:IDE) 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 AMLN 15.80 NOV 12.50 AQM WV 0.40 13 12.10 42 8.1% CYH 27.10 OCT 25.00 CYH VE 0.25 15 24.75 14 6.0% HLYW 17.20 NOV 15.00 HWQ WC 0.60 10 14.40 42 8.2% HOLX 11.74 NOV 10.00 QHX WB 0.50 0 9.50 42 10.5% KDE 23.77 NOV 20.00 KDE WD 0.70 762 19.30 42 7.9% OVER 23.40 OCT 20.00 GUO VD 0.30 457 19.70 14 10.4% QCOM 29.26 OCT 25.00 AAW VE 0.30 17222 24.70 14 8.4% UDI 22.75 OCT 20.00 UDI VD 0.25 296 19.75 14 8.2% 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 HOLX 11.74 NOV 10.00 QHX WB 0.50 0 9.50 42 10.5% OVER 23.40 OCT 20.00 GUO VD 0.30 457 19.70 14 10.4% QCOM 29.26 OCT 25.00 AAW VE 0.30 17222 24.70 14 8.4% HLYW 17.20 NOV 15.00 HWQ WC 0.60 10 14.40 42 8.2% UDI 22.75 OCT 20.00 UDI VD 0.25 296 19.75 14 8.2% AMLN 15.80 NOV 12.50 AQM WV 0.40 13 12.10 42 8.1% KDE 23.77 NOV 20.00 KDE WD 0.70 762 19.30 42 7.9% CYH 27.10 OCT 25.00 CYH VE 0.25 15 24.75 14 6.0% 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). ***** AMLN - Amylin Pharmaceuticals $15.80 *** New Drug Deal! *** Amylin Pharmaceuticals (NASDAQ:AMLN) is a biopharmaceutical firm engaged in the discovery, development and commercialization of drug candidates for the treatment of diabetes and other metabolic disorders. The firm has exclusive rights to two drug candidates that are in late-stage development for the treatment of diabetes, SYMLIN (pramlintide acetate) and AC2993 (synthetic exendin-4). The company has a third drug candidate, AC3056, in early stage clinical trials, and maintains a focused research and development program to discover and in-license additional drug candidates for metabolic diseases. Amylin recently announced a deal with drug giant Eli Lilly that analysts say is rare in this market. In exchange for a big piece of future profit of its experimental diabetes drug, AC2993, the biotech firm will receive $110 million upfront from Lilly. That amount could triple if Amylin reaches all the deal's milestones. Not only is Amylin getting a big cash infusion, but it also will keep 50% of all U.S. profit and 20% of foreign profit. Investors who like the outlook for Amylin can establish a low risk cost basis in the issue with this position. NOV 12.50 AQM WV LB=0.40 OI=13 CB=12.10 DE=42 TY=8.1% ***** CYH - Community Health Systems $27.10 *** Health Services *** Community Health Systems (NYSE:CYH) is a non-urban provider of general hospital healthcare services. In over 85% of its markets, the company is the sole provider of these services. In all but one of its other markets, the company is one of two providers of these services. Community Health Systems receives payment for healthcare services provided by its hospitals from the federal Medicare program; state Medicaid programs; healthcare insurance carriers, health maintenance organizations, preferred provider organizations and other managed care programs, as well as patients directly. The company owns, leases or operates over 50 hospitals, geographically diversified across 20 states, with an aggregate of 5,391 licensed beds. Stocks in the Health Services sector are performing well and this position offers a conservative basis in one of the more bullish issues in the group. OCT 25.00 CYH VE LB=0.25 OI=15 CB=24.75 DE=14 TY=6.0% ***** HLYW - Hollywood Entertainment $17.20 *** Solid Earnings! *** Hollywood Entertainment (NASDAQ:HLYW) is a specialty retailer of rentable home videocassettes, DVDs and video games in the United States. The company operates approximately 1,800 Hollywood Video superstores in 47 states and the District of Columbia. Most of Hollywood's revenue was derived from the rental of movies in the VHS and DVD format, as well as games. The remainder of the firm's revenue was generated from the sale of new and previously viewed movies and games and concessions. Unlike many video retailers that have grown through acquisitions, the company has focused on organic growth. Of Hollywood's 1,535 video superstores opened since 1995, nearly 95% of these superstores have been opened as new stores. The company seeks to open approximately 50 new stores during 2002, and to increase its store base by approximately 10% per year thereafter. Hollywood Entertainment recently announced that third-quarter same-store sales rose 7%, beating an internal projection for 3% growth, and the video store chain raised its earnings estimate for the quarter. The company also said it's expanding its game rental business amid strong results in that segment. NOV 15.00 HWQ WC LB=0.60 OI=10 CB=14.40 DE=42 TY=8.2% ***** HOLX - Hologic $11.74 *** FDA Approves New Cancer Screener *** Hologic (NASDAQ:HLGC) is a developer, manufacturer and supplier of diagnostic and medical imaging systems primarily serving the healthcare needs of women. Hologic focuses its resources on developing systems and subsystems offering superior image quality and diagnostic accuracy. The company's core women's healthcare business units are focused on bone densitometry, mammography and breast biopsy, and on developing a unique, direct-to-digital X-ray mammography system. In addition, the firm develops, manufactures and supplies other X-ray based imaging systems, such as general purpose direct-to-digital X-ray equipment and mini c-arm imaging products. The company's customers include hospitals, imaging clinics, private practices and other healthcare organizations worldwide. The firm's customers also include major pharmaceutical companies that use it products in conducting clinical trials. This week, Hologic received final approval from the Food and Drug Administration for its DirectRay amorphous-selenium image receptor for its LORAD Selenia Full Field Digital Mammography System. The Selenia generates digital mammographic images that can be used for screening and diagnosis of breast cancer and is intended for use in the same clinical applications as traditional screen-film mammography systems. Hologic said that with the final FDA approval, it will begin marketing activities in the U.S. immediately, adding that initial shipments of Selenia will begin this quarter. NOV 10.00 QHX WB LB=0.50 OI=0 CB=9.50 DE=42 TY=10.5% ***** KDE - 4Kids Entertainment $23.77 *** On The Move! *** 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 recently on speculation that a new show, "Yu-Gi-Oh" from Japan, could offer property rights bigger than Pokemon. On Thursday, 4Kids announced that it has signed an agreement with DreamWorks Records to release an album based on the music in the Yu-Gi-Oh! animated television series. Technically, the issue has moved up and out of a year-long trading range and the support near the cost basis in this position offers a reasonable margin of safety for traders who are bullish on the issue. NOV 20.00 KDE WD LB=0.70 OI=762 CB=19.30 DE=42 TY=7.9% ***** OVER - Overture Services $23.40 *** Trading Range! *** Overture Services (NASDAQ:OVER) is engaged in the provision of pay-for-performance search services on the Internet. Overture operates an online marketplace that introduces consumers and businesses that search the Internet to advertisers that provide products, services and information. Advertisers participating in the company's marketplace include retail merchants, wholesale and service businesses and manufacturers. Overture facilitates these introductions through its search service, which enables advertisers to bid in an ongoing auction for priority placement in the company's search results after editorial approval. The company's marketplace offers consumers and businesses quick, easy and relevant search results for products, services and information, while providing advertisers with a cost-effective way to target them. Overture is comfortably established in a 6-month long trading range and traders who think the company's upcoming earnings report will be favorable can speculate on that outcome in a conservative manner with this position. OCT 20.00 GUO VD LB=0.30 OI=457 CB=19.70 DE=14 TY=10.4% ***** QCOM - Qualcomm $29.26 *** Entry Point! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. The company offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology, enhanced component integration and interoperability, as well as reduced time to market. Qualcomm recently announced that strong demand for next-generation chips for wireless phones prompted it to raise its shipment guidance for the fiscal fourth quarter. The news helped the issue move back to the top of an intermediate-term trading range and this position offers investors reasonable reward potential at the risk of owning the company at a cost basis near $25. OCT 25.00 AAW VE LB=0.30 OI=17222 CB=24.70 DE=14 TY=8.4% ***** UDI - United Defense $22.75 *** Defense Sector Hedge *** 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 and industry analysts say the company's prospects are favorable as the firm has signed a number of new contracts. Defense stocks are likely to rally if the U.S. starts a war with Iraq and this position offers a favorable way to hedge against a sell-off in the broader markets if war erupts in the near future. OCT 20.00 UDI VD LB=0.25 OI=296 CB=19.75 DE=14 TY=8.2% ***** ***************** 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 NPSP 22.33 OCT 20.00 QKK VD 0.40 73 19.60 14 12.4% MGAM 20.48 OCT 17.50 QMG VW 0.30 33 17.20 14 11.8% ADTN 19.63 OCT 17.50 RQA VW 0.30 15 17.20 14 10.8% EW 25.85 OCT 25.00 EW VE 0.45 0 24.55 14 9.8% FSH 30.78 OCT 30.00 FSH VF 0.50 0 29.50 14 9.0% MOVI 17.03 NOV 15.00 QLV WC 0.55 0 14.45 42 7.5% HMA 20.62 OCT 20.00 HMA VD 0.25 276 19.75 14 6.9% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Tumble To New Lows! By Ray Cummins The major equity averages continued their recent decline Friday, falling to multi-year lows amid concerns over waning corporate profits, a sluggish labor market and an impending war with Iraq. The Dow Jones Industrial Average fell 188 points to 7,528 on weakness in Alcoa (NYSE:AA), Disney (NYSE:DIS), Philip Morris (NYSE:MO), Boeing (NYSE:BA), Honeywell (NYSE:HON), J.P. Morgan (NYSE:JPM) and International Business Machines (NYSE:IBM). In the technology segment, virtually every sector was plagued by selling pressure and hardware stocks were among biggest losers after EMC (NYSE:EMC) issued an unexpected profit warning. The NASDAQ Composite dropped 25 points to 1,139. Among the broader market groups, utility, financial and drug shares were sold off while retail stocks saw limited buying interest. The S&P 500 Index ended 18 points lower at 800. Trading volume was average at 1.82 billion on the NYSE and at 1.59 billion on the NASDAQ. Market breadth was poor with falling issues outnumbering rising issues 3 to 1 on the Big Board and over 2 to 1 on the technology exchange. Treasury instruments rebounded as stocks fell with the 10-year note adding 1/8 to yield 3.67% while the long bond rose 7/32 to yield 4.72%. On the fund flow front, Trim Tabs estimated that all equity funds had inflows of over $2 billion during the week ending 10/3, compared with outflows of $7.3 billion in the prior week. Equity funds that invest primarily in U.S. stocks had outflows of $500 million versus outflows of $6.7 billion in the prior week. Not surprisingly, bond funds enjoyed inflows of almost $2 billion compared with inflows of $900 million the previous week. With the recent exodus from stocks, analysts continue to look for indications of true capitulation and unconditional surrender among retail investors. Unfortunately, conditions such as heavy volume during the big sell-offs and extreme fear in the sentiment gauges have yet to emerge, thus the end of the bear market is nowhere in sight. ***************** PORTFOLIO SUMMARY ***************** (As of 10-04-02) PUT CREDIT SPREADS ****************** Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status BLL 53.75 48.54 OCT 45 50 0.70 49.30 ($0.76) Open? OEX 446.00 403.22 OCT 395 400 0.45 399.55 $0.45 Open? OHP 42.62 38.02 OCT 33 35 0.30 34.70 $0.30 Open NOC 124.54 119.30 OCT 105 110 0.35 109.65 $0.35 Open UOPX 32.11 29.85 OCT 25 30 0.55 29.45 $0.40 Open? As noted last week, Ball Corporation (NYSE:BLL) and the bullish portion of the OEX credit-spread strangle are candidates for early exit. University of Phoenix Online (NASDAQ:UOPX) has also turned south amid bad news from DeVry (NYSE:DV), which was hit for large losses after saying that fiscal first-quarter earnings would come in below the consensus estimate due to the negative impact of the technology recession on enrollment. Conservative traders should consider closing the position to limit losses. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status OEX 446.00 403.22 OCT 500 495 0.45 495.45 $0.45 Open SLAB 19.66 17.66 OCT 30 25 0.40 25.40 $0.40 Open BRL 63.65 59.60 OCT 75 70 0.50 70.50 $0.50 Open LXK 43.49 46.95 OCT 55 50 0.50 50.50 $0.50 Open MMM 119.46 114.50 OCT 135 130 0.40 130.40 $0.40 Open WFC 46.89 44.86 OCT 55 50 0.55 50.55 $0.55 Open ASD 64.56 61.33 OCT 75 70 0.65 70.65 $0.65 Open S 40.62 37.64 OCT 50 45 0.30 45.30 $0.30 Open SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V (G/L) Status BYD 17.71 16.99 DEC 20 15 (0.15) 0.90 0.75 Closed CVC 9.48 7.49 DEC 15 5 (0.10) 0.60 0.50 Closed TARO 32.55 32.53 OCT 37 27 0.10 0.40 0.50 Closed DIAN 46.10 42.05 NOV 60 35 (0.10) 0.10 0.00 Open ERTS 67.73 62.96 NOV 75 60 0.40 0.00 0.40 Open? Bullish synthetic positions in Boyd Gaming Group (NYSE:BYD) and Cablevision (NYSE:CVC) 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 20.89 JAN 20 30 0.05 1.45 1.50 Open PFE 30.75 28.55 JAN 25 35 0.15 0.80 0.95 Open BRCD 12.33 5.82 JAN 10 15 (0.05) 8.90 8.85 Open? MRK 45.74 44.26 OCT 40 50 0.10 0.45 0.55 Open PGR 50.96 49.85 NOV 45 56 (0.10) 0.60 0.50 Open Brocade Communications (NASDAQ:BRCD) was the big winner this month with a closing credit of up to $8.90 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 4.00 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 17.30 JAN-27C OCT-27C 0.80 0.75 Closed LEH 49.69 44.92 JAN-40P OCT-40P 1.90 2.70 Open Despite a lack of public news, Schering-Plough shares began to decline early in the week on heavy volume and the activity left investors and analysts scratching their heads for an explanation. The reason came on Thursday when the company said its earnings in 2003 and 2004 would be far below consensus forecasts due to the loss of patent protection for its top allergy drug Claritin. The announcement sent SGP's share value to depths not seen since late 1996, and if you did not exit the position during the initial stages of the decline (along with the "inside" traders), there was little value left in the long (call) option at Friday's close. SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit M/V Status AES 2.92 1.98 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 18.07 OCT 40 15 1.10 0.95 0.15 Open? ISIS 8.97 9.03 OCT 15 7 1.50 0.50 1.00 Open QCOM 28.58 29.26 OCT 32 22 1.50 0.50 1.00 Open TKTX 34.41 12.71 OCT 45 25 1.55 (12.50)(10.95) Closed PPD 21.80 18.20 OCT 25 17 1.95 1.30 0.65 Open? STJ 36.29 35.20 OCT 40 30 1.00 0.55 0.45 Open OMC 55.86 52.10 OCT 65 40 0.95 0.85 0.10 Open Transkaryotic Therapies (NASDAQ:TKTX) was in the news this week after the company said the Food and Drug Administration is not satisfied that the drug, Replagal, significantly reduces pain associated with Fabry Disease. However, that was not the only problem with TKTX as rumors circulated that company officials had failed to disclose the FDA's concerns earlier, after reviewing briefing documents sent to the company ahead of the advisory panel meeting. With the potential for another ImClone debacle, investors were quick to punish the issue and the retribution was far more excessive than anyone expected. Even with our timely exit on Thursday morning, the resultant 50% loss in share value demonstrated why you should never sell puts on a stock you don't want to own. Questions & comments on spreads/combos to Contact Support ***************************** READER'S WRITE E-MAIL REPLIES ***************************** With the recent volatility in stocks, it was not surprising that two readers commented on the use of indexes with credit spreads this week. Indeed, it is considered beneficial for the credit spread trader to use index options rather than equity options as a gap in one component of an index will not unduly affect that index. At the same time, a stock that gaps sharply in the wrong direction (such as frequently occurs after an unexpected earnings warning or a quarterly report) limits the ability to manage risk in equity-option positions. Here are some excerpts from a recent commentary on the subject of index credit spreads. Index Credit Spreads To be successful with index credit spreads, traders must master a number of skills: First, one must correctly assess the direction of movement and magnitude of the underlying stock or index. For credit spreads, the only objective is for the sold option to stay "out-of-the-money." This means you can be far less precise in your forecast for the underlying, but it does not relieve you of sound judgment about the overall character of the market and the potential for volatility. Considering the current outlook, it is fortunate that index credit spreads can be profitable in a bearish environment. If you are trading bullish positions, make sure there is technical support above the sold put (such as a moving average, the bottom of an established chart pattern or a commonly recognized trend-line) to increase the probability that both options finish "out-of-the-money." Of course, the opposite would be the case for a bearish credit spread utilizing calls; overhead resistance or supply or a technical "top" formation below the strike price of the sold option. Second, it is important to establish spreads that are sufficiently distant from the current price of the underlying, so the position can withstand a substantial (unexpected) movement in the underlying market without undue risk. If excess volatility is a concern, you should consider establishing a larger cushion than normal (a greater margin for error) to avoid getting "whip-sawed" out of the position. Successful credit-spread traders learn to identify periods of extreme volatility and avoid those periods unless they can be used to one's advantage in a position's set-up (which is based on a longer-term timeframe and confirming technical indications). The basic questions related to position (strike) selection are: How much downside are you willing to risk in return for the (relatively small) profit achieved, and are you the type that manages his plays more aggressively, with a focus on limiting losses before they become substantial? In addition to defining the fundamental style of your trading, the first question also relates directly to option pricing theory because we know that option prices are determined from historical and statistical data, and that in all but the most extreme cases, the market trades inside the 2nd standard deviation of a normal distribution. That area is generally equivalent to the 3%-5% monthly (annualized) return offered in conservative strategies such as deep-OTM credit spreads. Thus, if you want to have a high probability of making a low profit (one way, but not necessarily the best method of option trading), target positions that are in that range. The second part of the question is probably more important since it relates to the fact that success with a low profit, high probability approach to the options market is based on limiting losses to a minimum. There are never any big winners to offset the big losers, so there simply can't be any big losers. All option trading strategies, including OTM credit spreads, need to have some type of exit (or adjustment) point or signal in case the market, stock, or sector turns in the opposite direction from that which is expected. Obviously, a gapping issue will occasionally wipe out a portion of previous gains and there is nothing you can do about it. At the same time, traders must endeavor to manage the remaining positions effectively or there will be no profits to offset the rare catastrophic losers. The key to success with a strategy such as OTM credit spreads is the position management that follows the initial trade and in all cases, remember the adage: Traders become successful when they learn to take small profits regularly and they don't let losing plays significantly erode capital. The basic approach to analysis of these broader instruments is much the same as with any financial issue: Define the primary trend, the support and resistance areas, the historical volatility (which leads to a probability assessment) and any potential news or events that could affect the future price of the underlying issue. Regarding the target time frame with index spreads, most experienced traders use expiration dates within three months, as there is simply too much potential for a major change in character in the underlying market in longer-term positions and the premiums are generally not as favorable on a relative basis. As far as position management and adjustment strategies, they are similar to those utilized in equity-based credit spreads: close, cover or roll-out; all of which have been covered at length in the strategy narratives on the OIN website (look in the newsletter archives on the left side of the home page). One more thought... Traders who employ index-based credit spreads often hedge their portfolios through the use of simultaneous bearish and bullish spreads (known as "Condors" to experienced players) and in some cases, traders can benefit from the reduced collateral requirements of a neutral-outlook position. The best research material on this subject comes from professional traders who utilize the technique frequently (Don Fishback and Jay Kaeppel come to mind) and these experts suggest that traders who are new to index credit spreads should focus on the probability aspect of the strategy, as well as the technical indications of the underlying instrument, to help make accurate price forecasts and volatility projections. Good Luck! ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ***************** SPECULATION PLAYS ***************** These positions are based on recent increased activity in the stock and underlying options. All of these plays offer favorable risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ***** IMCL - ImClone $7.77 *** Erbitux Lives Again! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product candidate, Erbitux (cetuximab), is a therapeutic monoclonal antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. ImClone's next most advanced product candidate, BEC2, is a cancer vaccine. In addition to the development of its lead product candidates, the company conducts research, both independently and in collaboration with academic and corporate partners, in a number of areas related to its core focus of growth factor blockers, cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. This speculative short-put combination utilizes Jim Brown's (OIN Founder/Chief Editor) popular technique of writing "in-the-money" Puts to profit from upward movement in the underlying issue. A near-term Put is also purchased to limit downside risk in the play, if bullish activity does not begin in the next few months. More information on this unique strategy can be found at: http://members.OptionInvestor.com/editorplays/042201_1.asp PLAY (speculative - bullish/short-put combination): SELL PUT JAN04-15.00 KFC-MC OI=268 B=$8.80 BUY PUT JAN03-5.00 QCI-MA OI=83 A=$0.85 INITIAL NET-CREDIT TARGET=$7.90-$8.00 TARGET PROFIT=$1.75-??? Note: There is a collateral requirement for the sold (short) Put, whether it is partially covered in the initial spread or exists "naked" when the long option expires. Please review the terms of the collateral requirements with your broker. **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. ***** BAC - Bank of America $58.00 *** Big Bank Breakdown! *** Bank of America (NYSE:BAC) is a bank holding company. Through its banking subsidiaries (the Banks) and various non-banking subsidiaries, the firm provides a diversified range of banking and non-banking financial services and products, throughout the Mid-Atlantic (Maryland, Virginia and the District of Columbia), the Midwest (Illinois, Iowa, Kansas and Missouri), the Southeast (Florida, Georgia, North Carolina, South Carolina and Tennessee), the Southwest (Arizona, Arkansas, New Mexico, Oklahoma and Texas), the Northwest (Oregon and Washington) and the West (California, Idaho and Nevada) regions of the United States and in selected international markets. As part of its operations, the company regularly evaluates the potential acquisition of, and often holds discussions with, financial institutions and other businesses of a type eligible for financial holding company ownership or control. PLAY (speculative - bearish/calendar spread): BUY PUT JAN-50 BAC-MJ OI=17329 A=$2.50 SELL PUT OCT-50 BAC-VJ OI=401 B=$0.55 INITIAL NET-DEBIT TARGET=$1.85-$1.90 TARGET PROFIT=0.70-$0.95 ************** LPNT - Lifepoint Hospitals $33.04 *** Sector Upgrade! *** Lifepoint Hospitals (NASDAQ:LPNT), operates a number of general, acute care hospitals with in non-urban communities. The company was originally formed as a division of HCA Incorporated (NYSE:HCA), a healthcare services company that operates in the United States, England and Switzerland. Lifepoint's hospitals are located in Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. The firm's general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non-urban markets. These hospitals also provide a range of diagnostic and emergency services, as well as outpatient and ancillary services, including outpatient surgery, laboratory, rehabilitation, radiology, respiratory therapy and physical therapy. PLAY (conservative - bullish/calendar spread): BUY CALL FEB-35 PUN-BG OI=29 A=$3.10 SELL CALL OCT-35 PUN-JG OI=38 B=$0.55 INITIAL NET-DEBIT TARGET=$2.45-$2.50 TARGET PROFIT=0.90-$1.25 ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** AZO - Autozone $81.27 *** 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. PLAY (conservative - bullish/credit spread): BUY PUT OCT-70 AZO-VN OI=2458 A=$0.45 SELL PUT OCT-75 AZO-VO OI=1109 B=$0.85 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$74.55 PROBABILITY OF PROFIT (100-day HV)=87% ***** VZ - Verizon $33.60 *** Baby Bell Rally! *** Verizon Communications (NYSE:VZ) is one of the world's leading providers of communications services. Verizon companies are the largest providers of wireline and wireless communications in the United States, with 135.1 million access line equivalents and 30.3 million Verizon Wireless customers. Verizon is also the largest directory publisher in the world. With more than $67 billion in annual revenues and approximately 241,000 employees, Verizon's global presence extends to more than 40 countries in the Americas, Europe, Asia and the Pacific. PLAY (conservative - bullish/credit spread): BUY PUT OCT-27.50 VZ-VY OI=178 A=$0.20 SELL PUT OCT-30.00 VZ-VF OI=40880 B=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$29.75 PROBABILITY OF PROFIT (100-day HV)=88% ***** FITB - Fifth Third Bancorp $57.47 *** Sector Downgrade! *** Fifth Third Bancorp (NASDAQ:FITB) is a diversified financial services company headquartered in Cincinnati, Ohio. The company has $75 billion in assets, operates 16 affiliates with 917 full service Banking Centers, including 133 Bank-Mart locations open seven days a week inside select grocery stores and 1,856 Jeanie ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida and West Virginia. The financial strength of Fifth Third's affiliate banks continues to be recognized by rating agencies with deposit ratings of AA- and Aa1 from Standard & Poor's and Moody's Rating Service, respectively. Also, Fifth Third Bancorp continues to maintain the highest short-term ratings available at A-1+ and Prime-1, and was recently recognized by Moody's with one of the highest senior debt ratings for any U.S. bank holding company of Aa2. Fifth Third operates four primary businesses: Commercial, Retail, Investment Advisors and Midwest Payment Systems, the Bank's electronic payment processing subsidiary. PLAY (conservative - bearish/credit spread): BUY CALL NOV-70 FTQ-KN OI=3745 A=$0.25 SELL CALL NOV-65 FTQ-KM OI=2040 B=$0.85 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$65.65 PROBABILITY OF PROFIT (100-day HV)=89% ***** LEN - Lennar $53.67 *** Housing Industry Bubble? *** Lennar Corporation (NYSE:LEN) is a homebuilder and a provider of residential financial services. Their homebuilding operations include the sale and construction of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through its partnerships. Lennar's financial services operations provide mortgage financing, title insurance and closing services for both its homebuyers and others, resell the residential mortgage loans originated in the secondary mortgage market and also provide high-speed Internet access, cable television and alarm monitoring services to residents of its many communities and others. In 2002, Lennar acquired Patriot Homes, a homebuilder in the Baltimore marketplace, and expanded into the Carolinas with the acquisition of Don Galloway Homes and the assets and operations of Sunstar Communities. PLAY (less conservative - bearish/credit spread): BUY CALL NOV-65 LEN-KM OI=2264 A=$0.60 SELL CALL NOV-60 LEN-KL OI=3249 B=$1.45 INITIAL NET-CREDIT TARGET=$0.90-$1.00 POTENTIAL PROFIT(max)=22% B/E=$60.90 PROBABILITY OF PROFIT (100-day HV)=78% ******************* 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. ***** CTSH - Cognizant Technology $51.76 *** Rolling Over! *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. PLAY (very speculative - bearish/synthetic position): BUY PUT OCT-40 UPU-VH OI=138 A=$0.60 SELL CALL OCT-60 UPU-JL OI=378 B=$0.45 INITIAL NET-CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.30-$0.50 Note: Using options, the position is similar to being short the stock. The initial collateral requirement for the sold call is approximately $1,295 per contract. ***** C - Citigroup $27.98 *** Banking Sector Slump! *** Citigroup (NYSE:C) is a diversified worldwide financial services holding company whose businesses provide a wide range of financial services to consumer and corporate customers. The firm has over 192 million customer accounts in 100 countries and territories. The company's activities are conducted through Global Consumer, which delivers a wide array of banking, lending, insurance and investment services; Global Corporate, which provides businesses, corporations, governments, institutions and investors with a broad range of financial services; Global Investment Management, which offers a variety of life insurance, annuities and asset management products; Private Banking, which consists of traditional banking activities, and Investment Activities, which consists of the firm's venture capital activities. PLAY (speculative - bearish/synthetic position): BUY PUT NOV-22.50 C-WX OI=483 A=$0.75 SELL CALL NOV-32.50 C-KZ OI=5173 B=$0.55 INITIAL NET-DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.40-$0.70 Note: Using options, the position is similar to being short the stock. The initial collateral requirement for the sold call is approximately $725 per contract. ***** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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