The Option Investor Newsletter Sunday 10-13-2002 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: Is October Synonymous with Bottom? Futures Market: Octoberfest! on 1st Green Weekly Close in 7 Weeks Index Trader Wrap: Not only "present," but found! Editor’s Plays: (See Note) Market Sentiment: Behind the Curtain Ask the Analyst: A Lesson In the Basics Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Expecting a pullback, after bears take profits Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 10-11 WE 10-4 WE 9-27 WE 9-20 DOW 7850.29+321.89 7528.40 –63.58 7701.45 -284.57 7986.02 -326.67 Nasdaq 1210.47+774.16 436.31 – 9.13 1199.08 - 22.00 1221.08 - 70.28 S&P-100 422.68+ 19.46 403.22 – 4.03 413.22 - 10.68 423.90 - 20.34 S&P-500 835.32+ 35.04 800.28 –14.70 827.36 - 18.03 845.39 - 44.41 W5000 7873.03+274.41 7598.62-175.00 7872.54 -150.63 8023.17 -417.71 RUT 344.93- 3.05 347.98 –14.29 361.77 - 5.51 367.28 - 22.70 TRAN 2154.67+ 16.99 2137.68 –13.39 2185.17 + 1.15 2184.02 - 62.85 VIX 43.44- 2.84 46.28 + 3.14 43.14 - 1.41 44.55 + 5.24 VXN 58.87- 1.41 60.28 + 2.42 57.86 - 1.22 59.08 + 3.23 TRIN 0.41 1.98 2.09 0.86 Put/Call 0.93 0.97 0.90 1.16 ****************************************************************** Is October Synonymous with Bottom? By John Seckinger jseckinger@OptionInvestor.com The Dow set a multi-year low on Thursday, only to rally 700 points from Thursday's low to Friday’s high and post its first weekly gain since mid-August. Additionally, volume on the NYSE on Friday was an impressive 1.8 billion shares. More impressive was the fact that advancing issues represented almost 90 percent of volume. Gains in the Nasdaq was equally impressive, as the tech-laden index rose 10% from its low on Thursday and, like the Dow, closed above its 22 DMA (1199). Volume on the Nasdaq was 1.7 billion, while up volume swamped down volume by a ratio of over 4:1. Unlike the Dow, the Nasdaq engulfed the "real body" (candlestick term meaning range from open to close) of the prior two weeks. The headline catalysts on Friday included in line earnings from GE and an upgrade of IBM from Lehman Brothers. GE's 3Q earnings reportedly rose 25% as NBC television and the sale of their Internet commerce unit managed to offset weak demand in aerospace and power markets. Shares of GE rose $1.61 to $24.21, but failed to test its 22 DMA (25.32). Shareholders of IBM were rewarded following a Lehman Brothers upgrade to "overweight" from "equal weight". The investment house noted that third-quarter earnings for IBM should be in line with estimates, adding that information technology spending by corporations should improve in 2003. Shares of IBM on Friday rose $6.34 to $63.92 and above its 22 DMA (62.52). Another company making headlines was Intel (INTC), ordered to play at least $150 million in damages after a Texas-based Judge ruled the company infringed on patents held by Intergraph (INGR). Intel can appeal the ruling, and has already asked the Judge to reconsider his ruling. Shares of INTC rose 1.04, or 7.33%, to 15.22 and broke above its 22 DMA (14.72) for the first time since late-August. These developments seemed to be the catalyst for the Dow rising almost 170-points during the first 10 minutes of trading. Other developments include weakness in the bond market and a strong rally seen in Semiconductor, Airline, and Retail Stocks. Just before 2 p.m. (EST), the Dow was at 7900 and fueling speculation that this rally was more than just traders covering shorts. Speaking of the bond market, a rumor on Wednesday began to circulate regarding George Soros buying a significant amount of U.S. Treasuries. Reasons for sizable purchases included the fact that the European Central Bank (ECB) would lower interest rates during their meeting on October 10th. When the ECB kept rates unchanged, Treasury Bonds began selling off from a high of 114-18 on Thursday to 112-03 during trading on Friday. The December 30- year settled on Friday down 1-14 to 112-10. The question is: If Soros was selling Treasuries (and most likely buying stocks) on Friday, are there more bond contracts to be sold during trading next week? As the bond market came under selling pressure, some securities fell into the red as well. One of those was Lucent Technologies (LU), losing 17% to 0.58 following news that the company will report a wider-than-expected loss in the fourth quarter, cut 10,000 more jobs, and take billions in charges for severance and a decline in its pension assets. The company also said it canceled a $1.5 billion credit line to avoid a likely technical default. Largely ignored on Friday were economic reports covering inflation on the wholesale level, retail sales, and a preliminary October Michigan sentiment report. U.S. wholesale prices rose 0.1 percent last month after an unchanged reading in August, according to the Labor Department. The "core" PPI, which strips out volatile food and energy costs, also rose 0.1 percent in September following a 0.1 percent drop. This reading seems to fall into the category of “not deflationary or inflationary”; so traders apparently looked elsewhere. Overall retail sales, according to The Commerce Department, reportedly fell 1.2 percent in September, mainly hindered by poor automobile sales. Excluding autos, September sales actually rose 0.1 percent. Then, at 9:45 a.m., the University of Michigan preliminary sentiment reportedly fell to 80.4 in October and a new 9-year low. September’s reading came in at 86.1. The equity markets momentarily sold off following the Michigan report (10- minutes and 53 points); however, bulls were relentless and kept the buying enthusiasm in tact. Speaking of reports, next week will feature a significant number of bellwether companies reporting earnings. Below is a list of only a few of the notable names. On Monday FNM reports before the open, while MYG is scheduled to release earnings after the close. Tuesday features companies such as BAC, ONE, BBOX, C, FITB, FRX, FCX, GM, JNJ, LLL, and WFC; all before the open. After-the-close on Tuesday includes AMCC, DCLK, HDI, INTC, ISSX, MOT, NVLS, RFMD, and TER, all after the close. Earnings on Wednesday will highlight companies including BK, BA, CAT, KO, FBF, F, GD, GENZ, HON, HI, JPM, MER, PFE, RETK, USM, WHR, and WB, all before the open; while AMD, AKAM, AAPL, CDWC, CLS, IBM, IWOV, MACR, QLGC, RSAS, SEBL, SYMC, and VIGN are set to report after the close on Wednesday. Thursday is busy as well, with BOL, BAX, CEN, CAL, CY, EMC, FO, GP, KEY, MAT, NYT, NOK, MO, PNC, PPG, S, LUV, and UNH all before the open. After-the-close involves ATML, ELY, CPWR, EBAY, GTW, HAND, MERQ, MSFT, NT, PBI, PMCS, DGX, RATL, SFA, FON, SUNW, SY, and XLNX. On Friday, BGEN, ERICY, MRK, and TLAB are scheduled to report earnings before the open. Busy, to say the least. Economic reports scheduled next week includes September housing starts on Thursday, with economists' forecasting a 1.636 million number versus 1.609 million in August. Also on Thursday the Federal Reserve releases industrial production and capacity utilization figures for September. Forecasts are for industrial production to rise by 0.1 percent, after dropping 0.3 percent in August. The capacity utilization is expected to come in at a relatively low 76 percent. The Philadelphia Fed report, scheduled for Thursday, should be a solid leading indicator since it covers the month of October. Economists expect it came in at 2 against last month's 2.3. Zero is the break-even mark for growth at the region's manufacturers. On Friday, the trade balance for August is scheduled. Economists predict a larger trade deficit to 35.2 billion from 34.6 billion the month before. Also on Friday the consumer price index (CPI) will be released. Economists think it grew by 0.2 percent, lower than August's rise of 0.3 percent. Note: The US fixed income market is closed on Monday, while Canadian and Japanese markets will be closed as well. Time for some illustrations. We begin with the Dow, which closed higher on Friday by 316 points, or 4.20%, to 7850. Following the rally seen on Thursday and Friday, is it time to talk about a bottom? As the chart shows, the Dow appears to be overextended by being above both its 22 DMA and daily regression channel; however, shorts might be patient and wait for prices to fall back below the 22 DMA and into the channel before becoming aggressive again. The objective to the upside is three-fold. As the chart explains, the Dow managed to get back inside a monthly regression level (profiled last Sunday) and technicians will now have a long-range projection of near 8900. For shorter-term traders, psychological resistance is at 8000. For those following moving averages, traders will most likely look for a test of the 50 DMA (8187). When do all of these bullish projections get nullified? Most likely when the Dow trades back underneath 7532. Chart of the Dow Jones Industrial Average, Daily With yields rising on Friday more than any other day of the year, traders will once again watch the bond market for confirmation of a move in equities. A chart of the cash bond shows yields now above both its 22 DMA and top of regression channel. I believe the key will be (1) earning developments, and (2) possibility Soros is not done selling Treasuries and rolling cash into stocks (note: unconfirmed rumor). Nevertheless, clearly there appears to be a shock to the bond market that cannot be ignored. The objective should be for yields to test the 50 DMA, while a move back under the 22 DMA will most likely bring back all investors who exited during the last few days. Chart of the 30-year Treasury Bond, Daily How are technology stocks looking from a technical perspective? After Friday’s rally of 47-points, or 2%, to 1210, this tech- laden index now sits above its 22 DMA (1199) and two prior relative lows set a couple months back. Note: Since March, every time the Nasdaq rose above its 22 DMA, a test of its 50 DMA occurred soon thereafter. The one exception was on September 11th. MACD has crossed higher, indicting a change in momentum; however, resistance above is numerous. A descending trend line, the top of its regression channel, and its 50 DMA; all located within the next 50 points higher (1260). If the Nasdaq falls back below 1200, shorts will most likely become more aggressive. Chart of the Nasdaq, Daily How about the highly-watched volatility index? Following Friday’s 6% loss to 43.55, it would first appear optimism is gaining in strength. However, a further look only places the VIX at the bottom of a well-defined upward channel. Therefore, I would wait until the index trades underneath 41 before expecting a significant decrease in the amount of market pessimism. Chart of the Market Volatility Index, Daily One other highly-watched index that also appears to be at the bottom of its upward channel is the US Dollar. With the Greenback underneath its 22 and 50 DMA’s, the possibility of a breakdown under 106 continues to enter traders’ minds. If this index can manage to rise above 108, shorts should start covering and the likelihood of solid dollar-denominated buying will begin to take root. Note: Higher dollar should mean higher equity prices. The last chart is "food for thought," since the month of October is far from over and the monthly "hammer" (significant reversal indicator) formation cannot be considered successfully achieved. Nevertheless, if October ended today, technicians would clearly look at this pattern as an attempt by bears to "gauge possible depth" of the bottom before covering shorts and allowing bullish sentiment to take over. Note: The last time a "hammer" formation was seen in the Nasdaq, the market went on to rally thousands of points higher. Ok, I don’t expect the same magnitude this time; nevertheless, this "hammer" formation should increase a trader’s odds when placing a trade to the long side. Chart of the Nasdaq, Monthly Good luck. ************** FUTURES MARKET ************** Octoberfest! on 1st Green Weekly Close in 7 Weeks by Alan Hewko futures@OptionInvestor.com ---------------------------------------------------------------- Friday's Friday's Fri. Thur. Cash Index Close Futures Close Highs Lows ---------------------------------------------------------------- Dow 7850 + 316 7865 7900 7200 SP500 835 + 31 838 + 36 844 767 NDX 100 890 + 41 890 + 45 903 802 Compx 1210 + 47 ---------------------------------------------------------------- As previously done, I shall use these abbreviations for this article: ES = E-mini SP500 December futures YM = E-mini Dow $5 December futures NQ = E-mini NDX 100 December futures In round numbers, the difference from Thursday's Day Lows to Friday's Day Highs were: YM (Dow Jones) : 700 points, closing 650 pts above Thur Low ES (SPX) : 77 points, closing 71 pts above Thur Low NQ (NDX) : 101 points, closing 88 pts above Thur Low This was Day Two of "Buy the Bad News" as Thursday had some simply terrible news from the retailers; and Friday pre-open had the following Negative News: Intel (INTC): Judge rules that Intel's Itanium process may infringe on patents owned by Intergraph (INGR). Intel (INTC): Earnings estimates cut by UBS and Salomon. Taiwan Semi (TSM) and United Micro (UMC) face Bleak 4th Qtrs. Wall Street Journal reports a study showing S&P 500 companies' face some possible extreme Pension shortfalls. 360 of the S&P500 companies face a $ 243 Billion pension shortfall, the worst levels since 1993. Lucent (LU) announces more bad news. Friday pre-open had the following Good News: Japan and European markets rallied very hard all day closing at day highs with every chart dip being bought. IBM received an upgrade, causing IBM to gap up 5 points. General Electric (GE - a Dow stock) reported In-Line earnings. 8:30 AM Economic Data mostly in line with no surprises. Check Futures Each morning: For those of you without real-time futures quotes, may I suggest each morning you do this as it will provide a sense for the open. Go to www.livecharts.com (they are FREE delayed quotes, but when checking to see what happened in the overnight futures markets it doesn't matter they are delayed). Be sure to click Charts / ALL sessions (24 hrs) to show after hours. Set it to 10 or 15 minute chart. The three Futures Tickers to check: ES02Z which is the E-mini SP500 future, NQ02Z (E-mini NDX),and YM02Z (Dow $5 futures). That's the number 02 in the ticker for the year 2002, and not the letter O as in ocean. Take a look at Thursday's Overnight Futures Market Chart below: Chart: ES02Z E-mini SP500 Futures December contract. This chart shows from Thursday at 5 PM, sideways the rest of the evening, sideways at Friday (Oct 11) 1 AM, and then exploding upward when the European markets opened at 3 AM. As you can see, they were already UP a great deal (off of Europe) long before GE earnings came out, or before news of the IBM upgrade hit. Please note that ES 815 level at around 6 AM, I will refer to it again shortly. You can also see how ES held 809-810 at 8 AM as that same number was this past Tuesday's HIGH, and now became support. Chart: ES02Z (S&P500 E-Mini) 5-minute After Hours (Overnight Futures Market) Thursday 4:15 PM Futures Close: ES 803.75, YM 7501, NQ 850 FRIDAY: 9:30 AM Cash Market Open: ES 817, YM (Dow) 7650, NQ 868 As you can see, the Gap UP was very large. Such large gap days, either up or down, can be challenging, as one doesn't know if it will be a "Gap and Trap" or "Gap and continue the trend" - Friday proved to be the later example. 9:43 AM ES 823, Dow Cash 7700, NQ 873. First 13 minutes has the market Gapping UP and running UP. Not surprisingly, there is some Long profit taking ahead of the 9:45 AM economic report 9:43 AM to 9:52 AM ES 815, Dow Cash 7650, NQ 865 * DAY LOWS * A very bearish Michigan Consumer Sentiment Report (preliminary data for October) came out at 9:45 with a number of 80.4 carrying expectations of 85.2 and this data sent the ES down a blistering fast 8 points to a pivot number of 815. Scroll up a few lines to the above chart, remember me asking you to note the ES 815 number from 6AM ? After ES sold off from the consumer numbers, guess where it paused at? Yup, 815. Chart: ES (E-mini SP500 Futures). This chart does NOT include the Overnight session. It shows where ES closed at Thur 4:15pm (803) on the lower left, and from Friday 9:30 AM to Friday 4:15 PM. Chart: ES02Z (S&P500 E-Mini) Intraday for Friday 10/11/02 Chart: NQ (E-mini NDX futures). Thur Close & Friday 9:30AM-4:15PM Scroll back up and read all the pre-market bearish news, factor in this very bearish Consumer Sentiment number, factor in the Dow index which at 9:52 was still 450 points above yesterday's lows. A few days ago, Last week, 2 weeks ago - such a scenario would have quite simply been the perfect "excuse" to take some Long Profits from yesterday. In other words, that very bearish consumer number would have been market top for the day, followed by 4-5 hours of steady selling to perhaps retrace 1/2 of that Dow +500 24 hour gain from Thursday at 10 AM to Friday at 10 AM. "BUY THE BAD NEWS" however was what happened instead. I cannot tell you why that became the market tone, merely that it was. As an aside, there was some technical trouble this morning with the Market Monitor near 9:50 AM when ES amazingly held 815-816. I had tried for 5-10 minutes to send out a "Open a Long" signal but by the time the technical glitch cleared up it was simply too late to suggest opening a Long at Dow Cash 7750. To be very honest, until the 3:45 PM post in Market Monitor today, that was the only other Long signal I saw today. 11 AM ES 833, Dow Cash 7800, NQ 888. As all three of those numbers were now at or near known resistance levels, the only safe trade seemed to be Opening a Short at Dow Cash 7800. It was not obvious once that trade was opened whether it would become the type trade that only offered a gain of 35-50 Dow points, or might that level, 600 points higher than yesterday's low indeed be a trade top before taking the Dow down to the 7650- 7700 level. The most a trader can do is follow their signals when given, pick a minimum profit target, along with an intelligent stop when wrong. While I had wished this trade was as successful as Monday's Long ES trade which saw a gain of 10-15 ES points, or this Tuesday's ES Short from 809.75 which caught the day high to within one tick and seeing a possible gain of between 20-35 points; the market only had a small retracement down to ES 826-27 and Dow Cash 7555. At best, this trade provided a Dow Futures Short gain of 35-40 points, or $175-$200 per contract; roughly a 20% return on investment depending upon broker margin requirements. At worst, this trade may have stopped out at/near break-even with no loss. No News: Once the 9:45 AM consumer numbers were out, there was no market moving "News" the rest of the day. 11:30 AM - 1:30 PM Markets continued to "leak higher" on the combination of 1) New Buying, 2) Old shorts from weeks/months ago taking more Short Covering Profits, and 3) New shorts testing the water, and quickly covering or getting squeezed. ----------------------------------------------------------------- Something to keep in mind about "smart money" Shorts: Dow was at 10,600 in Jan 2002, Dow was 9000 just 6 short weeks ago. SPX was at 1150 in March 2002, SPX was at 1000 in July 2002. Compx was at 2100 in Jan 2002 and 1600 during the summer. If "smart money" earlier this spring or summer expected a large decline into the historically terrible period of early October; they certainly were rewarded very well. No one "knows" how long some big money shorts have been holding, but the last two days certainly has seen some very happy shorts taking profits as just yesterday the Dow made a five-year closing low. Also for consideration: Given the historical weakness of October, perhaps some Funds who were long Stock this spring/summer, decided to write some October 2002 calls on their Long Stock positions, or buy some deep out-of-the-money October Protective Puts. Both those type October Options must come off in same fashion by next Friday and we all know big-money cannot wait (the way retail size option traders can) by waiting until Option Expiry Friday to take those very large positions off. As an example, say a Fund had 1 million shares of Long MSFT stock. This spring it was $65-70. Umm, that fund might say, MSFT at 70 bucks was an area of resistance before, Q1 2002 earnings sure were pretty bad, maybe Sep 2001 really wasn't the bottom. Let's write some covered calls. Historically, Early to Middle of October every year seems to be the year lows, so lets sell 5,000 option contracts of Oct MSFT 45 calls and sell 5,000 option contracts of Oct MSFT 50 Calls to hedge those 1,000,000 shares of MSFT we own. And just in case something very bad happens, lets buy 5,000 option contracts of super-cheap MSFT Oct 40 puts as some downside protection. (Note: this occurring in spring when MSFT was $65-70). Well now, it's Oct 9th 2002, MSFT is $43, and the Dow is 7200. Oct options expire in just 6 more trading days. Ummm, we've had lots of companies warn, but we are probably at the end of the warnings period; so yea - let's start bringing-in (Take Profits on) those 15,000 option contracts (10,000 covered call contracts, and 5,000 protective put contracts) we opened this spring when MSFT was $25 bucks higher. 15,000 option contracts equals 1,500,000 shares of stock. Might this create an uptick in MSFT as the option market makers receive orders of "Buy" (to Close) 10,000 contracts along with orders of "Sell to Close" 5,000 put contracts"? You bet! Multiply this by XYZ number of firms and funds on different stocks and this certainly could be one of the reasons for the last two days. Along with some genuine "real" buying at some very very over-sold levels (CSCO at $8, IBM at $53, GM $31, GE $21s, AIG at $52, etc). Always remember, funds buy stock for where they are months if not years from "today" vs. the much shorter term approach us common folk must have. Now that I got that off my chest, back to Friday's action: ----------------------------------------------------------------- 1:30 PM ES 838-840, Dow Cash 7852 +300, NQ 897 (current day highs) Once again, similar to the first trade, all 3 of these indices are at/near trade strong resistance levels, and the technical trade model indicating to Open a YM (Dow Futures) Short with a tight 25 point stop. 1:50 PM Today's 2nd Trade today gets stopped out for a 25-point loss. 2:00 PM ES 844, Dow Cash 7900, NQ 904 * DAY HIGHS * Realizing the original idea was correct, simply 40-50 Dow points "too early", the 3rd Trade of the day is taken with a YM (Dow $5) Short at Dow Cash at 7900. 2:00 PM to 3:30PM Logical Long Profit taking takes place for 90 minutes on a slow steady "leak lower" fashion sending Indices all the way back to their 11-11:30 AM levels by 3:30 PM. 3:30 PM ES 826, Dow cash 7765, NQ 877 Dow Cash stops just short of a 150 point profit taking inches above the prior support of 7750. If you recall, Dow 7750-7770 had been strong support in the prior weeks. Scroll back to today's charts - notice how at 3:30 PM, while coming down quite a bit from the 2 PM Highs, they filled the gap from 11-11:30 AM? And once that Gap Filled, they rebounded from the 11 AM levels. Trade 3 generates profit of between 50 to 75 Dow points on 1/2 the position, and 100 Dow points on the 2nd half of the position. Maximum potential profit on the trade was about 130 Dow points. 3:45 PM The below was the Market Monitor post from 3:45 PM and makes the attempt to answer some reader emails regarding Futures Margin requirements. "3:54:38 PM Futures Index Trade 3 EXIT: From the YM (Dow Futures) short from Dow 7900 Cash, the previously suggested target of +100 (or more) point gain was reached as Dow Cash touched 7765. Shall use this trade to answer some reader emails on Futures Margin and % of returns: Depending upon your entry from Dow Cash 7890-7900 area, the trade generated a gain of +100 points - at $5 per Dow point this is a $500 gain per contract, and as Dow margin requirements per contract average $800 for daytrades this would represent a Net gain of 62%. The Futures Index will not generate any more Trade signals today going into the weekend Flat. If forced to make a guess on the last 20 minutes, I wouldn't be surprised to see one final attempt on Dow Cash 7800/ES (Sp 500 futures) 830." 3:45 PM to 4:15 PM Futures Close: Once the market did a Gap fill from its 2 PM Highs down to the levels it was at from 11-11:30 AM - my view is that Futures Shorts tried to press ES (826-827 at the time of 3:30 PM) under the support of 823-825, and tried to press the Dow under the 7700-7750 levels; both of which COULD have resulted in continued selling from 330PM straight into the close. Shorts could only take it to the 826-827 level, and once it became obvious it wasn't going to go any lower, "last minute" shorts covered the rest of the day right into the Close. I wasn't surprised to see at attempt to run ES back to 830-832 level, or to attempt to ramp up the Dow from 7765 to try and get it back over 7800. That didn't surprise me. However, I was surprised to see the strength of that closing rally, as ES ran 8 points in 30 minutes, and the Dow about 80, NQ about 12 during the final 30 minutes of the Cash Market (3:30 PM to 4 PM). Futures were still going up into their 4:15 PM close, with the ES tacking on an additional 3 pts to close 838, YM (Dow futures) adding on 40. 4:00 PM Cash Close ES 835, YM 7820, NQ 892 4:15 PM Futures Close ES 838, YM 7865, NQ 894 5:46 PM News : GE files $50 billion shelf registration Recap of Friday's Futures Trades from OI's Market Monitor: Chart: Dow Jones Industrials - Intraday Friday 10/11/02 Futures Trade model came into Friday FLAT. Technical posting problem never allowed the 9:50 AM Long trade to originate. (In all candor, I only "saw" 2 safe-longs all day, the one at 9:50 AM that I wasn't able to post, and the 3:30 PM Long at ES (sp500) 827). By the time the morning posting problems were resolved, the first trade was at 11 AM. Trade 1: 11 AM : Short YM (Dow Futures) at Dow Cash 7800. Suggested target of either 35 to 50 points, or perhaps hold for much more. After-trade reflection: At Dow 7800 (up 600 from yesterday on no real news), this short entry made sense. The market "could" have sold off to Dow 7650 very easily and still maintained it's new "up" trend. However, that was not the case as the Dow never even challenged the support at 7750 as the low was 7760. This Trade either made anywhere from 35 YM points or $175 (at lower level of suggested target) for a Dollar gain of 22% based on $800 margin per contract. At worst, it was a Break-even trade. The entry made sense, market simply didn't co-operate, and the good rule of "its better to take a 22% gain, than holding on and possibly losing money" came to mind. Trade 1 Result: Gain of 35 YM points, $175 (22% gain) at best, Breakeven at worst, $ 0 (0% gain) Trade 2: 1 PM Area: Short YM (Dow $5 futures) at Dow Cash 7850- 60. Suggested a Tight 25-point stop from the Entry price. Dow 7850-60 had been a large support area, and usually would now become an area of resistance. Profit target was 50 to 100 points. Within 15-20 minutes of entry, this trade was stopped out for a loss of 25 YM points. Trade 2 Result: Loss of 25 YM points, $ -125 (15% loss). Trade 3: 2 PM: Short YM (Dow $5 futures) at Dow Cash 7900. Same tight stop of 25 points, with a target of at first 50 to 75 points. The 1 PM trade was correct, simply 40-50 Dow points too early. This Dow level also matched known resistance levels on ES (SP500 futures) of 843, and NQ (NDX 100 futures) of 902-905. This trade entry was correct, opening the short at the exact day high. 2 exits were suggested, 1/2 size of your position for a gain of between 50 to 75 points at 2:42 PM; and the remaining 1/2 size to be covered for a gain of 100 points which hit at approx. 3:30 PM when Dow Cash go to it's afternoon low of 7760. Trade 3 Result: 1/2 Position Size: Gain of 50-75 YM (Dow $5) points, average of 62.50 points x $5 per point = $312.50 per contract, or a 39% gain based on $800 of margin per each YM Dow $5 futures contract. 1/2 Position Size: Gain of 100 YM (Dow $5) points x $5 per point = $500 per contract, or a 62% gain. Friday gains/losses summary: + 22% or 0%, - 15%, +39%, +62% The possible Long signal given at 3:43 PM (ES 827, YM 7765)for the final 30 minutes of the Future session was not actually taken given the lateness of the day, but did work as ES (SP500 futures) closed at 838, and YM (Dow$5 futures) at 7865. Merely as a continued effort to explain % rate-of-return regarding futures margin, if that Long signal at 3:43 PM had been taken, it would have given an ES gain of 10 points, or $500 (10pts x $50), or a 50% return based on margin. A similar YM Long would have gotten about 90 YM (Dow $5) points, or $450 gain equal to a 56% return. Futures Trade model is Flat going into the weekend. ----------------------------------------------------------------- Thoughts for Monday: Monday is Columbus Day, Bond market is Closed; Stocks, Options and Futures markets are Open. Volume may be impacted to downside. So what happens next week? Dow over 8000 - or - revisiting Dow 7500-7600 - or both? [grins] Are Shorts who shorted (and are still holding) Thur & Fri worried? Are Mutual Funds worried about missing the Dow 7200 "market bottom"? Are Shorts who covered to flat on Thursday morning at Dow 7200- 7400 for huge profits licking their chops to re-short at higher levels? Do we creep higher during next week's large amount of earnings as companies meet vastly lowered Q3 earnings expectations? Contrary to the fact that the three trades on Friday were Shorts (with one small gainer, one small stoploss, and one Nice Winner); by nature, I'm often reminded of a quote: I'm not Bullish - I'm not Bearish - I'm a Trader. Jeff Bailey in his comments the last few days has done a great job explaining what the Bond market has been doing which may also be adding to the reasons the Equities and Futures markets are upticking so strongly. I have little doubt in my mind that the last 30 minutes of Friday's action was last-minute shorts covering. That doesn't change the fact that Dow closed at 7850 and Compx over 1200. The next large resistance for ES is 850-853, 872; and this would match up with Dow 7950-8000, 8150-8300. I would consider Dow support now at 7600-7650; and ES support at 818-823, and NQ at 850-870. Next week is Option Expiry Week. We've seen this before: the market goes strongly in one direction for an entire month, and then the Wed or Thur before Option Expiry, the market does a complete 180 turn. Also, during spring and summer months, big- money tends to like October contracts, so there may be a lot of Oct option contracts being unwound. Market has gone from terribly oversold to terribly overbought in two trading days. First, don't look backward this weekend: Don't become upset with yourself for not backing up the truck with Longs Thursday morning at Dow 7200-7300. I'm lucky - I was away Thursday until later in the morning, and since I wasn't here for Dow 7200 - I'm not now beating myself up on 'missing the bottom' [grins]. We've seen many "one-day wonders" give back 1/2 their gains the next day. But not Friday. However that doesn't mean it won't happen next week. Here is a 30-Day Dow Chart for some perspective: You say you want some Earnings? Next week has a slew of them... Some of the more important ones: Monday: Fannie Mae (FNM), Maytag (MYG) Tuesday: Bank Stocks of C, BAC, ONE, STT, Wells Fargo (WFC); General Motors GM), Delta (DAL), Forest Labs (FRX) [is FRX a sell-the- earnings-news stock or does it see 100 first], JNJ, LLL (defense stock), MLNM, MOT, Key Semi stocks of Intel (INTC) and Novellus (NVLS), Washington Mutual (WM) Wednesday: Alcan (AL), Boeing (BA), Caterpillar (CAT), Coke (KO), Ford, Honeywell (HON), JPM (perhaps with some insight to their many problems), MER, Pfizer (PFE), Dow stock UTX, Whirlpool (WHR), AMD, CLS, IBM, Kraft KFT, QLogic (QLGC), Siebel (SEBL), Symantec (SYMC) Thursday: Baxter (BAX), Colgate (CL), Cummins (CUM), Cypress Semi (CY), EMC, IR, Mattel (MAT), New York Times (NYT), Nokia (NOK), Northrup Grumman (NOC), Phillip Morris (MO), SAP (large European software stock), Sears (S), United Healthcare (UNH), Broadcom (BRCM), CHKP, EBAY, Fairchild Semi (FCS), Gateway (GTW), MERQ software, MSFT, Nortel (NT), Peoplesoft (PSFT), RATL, SUNW, Sprint (FON), Friday: Avon (AVP), Biogen (BGEN), ERICY, Merck (MRK), TLAB And folks - this huge list is just what I consider to be "important" earnings as there are many more other companies reporting who are not listed above. I count * 14 * of the 30 Dow Stocks reporting earnings next week. In my view, the obvious extra-important earnings are : C, GM, INTC, NVLS, BA, JPM, IBM, MSFT, SAP, MRK Many stocks who report this coming week have already warned, or have had analysts downgrade / reduce their expected earnings to greatly lowered numbers. The obvious question is how much of the non-impressive Q3 earnings this week is already Priced Into the stock or the market. For Monday morning : Guess would be some Long profit taking occurs Monday; as even a Bull would agree that some retracement is healthy. I also realize the Short Squeeze could send em higher. I would use the Dow's 7800-7850 level to get a sense of market direction. In the larger view, one target might be a possible exhaustion top near Dow 8000-8100; and the other target towards the 7550-7650 level. It's almost impossible to "know" what the market will do the next day, the best one can do is form thoughts of "If A happens, then maybe B might happen". October History: This market has seen many Bear Market rallies coming from deeply oversold conditions fizzle away after just 1 or 2 days. However, go back and look at the charts from October 2001 and July 2002 for an example of a complete trend reversal as the markets simply continued higher and higher. Earlier this week I had written that on prior years, the Oct 8th to Oct 15th time period historically has been a Key Market Bottom, with that bottom lasting for many months. This is not to say October 10 2002 will be the "bottom" for the next several months, but it's always a good idea to have Historicals in mind. History has the period from November to April as the months giving the best bullish returns. Do yourself a favor and take a look at how the market has traded from Mid-Oct / early November going into April on prior years. If October 10th 2002 does indeed become the Yearly Low, this would make the 5th year in a row that the "bottom" came between in early to middle October (2001's market bottom was a bit early, due to 9-11, in the period of the last week of Sept going into early October). Is it possible that October 10th actually is not "Year Bottom" and once all the October earnings are done, that the market rolls over yet-again going into the year-end and sends the Dow down to the 6900 level many have spoken about, or Compx 1000. Anything is possible... Unlike a mutual fund, I would rather focus on what may or may not happen this week vs. what may happen in December 2002. Over the last few months, a Trader who was too bullish on the Buy side may have gotten chewed up pretty bad. Over the last few months, a Trader was rewarded if they mostly traded from the Short Side - but it also becomes possible to get so used to Shorting you get chewed up now on the Short side if the market does continue to reverse itself to a bullish tone. I am not suggesting buying with reckless abandon and holding till April, nor am I suggesting blindly shorting. Don't be a Bull, don't be a Bear - simply trade the tape observing Key support and resistance numbers, pivots from prior occurrences, retracement levels, and always keep your Stops tight and also important is to form a Profit target and take it when hit. A reader wrote re the trade I suggested on Friday at 2 PM in Market Monitor "Great job getting a Dow short off at Dow 7900, but why did you only take 100 points on it? Why didn't you hold it? Looks to me Dow is going back to 7500 pretty soon" The answer relates to Profit Targets: A gain of 100 Dow points was my objective for the trade, a Buy order (to cover) was suggested to be placed to give anyone following the trade a 100 point gain. In other words, the buy to cover order was placed BEFORE it traded there. A YM (Dow $ 5 Futures) gain of 100 points is a rather respectable 62% gain. At 3 PM Friday, I had no view where the market MIGHT go next week, but instead created a profit target (100 points) and it was achieved. It never hurts taking Profits (long or short) in this whip-saw market. Also, placing that Buy (to cover) order BEFORE it hit, prevents one from perhaps trying to become too greedy. (only to find those gains wiped away, perhaps even becoming a loss) --------------------------------------------------------------- This marks my 2nd Sunday Futures Wrap article; and early next week, I would like to do another Futures Article in a Q&A format. Many emails have come in asking a range of questions on : Pivots, explaining Margin, rate of return percent-wise on a trade, hedging options with futures, where to get real-time Futures quotes, futures brokers, the different type of online futures trading platforms, how much each index point move is worth, etc. Some of these questions were answered in the 2 Futures articles I wrote, and they can be viewed at: 10/8/02 Using Futures to Hedge a Stock or Options position: http://www.OptionInvestor.com/traderscorner/100802_1.asp 10/7/02 Futures Primer article on Futures Basic Information: http://www.OptionInvestor.com/traderscorner/100702_1.asp One Futures Q&A (questions and answer) article cannot answer all the different subjects you have asked me to answer; so I would appreciate getting a poll from you the readers as to what questions you yourself have on anything Futures related and that you would like to see covered in a Future's Q&A article for later next week. Please email them to futures@OptionInvestor.com And if you could, put the words "Futures Q&A topic" in the email subject line. Thank you for all your kind emails, I've done my best to read them all. Alan Hewko ******************** INDEX TRADER SUMMARY ******************** Not only "present," but found! In last weekends Index Wrap, we were still bearish, but thought signs of a rebound were present. No, it wasn't the economic data, nor earnings reports, but the bond market that may have been signaling a turn higher for stocks. After a rough start earlier in the week, stocks staged impressive rallies the last two sessions and managed to finish the week on a positive note. For the second straight week, the benchmark 10-year YIELD ($TNX.X) rose as bond bulls relinquished their grip on perceived safety and put some money to work in stocks. That DIVERGENCE we noted in last week's weekly index summary seemed to be the "heads up" as stocks posted their first weekly gain after a 7-week losing streak. Before we look at some charts, lets quickly review our weekly major market index and sector numbers to see where the money was flowing. Not all of the money coming from the bond market was responsible for this weeks rise in stocks. Nor, sir/mam. Bears were also hard at work locking in their gains and buying back borrowed shares. Aside from the Russell 2000 (RUT.X) 344.93, the major indexes all showed gains. Weekly Index / Sector Changes The Dow Industrials are perhaps the bullish index traders "best" risk/reward trade in the coming months. If the bottom is to be found, this group of stocks that are more deeply rooted in the U.S. economy should attract more institutional capital in a concentrated index. This week's 4.3% gain was nothing to sneeze at. The NASDAQ-100 Index (NDX.X) jumped 9.2% on the week, as this index's most heavily weighted software and biotech sectors posted strong gains. Biotech's have held up the best on a relative basis this year (-44%) when compared to other technology sectors, while the third-quarters -8% decline also held top relative strength category. When looking at the year-to-date relative strength and Q3 relative strength, this weeks more modest 5.9% gain compared to Software, Semiconductor, Internet and Fiber Optic hint that the latter mentioned sectors benefited most from short covering. It's always been my thinking that "smart money" tends to stick with what's been working and performed best on a relative basis before the catalysts actually present themselves. Concerning to a bull's thoughts of a market turnaround are the lagging of the financials (Banks and Brokerage). Insurance carriers are looking strong, but that group is better able to raise premiums to fuel the bottom line, where the MARKET appears to be cautious of the banks and bad credit exposure. A bull wants the banks to rebound further as a MARKET signal that all is well. Brokers will benefit only from higher stocks prices, which would lead to greater trading volumes and new investment banking deals like secondary offerings and initial public offerings (IPOs) that come with a rejuvenated equity market environment. Currently, its the "lagging" banks sectors that will have a bull cautious. Also concerning is the "lagging" in the deeper cyclicals as depicted by the Cyclical Index (CYC.X) 408.78 +5.42% and Forest Paper Products Index (FPP.X) 246.29 +4.87%. Both sectors caught fire on Friday after setting 52-week lows intra-day on Thursday. Look for these two sectors to "outperform" to the upside if a market bottom is to be found. While little "economic" significance is found in the healthcare arena, Drugs, HMO's and broader healthcare perform well on a relative basis. Despite extreme broader market negativity and price performance, these groups haven't seen the mass redemption of cash. Look for any "rising tide" in the broader market averages to only help underlying bullishness that has been washed out by broader market negativity. A broader market equity bull most likely views the negative Gold/Silver Index (XAU.X) 62.52 +2.98% action as a positive. This sector has been the DIVERGING sector on a year-to-date basis, and lower price action in this group in recent weeks hints that market psychology may be losing its "fear factor." And finally, and perhaps MOST IMPORTANT, is that Treasuries found selling for the second week, and indeed may have been last week's "best hint" that equities were poised for a rebound. Over the next two weeks, an equity bull would want to see Treasuries find selling (higher YIELD) in at least one of the two weeks. Last week, I felt that the higher YIELD as depicted by the benchmark 10-year YIELD ($TNX.X) might signal a turn higher for equities, and that looks to have been a good observation. This weeks higher YIELD also portends good things for equities in the coming weeks. While I think this weeks "rebound" may have been a little "overdone" to the upside, I do think that a pullback in the indexes offers good entry points for bulls. For any investor/trader that feels he/she has "missed the bottom, then simply go back to the spreadsheet shown above, and reassess those thoughts. For any bull that thinks the markets have rallied too much and that there's little "rally potential" left, then they too should review the above spreadsheet and the bullish % charts. Speaking of bullish % This week's action did find the NASDAQ-100 Bullish % ($BPNDX) from www.stockcharts.com reversing up into "bull alert" status. Last Friday, this indicators was reading 17%, it fell to a low of 13% on Wednesday, and reversed the needed 3-boxes to 22% after Friday's action. This now has NASDAQ-100 Index Trader's taking 1/4 or 1/2 bullish positions on a longer-term basis (November/December expiration), while index bears should have reduced exposure to MAXIMUM 1/4 or 1/2 in recent sessions. Again, the bullish percent do NOT tell us anything about price direction, but DO tell us EVERYTHING about RISK. Bears have had ample opportunity in the "oversold" area below 30% to limit exposure and take profits and there are no excuses for an account that gets sideways should a short-covering rally continue. As noted before, the NASDAQ-100 Bullish % ($BPNDX) is the more volatile and quicker changing bullish %. We usually look for it to show INTERNAL WEAKNESS first and INTERNAL STRENGTH before the other bullish % indicators due to the volatility of the technology stock components. Usually the LAST bullish % to reverse course up or down is the more institutionally owned/traded NYSE Bullish % ($BPNYA). I didn't see/understand/observe this chart until Friday night. While I keep track of all the bullish % on a daily basis to get a feel for the market's internals, this chart shows some very interesting and potentially bullish characteristics from the both the "risk level" and what took place the last mid-term election year. For listed stock traders in the NYSE, here's a chart of the NYSE Bullish % ($BPNYA) that deserves some attention. Again... I can't explain the "whys," but this market/index tends to show reversals higher from this level of bullishness and risk. I also want to "look back" to the last mid-term election year and the month of October, which historically has been a bullish seasonal period. For the 4th quarter, the months October (A), November (B) and December (C) are noted on the charts. The last mid-term election year was 1998. NYSE Bullish % ($BPNYA) Chart - 2% box The chart of the NYSE Bullish % ($BPNYA) gives index traders and investors alike a snapshot view at how the third-quarter (October (A)-early January (1)) seeing the NYSE internals improve and become more bullish. 1998 was the last mid-term election year and the NYSE Bullish % improved markedly from an oversold level in September (9) and October (A). Here's a quick look at the bar chart of the NYSE Composite in late October 1998. The markets were going to heck in a hand basket.... NYSE Composite ($NYA.X) - Fourth-quarter 1998 Key points. The NYSE Composite looked terribly weak on October 8, 1998 and broke to an intra-day low, but was QUICKLY REVERSED higher. Obvious NOW that the breakdown TRAPPED some BEARS. A trader DID NOT have to take a FULL POSITION to make some money by late December. A simple 1/4 position would have been nice in some at the money calls. Just for "fun" lets do something with the NYSE Composite, but this time, in PRESENT day and see if there's anything suspicious taking place. Again... the NYSE Bullish % ($BPNYA) is also at a SUSPICIOUSLY low level where it has found reversals in the past. I know, I know.... this time its different. But what if it isn't? NYSE Composite ($NYA.X) Chart - Daily Interval Oh my! That 52-week low on Thursday, which was quickly reversed becomes very suspicious in my mind. The NYSE Composite has rallied right back to 19.1% retracement, very similar to that found in 1998. Also similar is the testing of the 21-day (pink) simple moving average. Something's "up" with a two-week higher Treasury bond YIELD, some rather "quick" reversals in the indexes and some historical bullishness starting to show through. Option expiration is this week and I'm expecting some volatility. I'm now about 60% bullish and 40% bearish in my posture. If I could get a pullback into the NYSE 435 level, that would be a level to look for some pullback call entries in other indexes. Now... that's my BIG picture view. Let's be a little more "reasonable" perhaps and look at some of the other indexes with a tighter range of retracement. Here I'll be anchoring to the recent lows as if to "call a bottom" and anchor to the recent highs of late August. Dow Industrials Chart - Daily Interval A good test of technical strength as it relates to retracement would be to note that since the decline in August, anytime the Dow Industrials traded a lower level of retracement, it hasn't broken above the previous higher level of retracement on a closing basis. Until Friday at least. This is DIVERGENCE from the past and should now have bears more eager to cover on any pullback near 7,621. That also becomes a pullback entry point for bulls. Should the Dow break above 7,959 or psychological 8,000, a move bullish move can take place as it further applies pressure for bears to cover. When considering the Dow Industrials Bullish % ($BPINDU) was as low as 6.66% just recently and currently reads 13.33%, bears certainly understand the HIGH RISK for bears condition that they've been in, and are still in. Again... there's a lot of work to be done before a bull should be OVERLY AGGRESSIVE in his/her call buying. On October 1st, I profiled a partial position in the DIA Nov. $80 calls (DAVKB) at $3.80 and they're currently offered $2.90. For those that don't OVERLEVERAGE in their option trading and don't trade stops, there is still plenty of time until November expiration and 87-90 is still a reasonable bullish target. Currently looking for the Dow Industrials Bullish % ($BPINDU) to reverse higher and need a reading of 14% to get it. S&P 500 Index Chart - Daily Interval Thursday night, I was looking for some type of "confirmation" and a break of downward trend in the indexes. Boy did we get some on Friday. I personally didn't "chase" the move from the bullish side and now look for a pullback call entry point, which this weeks option expiration volatility might just create. Thursday's "dip" lower and QUICK reversal followed by break of trend sets up the "trap" that bears may have found themselves in and should find the 800 level firming up as support. Can establish 1/4 to 1/2 bullish positions here, then look to round out on a move above 856 or the 50-day SMA of 875. Still cautious here as a trader (bullish and bearish), as I'm following the S&P Banks Index (BIX.X) 261.78 +4.41%. If you've never been a "believer" in retracement, then recent weeks action might just convert a trader. An S&P Index Trader doesn't need to trade the banks, but understanding how this group impacts S&P index performance is important. S&P Banks Index Chart - Daily Interval Is there a banking crisis about to unfold in the U.S.? "Smart money" knows the answer. All a market technician needs to do is monitor the technicals and make strategic disciplined bets. I for one try and AVOID uncertainty and don't look to trade the BIX.X at this point. Support at 236 held firm and the break above 253 helped spur the S&P's higher Friday. Note the "suspicious" resistance found at 38.2% retracement. Until proven WRONG, bears will continue to short and eventually "smart money" will win out. S&P bulls can't be OVERLEVERAGED long, but look for a gradual pullback into 253 support and a rebound from there back above 268 to get a more prolonged rally in the broader market indexes going. S&P 100 Index Chart - Daily Interval Technically, the OEX has been "stronger" than the SPX as it hasn't hit its lows. The OEX Bullish % is still "bear confirmed" with Friday's closing reading of 20%, up from Monday's low reading of 17%. It would currently take a reading of 24% to get this index reversing higher to "bull alert" status. Recent reading of bullish % have been bouncing around between 17% and at 20%. In this weekends Swing Trader Wrap, I talked about "market maker" support and resistance as it relates to the NASDAQ-100 Index. It now appears that market makers were indeed turning into "buyers" near the $20.20 level and depending on order flow would be expected to be near-term sellers at current levels. The "gap higher" on Friday hints that market makers may have been too bearish in their inventory, and when good buy side order flow showed up, market makers "gapped" the Q's higher to help remove some risk, as their risk levels quickly became the $22.21 level in the Q's. Remember, the retracement we've been using on the Q's has been based on what we believed to be what a market maker in the NASDAQ would be using. NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval An "ideal" bullish entry point for the QQQ would be some type of dip back into the $21-$21.21 range, but I'm starting to expect some support to come in at the $21.44 level near-term. A close much above $22.21 on volume greater than 150 million would hint further near-term upside to $22.97. If I had $1,000 to invest in November/December call options and could put it in any of the indexes, then 10% would go in the NASDAQ-100 and the rest would be spread among the Dow, SPX and OEX indexes. Technology stocks are still at the bottom end of the food chain as it relates to seeing any type of capital expenditure increases from the "big boys" in the Dow and S&P 500 Index. While not a NASDAQ-100 component, despite broader market bullishness in the last few days, telecom equipment maker Lucent (NYSE:LU) $0.58 -17% traded a new 52-week low on Friday. Hmmmm... wasn't it in the 09/15/02 weekend Index Wrap when we talked about some analyst at Bernstein saying that Lucent's loss carry forwards were worth $0.44 per share? Another 14-cents and we'll find out. 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 ************** Jim is still out of the office this weekend but the Sunday editor's plays will be back next week. Jim has included an update to his index option swing trade game plan strategy in this weekend's newsletter. View it online here: http://members.OptionInvestor.com/itrader/swing/swtgp_10130268.asp **************** MARKET SENTIMENT **************** Behind the Curtain by Steven Price I think back to Yakov Smirnov's line in Coming to America, "What a country!" Then I look at the Dow and think the same thing - you're down and out one day, riding the low point, looking into the abyss; and two days later, euphoria reigns supreme after a massive rally. "What a market!" Well what is interesting about the booming 653 point rally off of Thursday morning's low is where it stopped. I'm not going to tell you that it's not significant, or that the down trend line has not been broken - both of these are true. However, a look at the 1879.52 point loss from the August 22 high of 9077, to Thursday morning's low of 7197, shows that today's rally stopped dead the 38.2% fibonacci retracement level of 7915. The daily high was actually 7901, which lends credence to 7900 as resistance, as well. The other bearish fact is that until we get a higher high ( a break of 8012), the trend of lower highs and lower lows is still in tact. Maybe I sound bitter because I neglected to close all of my short positions two days ago. However, if you drop a dead cat from a high enough level, its bounce will last a little longer. I am struggling with my inner bear, because when I look at the chart in front of me, I see a pretty impressive rebound. However, if the Dow had settled just above the 38.2% level, rather than falling from it, I would be more comfortable strapping on my horns. If 8000 weren't also looming above, I wouldn't feel like the bull running into the matador's red flag. Of course, this red flag may have a brick wall behind it if we ever get there. This morning's news was mediocre, at best. Retail sales fell 1.2% (+0.1% ex. auto) and preliminary Consumer Sentiment number reached a 9-year low of 80.4, down from 86.2 in September and far below expectations of 85.7. The current conditions index hit a 10 year low, falling from 95.8 to 92.9, as well. Consumers think that unemployment will rise, the economy will worsen, and the Federal Reserve will not lower rates. Yet still we rallied in impressive fashion. Can you say "short covering?" The market actually bounced on Thursday just after breaking the July intraday low in the SPX, and after the Market Volatility Index (VIX.X) crossed the 50 level. My impression is that market bears that had been short for the last couple of months saw these signals as a sign to cash out their winnings. In addition to these levels, bullish percentages had fallen into far oversold territory, with the Dow getting down to 8%, the NDX to 14% and the SPX to 20%. What is even more interesting is the bullish percentage in the NYSE, which bottomed at 26% for the third straight time and then rebounded. If we break below that level, watch out below; but if not, then the rally has some room to run. The last two rebounds took the percent up to 52 and 44. The current rally still has not registered a 3-box reversal up to 32%. IBM led the rally after a Lehman Brothers upgrade this morning, just ahead of next week's earnings release. The stock came back from the dead, and the EDS warning, tacking on $6.34 to close at $63.92. In spite of one I.T. spending warning after another, Lehman apparently believes IBM will be able to meet already mild expectations. Next week will bring plenty of earnings reports, and although warning season is in full swing, there may still be a few surprises on release day. Along with IBM on the 16th, we will also get AMD, Apple, J.P. Morgan, QLogic and Coke. That is just a sample of one day's schedule, so given recent market volatility, next week should be a wild ride. Today brought forecasts of another steep decline in on-line advertising revenue, which only underscores the needs of internet portals to find other streams of fee-based revenue, much like Yahoo has done. Lucent announced that it would take a $4 billion charge and cut an additional 10,000 jobs, as it struggles with lower sales. $1 billion of the charge will be due to restructuring costs, while $3 billion is related to the decline in value of stock in its pension fund. The company said it expects sales to fall as much as 25% in the third quarter and it will post its 10th straight quarterly loss. The telecom equipment industry does not look like it will be turning around any time soon, as many telephone companies have filed for bankruptcy, and the ones that are still solvent have slashed spending to offset lower sales. If the Dow breaks above 8012 and the Nasdaq crosses 1240, I may be changing my tune and my positions, as well. Until then I can't seem to put my faith in a rally that has materialized on no good news. Right now it seems like a technical bounce, but I will remember to trade what I see and leave my ego in the passenger seat. Just be careful of the red flag, you won't know what's behind it until you get there. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7286 Current : 7850 Moving Averages: (Simple) 10-dma: 7612 50-dma: 8286 200-dma: 9421 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 835 Moving Averages: (Simple) 10-dma: 811 50-dma: 876 200-dma: 1022 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 890 Moving Averages: (Simple) 10-dma: 836 50-dma: 912 200-dma: 1213 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): I am revisiting the semis (I haven't forgotten about them) as they attempted a rebound of major proportions. If the index had been able to hold above 250, I would have been torn as to whether the trend of lower highs and lower lows had been broken. The high of 256 on 9/25 is the alternative, but thank goodness, I didn't have to make that decision. Thank goodness for the shorts, anyway. Today's rally touched 250.41, only to be turned back to a close of 246.22. the fact that it was turned back at a significant resistance level tells me there are shorts in the sector sitting on the 250 mark and it will take another major push to move them out of the way. The other level to watch is the intraday high of 263 from 10/02. If these levels are both broken, then apparently the lack of IT spending will be forgiven, and all will be well. I will have a big problem believing in this sector until we see an increase in technology spending or in PC demand, but that doesn't mean I won't go along for the ride if we do break through. After all, profits and losses aren't picky about where they happen. 52-week High: 657 52-week Low : 282 Current : 316 Moving Averages: (Simple) 10-dma: 232 50-dma: 284 200-dma: 449 ----------------------------------------------------------------- Market Volatility The VIX continued to drop on the massive Dow rally. However, the index remains above 40, reflecting still inflated premiums. Although we have seen a rally of over 600 points from Thursday morning's low, we have retraced barely 1/3 of the losses since the index topped out at 9077 on August 22. This could simply be a bear market rally, and with the VIX still at high levels, that sentiment is apparently shared by OEX traders. There are a slew of earnings reports due next week, and until we see the Dow close above 8000, or we get some positive earnings surprises, I expect the VIX to remain above 40. CBOE Market Volatility Index (VIX) = 43.44 –2.85 Nasdaq-100 Volatility Index (VXN) = 58.87 –3.95 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.93 777,778 723,811 Equity Only 0.70 562,047 393,808 OEX 1.15 62,469 71,939 QQQ 1.01 57,318 57,925 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 26 + 1 Bull Correction NASDAQ-100 22 + 7 Bull Alert Dow Indust. 13 + 3 Bull Correction S&P 500 22 + 4 Bear Confirmed S&P 100 20 + 3 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 0.77 10-Day Arms Index 1.15 21-Day Arms Index 1.37 55-Day Arms Index 1.32 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 2267 496 NASDAQ 2241 1017 New Highs New Lows NYSE 21 209 NASDAQ 17 263 Volume (in millions) NYSE 2,124 NASDAQ 1,906 ----------------------------------------------------------------- Commitments Of Traders Report: 10/08/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials got shorter, as they increased both positions, by increased shorts by an additional 1600 contracts. Small Traders also added significantly to both sides, but added an additional 1800 contracts to the long side. Commercials Long Short Net % Of OI 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%) 10/08/02 427,070 445,135 (18,065) (2.1%) 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 09/17/02 182,243 116,377 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% 10/08/02 131,486 81,010 50,476 23.7% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials increased short positions by 2,500 contracts, while reducing longs by 700. Small traders reduced longs by 1,000, but reduced shorts by 4,000, getting decidedly longer. Commercials Long Short Net % of OI 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%) 10/08/02 45,384 55,504 (10,120) (10.0%) 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 09/17/02 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% 10/08/02 10,735 5,721 5,014 30.4% 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 increased long positions slightly, and added 3,000 short contracts, reducing the net long position significantly. Small traders increased long positions by 1,000 contracts and lowered shorts by the same amount, reducing the net short position by 50%. Commercials Long Short Net % of OI 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% 10/08/02 19,550 11,823 7,727 24.6% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 09/17/02 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%) 10/08/02 7,890 9,645 (1,755) (10.0%) 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 *************** A Lesson In the Basics by Steven Price Steve, Interesting to see the price on JPM(Jan 2005) leaps: Stock is hovering over $16 but the ITM 15 calls are cheaper than the OTM 15 puts.I would have expected the premiums to be skewed the other way. I received this email earlier in the week, with the stock lower, so the chart below shows the calls priced higher than the puts, but the principle described below is the same. I thought this would be a good opportunity to explain some basics about options pricing and why certain relationships sometimes seem out of whack. There are very finite relationships between calls and puts that prevent an arbitrageur from taking advantage of option traders in the pits. Arbitrage basically refers to buying and selling the same security in different markets for a profit. In an equity option scenario, it works because you can combine options to synthetically represent the purchase or sale of stock, and then do the opposite with the stock for a profit. This is how it works. The entire basis of option pricing is the conversion/reversal. Let's use stock XYZ, trading at $50. Reversal: The purchase of a call and sale of a put at the same strike represents the purchase of stock at that price. For example, if I purchase one XYZ 50 call and I sell you one XYZ 50 put, then it doesn't matter which way the stock goes, I will end up paying $50 for 100 shares of XYZ at expiration. (Unless it ends right at $50.00, but that is called "pin risk" and it is for another discussion). If the stock goes up, whether it goes to $51 or $151, I will exercise my call and buy it at $50. If the stock goes down, whether it goes to $49, or $1, you will exercise your put and sell it to me at $50. So either way I will own the stock at $50. In order to hedge this position, so that I don't have to worry about which way the stock goes, I will go to the market and sell 100 shares of stock. If I can sell it higher than $50, I will make a profit. If I sell it lower, I will lose money. Therefore, when option market makers post their bids and offers on calls and puts, they always do so in a manner that allows them to make a profit if they can buy the call on their bid and sell the put on their offer. If the stock is trading for $50, I will make my market $2.00-$2.40 on the call and $2.00- $2.40 on the put. I buy the call at $2.00 and sell the put at $2.40, for a 0.40 credit to my account, and then sell the stock at $50.00. The transaction is complete. I will buy the stock at $50 on expiration and I have already sold it at $50.00, as well. But I get to keep the extra $0.40, essentially making my stock purchase price $49.60. The bids and offers move with the stock price in order to assure this relationship. If the stock is trading $51, then I am selling the stock $1 higher and I can either pay $1 more for the call and sell the put at the same price, or I can pay $0.50 more for the call and sell the put $0.50 cheaper, or any combination that makes up for the extra dollar I sold the stock for. But in any case the extrinsic value must behave according to the above example. If I could not make any money off of the markets I am posting, then there is no point in being a market maker. Conversion: This is just the opposite of the reversal. Instead of being long call/short put, I have the opposite position: short call/long put. I will buy the XYZ 50 put for $2.00 and sell you the 50 call for $2.40. If the stock is below $50 (whether it is $49 or $1) on expiration, I will exercise the put and sell the stock at $50. If it is higher than $50 (whether $1 or $151), then you will exercise the call I sold you and buy the stock from me at $50. Either way, I sell the stock at $50 on expiration. Therefore, in order to stay directionally neutral, I go out to the market and buy the stock at $50.00. So I've bought the stock at $50 in the market and I will sell it at $50 on expiration, but get to keep the extra $0.40 from selling the call for $0.40 more than I paid for the put. So I have effectively sold the stock for $50.40, while buying it for $50. There are two more considerations, which will explain why the JPM calls in the above question were cheaper than the puts, even though the calls were in the money. Let's go back to the reversal, where I have bought 1 call, sold 1 put and sold 100 shares of stock. If I am trading JPM and I conduct the trade with the purchase of one 2005 Jan 15 call, the sale of a 2005 Jan 15 put and I sell 100 shares at $16, then from the stock purchase alone I have placed $1600 in my account. I get to keep that money until expiration, when I will buy the stock at $15. I also get to earn interest on that money. Because I get to earn interest on the money from the short stock, I can now pay even more for the call. So normally a call costs more than a put, even if they are right at the strike, because the reversal earns the call owner money from short stock interest. However, there is one more part of the equation. If the stock I have sold also pays a dividend, then I am obligated to pay that dividend to the person that bought the stock from me. Therefore, I then subtract that amount from the price I am willing to pay for the call. So that in the end, the extra premium amount that I will pay for a call, versus a put at the same strike, is the amount of interest I can earn from the sale of short stock, minus the dividend I must pay out on that stock. Example: JPM = $16 JPM December15 call is worth $1 of intrinsic value, plus $1.00 time premium = $2 JPM December 15 Put is worth $0 of intrinsic value, since it is out of the money, plus $1 of time premium=$1 However I am going to earn 0.15 for selling the stock and between now and December and I do not have to pay a dividend between now and then. Therefore I can pay $2.15 for the call, rather than just $2.00. However, JPM pays a dividend of $1.36 per year. If I buy the 15 call in Jan 2005 and sell the same put, and sell the stock, I will earn about $1.00 per share in interest on my short stock over the next two years, until expiration. Therefore I will raise the price I am willing to pay for the call by $1.00. However, since the stock pays $1.36 per year and I am going to hold the position with short stock for 2 years, I will have to pay $2.72 in dividends, so I now lower the price I am willing to pay for the call by $2.72. (after raising it only $1.00 for the interest). Now the calls are actually worth $1.72 less than the puts. This example was simplified and does not match the numbers above exactly, but hat is why the calls are trading less than the puts, even though the call is in the money. Please send your questions and suggestions to: Contact Support ************* COMING EVENTS ************* ========================================= Market Watch for the week of October 14th ========================================= ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- BRE BRE Properties Mon, Oct 14 After the Bell 0.67 CSL Carlisle Companies Mon, Oct 14 After the Bell 0.62 ETN Eaton Mon, Oct 14 -----N/A----- 1.21 GMH Hughes Electronics Mon, Oct 14 -----N/A----- -0.08 KRI Knight-Ridder Mon, Oct 14 Before the Bell 0.81 MYG Maytag Mon, Oct 14 -----N/A----- 0.66 MHK Mohawk Industries Mon, Oct 14 -----N/A----- 1.20 PKG Pack Corp of America Mon, Oct 14 Before the Bell 0.13 SONC Sonic Corporation Mon, Oct 14 After the Bell 0.38 SOV Sovereign Bancorp Mon, Oct 14 -----N/A----- 0.33 TIN Temple Inland Mon, Oct 14 -----N/A----- 0.25 UIS Unisys Mon, Oct 14 After the Bell 0.17 ------------------------- TUESDAY ------------------------------ ACF AmeriCredit Tue, Oct 15 After the Bell 0.62 ASO AmSouth Bancorp Tue, Oct 15 Before the Bell 0.43 BAC Bank of America Tue, Oct 15 Before the Bell 1.41 ONE Bank One Tue, Oct 15 Before the Bell 0.70 CDN Cadence Design Sys Tue, Oct 15 After the Bell 0.15 COF Capital One Financial Tue, Oct 15 -----N/A----- 0.99 CNB Colonial BancGroup Tue, Oct 15 -----N/A----- 0.30 CBSS Compass Bancshares Tue, Oct 15 -----N/A----- 0.61 FBAN F.N.B. Corporation Tue, Oct 15 After the Bell 0.54 FNM Fannie Mae Tue, Oct 15 Before the Bell 1.57 FITB Fifth Third Bancorp Tue, Oct 15 Before the Bell 0.70 FRX Forest Laboratories Tue, Oct 15 Before the Bell 0.73 FCX Freprt-McMRn Cop Gld Tue, Oct 15 -----N/A----- 0.36 FULT Fulton Financial Tue, Oct 15 -----N/A----- 0.33 GCI Gannett Tue, Oct 15 Before the Bell 0.99 GM General Motors Tue, Oct 15 Before the Bell 0.99 GNTX Gentex Tue, Oct 15 -----N/A----- 0.27 HDI Harley-Davidson Tue, Oct 15 After the Bell 0.46 HCN Health Care REIT Tue, Oct 15 During the Market 0.68 HCBK Hudson City Bancorp Tue, Oct 15 After the Bell 0.25 HU Hudson United Bancorp Tue, Oct 15 -----N/A----- 0.57 INTC Intel Tue, Oct 15 After the Bell 0.13 JNC John Nuveen Tue, Oct 15 Before the Bell 0.31 JNJ Johnson & Johnson Tue, Oct 15 Before the Bell 0.59 LLL L-3 Comm Hldng Tue, Oct 15 -----N/A----- 0.61 LLTC Linear Technology Tue, Oct 15 After the Bell 0.17 MEL Mellon Finl Corp Tue, Oct 15 -----N/A----- 0.42 MLNM Mill Pharmaceuticals Tue, Oct 15 After the Bell -0.27 MOT Motorola Tue, Oct 15 After the Bell 0.05 NVLS Novellus Systems Tue, Oct 15 After the Bell 0.09 PH Parker Hannifin Tue, Oct 15 Before the Bell 0.41 PNR Pentair Tue, Oct 15 Before the Bell 0.75 PPDI Pharm Prd Development Tue, Oct 15 After the Bell 0.33 PPP Pogo Producing Tue, Oct 15 During the Market 0.46 PII Polaris Industries Tue, Oct 15 Before the Bell 1.56 RFMD RF Micro Devices Tue, Oct 15 After the Bell 0.03 PHG Royal Philips Tue, Oct 15 -----N/A----- N/A SKFR SKF AB Tue, Oct 15 -----N/A----- N/A STT State Street Tue, Oct 15 Before the Bell 0.55 TER Teradyne Tue, Oct 15 After the Bell -0.29 TRMK Trustmark Corporation Tue, Oct 15 After the Bell 0.51 TSS TSYS Tue, Oct 15 After the Bell 0.16 USB US Bancorp Tue, Oct 15 During the Market 0.46 WM Washington Mutual Tue, Oct 15 After the Bell 1.01 WBST Webster Financial Tue, Oct 15 Before the Bell 0.83 WFC Wells Fargo Tue, Oct 15 Before the Bell 0.84 WABC Westamerica Bancorp Tue, Oct 15 Before the Bell 0.66 ----------------------- WEDNESDAY ----------------------------- ABT Abbott Laboratories Wed, Oct 09 -----N/A----- 0.48 AMD Adv Micro Devices Wed, Oct 16 After the Bell -0.67 AL Alcan Inc. Wed, Oct 16 Before the Bell 0.46 ADS All Data Systems Corp Wed, Oct 16 -----N/A----- 0.16 ALL Allstate Wed, Oct 16 Before the Bell 0.68 ABK Ambac Financial Wed, Oct 16 Before the Bell 1.16 ASD American Standard Wed, Oct 16 -----N/A----- 1.54 APH Amphenol Wed, Oct 16 Before the Bell 0.49 AAPL Apple Computer Wed, Oct 16 After the Bell 0.02 BXS BancorpSouth Wed, Oct 16 After the Bell 0.38 BK Bank of New York Wed, Oct 16 Before the Bell 0.11 BA Boeing Wed, Oct 16 -----N/A----- 0.59 BCR C.R. Bard Wed, Oct 16 After the Bell 0.83 CAT Caterpillar Wed, Oct 16 Before the Bell 0.55 CDWC CDW Computer Centers Wed, Oct 16 After the Bell 0.59 CLS Celestica Wed, Oct 16 After the Bell 0.19 CNT CenterPoint Prop Trst Wed, Oct 16 After the Bell 1.02 CERN Cerner Wed, Oct 16 After the Bell 0.36 CYN City National Wed, Oct 16 Before the Bell 0.89 CCE Coca-Cola Enterprises Wed, Oct 16 Before the Bell 0.33 CMA Comerica Wed, Oct 16 Before the Bell 0.14 CTB Cooper Tire & Rubber Wed, Oct 16 Before the Bell 0.32 COT Cott Corp Wed, Oct 16 Before the Bell 0.23 DPH Delphi Wed, Oct 16 Before the Bell 0.08 DSL Downey Financial Wed, Oct 16 Before the Bell 0.83 ET E*TRADE Wed, Oct 16 After the Bell 0.12 ETH Ethan Allen Interiors Wed, Oct 16 Before the Bell 0.53 FTN First Tennessee Natl Wed, Oct 16 Before the Bell 0.69 FBF FleetBoston Financial Wed, Oct 16 Before the Bell 0.57 F Ford Motor Company Wed, Oct 16 Before the Bell 0.03 GD General Dynamics Wed, Oct 16 Before the Bell 1.32 GENZ Genzyme Wed, Oct 16 Before the Bell 0.28 GSF GlobalSantaFe Corp. Wed, Oct 16 Before the Bell 0.30 GPT GreenPoint Financial Wed, Oct 16 Before the Bell 1.39 HRS Harris Wed, Oct 16 -----N/A----- 0.29 HIB Hibernia Corporation Wed, Oct 16 -----N/A----- 0.41 HON Honeywell Wed, Oct 16 Before the Bell 0.50 HMT Host Marriott REIT Wed, Oct 16 Before the Bell 0.11 HI Household Intl Wed, Oct 16 Before the Bell 1.17 IDPH IDEC Pharmaceuticals Wed, Oct 16 After the Bell 0.21 ITW Illinois Tool Works Wed, Oct 16 Before the Bell 0.78 IBM Intl Bus Machines Wed, Oct 16 After the Bell 0.96 JPM J.P. Morgan Chase Co Wed, Oct 16 Before the Bell 0.07 KMI Kinder Morgan Wed, Oct 16 -----N/A----- 0.64 KMP Kndr Mrgn nrgy Prtnrs Wed, Oct 16 -----N/A----- 0.44 KFT Kraft Foods Inc. Wed, Oct 16 After the Bell 0.50 LEG Leggett & Platt Wed, Oct 16 After the Bell 0.27 MER Merrill Lynch Wed, Oct 16 Before the Bell 0.58 MIL Millipore Wed, Oct 16 After the Bell 0.43 NCC National City Wed, Oct 16 Before the Bell 0.61 NYCB New York Com Banc Wed, Oct 16 Before the Bell 0.55 NFB North Fork Bancorp Wed, Oct 16 Before the Bell 0.66 NTRS Northern Trust Wed, Oct 16 Before the Bell 0.43 ODP Office Depot Wed, Oct 16 Before the Bell 0.27 BTU Peabody Energy Corp. Wed, Oct 16 Before the Bell 0.36 PFE Pfizer Wed, Oct 16 -----N/A----- 0.38 PGR Progressive Wed, Oct 16 After the Bell 0.82 PFGI Provident Finl Group Wed, Oct 16 Before the Bell 0.61 PSD Puget Sound Energy Wed, Oct 16 After the Bell 0.04 QLGC QLogic Wed, Oct 16 After the Bell 0.26 RTRSY Reuters Group Wed, Oct 16 -----N/A----- N/A RHI Robert Half Intl Wed, Oct 16 After the Bell -0.01 RSLN Roslyn Bancorp Wed, Oct 16 Before the Bell 0.46 RDC Rowan Companies Wed, Oct 16 Before the Bell 0.09 SON Sonoco Products Wed, Oct 16 -----N/A----- 0.33 SOTR SouthTrust Wed, Oct 16 Before the Bell 0.46 STJ St. Jude Medical Wed, Oct 16 Before the Bell 0.36 SWK Stanley Works Wed, Oct 16 Before the Bell 0.66 SYK Stryker Wed, Oct 16 After the Bell 0.37 SYMC Symantec Wed, Oct 16 After the Bell 0.31 SNV Synovus Financial Wed, Oct 16 -----N/A----- 0.31 TCB TCF Financial Wed, Oct 16 Before the Bell 0.80 TFX Teleflex Wed, Oct 16 After the Bell 0.70 TDS Telephone Data Wed, Oct 16 During the Market 0.84 TPP Teppco Wed, Oct 16 -----N/A----- 0.44 KO The Coca-Cola Company Wed, Oct 16 Before the Bell 0.48 TRW TRW Wed, Oct 16 Before the Bell 0.83 UB UnionBanCal Wed, Oct 16 After the Bell 0.85 VLY Valley National Banc Wed, Oct 16 -----N/A----- 0.40 GWW W.W. Grainger Wed, Oct 16 Before the Bell 0.63 WB Wachovia Wed, Oct 16 Before the Bell 0.70 WHR Whirlpool Wed, Oct 16 Before the Bell 1.58 ------------------------- THURSDAY ----------------------------- AFCI Advanced Fibre Comm Thu, Oct 17 After the Bell 0.04 ASBC Associated Banc-Corp Thu, Oct 17 After the Bell 0.69 AF Astoria Financial Thu, Oct 17 After the Bell 0.72 ALV Autoliv Thu, Oct 17 -----N/A----- N/A ADP Automatic Data Proces Thu, Oct 17 -----N/A----- 0.34 BOL Bausch & Lomb Thu, Oct 17 Before the Bell 0.44 BAX Baxter International Thu, Oct 17 -----N/A----- 0.51 BCC Boise Cascade Thu, Oct 17 Before the Bell 0.06 BRCM Broadcom Thu, Oct 17 -----N/A----- -0.03 BR Burlington Resources Thu, Oct 17 Before the Bell 0.13 CEN Ceridian Thu, Oct 17 Before the Bell 0.19 CHKP Check . Software Tech Thu, Oct 17 After the Bell 0.25 CAKE Cheesecake Factory Thu, Oct 17 After the Bell 0.26 CPS ChoicePoint Thu, Oct 17 Before the Bell 0.35 CL Colgate-Palmolive Thu, Oct 17 -----N/A----- 0.57 CFBX Community 1st Banksh Thu, Oct 17 Before the Bell 0.51 CPWR Compuware Thu, Oct 17 After the Bell 0.06 ED Consolidated Edison Thu, Oct 17 -----N/A----- 1.32 CR Crane Thu, Oct 17 After the Bell 0.34 DHR Danaher Thu, Oct 17 Before the Bell 0.73 DLX Deluxe Thu, Oct 17 Before the Bell 0.75 DV DeVry Thu, Oct 17 After the Bell 0.14 DL Dial Thu, Oct 17 Before the Bell 0.30 DO Diamond Offshore Dril Thu, Oct 17 Before the Bell 0.06 D Dominion Resources Thu, Oct 17 -----N/A----- 1.50 EBAY eBay Thu, Oct 17 After the Bell 0.20 EMC EMC Thu, Oct 17 Before the Bell -0.02 ESV ENSCO International Thu, Oct 17 Before the Bell 0.20 EFX Equifax Thu, Oct 17 Before the Bell 0.36 FVB First Virginia Banks Thu, Oct 17 Before the Bell 0.65 FMER FirstMerit Thu, Oct 17 Before the Bell 0.37 FO Fortune Brands Thu, Oct 17 Before the Bell 0.79 FPL FPL Group Thu, Oct 17 Before the Bell 1.76 GPC Genuine Parts Thu, Oct 17 -----N/A----- 0.55 GP Georgia-Pacific Thu, Oct 17 Before the Bell 0.41 GDW Golden West Financial Thu, Oct 17 -----N/A----- 1.45 GGG Graco Thu, Oct 17 Before the Bell 0.41 DA Groupe Danone Thu, Oct 17 -----N/A----- N/A GDT Guidant Thu, Oct 17 -----N/A----- 0.53 HSY Hershey Foods Thu, Oct 17 Before the Bell 0.99 HBAN Huntington Bancshares Thu, Oct 17 Before the Bell 0.34 RX IMS Health Thu, Oct 17 After the Bell 0.27 IR Ingersoll-Rand Co. Thu, Oct 17 Before the Bell 0.57 IVC Invacare Thu, Oct 17 -----N/A----- 0.63 ITG Investment Tech Group Thu, Oct 17 Before the Bell 0.39 KEY KeyCorp Thu, Oct 17 Before the Bell 0.57 LRCX Lam Research Thu, Oct 17 After the Bell 0.00 LIZ Liz Claiborne Thu, Oct 17 Before the Bell 0.78 MAN Manpower Thu, Oct 17 Before the Bell 0.44 MAT Mattel Thu, Oct 17 Before the Bell 0.56 KRB MBNA Thu, Oct 17 -----N/A----- 0.42 MRBK Mercantile Banksh Thu, Oct 17 Before the Bell 0.69 MERQ Mercury Interactive Thu, Oct 17 After the Bell 0.16 MSFT Microsoft Thu, Oct 17 After the Bell 0.43 MOLX Molex Thu, Oct 17 After the Bell 0.14 NCF Natl Cmmerce Finl Crp Thu, Oct 17 -----N/A----- 0.40 NATI National Instruments Thu, Oct 17 After the Bell 0.13 NXY Nexen Thu, Oct 17 During the Market 0.61 NOK Nokia Corporation Thu, Oct 17 Before the Bell 0.17 NT Nortel Networks Thu, Oct 17 After the Bell -0.10 NOC Northrop Grumman Thu, Oct 17 Before the Bell 1.57 NVS Novartis AG Thu, Oct 17 -----N/A----- 0.44 NUE Nucor Thu, Oct 17 -----N/A----- 0.48 PBCT People`s Bank Thu, Oct 17 After the Bell 0.24 PSFT PeopleSoft Thu, Oct 17 After the Bell 0.13 MO Philip Morris Thu, Oct 17 Before the Bell 1.26 PBI Pitney Bowes Thu, Oct 17 After the Bell 0.61 PCL Plum Creek Timber Thu, Oct 17 After the Bell 0.34 PNC PNC Finl Services Grp Thu, Oct 17 -----N/A----- 1.04 PP Prentiss Properties Thu, Oct 17 After the Bell 0.85 PHCC Priority Healthcare Thu, Oct 17 Before the Bell 0.26 DGX Quest Diagnostics Thu, Oct 17 After the Bell 0.82 RATL Rational Software Thu, Oct 17 After the Bell 0.03 TSG Sabre Holdings Corp Thu, Oct 17 Before the Bell 0.44 SAP SAP AG. Thu, Oct 17 -----N/A----- 0.11 SFA Scientific-Atlanta Thu, Oct 17 After the Bell 0.21 S Sears Roebuck Thu, Oct 17 -----N/A----- 0.82 SEIC SEI Investments Thu, Oct 17 Before the Bell 0.31 SJR Shaw Communications Thu, Oct 17 After the Bell N/A SEBL Siebel Systems Thu, Oct 17 After the Bell 0.05 SKYF Sky Financial Group Thu, Oct 17 Before the Bell 0.41 SII Smith International Thu, Oct 17 After the Bell 0.21 LUV Southwest Airlines Thu, Oct 17 -----N/A----- 0.05 FON Sprint (FON Group) Thu, Oct 17 After the Bell 0.37 PCS Sprint (PCS Group) Thu, Oct 17 After the Bell -0.19 STU Student Loan Thu, Oct 17 After the Bell N/A SUNW Sun Microsystems Thu, Oct 17 After the Bell -0.04 SUP Superior Industries Thu, Oct 17 -----N/A----- 0.60 SY Sybase Thu, Oct 17 After the Bell 0.26 SBL Symbol Technologies Thu, Oct 17 After the Bell 0.06 TE TECO Energy Thu, Oct 17 -----N/A----- 0.72 TXT Textron Thu, Oct 17 Before the Bell 0.68 NYT The N Y Times Company Thu, Oct 17 Before the Bell 0.38 TBL Timberland Thu, Oct 17 Before the Bell 1.29 TAC TRANSALTA CORP Thu, Oct 17 -----N/A----- N/A TRB Tribune Thu, Oct 17 Before the Bell 0.38 UPC Union Planters Thu, Oct 17 After the Bell 0.63 UTX United Technologies Thu, Oct 17 Before the Bell 1.19 UNH UnitedHealth Group Thu, Oct 17 Before the Bell 1.04 UHS Universal Health Serv Thu, Oct 17 After the Bell 0.59 SLM USA Education Thu, Oct 17 -----N/A----- 1.19 UTSI UTStarcom Thu, Oct 17 After the Bell 0.28 VFC VF Thu, Oct 17 Before the Bell 1.09 WTNY Whitney Holding Thu, Oct 17 -----N/A----- 0.58 WL Wilmington Trust Thu, Oct 17 -----N/A----- 0.52 WIT Wipro Limited Thu, Oct 17 After the Bell 0.20 XLNX Xilinx Thu, Oct 17 After the Bell 0.10 ZION Zions Bancorp Thu, Oct 17 After the Bell 0.93 ------------------------- FRIDAY ------------------------------- BBT BB&T Fri, Oct 11 Before the Bell 0.70 ALE Allete Fri, Oct 18 Before the Bell 0.50 AEE Ameren Fri, Oct 18 Before the Bell 1.64 AVP Avon Products Fri, Oct 18 Before the Bell 0.47 BGEN Biogen Fri, Oct 18 Before the Bell 0.35 POS Catalina Marketing Fri, Oct 18 -----N/A----- 0.22 CBCF Citizens Banking Fri, Oct 18 -----N/A----- 0.47 EQT Equitable Resources Fri, Oct 18 Before the Bell 0.43 ERICY Ericsson LM Telephone Fri, Oct 18 -----N/A----- -0.02 HDB Hdfc Bank Limited Fri, Oct 18 Before the Bell N/A LAB LaBranche & Co Inc. Fri, Oct 18 Before the Bell 0.24 LEA Lear Fri, Oct 18 Before the Bell 0.88 MEG Media General Fri, Oct 18 Before the Bell 0.37 MRK Merck Fri, Oct 18 Before the Bell 0.82 PGN Progress Energy Fri, Oct 18 Before the Bell 1.64 TLAB Tellabs Fri, Oct 18 Before the Bell -0.06 X Un St Steel Corp. Fri, Oct 18 -----N/A----- 0.64 UST UST Inc Fri, Oct 18 Before the Bell 0.77 VC Visteon Fri, Oct 18 Before the Bell -0.26 WPO Washington Post Fri, Oct 18 -----N/A----- 4.94 ZBRA Zebra Technologies Fri, Oct 18 Before the Bell 0.58 ---------------------------------------------- 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 SPW SPW Corp. 2:1 10/24 10/25 CPBI CPB Inc. 2:1 10/25 10/28 -------------------------- Economic Reports This Week -------------------------- Third quarter earnings are now in full swing. Headliners will probably be Intel on Tuesday and Microsoft on Thursday. The week's economic reports are weighted to come out on Thursday and Friday with Friday reporting the CPI numbers. ============================================================== -For- Monday, 10/14/02 ---------------- None Tuesday, 10/15/02 ----------------- None Wednesday, 10/16/02 ------------------- Business Invntories(BB) Aug Forecast: 0.2% Previous: 0.4% Thursday, 10/17/02 ------------------ Initial Claims (BB) 10/12 Forecast: N/A Previous: 384K Housing Starts (BB) Sep Forecast: 1.636M Previous: 1.609M Building Permits (BB) Sep Forecast: 1.670M Previous: 1.666M Industrial Prduction(DM)Sep Forecast: 0.1% Previous: -0.3% Capacity Utilization(DM)Sep Forecast: 76.0% Previous: 76.0% Philadelphia Fed (DM) Oct Forecast: 2.0 Previous: 2.3 Friday, 10/18/02 ---------------- Trade Balance (BB) Aug Forecast:-$35.2B Previous: -$34.6B CPI (BB) Sep Forecast: 0.2% Previous: 0.3% Core CPI (BB) Sep Forecast: 0.2% Previous: 0.3% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* SWING TRADE GAME PLAN ********************* Expecting a pullback, after bears take profits Don't let the headline fool you. This week looks quite bullish and combined with weekly observations, bears look jittery after the major indexes posted their first weekly gain after 7 consecutive weekly losses. --- Swing Trader Strategy Update By Jim Brown While I was bedridden last week I kept analyzing the reasons we get stopped out of so many swing trades. It all boils down to entry points. If you had the perfect entry point you could have a two point stop loss and never be hit. Sounds simple in theory but difficult in practice. --- To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 10-13-2002 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: MME Put Play of the Day: GS Dropped Calls: MDT Dropped Puts: WHR, 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 ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AZO 81.51 0.10 -0.88 -1.52 1.90 0.54 Pullback effective ITMN 32.36 -0.74 1.29 -0.25 1.00 1.42 Steady climber LLY 62.00 0.62 0.60 0.79 0.50 5.80 New, breakthrough LMT 62.45 0.34 -3.36 0.16 2.87 1.35 History repeats MBG 30.19 -1.85 0.25 0.76 –0.06 –3.46 New, On Black MDT 28.88 -1.55 1.01 0.16 1.54 0.88 Drop, no foul WLP 80.84 -0.17 -0.86 1.64 0.82 3.44 Got our trigger PUTS GIS 41.50 -0.53 0.11 0.78 –0.60 -3.00 New, added pressure GS 64.20 -2.02 1.15 -1.02 1.81 2.65 New, failed bounce HAR 49.22 -1.27 -1.49 -1.10 1.11 -2.14 failed 200-dma MME 40.25 -0.06 -0.23 1.29 –0.73 3.47 New, new high PHM 40.60 -1.61 1.51 -1.67 1.94 1.88 Drop, stopped out WHR 43.79 -1.94 1.55 -2.53 0.08 0.07 Drop, engulfed ************************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: ********************* MME – Mid Atlantic Medical Services $40.25 (+3.07 last week) See details in play list Put Play of the Day: ******************** GS – Goldman Sachs Group $64.20 (+2.15 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 ^^^^^ MDT $44.02 (+0.82) Following yesterday's breakout over the 200-dma, shares of MDT pushed through the $45 level this morning, despite news of competitor GDT's FDA approval of its new Contak defibrillator. While this development could be viewed as increased competition for MDT, the stock continued to hold near the $45 level until around 2:30pm ET. Then a rush of selling came into the stock, with more than 2 million shares (vs. the ADV of 4.4 mln) trading hands in the final 90 minutes of the day, driving MDT down to the $44 support level. While there was no real technical violation, the heavy selling volume was disconcerting, and perhaps portends some bad news waiting in the wings. Rather than risk a selloff next week when that 'news' becomes public, we're going to err on the side of caution this week and drop the play. For those that opt to stay in the play, we'd recommend snugging stops up to the $43 level, just in case. PUTS ^^^^ WHR $43.79 +3.11 (+0.07 for the week) Whirlpool looked extremely weak after adding only +0.08 as the Dow rallied over 200 points on Thursday. The 316-point rally on Friday finally brought the bulls back. Whether it was shorts covering positions, or simply the rising tide lifting all boats, the trend we were attempting to capture in WHR was broken. We originally entered the play at $44.81 on 10/03, and after failing to take our profits when it traded down under $40, we will walk away approximately where we entered. The recent sales numbers from Sears and additional layoffs at Maytag would indicate a drop in demand for WHR's products, but we're not here to prove we're right, just to take profits where we can. The fact that WHR was able to make up 4 days of losses in one fell swoop suggests a reversal and we are exiting the play. --- PHM $40.60 (+1.46) If you thought (as we initially did) that Thursday's short-covering rally was another one-day wonder, you were surprised to see the moon-shot rally that commenced at the open this morning. Propelled by the buying in the overall Housing sector, PHM pushed through our $39.50 stop shortly after the open and never looked back. The solid buying action indicates the bears are getting a lot more nervous, and rather than fight the trend, we're dropping the play this weekend. If still holding open positions, use any early weakness on Monday to facilitate your exit. *********** 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 10-13-2002 Sunday 3 of 5 In Section Three: New Calls: LLY, MBG, MME Current Calls: ITMN, LMT, WLP, AZO New Puts: GIS, GS ************************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 ************** LLY - Eli Lilly - $62.00 +1.10 (+4.58 for the week) Company Summary: Lilly, a leading innovation-driven corporation, is developing a growing portfolio of best-in-class pharmaceutical products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Ind., Lilly provides answers -- through medicines and information -- for some of the world's most urgent medical needs. (source: company release) Why We Like It: Just as Lilly looked like it was about to break down last month, appearing on the verge of a triple bottom breakdown, the stock made a comeback, breaking out to the upside from its almost two month consolidation rectangle. With the exception of a brief one-day upside breakout toward the end of August, the stock had been stuck between $55 and $60 since August 7. the general rule is that the longer a pattern takes to form, the more significant is its breakout. We got that breakout on Thursday, as the stock finally found enough legs to get through resistance at $60. It then tacked on another $1.10 during Friday's rally. The difference between LLY and other stocks that saw big gains on Friday, is that the stock hadn't been beaten up over the last two months. In fact it showed great relative strength, staying in consolidation while the Dow lost almost 2000 points in a month and a half. While the broader markets slid quickly downhill at the beginning of the week, reaching multi-year lows, LLY was actually climbing. While the Dow broke support levels from Monday through Wednesday, LLY was banging up against upside resistance. Lilly was upgraded by Fulcrum on Thursday, as previous delays in new drug launches were believed to already be priced into the stock. In addition, the 12 month erosion of sales from Prozac seeing generic competition is now behind it and the company could be launching 5 new products in the U.S. in 2003, including Cymbalta, Cialis, Forteo, Strattera and duloxetine, which should have positive earnings effects for 2004 and beyond. A look at the point and figure chart shows the stock establishing a buy signal at $60 on a double top breakout. The current bullish vertical count is $77, but we'll set our initial target at the next PnF resistance level of $67. The last time the stock traded $62, it registered a break in the bearish resistance line, and so the current level has more than one implication. The consolidation rectangle brings with it a minimum measuring objective of $65, but we expect it to be just that - a minimum. Conservative traders can look for a trade of $63, above previous PnF highs, as a trigger to go long, or wait for a re-test of $60 to the downside, as evidence of support. A pullback to $60 would be our ideal entry point, but if we don't get that opportunity, then we will enter at the current level. Place stops at $58.00, below Tuesday and Wednesday's lows. *** October contracts expire next week *** BUY CALL NOV-60 LLY-KL*OI= 1691 at $4.40 SL=2.20 BUY CALL NOV-65 LLY-KM OI= 4516 at $1.70 SL=1.00 BUY CALL JAN-60 LLY-AL OI= 10604 at $6.50 SL=3.25 BUY CALL JAN-65 LLY-AM OI= 7667 at $3.90 SL=2.00 Average Daily Volume = 4.38 MIL --- MBG - Mandalay Resort Group - $30.19 +0.75 (-3.69 for the week) Company Summary: Mandalay Resort Group owns and operates 11 properties in Nevada: Mandalay Bay, Luxor, Excalibur, Circus Circus, and Slots-A-Fun in Las Vegas; Circus Circus-Reno; Colorado Belle and Edgewater in Laughlin; Gold Strike and Nevada Landing in Jean and Railroad Pass in Henderson. The company also owns and operates Gold Strike, a hotel/casino in Tunica County, Mississippi. The company owns a 50% interest in Silver Legacy in Reno, and owns a 50% interest in and operates Monte Carlo in Las Vegas. In addition, the company owns a 50% interest in and operates Grand Victoria, a riverboat in Elgin, Illinois, and owns a 53.5% interest in and operates MotorCity in Detroit, Michigan. (source: company release) Why We Like It: MBG had been on a steady climb since the end of July, in spite of the broad market sell-off around it. The series of higher highs and higher lows was consistent, topping out at just over $30 during the beginning of October. That climb ended this week, as several analysts released poor expectations for some of the casinos. Salomon Smith Barney downgraded the sector, based on issues such as consumer spending, valuation, and high investor expectations. Year to date, the group had been up 17%, compared to a 28% drop for the S&P at the time of the downgrade. However, Prudential Securities analyst William Lerner, who also issued downgrades of Argosy (AGY) and Harrah's (HET), actually raised estimates for Mandalay. The sector downgrades have come on speculation, rather than poor results, and just a few weeks ago Mandalay CFO Glenn Schaeffer said, "the market underestimates the earnings power of this company, particularly our free cash flow... That represents a 16% to 20% cash dividend yield." The sell-off in MBG found its bottom right at the 200-dma, and appears to be a blow-off hammer formation. Today's bounce was actually turned back above the 50-dma of $30.78, but given the recent strength of the company, a continued rebound to $35 looks possible. In spite of predictions of doom and gloom for the from the analysts, Nevada gambling revenue rose 1.8% in August from 2001, driven by a 9% increase on the Las Vegas strip. The Nevada "win," or the amount casinos keep after paying off bets, was up to $839.5 million, compared to $824.5 million a year ago. The strip, where several Mandalay properties are located, accounted for more than half the state's total. The statewide improvement was the first since April. We see the rebound at the 200-dma and the current price level of $30.19 as giving us a good risk/reward ratio, with a stop loss of $28.00 and an initial price target of $35.00. if the broad market experiences a pullback on Monday, after the furious rally of the last two days, look for support at the 200-dma of $29.62 before initiating long positions. *** October contracts expire next week *** BUY CALL NOV-27.50 MBG-KY OI= n/a at $4.00 SL=2.00 BUY CALL NOV-30.00 MBG-KF OI= n/a at $2.40 SL=1.20 BUY CALL DEC-27.50*MBG-LY OI= 212 at $4.60 SL=2.30 BUY CALL DEC-30.00 MBG-LY OI= 594 at $3.00 SL=1.50 Average Daily Volume = 844 K --- MME – Mid Atlantic Medical Services $40.25 (+3.07 last week) Company Summary: Mid Atlantic Medical Services is a holding company for subsidiaries active in managed healthcare and other life and health insurance related activities. MME and its subsidiaries offer a broad range of managed healthcare coverage and related ancillary insurance and other products and deliver these services through health maintenance organizations, a preferred provider organization, and a life and health insurance company. MME owns a home healthcare company, a pharmaceutical services company and a hospice company. The company also owns a collections company and maintains a partnership interest in an outpatient surgery center. Why We Like It: Despite the 2-day wonder rally we have just experienced, the fact remains that the fundamental picture for the economy is questionable at best. About the only area where investors can point to true signs of expansion is Health Care, so it should come as no surprise that we're going fishing in that well again. From the Health Care Payor index (HMO.X) to the Pharmaceutical index (DRG.X), the Health Care sector has exhibited some impressive relative strength over the past month, refusing to follow the broad market's lead in dropping to test the July lows. With its hand in many areas of the industry, from insurance to pharmaceuticals and from home health to outpatient surgery, MME is continuing to benefit from the cycle of growth within the sector. In fact, Friday's bullish session saw the stock blasting through the $40 level to post a new all-time high, supported by volume that more than doubled the daily average. How's that for relative strength? The PnF chart recently generated a fresh Buy signal, and the vertical count is pointing to an upside target of $46. While that may seem rather close, it is still more than 14% above current the current price. So long as the bullish trend remains in place, MME should continue to march higher, especially if the tentative broad market rebound lengthens its stride next week. We want to be careful about chasing MME higher, but a rally through $41.25 (just above Friday's intraday high) can be used to initiate new positions, so long as volume remains robust. A bit of a pullback early next week could help to provide a more conservative entry on a rebound near the $39 level, and a dip to stronger support at $38 would be even better. Of course, we need to be on the lookout for something more ominous than profit taking, so we're setting our stop at 37. *** October contracts expire next week *** BUY CALL OCT-40 MME-JH OI=618 at $1.30 SL=0.50 BUY CALL NOV-40*MME-KH OI= 27 at $2.50 SL=1.25 BUY CALL NOV-45 MME-KI OI= 0 at $0.65 SL=0.25 BUY CALL DEC-40*MME-LH OI= 25 at $3.00 SL=1.50 BUY CALL DEC-45 MME-LI OI= 0 at $1.05 SL=0.50 Average Daily Volume = 514 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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** ITMN - InterMune - $33.99 +1.17 (+2.26 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: ITMN has continued its steady up trend of the last seven weeks. While the Dow tacked on 316 points, ITMN continued its upward creep with a modest $0.17 gain to close at $32.36. While bears may see this as a sign of relative weakness, we see it as evidence that it did not experience a short covering bounce like many other stocks that had been in severe downtrends recently. It's Actimmune drug, which continues to show positive results in both the next generation version with less dosing, and for new diseases, is a positive for the company, which has kept it moving forward. The series of higher highs and higher lows continues and the fact that the last pullback was stopped dead at the 200- dma shows a solid level of support. The company recently announced a pact with Inhale Therapeutic Systems Inc. (INHL) to develop an extended release treatment for hepatitis C. The companies plan on combining ITMN's Infergen, already in the market, and INHL's PEGylation technology, which prolongs the effectiveness of a drug, into a new medicine called PEG-Infergen. if approved, the new drug would compete with Schering-Plough's big-seller, Peg-Intron and a new drug from Roche, which is expected to receive approval by the end of the year. ITMN President Scott Harkonen said, "We believe PEG-Infergen will build on the success we are having with Infergen in this market. We expect this market will grow to $3 to $4 billion over the next five years." He also said the company plans to initiate clinical trials in the first quarter of 2003. The company's strong pipeline should help it continue the upward momentum in the stock price and OI sees the current level as a long entry point. Additional entries for conservative traders might be the PnF 3-box reversal number of $34, or the buy signal of $35. We would favor November contracts for new entries. ***** October contracts expire in 1 week ******* BUY CALL OCT-30 IQY-JF OI= 4134 at $3.10 SL=1.60 BUY CALL OCT-35 IQY-JG OI= 1598 at $0.50 SL=0.00 BUY CALL NOV-30 IQY-KF OI= 30 at $4.60 SL=2.30 BUY CALL NOV-35 IQY-KG OI= 70 at $1.90 SL=1.00 Average Daily Volume = 1.58 mil --- LMT - Lockheed Martin - $60.88 +2.87 (-0.12 for the week) Company Summary: Lockheed Martin Corporation, headquartered in Bethesda, Md., is a global enterprise principally engaged in the research, design, development, manufacture and integration of advanced technology systems, products and services. Employing about 125,000 people worldwide, Lockheed Martin had 2001 sales of $24 billion Why We Like It: LMT's rebound followed the rising tide today, as it tacked on $1.57. However, unlike other stocks that seemed to rally mostly due to short covering after the SPX reached its July low, LMT had some substance behind it. Last, night the President got approval from both the House (296-133) and Senate (77-230) to use military force to confront Saddam Hussein. The overwhelming percentage by which the resolution was passed serves to empower the President, who has little patience for a shell game of weapons inspections. While it is not certain that we will be going to war, the resolution does not require President Bush to seek U.N. cooperation, and an invasion appears likely at some point. The stock continues to mirror its activity from the end of July when it dipped below the 200-dma, only to rally quickly above its breakdown level. The stock is now on a 5-box PnF reversal up. Each time it has experienced a PnF reversal in the current formation, it has achieved one box higher than the previous high, which in this case was $67. We will base our initial target of $68 on that consistency, and the fact that war rhetoric should be heating up again with Congressional approval and elections around the corner. LMT was turned back this morning at its 50-dma of $63.56 and conservative traders may want to use a trade above that level to initiate long positions. After the massive rally of the last two days, we may experience a pullback on Monday. In that case, look for support at the 200-dma of $59.90 as a sign to enter the position. *** October contracts expire next week *** BUY CALL NOV-60 LMT-KL OI= 443 at $5.00 SL=2.50 BUY CALL NOV-65 LMT-KM OI= 454 at $2.40 SL=1.20 BUY CALL DEC-60*LMT-LL OI=2133 at $6.00 SL=3.00 BUY CALL DEC-65 LMT-LM OI=1773 at $3.40 SL=1.70 Average Daily Volume = 3.15 mil --- WLP - Wellpoint Health Network - $78.40 +0.82 (+0.78 for the week) Company Summary: WellPoint Health Networks Inc. serves the health care needs of more than 13 million medical members and approximately 45 million specialty members nationwide through Blue Cross of California, Blue Cross and Blue Shield of Georgia, Blue Cross and Blue Shield of Missouri, HealthLink and UNICARE. WellPoint offers a broad spectrum of quality network-based health products including open access PPO, POS and hybrid products, HMO and specialty products. Specialty products include pharmacy benefit management, dental, utilization management, vision, mental health, life and disability insurance, long term care insurance, flexible spending accounts, COBRA administration, and Medicare supplements. Blue Cross of California, Blue Cross and Blue Shield of Georgia, and Blue Cross and Blue Shield of Missouri are independent licensees of the Blue Cross Blue Shield Association. Why We Like It: We finally got the breakout we've been looking for in WLP, as it traded through resistance at $80. The stock had been turned back at that level on numerous occasions since its breakdown below $80 back in June. We waited for a break back above that level to initiate the play and initiated it this afternoon. That $80 price level did several things on a technical basis. It provided another higher high in the rising pattern begun at the start of August, when its previous short-term downtrend reversed. It also created a new point and figure buy signal on a double top breakout. Additionally, it may have placed the stock into a new consolidation range. Historically, the stock has moved within $10 consolidation rectangles, breaking out to a new $10 level each time. An exception occurred last June, when the break above $80 only reached $86. Of course a $6 gain is fine with us, but our target is $90, after the recent consolidation between $70 and $80. WLP was added today to Goldman Sachs recommended list, which is quite an achievement in the current market. Traders looking to initiate new long positions can watch for a re-test of $80 to the downside, as evidence of support at the previous level of resistance. We see the current level, above $80, as ideal for new entries. The current vertical count for the stock is $100, but *** October contracts expire next week *** BUY CALL NOV-75 WLP-KO OI= 68 at $7.80 SL=3.90 BUY CALL NOV-80*WLP-KP OI= 339 at $4.50 SL=2.25 BUY CALL JAN-80 WLP-AP OI= 312 at $7.40 SL=3.70 BUY CALL JAN-85 WLP-AQ OI= 457 at $5.00 SL=2.50 Average Daily Volume = 1.58 mil --- AZO – AutoZone, Inc. $81.51 (+0.24 last week) Company Summary: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why We Like It: It's always amazing how quickly bad news is forgotten, when an oversold rally gets underway. Remember the stream of negative news out of the Retail sector (RLX.X) all last week from the likes of FD, WMT and KSS? Well, apparently neither do the bulk of the bears who spent the past 2 days covering and propelling the RLX to more than a 5% gain on Friday. That's fine with us, as the likelihood of this sort of rebound was part of our logic in adding AZO to the call list. If it held up as well as it did while the bulk of the Retailers were committing hari-kari, imagine how well the stock would perform if the market turned around. Well that's exactly what happened the past couple days, with AZO posting better than a $2 gain on Friday. If that sounds pretty meager, remember that AZO is likely rising from actual buying, not just shorts buying to cover their assets. While the stock has some significant resistance near the $82-83 area, once clear of that zone, it will be time to focus on a run at the all-time highs, just south of $85. Friday's gap is a bit of a concern, and ideally we'd like to see a bit of weakness early next week that has AZO filling that gap (down near $79.50) before continuing its skyward trek. That sort of bounce would make for a high-odds bullish entry, as momentum traders will need to be very careful. Once clear of the $83 resistance from earlier this month, AZO is right up to the $83-85 resistance from May-June. But with the daily Stochastics just starting to reverse upwards, momentum entries might be just the way to go. Raise stops to $77 this weekend. *** October contracts expire next week *** BUY CALL OCT-80 AZO-JP OI=1563 at $2.95 SL=1.50 BUY CALL NOV-80 AZO-KP OI= 776 at $6.10 SL=4.00 BUY CALL NOV-85*AZO-KQ OI= 692 at $3.20 SL=1.50 BUY CALL DEC-85 AZO-LQ OI=1509 at $5.60 SL=3.50 Average Daily Volume = 1.32 mln ************* NEW PUT PLAYS ************* GIS - General Mills, Inc. $41.50 (-3.10 last week) Company Summary: General Mills is a producer of packaged consumer foods and operates exclusively in the consumer foods industry. The company operates three business segments: U.S. Retail, Bakeries and Foodservice and International. U.S. Retail consists of cereals, meals, refrigerated and frozen dough products, baking products, snacks, yogurt and health venture activities. The Bakeries and Foodservice segment consists of products marketed to retail and wholesale bakeries and offered to the commercial and noncommercial foodservice sectors throughout the United States and Canada, such as restaurants and school cafeterias. The International segment is made up of retail business outside the U.S. and foodservice business outside of the U.S. and Canada. Why We Like It: Huge short-covering rallies like we saw over the past 2 days are great for identifying the really weak stocks. Let's face it, if a 700+ point DOW rally and a nearly 100 point NASDAQ rally can't drag a stock (any stock) into positive territory, there must really be some serious problems. That's our thinking with GIS, which has been falling precipitously for the past week after being firmly rejected at the 200-dma up at $45.50. That was a former area of resistance and apparently it is still firmly in place. On Monday, the company announced that is was considering further plant closings (not a good sign) in the wake of its acquisition of Pillsbury, got hit with a CSFB downgrade on Wednesday and then had its debt rating cut by Moody's on Thursday. Investors obviously didn't like the taste of what was being served and promptly spit out the stock at a brisk rate. Friday's selling volume came in at double the ADV, as GIS fell to close just off the $41 support level. If it loses that level of support, the next help will be found at $40, before a full retest of the July lows down at $38. To be fair, we're likely still early in the stock's decline, if our bearish thesis is correct. The PnF chart is still on Buy signal, although that could change quickly if GIS breaks $39, generating a fresh Sell signal and a tentative price target of $32. Lately, the market hasn't been kind to company's being awarded with debt downgrades, and we expect that to remain the case. Note that the ascending trendline connecting the lows since July is right at $41.25, just below Friday's low. Conservative traders will want to wait for an oversold rebound to provide a better entry, ideally on a rollover near the $42.50-43.00 level. Traders that want to see the breakdown before playing will want to see GIS pushed under the $41 level on continued strong volume before playing. We are initiating coverage with our stop set at $43.50, the site of the mid-August highs. BUY PUT NOV-45 GIS-WI OI=175 at $4.10 SL=2.50 BUY PUT NOV-40*GIS-WH OI= 67 at $1.25 SL=0.75 Average Daily Volume = 1.26 mln --- GS – Goldman Sachs Group $64.20 (+2.15 last week) Company Summary: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why We Like It: It seems like Wall Street is finally starting to acknowledge that this is one nasty bear market and the heady days of the late 1990s are gone for good. That much is evident by the absolute dearth of investment banking deals and the declining levels of trading volume. This trend is finally starting to hit the big Brokerage firms where it counts and layoffs are still being announced. As if that wasn't bad enough, the Congressional hearings are still rolling along, peppered with news of shareholder lawsuits on the basis of conflict of interest. That cycle of bad news hammered the Brokerage sector (XBD.X) down to the $320 level last week, completing a successful test of the September 2001 lows when the rebound got underway over the past 2 days. But the fundamentals in the sector are still dismal and likely to get worse. This was highlighted by a JP Morgan report on Wednesday citing that Wall Street firms are still overstaffed by 17 percent, despite the thousands of industry job cuts that have already taken place. GS, the brokerage firm that everyone loves to hate, because of the shamelessly bullish AJ Cohen, drilled to a new all-time low below $59 on Thursday before reversing higher with the rest of the market. Since then the bulls have been in charge, pushing the stock up to the $65 level on Friday before relaxing a bit into the close. This is where the rubber meets the road, as the stock has some very heavy resistance, starting at $5.50, also the site of the 20-dma. Even if the bulls are able to scale that level, there is even stronger resistance laying in wait near $68. We don't want to rush into the play, but want to wait for the bulls to exhaust themselves banging their heads into resistance. Then we can look to initiate new positions as the rally fails. Aggressive entries can be attempted near the $65.50 level if the rally stalls out early in the week, although the $68 level will provide for easier risk management. Alternatively, if GS reverses course from current levels and moves into Friday's gap, that drop under $62.50 can be used for new momentum-based entries. We want to give GS some room to move, so we are setting a rather wide stop at $68.50. *** October contracts expire next week *** BUY PUT OCT-65 GS-VM OI=10208 at $2.05 SL=1.00 BUY PUT NOV-65*GS-WM OI= 2459 at $4.20 SL=2.50 BUY PUT NOV-60 GS-WL OI= 1685 at $2.30 SL=1.25 Average Daily Volume = 6.66 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 10-13-2002 Sunday 4 of 5 In Section Four: Current Put Plays: HAR Leaps: Double Bottom? Traders Corner: Put Down The Remote and Test Your Option IQ? Traders Corner: Overbought and Oversold: Concepts and Use Traders Corner: SINGLE STOCK FUTURES (SSF) ************************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 ***************** HAR - Harman International - $48.60 -1.49 (-2.76 for the week) Company Summary: Harman International Industries, Incorporated is a leading manufacturer of high-quality, high fidelity audio products and electronic systems for the consumer and professional markets. The Company's stock is traded on the New York Stock Exchange under the symbol: HAR. (source: company release) Why We Like It: HAR was carried along with the rising tide the last couple of days. However, today's rally actually was rejected at the 200-dma of $49.44, which also serves as a secondary neckline on the head and shoulders breakdown the stock experienced on Tuesday. While the stock traded as high as $50.76 intraday, the drop-off during the afternoon shows that $50, which should have provided support on a legitimate rally, could not hold up. The other indicator that the sentiment for the bounce did not have as much conviction as the previous breakdown is volume. The average volume on the bounce of the last two days was less than half of what it was on the breakdown. While we don't want to stand in front of a speeding train if the rally continues on Monday, this stock seems better suited for the "short" stack. With retail sales poor over the last month, even as compared to September 2001, and the trend of sales declines continuing as we head toward the holiday shopping season, HAR should see fewer shoppers attracted to its pricey audio components. A look at the point and figure chart shows several attempted rebounds in the stock since September, with each rejected at a lower high than the last, eventually landing at a lower low, as well. The rally of the last two days continued that trend and should have the stock headed to another lower low if the market turns over. New entries should wait for signs of market weakness and a trade below previous recent highs around $48. *** October contracts expire next week *** BUY PUT NOV-50*HAR-WJ OI= 50 at $4.70 SL=2.35 BUY PUT NOV-45 HAR-WI OI= 10 at $2.90 SL=1.45 Average Daily Volume = 297 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 $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Double Bottom? By Mark Phillips mphillips@OptionInvestor.com That was the question on every bulls' mind after the S&P 500 (SPX.X) rebounded from just below the site of the July lows. Positively-received earnings from GE and an upgrade of IBM on Friday morning sealed the deal and the markets put in their second strong performance in as many days, with the SPX briefly trading north of 840 and the DOW actually kissing the 7900 level. Unfortunately for the anxious bulls out there, they're going to have to wait awhile before they know if this is a successful double bottom. In order to fit the description, the SPX will need to then clear the level of its August highs, which is clear up at 965. There's 130 points between Friday's close and that level, so there will be plenty of time for the pundits to argue about whether this is The Bottom or not. As you know, I think the overall bear has a lot more room to go, and we got another important point of confirmation last week just before the short-covering rally got started. The DOW Transports ($TRAN) violated their September 2001 low and those of you that happen to follow DOW Theory will recognize that development as an important confirmation of the strength of this bear. But the market moves in strange ways and it appears that it is once again time for a brief bear-market rally. As traders, we really don't care about the eventual destination of this market, just what is the near-term trend that we can benefit from. In recent months, the bear has been completely in control, as a view of the monthly chart reveals. The rebound off the July lows almost completely disappears, with the only monthly gain since March being the paltry 5-point advance in August. To put it into perspective, that gains was sandwiched between July's 78-point loss and September's 101-point loss. The SPX is still caught firmly in the clutches of the downward trend that has been in force since late 2000, but that isn't to say that we aren't due for a solid rally. Historical trends are in favor of this rally finding its legs, as October is famous for ushering in important bottoms. The Bullish Percent charts are in favor of the bulls as well, as they have recently all reached down to extreme levels of bearishness. Sure they can go further, but right now it appears the path of least resistance is up. After reaching as low as 7%, the DOW's Bullish percent has now reversed up to 13%. No 3-box reversal yet (that won't happen until 14%), but it's a start. The NASDAQ has led the market in recent important reversals both to the upside and to the downside. After reaching as low as 14%, the NASDAQ-100 Bullish Percent chart has reversed into a column of X's and is now Bull Alert with a reading of 22%. Still in oversold, but this one could be a leading indicator for the rest of the market over the near term. Stepping away from the technicals for a few minutes, the fundamentals of this market are still abysmal. There is no pickup in demand for Information Technology, the economy is still on very wobbly legs, there is no pickup in employment, the West Coast dock lockout has dealt another body blow to the Retail sector that will likely be felt through the holiday season, and War with Iraq is seeming more likely by the day. There are numerous other problems to contend with as well, but it is possible that the markets have already discounted this picture and it is once again time for bad news to be interpreted in a positive light. I'm not yet convinced that the bulls are in charge, but the level of fear has certainly diminished in the past 2 days. In contrast to the recent pattern of holding near the 50 level, Friday's free fall brought the VIX back to the 43 level. Still an extreme level to be sure, but a definite improvement. The bottom line is that we are possibly getting started on the next oversold rally that lasts for more than a day or two, but it will require more than a 2-day wonder rally before we know for sure. Fortunately for us, we're traders and we can benefit from the reversal of trend before we know whether that reversal is going to stick. It's all about picking the right entry and exit points and sticking to our defined trading plan. Speaking of trades, let's see how our list of trades and trade candidates is faring. Portfolio: LEN - Along with the rest of the market, the Housing sector took a tumble early last week, before the shorts decided it was time to cover. That activity propelled the markets higher all the way until the closing bell on Friday, helping LEN to recapture a fair chunk of its losses from earlier in the week. The drop below $53 put the PnF chart on a Sell signal, and the vertical count now shows us there is potential downside to the $41 level. But first, the bears will have to successfully defend resistance near $58-59. The bounce off the $50 level was to be expected, as it was the site of the bullish support line on the PnF chart, as well as a prior area of support. So long as the September highs hold as resistance, late-comers can use the rollover at the end of this rally to initiate new positions. Until the bullish support line is broken, we're keeping our stop rather wide at $60. Watch List: MO - After the negative news of late, investors in MO have been just waiting for a pause in the selling so that they could collect their wits. Recall our comments about support at $35? Well, that level seemed to have provided some support again last week, allowing the stock to close in the green for the first time in the past 6 weeks. While some may view this as the buying opportunity we want, I'm a patient man. That long column of O's on the PnF chart looks rather ominous and reminds me of what it looked like back in early 1999 before plunging as low as $18.50. I don't expect to see a repeat of that bargain, but I am concerned that this is only the first leg down. So before initiating a Portfolio play (or even taking MO off of HOLD), I want to at least see a 3-box reversal, and even better would be a fresh Buy signal. Stay tuned. BA - Has the bottoming process begun? That's how it looks to me. First the $32 price target from the PnF chart was achieved, and then BA found support near $30, just above the SEP-01 low. Finally, the DOW Transports ($TRAN) took out their SEP-01 low, while BA did not. That looks to me like a measure of relative strength. I know we're fishing in a weak area of the market here, with airlines struggling as they are. But BA also has a strong defense component to its business and risk has now become very easy to manage. A renewed dip and bounce from the vicinity of $30 can be used for new entries, as can a rally (and close) above $32. In either case, we'll set our stop at $27.50 (just below the SEP-01 low) for starters. MSFT - Denied! It looks like I got a little stingy on the entry point, and MSFT left the station without us. Blasting out of its 3-week consolidation pattern on Friday. Actually the move got started on Thursday when Mr. Softee once again confirmed the $43 level as support and rocketed higher throughout the remainder of the day. I am not yet convinced that this rally is for real, but even if it is, we don't want to chase the stock higher. There is significant resistance in the $49-50 area, which will likely produce the next pullback. Let's look for a dip into the $45-46 area to trigger new entries. NEM - So much for support! Actually, the support that market participants were watching was apparently different than the one I had in mind. The $23 level seemed to come into play on Thursday, but the rebound on Friday was less than convincing. That long-term ascending trendline is looking like a realistic target, now at $22.25. With the broad markets still trying to put in a snapback rally, we could see some more near-term weakness in the gold shares. Take advantage of that weakness by targeting entries near that trendline. Should the stock just rebound from current levels, wait for a push back above $25 before taking a position. The end of week was a refreshing change from the past few months, but I don't believe it is time to blindly put those horns back on. There are some important resistance levels that need to be taken out before it will be safe to go back into the pasture, and each day of this earnings season will present a fresh minefield to navigate. The scales are starting to tip back towards the bullish camp, but we still need to probe the market with small positions and a "Show Me" attitude. Have a great week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None JNJ 10/10/02 '04 $ 60 LJN-AL $ 6.50 $ 6.50 + 0.00% $51 '05 $ 60 ZJN-AL $ 9.10 $ 9.10 + 0.00% $51 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $10.20 +18.60% $60 '05 $ 50 XFF-MJ $11.20 $13.30 +18.75% $60 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BA 06/30/02 $30, 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 $45-46 JAN-2004 $ 50 LMF-AJ CC JAN-2004 $ 45 LMF-AI JAN-2005 $ 50 ZMF-AJ CC JAN-2005 $ 40 ZMF-AH NEM 09/29/02 $22.50, 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 JNJ - Johnson & Johnson $56.70 **Call Play** That didn't take long! Just when it looked like the broad markets were going to plunge off the edge of the cliff, the shorts started covering and helped the major indices to post their first winning week in quite some time. JNJ plunged mid-week following a downgrade from USB Piper Jaffray, giving us an entry when the stock rebounded from just above $54. While the standard price chart is still looking rather noisy, the PnF chart still shows demand in control, with a bullish price target of $74. The weekly Stochastics have posted a bullish reversal well above the oversold region, pointing to the likelihood of more bullish action ahead. The company is scheduled to report earnings on Tuesday morning, and cautious investors may want to wait for that report before entering the play, as the broad markets are still rather early in any recovery move. To give JNJ room to move before pushing higher, we're setting our stop rather loose at $51, as it would take a trade at or below this level to turn the PnF chart bearish. So long as this level isn't violated, a renewed dip down near $54 still looks attractive for new positions. BUY LEAP JAN-2004 $60 LJN-AL BUY LEAP JAN-2005 $60 ZJN-AL New Watchlist Plays QQQ - NASDAQ-100 Trust $22.22 **Call Play** One more time! We've had rather mixed results playing the QQQ lately, but I think the third time is going to be the charm. The NASDAQ has been extremely resistance to break lower and lately has been the first to respond when those shorts start covering. With Friday's strong rally, the NASDAQ-100 Bullish Percent reading finally reversed into Bull Alert at a level of 22%. It isn't the all-clear signal, but an early warning that the tide may be turning. The QQQ has been working its way lower in a bullish falling wedge for over a year now, and Friday's gains pushed the price right up to the upper boundary of that wedge. Just above that trendline, there is the 50-dma ($22.73), and then the upper Bollinger band at $23.06, along with significant resistance near $23. So clearly, I don't expect the QQQ to just run away to the upside from here. No, it is likely that we'll get one more drop into the $20-21 area to provide new entry opportunities. That's where we want to strike, as risk will be easy to control with a tight stop at $19.50. If this rally attempt is for real, the first real test of resistance will come near the $26.25 level, near the site of the August highs. BUY LEAP JAN-2004 $23 KLF-AW BUY LEAP JAN-2004 $20 KLF-AS **Covered Call** BUY LEAP JAN-2005 $23 ZWQ-AW BUY LEAP JAN-2005 $20 ZWQ-AS **Covered Call** Drops SMH - $20.36 Well, we knew the spring was getting coiled awfully tight and the past 2 days have seen some remarkable short-covering. After dropping as low as $211, the SOX exploded higher for a 16% gain in less than 2 days. As it turned out, our $19 stop was placed just about right, as the bulls probed that level several times on Thursday afternoon before allowing the SMH to settle back a bit at the close. The strongly positive open on Friday shot the SMH through our stop in the opening minutes, and those with stops in place were likely taken out near the $19.50 level. Since we record our results using closing prices, our results don't look as good as they otherwise might. But there is no denying this was a nice solid winner. ************** TRADERS CORNER ************** Put Down The Remote and Test Your Option IQ? By Mike Parnos, Investing With Attitude It’s been almost three months since the inception of the Couch Potaro Trading Institute. It’s time to see what kind of progress we’re making. This will be relatively painless – it’s like Who Wants To Be A Millionaire, on options – without (thankfully) Regis Philbin. Have fun and don’t be embarrassed if you don’t know all the answers. That’s one of the reasons I’m here – to help you make you better traders – and to make you smile. 1. With American style options, you can be exercised: a) on expiration date; b) before the expiration date; c) on your birthday; d) ouch, sounds painful. 2. European style differs from American style options in that: a) they don’t like premature exercise; b) they can only exercised with a Green Card; c) they can be exercised only on expiration Friday. 3. Gamma is defined as: a) the old lady who shows up with fruit cake on holidays; b) the rate of change of an option’s delta; c) the rate of change of an options sigma; d) none of the above. 4. Delta is an expected change in _____ compared with movement in the underlying price. a) temperature; b) attitude; c) price of the option; d) your bank account. 5. A bull put spread is a: a) bearish strategy; b) bullish strategy; c) neutral strategy; d) something you step in. 6. A bear call spread is a: a) bearish strategy; b) bullish strategy; c) neutral strategy; d) a new kind of lunchmeat, featuring a bear. 7. A bear put spread is a: a) bearish; b) bullish; c) nebbish; d) neutral strategy. 8. A bull call spread is a: a) bearish; b) bullish; c) Sweedish; d) neutral strategy. 9. Option buyers have: a) limited risk; b) limited reward; c) unlimited risk; d) unlimited reward; f) regular psychiatric appointments. 10. Option sellers have: a) limited risk; b) limited reward; c) to collect premium; d) unlimited risk; e) unlimited reward; f) garage sales to get rid of worthless options they acquired when they were option buyers. 11. The passage of time works: a) for option buyers; b) for option sellers; c) for government employees; d) for union workers. 12. A call buyer has the right, but not the obligation, to buy the underlying at a specified price on or before an expiration date. a) true; b) false; c) none of the above; d) some of the above. 13. A call seller has the responsibility to deliver the underlying at a specified price: a) on the expiration date; b) before the expiration date; c) during the next eclipse; d) on Mother's Day. 14. A put buyer has the right, but not the obligation, to: a) sell/short the underlying at a specific price on or before an expiration date; b) sell the put; c) retain counsel or one will be appointed for him; d) some of the above. 16. A put option has value on expiration only if the stock is trading ______ the strike price. a) above; b) below; c) near. 17. A call option has value on expiration only if: a) you're in your first trimester; b) the stock is trading above the strike price; b) you're up to date on your life insurance. 18. If market volatility increases while other market parameters remain the same, both put and call prices can be expected to: a) decrease; b) increase; c) decease. 19. An option that is in-the-money has no intrinsic value. a) true; b) false. 20. An option’s exercise price may: a) depend on its metabolism; b) is as unstable as its buyer; c) fluctuate over time; d) none of the above. 21. An option’s delta may or may not change over time. a) true; b) false; 22. A put option is in-the-money when: a) the price of the stock is above the strike price; b) at the strike price; c) below the strike price d) I don’t care. 23. A call option is in-the-money when; a) the price of the stock is below the strike price; b) the price of the stock is below the strike price; c) higher than your electric bill. 24. If a stock is at 50 and a call has a strike price of 45 with a premium of $8, what portion of the premium is considered intrinsic value? a) $8; b) $5; c) $14.95; d) $14.95. 25. As expiration approaches, intrinsic premium will: a) fluctuate with the changes in implied volatility; b) erode, eventually to zero; c) wait until you're good and ready to sell it. 26. The excess value of an option over and above the difference between the underlying stock price and the strike price for an option is known as: a) extrinsic premium; b) rebate; c) intrinsic value; d) pizza money. 27. With XYZ stock at 120, an in-the-money Oct 110 call with a price of 13 1/8 has extrinsic premium of: a) 13 1/8; b) 10; c) 3 1/8; d) sell the option, stupid, and take your profit. 28. OTM option premium can be made up of: a) intrinsic and extrinsic value; b) extrinsic value only; c) intrinsic value only; d) enchiladas. 29. ATM options have: a) the highest time value; b) the lowest time value; c) cash if you run out and the banks are closed. 30. A trader who has a short straddle wants: a) the market to sit still; b) longer legs, c) a dramatic movement from the straddlee. 31. A bull call spread has a) limited loss potential, but unlimited profit potential; b) limited profit potential and unlimited loss potential; c) I need a Tylenol. 32. An option with a delta of 33 means that the option should theoretically move about: a) three times a week; b) $.33; c) 33 percent of the time; d) 1/3 of the amount of the movement of the underlying. 33. The seller of a put retains the premium collected: a) until Christmas, b) until his wife spends it; c) whether the option is exercised or left to expire. 34. Buyers of options can have margin calls when: a) the Chicago Cubs win the World Series; b) Hell freezes over; c) their position goes against them; d) none of the above. 35. Theoretically, premium will erode at a more rapid pace: a) 90 days before expiration; b) 30 days before expiration; c) 10 days before expiration; d) two weeks after expiration. 36. The greatest amount of extrinsic premium will be in which strike price? a) $15; b) $20; c) $25; d) how the Hell am I supposed to figure this out? 37. Buying a straddle is often done: a) if you're lonely; b) if anticipating that the stock is going to be choppy; b) in anticipation of an increase in implied volatility; c) if it's been too long since your last one. 38. ITM options can be expected to move dollar-for-dollar with the underlying when: a) somebody moves the underlying; b) Lucy has some splainin' to do; c) all the time premium goes bye-bye; d) none of the below. 39. If life deals you lemons, make lemonade; if it deals you tomatoes, you: a) make Bloody Marys; b) make ketchup; c) damn! I’m on the wrong website again. In order to trade options profitably, it’s important to know the terms, the strategies and the risk -- before you trade! Print out this quiz along with your answers. In Thursday’s column we’ll go over the answers to the questions and evaluate the results. Are you ready to trade real money? We’ll find out -- unless you’re already trading real money. Then, you probably already know the answer to that question. _________________________________________________________________ Iron Condor Update: BBH finished this week at $82.73. We got bounced around plenty this week on the BBH roller-coaster. Maybe this time the silly index will stay above $80. It would have been more profitable if it ended up well below $75, but, at this point, most of our profits are intact and we’ll just be happy to have this trade over with. “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 ************** Overbought and Oversold: Concepts and Use By Leigh Stevens lstevens@OptionInvestor.com “OVERBOUGHT” AND “OVERSOLD” - The first thing to point out with the concepts of “overbought” and “oversold” is that both terms are ALWAYS RELATIVE. Overbought or oversold means that a stock or index is thought to be at an extreme (on the downside or upside). But a stock or an index is only “over”-bought or “over”-sold in terms of both TIME and CONDITION. TIME – By time is meant, are you talking about intraday, on a 2-3 day, 2-3 week or 2-3 month time frame? A stock or index is thought to be at an extreme only relative to, or in terms of, a certain period of time. For example, the OEX might be thought to be quite oversold because it went down sharply down for 5 straight days. However, this might be in the context that the index went up strongly for 5 straight weeks or, 5 consecutive months. In this example, on a longer-term basis the index is not oversold at all and may in fact be considered to be still “overextended” (overbought) on the upside after 5-down days. So, when you hear someone say the market is overbought or oversold, you have to think about what time frame are they talking about. CONDITION – By “condition” it is meant that the relative terms overbought and oversold mean different things in different market conditions or different types of markets. By this is meant that overbought and oversold are best defined in a market that is in a fairly defined trading range; e.g., for the last two years, stock XYZ has traded between 50 and 100 several times. When the stock is at 50 it is “oversold” – when it’s at 100, it’s “overbought” RELATIVE to this trading range. In a strong bull or bear market on the other hand, the overbought/oversold concepts are less meaningful as a stock stocks (an index) will tend to go up and keep going up and stay “overbought”, according to the conventional technical indicators for these things (e.g., MACD, Stochastics or RSI), for lengthily periods of time. The same is true in a bear market and we don’t have to search far for examples in this last year! The conventional indicators that attempt to define the relative concepts overbought and oversold are going to say that the market is oversold, and oversold and again, oversold! BASICS – Overbought & Oversold: A market, or an individual financial instrument, is commonly thought to be overbought or oversold when prices have an advance or decline of a degree that is greater than what is normal or usual relative to its past price behavior for a certain time frame and condition. Take, for example, the case of a stock that for five years has never traded at a price that was greater than 10% of its closing average for the prior 200 days. Then comes a period when there is such a steep advance that the stock reaches a price that puts it 20% above this same average – this stock may be considered to be “overbought”. Overbought here implies simply that any surge in buying well in excess of what is usual on an historical basis, also creates a likelihood that the stock price will correct. Another example of an overbought condition might make an assumption about a stock that has closed higher for 10 days straight – if this price behavior is “over” or beyond what is usual for this item, the assumption is that prices are vulnerable to snapping back – a rubber band analogy is a good one, as market valuations get stretched, so to speak, but then tend to also come back to a mean or an average. The concept of overbought and oversold refer to rallies or declines that are steeper than usual, but the degree of this can vary a good deal in terms – there is no precise, objective or agreed upon measurement. The first example mentioned of overbought is a more objective measure in that it examined the close in relation to an average close of the prior 5-years. The second example given of overbought was based on more subjective criteria -- 10 days of consecutive up closes resulted in an extreme reading on an oscillator or type of technical indicator that “oscillates” between 0 and 100 like the Relative Strength Index (RSI) or between certain levels in the context of its past range in values like the MACD indicator. A central important aspect of overbought or oversold is that the concepts relate to a situation where there is a preponderance of hours, days or weeks, over some specified period of time, where prices are moving strongly up or down. The concept of a specific price area that represents a level that is overbought or oversold does not normally come into play -- only that price momentum or the rate (speed) at which prices change, is stronger than usual and predominately in one direction and experience suggests that at some point, after a market gets into the overbought or oversold ranges, there is an increased likelihood that there will be a price correction or counter-trend move. USE IN TRADING – The “best” or most effective use for oscillator type indicators is in a trading range market - for more on these types of technical indicators see: Indicators-Oscillator type: Stochastics (7/25/02) - http://www.OptionInvestor.com/traderscorner/072502_1.asp Indicators-Oscillator type: RSI (8/1/02) - http://www.OptionInvestor.com/traderscorner/080102_1.asp Indicators-Oscillator type: MACD (8/8/02) - http://www.OptionInvestor.com/traderscorner/080802_1.asp ] There are however, two important things that an overbought or oversold extreme can highlight: 1.) A potential for a sharp countertrend move (such as Thursday & Friday of this week with a 500 point plus rally in the Dow) and 2.) Where there is a price/oscillator bullish or bearish DIVERGENCE The are two settings for the indicators above RELATIVE to how we will define overbought or oversold and have to do with LENGTH and LEVEL; i.e., what number of hours, days, weeks or months we want the indicator formula to use (length) and what will “define” what is an overbought or oversold level (the reading that starts what is an overbought or oversold “area”). In the OEX chart above, I am using a length setting of 14 for both RSI and Stochastics – that is, the formula measures the most recent close relative to the highest high and lowest low for the past 14-days. If this was an hourly chart, it would measure 14 hours, etc. I define oversold/overbought levels as 30 and 70 for the RSI above, which is a typical “default” or common setting or definition for the start of those extremes; and, 20 and 80 for the 14-day stochastic, also a most common “setting”. We see two things in the chart above - the recent low was oversold according to the stochastic model and nearly so according to RSI, however not as oversold as at the prior low. Leaving aside the related and obvious potential for a technical “double bottom” in the OEX, there is another bullish technical factor shown above – and in the weekly NDX chart below – that of a bullish PRICE/OSCILLATOR DIVERGENCE. The recent relative low in for the current move (the recent downswing) was not “confirmed” by a similar lower low in the RSI and Stochastics oscillator type indicators. In fact, they were registering a HIGHER low before the strong rebound, making the pattern a bullish (price/oscillator) DIVERGENCE. A bearish divergence would be just the opposite of course – prices make higher highs, but the RSI for example, does not ALSO make a higher high along with prices. I tend to use to the RSI most in spotting potential divergences as it tends to highlight them most often. This has to do with it being a ratio of down closes to up closes and to being a single reading and single point or plot. However, you see from the example chart above that Stochastics highlighted this bullish divergence quite well also. For the weekly chart above of the Nasdaq 100 (NDX), not only does the RSI tell us (on a 13-week – 1/4 of a year – basis) that this segment of the market was registering an oversold extreme common in a bear market, but that the recent lower swing low was not confirmed by the RSI. This bullish divergence was almost more important to helping spot the recent bottom than the fact of this index or group of stocks being oversold – because as we know, an oversold extreme in and of itself does not tell us necessarily of an impending trend reversal. The index can just STAY oversold. And, unlike the example of the S&P 100 (OEX) we did not have a potential double bottom setting up. So, we had little to go on except the bullish divergence with the RSI highlighting the POTENTIAL for an upside reversal. And, that’s all it is, is a “potential” – actual proof of the technical pudding so to speak is a breakout above its down trendline and a move above a prior swing high. But the divergence can get us ready to exit puts and shorts and take advantage of nice trade. Whether what we’re seeing in recent market action is the beginning of the end of the tough bear market we’ve been in, is another story and needs more confirming technical action. Just as is the case of the MORE technical signs that point to a possible trend reversal the better (e.g., the potential OEX double bottom low AND the bullish oscillator divergence) – the more time frames that a divergence shows up on, the more strong is the case for a trend reversal based on the technical indicator alone such as the RSI. In the recent example provided by the strong move of late last week – the bullish divergence on BOTH the daily AND weekly oscillators made a stronger technical case for a significant reversal that was DUE. A next question would become - how about the monthly chart picture? In the example of the Dow monthly chart here, we have to settle – as an indicator of a possible bottom – for the fact that (on an 8-month basis at least), this segment of the market got to a fully oversold reading for the first time in years. And, even with this reading, I marked the boundary of my oversold area at 25, rather than 20 – a somewhat subjective decision. I set the oscillator “oversold” boundary here based on the length I chose – 8 months – and did not necessarily expect an RSI reading on a monthly basis to dip UNDER 20 to mark a long-term oversold condition. Actually, it got to 20.6 at last month’s (Sept.) close. So, on a MONTHLY chart basis we did not see a bullish price/RSI divergence in the Dow 30 (Industrials), but did see an oversold extreme beyond what has been seen in years. What did this tell us – if you were asleep at the switch with heavy put positions and thought that it was likely that there would be a whole further down “leg” below the low-7000 area – WRONG!, on a risk to reward basis. The further “reward” potential on the downside in a market that shows (finally) a long-term oversold condition is likely quite limited RELATIVE to the risk of a strong upside rebound, whether we chose to call it an “oversold rally” or ”technical” bounce or whatever. And here comes another thing – while we don’t have a potential double bottom low as a “confirming” OTHER technical consideration to the oversold extreme in the long-term monthly Dow chart, we do have long-term trendlines - whether on a “best fit” internal trendline or marking 3 absolute lows exactly - coming in around this past week’s Dow low point, per the chart below: How’s that for a confirming technical? For more on the possible ways you can construct a trendline see my prior Trader’s Corner article at – Charting: Trendlines; Effective Uses in Trading (9/19/02)– http://www.OptionInvestor.com/traderscorner/091902_2.asp ************************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 ************************************************************** ************** TRADERS CORNER ************** SINGLE STOCK FUTURES (SSF) by Alan Hewko futures@OptionInvestor.com Ready or not, here they come... Single Stock Futures (here-after called SSF) have been in works for some time, and now are finally appearing in just a few short weeks with a launch date of October 25, 2002. SSFs have been traded in Europe for some time on the LIFFE exchange. As a Trader of the U.S. markets, one must stay a-tuned to change. An an Option Trader, one must understand how SSFs may impact option trading. As a Futures Trader, one must understand how SSFs can benefit your index Futures trading. OK - so what are Single Stock Futures? Frankly, they look to be an extremely interesting trading tool. Details will follow below, basically: SSFs shall trade on a new exchange called OneChicago. 1 SSF contract equals 100 shares of stock. Daytrade margin is 20% (or 5 to 1 leverage). SSFs will have market makers. No sense on what the bid/ask spread will be. I could not find out what hours of the day they will trade at. You do NOT need an uptick to open a Short (similar to index futures). SSFs will have twelve different expirations, one for each month of the year, similar to Options. I could not find the day when each month a SSF contract would expire, it may expire on the 3rd Friday of each month, as options do, but was not able to find information on when the SSF expiration date is. SSFs have no time decay, unlike options. SSF Real world example: MSFT is $45. Buy 1 MSFT Single Stock Future (SSF) contract. This controls 100 shares of MSFT. $45 x 100 shares = $4500, 20% margin is $900. So with $900 on the table, you are controlling $4500. MSFT upticks to $47. Sell your 1 MSFT SSF contract at $47. Profit is $2, or $200. Rate of return: 22% Someone with an Equities account over $25,000 currently has 4:1 daytrade margin, SSF provide 5:1 daytrade margin. Currently an active small trader, with an account under $25,000 is vastly restricted, usually with no margin at all, with all trades having to be 100% cash, and restrictive rules on only being able to do three daytrades within a five day period. SSFs would allow a small trade 5:1 margin (which of course can be either very good or very bad). It would appear, BUT please do NOT consider this an official opinion, that SSFs would allow a trader with under $25,000 to daytrade all they wished to without any limit to the number of daytrades done per week. Of these 80 stocks they have selected to start SSFs with, the only stock I found surprising was the inclusion of KKD - Kripsy Kreme Doughnuts. But since they also have Starbucks (SBUX), I guess it's a good match [grins]. Website to read more: OneChicago is the primary website. http://www.onechicago.com Brokers: I know that most (if not all) Futures Brokers shall be offering SSFs. You would have to contact your existing stock or options online broker to determine if they shall be offering them or not. _______________________________________________________________ Below is more detailed information direct from www.onechicago.com Single stock futures (SSF) are futures contracts on individual stocks. They will trade on a new exchange called OneChicago. OneChicago is an electronic exchange committed to becoming the global leader in futures on individual stocks and narrow-based indices. OneChicago is a joint venture of the world's premier options and futures exchanges: Chicago Board Options Exchange (CBOE), Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT). CME exchange is where SP500 and NDX 100 futures trade, the Dow $5 Futures contract trades on the CBOT exchange. A OneChicago single stock futures contract is an agreement for delivery of shares of a specific stock at a designated date in the future, called the expiration date. The size of a OneChicago single stock futures contract is 100 shares of the underlying stock. Narrow-based indices are futures contracts on small groups of stocks that allow an investor to take a position in a concentrated area of the equities market. Each narrow-based index will typically include three to nine companies in a specific sector. OneChicago will initially list at least 15 narrow-based indices on key economic sectors such as Airlines, Computers, Investment Banking, and Semiconductors. Liquid markets from day one: OneChicago employs a market maker system using a number of Lead Market Makers (LMMs). These LMMs have been selected based on their ability and commitment to make continuous two-sided markets. The benefits that LMMs provide to investors include tighter spreads and the ability to promptly execute orders placed with their brokers. OneChicago LMMs include globally recognized investment firms and market-making professionals who have demonstrated the experience and financial capacity to meet their contractual obligations to OneChicago. In addition, other market makers will be actively trading along with LMMs to ensure the liquidity that investors value. Lower transaction costs and better fills: As a fully electronic exchange, OneChicago has the potential to provide market participants with lower transaction costs and greater visibility behind the current market. All traders will have the option to view depth of book information including at least the top five bids and offers. Trades are routed, matched and reported electronically, creating fast and accurate trade execution and confirmation. Easy Access through CBOEdirect(tm) or GLOBEX(r): Most investors will be able to route their orders to OneChicago using their existing account and trading software because OneChicago's products can be traded from either a securities or a futures account. And, because most brokers are already connected to OneChicago either through CBOEdirect or GLOBEX, it is likely that you will be able to begin trading at OneChicago immediately. A List of the approximate 80 stocks that OneChicago will have SSFs on can be found at : http://www.onechicago.com/030000_products/oc_030101.html Stocks with Single Stock Futures: (Last Updated on October 11, 2002) Underlying Ticker OneChicago Security Symbol Base Symbol ---------- ------ ----------- American Express AXP AXP1C American International Group AIG AIG1C Amgen Inc AMGN AMGN1C * AMR Corp/Del AMR AMR1C AOL Time Warner, Inc. AOL AOL1C Applied Materials AMAT AMAT1C AT&T Corporation T T1C Bank Of America Corp BAC BAC1C Bank One ONE ONE1C Best Buy Company Inc BBY BBY1C Biogen Inc BGEN BGEN1C Bristol-Myers Squibb Co BMY BMY1C Broadcom Corp-Cl A BRCM BRCM1C Brocade Communications Sys BRCD BRCD1C Cephalon Inc CEPH CEPH1C Check Point Software Tech CHKP CHKP1C ChevronTexaco Corp CVX CVX1C Cisco Systems, Inc. CSCO CSCO1C Citigroup, Inc. C C1C Coca-Cola Company KO KO1C Dell Computer Corporation DELL DELL1C eBay, Inc. EBAY EBAY1C * EMC Corporation EMC EMC1C Emulex Corp ELX ELX1C Exxon Mobil Corporation XOM XOM1C Ford Motor Company F F1C General Electric Company GE GE1C General Motors Corp GM GM1C Genzyme Corp - Genl Division GENZ GENZ1C Goldman Sachs Group, Inc. GS GS1C Halliburton Co HAL HAL1C Home Depot Inc HD HD1C Idec Pharmaceuticals Corp IDPH IDPH1C Intel Corporation INTC INTC1C Intl Business Machines IBM IBM1C * InVision Technologies Inc INVN INVN1C J.P. Morgan Chase & Co. JPM JPM1C Johnson & Johnson JNJ JNJ1C KLA-Tencor Corporation KLAC KLAC1C Krispy Kreme Doughnuts Inc KKD KKD1C Merck & Co., Inc. MRK MRK1C Merrill Lynch & Co., Inc. MER MER1C Micron Technology Inc MU MU1C Microsoft Corporation MSFT MSFT1C Morgan Stanley Dean Witter MWD MWD1C Motorola, Inc. MOT MOT1C Newmont Mining Corp Hldg Co NEM NEM1C Nokia Corporation ADR NOK NOK1C Northrop Grumman Corp NOC NOC1C Novellus Systems Inc NVLS NVLS1C Oracle Corporation ORCL ORCL1C PepsiCo Inc PEP PEP1C Pfizer PFE PFE1C Philip Morris MO MO1C Procter & Gamble Co) PG PG1C QLogic Corp QLGC QLGC1C QUALCOMM, Inc. QCOM QCOM1C SBC Communications Inc SBC SBC1C Schlumberger Ltd SLB SLB1C * Siebel Systems, Inc. SEBL SEBL1C * Sprint Corp-PCS Group PCS PCS1C Starbucks Corp SBUX SBUX1C * Sun Microsytems SUNW SUNW1C Symantec Corp SYMC SYMC1C Texas Instruments Inc TXN TXN1C Tyco International Ltd TYC TYC1C * UAL Corp UAL UAL1C VERITAS Software Corp VRTS VRTS1C Verizon Communications Inc VZ VZ1C Wal-Mart Stores Inc WMT WMT1C Xilinx Inc XLNX XLNX1C * Trading on these stocks has been postponed because under current market conditions they do not meet OneChicago's listing standards. Market Data Subscriber Fees (Quotes) OneChicago intends to waive end-user subscription fees for real-time streaming market data until April 1, 2003. At that time, real-time streaming data will be available for a monthly per user fee (TBD). A 15-minute delayed streaming data feed is also available at no charge to subscribers. ********** 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 10-13-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: The Psychology Of Volatility Naked Puts: Options 101: Strategy Selection Spreads/Straddles/Combos: A Light At The End Of The Tunnel? 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: The Psychology Of Volatility By Mark Wnetrzak Volatility in the stock market is a familiar phenomenon to all traders but one has to wonder what causes the extreme changes in the "market value" of stocks on a daily basis. In recent months, there has been a surge in volatility in share values and even to the investing novice, it's apparent that there are extremely wide day-to-day changes in the prices quoted on the major stock exchanges. Experts have tried to explain and justify the abrupt transformation in the market's character but the exact reasons for the pronounced increase in volatility remains unknown. Surprisingly, analysts cannot agree on whether it is economic or psychological components that are the primary catalysts for price fluctuations in the stock market. This is an important question in the financial world because the entire basis for fundamental and technical analysis, concepts on which millions of dollars are spent each year, hinges on the answer. If investors were to learn that there are no underlying economic reasons for changes in share value, the two most common forms of analysis would be relatively useless. One of the leading authorities in the study of market volatility is Yale Professor Robert J. Shiller. Shiller is an advocate of the Popular Model explanation of market volatility, which proposes that the public's reactions, due to psychological or sociological beliefs, exert a greater influence on stocks than economic issues. Based on this principle, he suggests that traditional standards of measuring value in common equities no longer apply. That is not to say that Shiller totally disregards the opinions of economists who base their theories on the Efficient Market Hypothesis. On the contrary, he admits that the EMH can be supported by statistical data but he also believes that investor attitudes are crucial in determining share prices. For those of you who are new to the concept of Efficient Market Hypothesis, it basically states that all information, both publicly and privately known, is incorporated into a stock's current price. The problem is, recent data suggests that excess volatility exists in the stock market; volatility that cannot be explained by the EMH. Some experts say the excess volatility can be attributed to psychological attitudes such as the public's collective thoughts and beliefs concerning recent and future events. Other authorities note that not all investors are equally informed and even when that is the case in a specific situation, many investors simply react improperly to the data they receive. These observations seem to suggest that all freely available information is not necessarily factored into a stock's current price, thus there is certainly more to share value than the fundamentals of a company and its economic environment. Most studies on this subject are based on the idea that the public normally acts rationally on the known information. In contrast, Shiller suggests that irrational "herd" behavior has a greater effect on stock prices and that investors are often subject to "attention cascades" triggered by small events. Although there is certainly some truth to this opinion, investing does not have to be rational to produce favorable results. A great example of this concept occurred in the late 1990s during the era of "irrational exuberance." That period produced a deluge of capital investments that led to technology advances which would have been impossible in a less enthusiastic environment. Despite the incredible economic expansion of that timeframe, some analysts believe that unfounded growth in stock value is never good for a company because of the resultant "inflated" capitalization and the potential downfall of future shareholders. In reviewing the conflicting attitudes, one expert noted correctly that, "Irrational exuberance can be bad for the exuberant but good for the economy." That brings us to a much more important question: Do the recent excessive reactions by investors, which have generated extreme volatility in stocks, mark the bottom of a bear market? Many analysts believe they do and they cite reasons such as the spike to a peak in the CBOE's volatility index (VIX), representing a panic by the public during the recent market declines, and the fact that equity put-call ratios, another indicator of investor sentiment, have reached levels from which previous market bottoms occurred. Unfortunately, the study of historical data, while often a good indicator of future trends, does not guarantee a specific outcome so it remains to be seen whether the recent sharp sell-off in stocks will mark the final chapter of the current bear market. I, for one, am not irrationally exuberant but rather "cautiously optimistic." Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. 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 2.71 OCT 2.50 0.75 *$ 0.31 10.3% PRX 28.20 25.61 OCT 25.00 4.30 *$ 1.10 10.0% FLE 6.02 5.85 OCT 5.00 1.30 *$ 0.28 8.6% CVC 9.48 7.56 OCT 7.50 2.50 *$ 0.52 8.1% NWRE 15.97 12.90 OCT 12.50 4.10 *$ 0.63 7.7% CMLS 16.85 17.03 OCT 15.00 2.55 *$ 0.70 7.1% NOK 13.95 14.44 OCT 12.50 2.20 *$ 0.75 6.9% PPD 21.80 18.65 OCT 17.50 5.00 *$ 0.70 6.0% BSTE 29.40 27.66 OCT 25.00 5.70 *$ 1.30 6.0% UDI 22.58 22.55 OCT 20.00 3.30 *$ 0.72 5.4% QCOM 28.08 31.37 OCT 25.00 4.20 *$ 1.12 5.1% NWRE 13.75 12.90 OCT 12.50 1.90 *$ 0.65 4.8% GNSS 8.73 7.94 OCT 7.50 1.60 *$ 0.37 4.5% SYMC 34.30 34.40 OCT 30.00 5.20 *$ 0.90 4.5% KDE 23.39 27.27 OCT 22.50 1.55 *$ 0.66 4.4% PLMD 26.25 26.60 OCT 25.00 2.35 *$ 1.10 4.0% RTIX 8.00 8.30 OCT 7.50 0.75 *$ 0.25 3.7% ISIS 9.15 8.69 OCT 7.50 1.95 *$ 0.30 3.6% ISSX 13.65 15.85 OCT 12.50 1.70 *$ 0.55 3.3% UTSI 16.25 18.01 OCT 15.00 1.80 *$ 0.55 3.3% MENT 6.17 7.50 OCT 5.00 1.35 *$ 0.18 2.7% AMZN 16.55 18.46 OCT 15.00 1.90 *$ 0.35 2.6% IMCL 7.77 7.05 OCT 7.50 0.75 $ 0.03 0.9% MACR 8.49 6.71 OCT 7.50 1.45 $ -0.33 0.0% AES 2.92 1.44 OCT 2.50 0.75 $ -0.73 0.0% FDRY 6.02 5.09 NOV 5.00 1.35 *$ 0.33 5.1% BCGI 10.30 9.78 NOV 10.00 1.10 $ 0.58 4.6% WWCA 2.71 2.25 NOV 2.50 0.50 $ 0.04 1.3% *$ = Stock price is above the sold striking price. Comments: Whoosh! A 2-day "rocket" rally and a positive week for the major averages. Even the closed positions below were able to benefit from the extreme bullishness. This must be the bottom, right? Maybe, but without a base (Stage I phase), I think the bulls still have a rather weak case. But hey, it sure beats going down! With only one week until expiration, most of the October positions have benefited from the bullish explosion and now offer some downside protection. AES Corp. (NYSE:AES), could be exited or better yet, rolled forward as the risk is defined at roughly $2.00 (of course, they could go bankrupt). The JAN-$2.50 call is $0.20 X $0.40 and the JAN04-$2.50 call is $0.60 X $0.80, which would reduce the risk further. Overall, the current rally should offer ample opportunity to re-evaluate your positions and exit or adjust those that are acting weaker than expected. Positions Closed: Osteotech (NASDAQ:OSTE), Luminex (NASDAQ:LMNX) and Restoration Hardware (NASDAQ:RSTO). Disclosure: I am currently short puts in Cryolife (NYSE:CRY) and long calls in AES Corporation (NYSE:AES). Both positions were initiated after they were offered in this section. 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 CPB 22.59 NOV 22.50 CPB KX 1.05 308 21.54 35 3.9% MCHP 23.18 NOV 20.00 QMT KD 4.20 744 18.98 35 4.7% MEDI 24.95 NOV 22.50 MEQ KX 3.70 578 21.25 35 5.1% MENT 7.50 NOV 5.00 MGQ KA 2.70 61 4.80 35 3.6% SNDK 14.30 NOV 12.50 SWQ KV 2.75 175 11.55 35 7.1% TMCS 18.14 NOV 17.50 QMF KW 1.80 4 16.34 35 6.2% VOXX 7.40 NOV 7.50 UXX KU 0.45 144 6.95 35 5.6% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield SNDK 14.30 NOV 12.50 SWQ KV 2.75 175 11.55 35 7.1% TMCS 18.14 NOV 17.50 QMF KW 1.80 4 16.34 35 6.2% VOXX 7.40 NOV 7.50 UXX KU 0.45 144 6.95 35 5.6% MEDI 24.95 NOV 22.50 MEQ KX 3.70 578 21.25 35 5.1% MCHP 23.18 NOV 20.00 QMT KD 4.20 744 18.98 35 4.7% CPB 22.59 NOV 22.50 CPB KX 1.05 308 21.54 35 3.9% MENT 7.50 NOV 5.00 MGQ KA 2.70 61 4.80 35 3.6% 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). ***** CPB - Campbell Soup $22.59 *** Mmmm...Good, Say Insiders *** Campbell Soup (NYSE:CPB) and its consolidated subsidiaries, is a global manufacturer and marketer of branded convenience food products. The company operates in three business segments: Soup and Sauces, Biscuits and Confectionery, and Away From Home. The Soup and Sauces segment includes the Company's worldwide soup businesses. The Biscuits and Confectionery segment includes the Pepperidge Farm cookies and crackers business, the Godiva Chocolatier (yummy) business and Arnotts biscuit business. The Away From Home segment represents products, including Campbell's soups, Pace picante sauce and Campbell's Specialty Kitchens entrees. Campbell Soup is one of the companies where insiders are buying stocks according to a recent Reuters story. We favor the 3-month base that offers a clear loss-cut exit point and the chart has been showing steady accumulation with positive divergences in several indicators. This position offers a low risk entry point for investors who wouldn't mind having Campbell Soup in their long-term stock portfolio. NOV 22.50 CPB KX LB=1.05 OI=308 CB=21.54 DE=35 TY=3.9% ***** MCHP - Microchip Tech. $23.18 *** Near Long-Term Support *** Microchip Technology (NASDAQ:MCHP) develops and manufactures specialized semiconductor products used by its customers for a wide variety of embedded control applications. The company's product portfolio comprises field-programmable RISC-based microcontrollers that serve 8- and 16-bit embedded control applications, and a broad spectrum of high-performance linear and mixed-signal, power management and thermal management devices. The company also offers complementary microperipheral products, including interface devices, serial EEPROMS, and its patented KEELOQ security devices. The company markets its products to the automotive, communications, computing, consumer and industrial control markets. At a conference in late September, Microchip’s CEO reaffirmed its guidance, about a week after raising estimates. Investors will find out for sure on October 23, when the company reports earnings. We simply favor the long-term (two-year chart) technical support near the cost basis, which offers a relatively low-risk entry point in the issue. NOV 20.00 QMT KD LB=4.20 OI=744 CB=18.98 DE=35 TY=4.7% ***** MEDI - MedImmune $24.95 *** Take-Over Speculation *** MedImmune (NASDAQ:MEDI) is a biotechnology company with 5 products on the market and a diverse product pipeline. MedImmune is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in areas of infectious disease and immune regulation. The company also focuses on oncology through its wholly owned subsidiary, MedImmune Oncology, Inc. In addition, the company owns Aviron, a biotech company. In January 2002, MedImmune acquired Aviron, a company focused on the prevention of disease through vaccine technology. Not much news on MedImmune but there is speculation that the company could be a take-over candidate, especially if its lead drug, Actimmune, becomes the first and only effective treatment for patients with idiopathic pulmonary fibrosis, a fatal disorder marked by scarring of the lungs. The "double-bottom" formation and increasing volume during the recent rally make this reasonable speculation for those interested in the Biotech sector. Earnings are due 10/24. NOV 22.50 MEQ KX LB=3.70 OI=578 CB=21.25 DE=35 TY=5.1% ***** MENT - Mentor Graphics $7.50 *** Another Chance? *** 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 last week 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. Those investors with an extremely bullish outlook may consider the November $7.50 calls, or a combination of the two options for lower risk but higher potential profit. Earnings are due 10/29. NOV 5.00 MGQ KA LB=2.70 OI=61 CB=4.80 DE=35 TY=3.6% ***** SNDK - SanDisk $14.30 *** Stage I Base *** SanDisk (NASDAQ:SNDK) designs, manufactures, and markets flash memory storage products that are used in a wide variety of electronic systems. The company has designed its flash memory storage solutions for applications in the consumer electronics and industrial/communications markets. The company's products are used in a number of rapidly growing consumer electronics applications, such as digital cameras, PDAs, portable digital music players, digital video recorders and smart phones, as well as in industrial and communications applications. The company's products include removable CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards and embedded FlashDrives and Flash ChipSets with storage capacities ranging from eight megabytes to 1.2 gigabytes. SanDisk has been forming a Stage I base for about a year with technical support around $12.00. This position offers a reasonable risk-reward entry point for those investors who believe the Data Storage Sector may be recovering. Earnings are due 10/16. NOV 12.50 SWQ KV LB=2.75 OI=175 CB=11.55 DE=35 TY=7.1% ***** TMCS - Ticketmaster $18.14 *** The "Buy-Out" Rally *** Ticketmaster (NASDAQ:TMCS) is a provider of automated ticketing services, as well as a local portal and electronic commerce company that provides in-depth local content and services. The company's ticketing service has over 7,000 domestic and foreign clients, including many entertainment facilities, promoters and professional sports franchises. The company's principal online businesses are ticketing, personals, city guide and camping reservations. Ticketmaster's family of Websites includes ticketmaster.com, Match.com, citysearch.com, reserveamerica.com, museumtix.com, ticketweb.com, evite.com and livedaily.com, among others. Its businesses are operated in three segments: ticketing, personals and city guide. USA Interactive (NASDAQ:USAI) said on Thursday it will buy the shares of Ticketmaster it does not already own where shareholders of Ticketmaster would receive 0.935 of a share of USA common stock. As of Thursday, the deal valued each outstanding Ticketmaster share at $15.17 and reflects a premium of 20%. Keep an eye on USAI’s chart as Ticketmaster share price will be reflective of USA Interactive’s (see supplemental plays below) movement. USAI rallied strongly on the news as the company also said it was ending moves to acquire all of online travel firms Expedia (NASDAQ:EXPE) and Hotels.com (NASDAQ:ROOM). This position takes advantage of the bullish “buy-out” momentum and offers a method to speculate on the near-term performance of both issues. NOV 17.50 QMF KW LB=1.80 OI=4 CB=16.34 DE=35 TY=6.2% ***** VOXX - Audiovox $7.40 *** Barely OTM Speculation *** Audiovox (NASDAQ:VOXX) designs and markets a diverse line of products and provides related services worldwide, including: handsets and accessories for wireless communications; fulfillment services for wireless carriers; automotive entertainment and security products; automotive electronic accessories; and consumer electronics. The company has two primary markets: wireless communications, and mobile and consumer electronics. Audiovox on Friday morning reported a bigger quarterly profit, helped by improved margins, though revenue fell as a decline in its wireless business offset gains in its electronics subsidiary. Apparently investors were happy with the news (or lack of bad news?) as the stock rallied strongly on heavy volume. The stock has been in a fairly stable trading range for almost a year with strong support around the cost basis. The current technicals are bullish and suggest further upside movement. In addition, this position offers a low-risk entry point in the issue. NOV 7.50 UXX KU LB=0.45 OI=144 CB=6.95 DE=35 TY=5.6% ***** ***************** 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 VRSN 5.35 NOV 5.00 QVR KA 0.90 1327 4.45 35 10.7% JDEC 10.89 NOV 10.00 QJD KB 1.90 183 8.99 35 9.8% SLAB 22.50 NOV 20.00 QFJ KD 4.00 59 18.50 35 7.0% PLMD 26.60 NOV 25.00 PM KE 3.30 17 23.30 35 6.3% RATL 5.79 NOV 5.00 RAQ KA 1.10 508 4.69 35 5.7% CMCSK 20.02 NOV 17.50 CQK KW 3.60 226 16.42 35 5.7% USAI 19.60 NOV 17.50 QTH KW 3.10 142 16.50 35 5.3% YHOO 13.36 NOV 12.50 YHZ KV 1.55 8924 11.81 35 5.1% ADTN 21.01 NOV 20.00 RQA KD 2.05 168 18.96 35 4.8% KDE 27.27 NOV 25.00 KDE KE 3.50 1526 23.77 35 4.5% RFMD 6.92 NOV 5.00 RFZ KA 2.10 751 4.82 35 3.2% ***************** NAKED PUT SECTION ***************** Options 101: Strategy Selection By Ray Cummins One of our readers wants to know if selling naked puts is the right strategy for a conservative portfolio. Attn: Contact Support Subject: Strategy Selection Ray, Do you write the covered call section? Which strategy do you think gives you a better return covered calls, spreads or naked puts? I am interested in one that has the least amount of risk. Thanks for your assistance. BJN Hello BJN, I work with another OIN researcher to produce the (week-end edition) Covered-Calls and Naked-Puts sections. The "Premium Selling" plays and the "Spreads/Combos" are a product of my individual research. As far as risk-reward outlook, covered calls and naked puts are theoretically the same strategy, however naked puts have a higher reward potential (and a higher annualized return) because brokers require less collateral to sell a (equivalent strike) put than they do to buy a stock (on margin) and sell a call. As far as the best strategy, that's a tough decision with lots of different factors to consider. No strategy is immune to losses and even the most conservative approaches to option trading will not guarantee consistent profits without diligent position management. In addition, there are different types of investors and no single approach to the market can work for all of them. Suitability; matching an investors' risk-reward attitude and financial condition with the appropriate trading technique, is the key to determining which strategy may be best for any one individual. There are aggressive trading methods such as outright Put or Call buying and high potential spreads or combinations. There are also conservative techniques such as selling covered-calls on stocks and LEAPS. Another category involves the delta-neutral approach: straddles, ratio spreads and butterflies. Regardless of the way you choose to participate in the market, every strategy has risk and it is impossible to classify any specific technique as the absolute "best" one. However, it is important to understand the mechanics of any strategy you are using and try to construct a portfolio based on the correct balance of risk and reward, and also with regard to your experience level and trading style. The average investor will normally do well with a position that has limited risk and the potential for large profits because one successful trade can easily overcome a series of limited losses. However, a relatively new trader would not profit consistently as an outright buyer of options. For him, other strategies such as time-selling plays (calendar spreads) and debit straddles would be far more appropriate. Conservative stock-option combinations such covered-writes and bullish collars with moderate profit potential and reduced risk would also be appealing. An aggressive investor who is willing to take larger risks for the opportunity of making greater profits might buy and sell equity-index options. Some traders simply want low maintenance plays with the chance to make reasonable profits without risking excessive amounts of capital. Low-risk "in-the-money" debit spreads would probably appeal to this group. The wealthy investor may be attracted to methods that offer the opportunity to make money against portfolio collateral. Writing naked options and "out-of-the money" credit spreads may solve his needs. The most important thing to remember is the investment objectives are more crucial than the merits of the technique itself. If the strategy is not suitable for the investor, then it should not be used, no matter how attractive it appears. Some additional thoughts... As far as favored techniques, I prefer premium-selling positions with high probability and limited risk such as OTM credit spreads on broad indexes (OEX/SPX) and occasionally, individual issues. I will also sometimes speculate with a synthetic position (bullish or bearish) if the risk/reward outlook is very attractive. It is important to not limit your portfolio to directional trading only and in that respect, debit straddles can be very attractive when the implied volatility in options is near historical lows. Also, the strategy is easily managed without continually monitoring the underlying issue and its option prices, thus is may be appropriate for your situation. When the equity markets resume their bullish trends, I will transition to long-term diagonal/calendar spreads (and covered-calls on LEAPS) as well as selling cash-secured puts on portfolio-quality issues. Regarding money management, the old adage "never put all your eggs in one basket" holds true in the financial markets and professional players generally limit their portfolio exposure to 10-15% on any one position. That ratio is appropriate for most combination and spread techniques and diversity is a very important component of success for any type of trading. As far as the candidates in the OIN, I strongly recommend that you do NOT "implement all of the recommendations" that are offered. As stated in the disclaimer: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. I hope that helps you narrow the search for favorable trading strategies and when you find something that works, let me know so I can share your success with other traders who read the OIN! Ray *** 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 ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield CVC 9.94 7.56 OCT 7.50 0.25 *$ 0.25 16.2% RGLD 18.70 17.05 OCT 15.00 0.45 *$ 0.45 11.6% PPD 21.41 18.65 OCT 15.00 0.60 *$ 0.60 10.7% ABFS 27.53 29.67 OCT 25.00 0.90 *$ 0.90 10.4% ULAB 18.83 21.19 OCT 15.00 0.40 *$ 0.40 10.4% OVER 23.40 27.51 OCT 20.00 0.30 *$ 0.30 10.4% AG 22.63 23.87 OCT 20.00 0.45 *$ 0.45 9.5% RGLD 18.05 17.05 OCT 15.00 0.50 *$ 0.50 9.3% QCOM 29.26 31.37 OCT 25.00 0.30 *$ 0.30 8.4% RMCI 25.80 22.49 OCT 22.50 0.60 $ 0.59 8.4% GILD 33.56 33.56 OCT 25.00 0.55 *$ 0.55 8.2% UDI 22.75 22.55 OCT 20.00 0.25 *$ 0.25 8.2% MMSI 20.14 21.25 OCT 18.00 0.35 *$ 0.35 8.1% UDI 24.25 22.55 OCT 20.00 0.30 *$ 0.30 7.6% BSX 30.18 36.29 OCT 27.50 0.85 *$ 0.85 7.2% AMZN 16.61 18.46 OCT 12.50 0.30 *$ 0.30 7.2% TTWO 29.45 28.80 OCT 25.00 0.35 *$ 0.35 6.6% COF 38.92 30.66 OCT 27.50 0.60 *$ 0.60 6.2% PRX 28.20 25.61 OCT 22.50 0.25 *$ 0.25 6.1% SYMC 34.30 34.40 OCT 25.00 0.30 *$ 0.30 6.1% CYH 27.10 26.00 OCT 25.00 0.25 *$ 0.25 6.0% TTWO 26.20 28.80 OCT 20.00 0.30 *$ 0.30 5.9% FDS 25.95 25.42 OCT 22.50 0.35 *$ 0.35 5.2% INVN 35.76 30.45 OCT 25.00 0.45 *$ 0.45 5.1% STN 14.15 16.10 OCT 12.50 0.25 *$ 0.25 5.1% UTHR 16.50 14.20 OCT 15.00 0.55 $ -0.25 0.0% UTHR 17.01 14.20 OCT 15.00 0.30 $ -0.50 0.0% HOLX 11.74 11.15 NOV 10.00 0.50 *$ 0.50 10.5% HLYW 17.20 19.48 NOV 15.00 0.60 *$ 0.60 8.2% AMLN 15.80 16.95 NOV 12.50 0.40 *$ 0.40 8.1% KDE 23.77 27.27 NOV 20.00 0.70 *$ 0.70 7.9% *$ = Stock price is above the sold striking price. Comments: With the recent broad-based rally, a number of analysts have turned bullish in their outlook for equities. Some point to the successful test of the July lows in the S&P 500 index while other experts note the positive divergences in momentum-based indicators and the apparent capitulation earlier in the week. Regardless of the outcome, volatility is here to stay thus traders should remain vigilant in position management and exit (or adjust) any plays on issues with less than outstanding technical indications. United Therapeutics (NASDAQ:UTHR) is now a candidate for early exit and positions on the watch-list include: Right Management Consultants (NASDAQ:RMCI), Capital One (NYSE:COF), and Cablevision (NYSE:CVC). Positions Closed: Integrated Defense Technology (NYSE:IDE), Meridian Gold (NYSE:MDG), and Boyd Gaming (NYSE:BYD). 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 16.95 NOV 15.00 AQM WC 0.75 108 14.25 35 11.7% AMZN 18.46 NOV 15.00 ZQN WC 0.55 7495 14.45 35 10.7% COCO 37.75 NOV 30.00 UCS WF 0.75 313 29.25 35 7.9% GENZ 23.57 NOV 17.50 GZQ WW 0.35 47 17.15 35 6.0% NOK 14.44 NOV 12.50 NOK WV 0.40 1174 12.10 35 8.2% OVER 27.51 NOV 20.00 GUO WD 0.40 981 19.60 35 5.9% QCOM 31.37 NOV 25.00 AAW WE 0.65 2053 24.35 35 8.2% VZ 35.19 NOV 30.00 VZ WF 0.70 8453 29.30 35 6.3% 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 AMLN 16.95 NOV 15.00 AQM WC 0.75 108 14.25 35 11.7% AMZN 18.46 NOV 15.00 ZQN WC 0.55 7495 14.45 35 10.7% NOK 14.44 NOV 12.50 NOK WV 0.40 1174 12.10 35 8.2% QCOM 31.37 NOV 25.00 AAW WE 0.65 2053 24.35 35 8.2% COCO 37.75 NOV 30.00 UCS WF 0.75 313 29.25 35 7.9% VZ 35.19 NOV 30.00 VZ WF 0.70 8453 29.30 35 6.3% GENZ 23.57 NOV 17.50 GZQ WW 0.35 47 17.15 35 6.0% OVER 27.51 NOV 20.00 GUO WD 0.40 981 19.60 35 5.9% 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 $16.95 *** Lehman Upgrade! *** 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. Lehman recently upgraded the stocks and investors who like the outlook for Amylin can establish a low risk basis in the issue with this position. NOV 15.00 AQM WC LB=0.75 OI=108 CB=14.25 DE=35 TY=11.7% ***** AMZN - Amazon.com $18.46 *** 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. NOV 15.00 ZQN WC LB=0.55 OI=7495 CB=14.45 DE=35 TY=10.7% ***** COCO - Corinthian Colleges $37.75 *** Knowledge Is Power! *** Corinthian Colleges (NASDAQ:COCO) is one of the largest private, for-profit post-secondary education companies in the U.S. The company operated approximately 60 colleges in 21 states including 16 in California and 12 in Florida. Corinthian serves the large and growing segment of the population seeking to acquire career education to become more qualified and marketable in today's increasingly demanding workplace environment. On Tuesday, one of COCO's industry rivals, Apollo Group, reported a larger than expected rise in quarterly earnings and increased enrollment, sending share values in the group to recent highs. The issue appears to be comfortable in a range near $32-$36 and traders who believe the long-term bullish trend will continue can profit from that outcome with this position. NOV 30.00 UCS WF LB=0.75 OI=313 CB=29.25 DE=35 TY=7.9% ***** GENZ - Genzyme General $23.57 *** Biotechnology Speculation *** Genzyme General Division (NASDAQ:GENZ) is a division of Genzyme Corporation, a biotechnology and human healthcare company that develops products and provides services for unmet medical needs. Genzyme General develops and markets therapeutic products and diagnostic products and services with an emphasis on genetic disorders and other chronic debilitating diseases with defined patient populations. The company is organized into two segments, Therapeutics, which focuses on developing and marketing products for genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, and specialty therapeutics, and Diagnostic Products, which develops, markets and distributes in vitro diagnostic products. The company also operates a wholly owned subsidiary, GelTex Pharmaceuticals. Genzyme General has been in the news recently after experiencing inventory problems with Renagel, its kidney dialysis drug, and seeing one of its competitors, Transkarayotic Therapies, go up in smoke after the FDA said it was concerned about safety issues with the company's new drug. Traders who want a speculative position in the biotech group should consider this position. NOV 17.50 GZQ WW LB=0.35 OI=47 CB=17.15 DE=35 TY=6.0% ***** NOK - Nokia $14.44 *** Entry Point! *** Nokia Corporation (NYSE:NOK) is active in mobile communications as a supplier of mobile telephones and a provider of mobile, fixed broadband and Internet protocol (IP) networks. Nokia is comprised of Nokia Networks, Nokia Mobile Phones and Nokia Ventures Organization, as well as the common group functions, which include Nokia's corporate research unit, Nokia Research Center. Nokia Networks is a provider of mobile, fixed broadband and IP network infrastructure and related services. Nokia Mobile Phones is a mobile telephone maker. Nokia Ventures Organization exists to create new business ideas outside Nokia's current focus, as well as contribute to the growth of Nokia's existing core businesses. Nokia is due to report quarterly earnings next week and investors who believe the issue has reached "the bottom" can establish a low risk cost basis in the stock with this position. NOV 12.50 NOK WV LB=0.40 OI=1174 CB=12.10 DE=35 TY=8.2% ***** OVER - Overture Services $27.51 *** New 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. On Friday, Overture moved up and out of a 6-month trading range and traders who think the firm's upcoming earnings report will be favorable can speculate on that outcome in a conservative manner with this position. NOV 20.00 GUO WD LB=0.40 OI=981 CB=19.60 DE=35 TY=5.9% ***** QCOM - Qualcomm $31.37 *** 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 Friday the stock rallied to a 3-month high. This position offers investors reasonable reward potential at the risk of owning the company at a cost basis near $25. NOV 25.00 AAW WE LB=0.65 OI=2053 CB=24.35 DE=35 TY=8.2% ***** VZ - Verizon $35.19 *** 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. Verizon shares have been in "rally mode" since the global telecommunications team at Goldman Sachs said the industry is starting to heal itself as corporate managers and investors turn their focus toward free cash flows. Investors saw the optimistic comments as a reason to buy into downtrodden telecom stocks and now the group is in a broad recovery. NOV 30.00 VZ WF LB=0.70 OI=8453 CB=29.30 DE=35 TY=6.3% ***** ***************** 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 ISSX 15.85 NOV 12.50 ISU WV 0.50 194 12.00 35 11.8% CHKP 14.92 NOV 12.50 KEQ WV 0.55 665 11.95 35 11.7% DCTM 13.49 NOV 10.00 QDC WB 0.40 12 9.60 35 11.2% PSFT 15.96 NOV 12.50 PQO WV 0.45 593 12.05 35 10.7% HYSL 21.04 NOV 17.50 WQE WW 0.60 46 16.90 35 9.5% HLYW 19.48 NOV 17.50 HWQ WW 0.60 29 16.90 35 8.1% PPDI 22.97 NOV 20.00 PJQ WD 0.60 15 19.40 35 7.6% CLE 22.90 NOV 20.00 CLE WD 0.45 160 19.55 35 5.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Light At The End Of The Tunnel? By Ray Cummins Bargain-hunting investors returned to the market Friday, propelling the major equity averages to a second consecutive session of large gains. The Dow Jones Industrial Average soared 316 points to 7,850 with all 30 components blue-chip components supporting the advance. A favorable profit report from General Electric (NYSE:GE) and bullish analyst's comments on International Business Machines (NYSE:IBM) were among the catalysts for the sharp ascent. Semiconductor and software shares led the NASDAQ 47 points higher to 1,210. In the broader industry groups, buyers were apparent in every sector with the most pronounced advances taking place in retail, financial, airline and cyclical shares. The S&P 500 Index jumped 31 points to 835. Trading volume was robust at 1.81 billion on the NYSE and at 1.90 billion on the NASDAQ. Market breadth was sharply positive, with advancers pacing decliners more than 3 to 1 on the Big Board and more than 2 to 1 on the technology exchange. On the fund flow front, Trim Tabs estimated that all equity funds had outflows of $4.2 billion in the week ending 9/9/02, compared with inflows of $2.0 billion in the prior week. Equity funds that invest primarily in U.S. stocks saw outflows of $2.7 billion versus outflows of $500 million in the prior week. Bond funds saw inflows of $2.3 billion compared with inflows of $1.7 billion the previous week. Treasury issues slumped amid the bullish activity in equities. The 10-year Treasury note fell 1 7/32 to yield 3.80% while the 30-year bond lost 1 20/32 to yield 4.81%. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status OHP 42.62 41.21 OCT 33 35 0.30 34.70 $0.30 Open NOC 124.54 117.50 OCT 105 110 0.35 109.65 $0.35 Open UOPX 32.11 31.52 OCT 25 30 0.55 29.45 $0.55 Open? AZO 81.27 81.48 OCT 70 75 0.50 74.50 $0.50 Open VZ 33.60 35.19 OCT 28 30 0.30 29.70 $0.30 Open Previously Closed: Ball Corporation (NYSE:BLL) and S&P 100 Index (CBOE:OEX), both of which are positive. University of Phoenix Online (NASDAQ:UOPX) has rebounded in the wake of a favorable earnings report from the company's parent group, however traders should monitor the issue for future signs of a bearish reversal. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status PHA 40.86 40.75 OCT 50 45 0.60 45.60 $0.60 Open OEX 446.00 422.68 OCT 500 495 0.45 495.45 $0.45 Open SLAB 19.66 22.50 OCT 30 25 0.40 25.40 $0.40 Open BRL 63.65 59.50 OCT 75 70 0.50 70.50 $0.50 Open LXK 43.49 51.44 OCT 55 50 0.50 50.50 ($0.94) Open? MMM 119.46 120.60 OCT 135 130 0.40 130.40 $0.40 Open WFC 46.89 46.85 OCT 55 50 0.55 50.55 $0.55 Open ASD 64.56 64.68 OCT 75 70 0.65 70.65 $0.65 Open S 40.62 32.72 OCT 50 45 0.30 45.30 $0.30 Open FITB 57.47 61.49 NOV 70 65 0.65 65.65 $0.65 Open LEN 53.67 54.35 NOV 65 60 0.80 60.80 $0.80 Open The recent recovery rally may continue in the near-term, thus conservative traders should consider closing any positions in which the underlying issue moves above the sold strike. SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V (G/L) Status DIAN 46.10 37.17 NOV 60 35 (0.10) 0.10 0.00 Closed ERTS 67.73 67.60 NOV 75 60 0.40 0.00 0.40 Open Previously closed positions in Boyd Gaming Group (NYSE:BYD) and Cablevision (NYSE:CVC) yielded favorable short-term profits and the speculative play in Taro (NASDAQ:TARO) offered a small gain. The position in Dianon Systems (NASAQ:DIAN) has been closed to limit losses. SYNTHETIC (BEARISH) ******************* Symbol Pick Last Month L/P S/C Credit M/V (G/L) Status MET 25.25 22.64 JAN 20 30 0.05 1.45 1.50 Closed PFE 30.75 30.15 JAN 25 35 0.15 0.80 0.95 Closed BRCD 12.33 6.58 JAN 10 15 (0.05) 8.90 8.85 Closed MRK 45.74 47.30 OCT 40 50 0.10 0.45 0.55 Closed PGR 50.96 53.60 NOV 45 56 (0.10) 0.65 0.55 Closed CTSH 51.76 58.45 OCT 40 60 (0.40) 0.40 0.00 Closed C 27.98 30.40 NOV 22 32 (0.20) 0.45 0.25 Closed 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. Cognizant Technologies (NASDAQ:CTSH) gapped down Monday, offering little opportunity to enter the play at a favorable price. The issue finished Monday's session almost $4 lower but has since rebounded to a previous trading range near $60. Citigroup (NYSE:C) moved in a similar fashion and although there was a small gain available in the position, the stock has now rebounded to the top of a recent pattern, decreasing the probability of a near-term profit. BULL CALL SPREADS ***************** Symbol Pick Last Month L/C S/C Debit M/V B/E Status LUME 5.80 3.90 JAN 5 7 1.00 0.90 6.00 Open? CALENDAR SPREADS **************** Symbol Pick Last Long-Opt Short-Opt Debit M/V Status LEH 49.69 47.89 JAN-40P OCT-40P 1.90 3.00 Closed BAC 58.00 59.40 JAN-50P OCT-50P 2.00 2.70 Open? LPNT 33.04 35.10 FEB-35C OCT-35C 2.50 2.70 Open The Lehman Brothers (NYSE:LEH) position provided an excellent short-term gain during the recent bearish activity and the Bank Of America (NYSE:BAC) play also enjoyed a small profit during Wednesday's sharp sell-off. Lifepoint (NASDAQ:LPNT) has rallied to the sold strike at $35 on heavy volume and traders should be prepared to make a bullish adjustment in the position. Previously Closed: Schering Plough (NASDAQ:SGP) SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit M/V Status AES 2.92 1.44 J04-7.5 J03-2.5 4.50 4.25 Open IMCL 7.77 7.05 J04-15 JO3-5 8.00 7.75 Open CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V (G/L) Status ADRX 24.65 19.99 OCT 40 15 1.10 0.95 0.15 Open? ISIS 8.97 8.69 OCT 15 7 1.50 0.30 1.20 Open QCOM 28.58 31.37 OCT 32 22 1.50 0.60 0.90 Open PPD 21.80 18.65 OCT 25 17 1.95 0.80 1.15 Open? STJ 36.29 36.70 OCT 40 30 1.00 0.25 0.75 Open OMC 55.86 56.07 OCT 65 40 0.95 0.25 0.75 Open QualComm (NASDAQ:QCOM) is one to watch as the issue has moved up and out of a recent trading range. Traders should exit, adjust, or cover the position in the event of further upside activity. Previously Closed: Transkaryotic Therapies (NASDAQ:TKTX) Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. **************** READER'S REQUEST **************** In response to a recent E-mail concerning strategy selection, one of our readers asked for an example of a conservative debit spread. A bullish debit spread involves the purchase of one call and the sale of a higher strike-price call. The "bull-call" spread is less aggressive than the outright purchase of a call and in some cases, will actually outperform a call purchase if the underlying stock advances gradually until expiration. ***** CHTT - Chattem $42.99 *** Multi-year High! *** Chattem (NASDAQ:CHTT) is a marketer and manufacturer of a variety of branded consumer products, principally over-the-counter health care products, including Gold Bond medicated powders, Herpecin-L, Dexatrim, Icy Hot Patch and the Sunsource nutritional supplements. The company's OTC products are sold primarily through food, drug and mass merchandiser accounts. Internationally, the products are sold by national brokers in Canada and the United Kingdom and by distributors in Western Europe, Central and South America and the Caribbean. Wal-Mart Stores accounted for more than 10% of the company's consolidated net sales in 2001. PLAY (conservative - bullish/debit spread): BUY CALL NOV-35 HQT-KG OI=11 A=$8.80 SELL CALL NOV-40 HQT-KH OI=12 B=$4.50 INITIAL NET-DEBIT TARGET=$4.20-$4.25 POTENTIAL PROFIT(max)=17% B/E=$39.25 **************** 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. ***** WAT - Waters $26.61 *** Conservative Time-Selling! *** Waters Corporation (NYSE:WAT) is the holding company for Waters Technologies, which operates its businesses in the analytical instrument industry. The company manufactures and distributes three complementary technologies: high-performance liquid chromatography instruments, chromatography columns and other consumables, and related service; mass spectrometry instruments that can be integrated and used along with other analytical instruments, especially HPLC, and thermal analysis and rheology instruments. HPLC, the largest product group of the analytical instrument market, is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. PLAY (conservative - bullish/calendar spread): BUY CALL MAY-30 WAT-EF OI=61 A=$2.90 SELL CALL NOV-30 WAT-KF OI=2334 B=$0.60 INITIAL NET DEBIT TARGET=$2.20-$2.25 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. ***** SLM - SLM Corporation $96.58 *** Sally Mae Lives! *** SLM Corporation (NYSE:SLM), formerly USA Education, is a private source of funding, delivery and servicing support for higher education loans for students and their parents in the United States. SLM provides a range of financial services, processing capabilities and information technology to meet the needs of educational institutions, lenders, students and guarantee agencies. The company's managed portfolio of student loans, including loans owned and loans securitized, totals over $70 billion, of which the majority is federally insured. The firm also has commitments to buy billions of dollars of additional student loans. Primarily a provider of education credit, the company serves a diverse range of clients, including over 6,000 educational and financial institutions and guarantee agencies. The company serves in excess of seven million borrowers through its ownership or management of student loans. PLAY (conservative - bullish/credit spread): BUY PUT NOV-80.00 SLM-WP OI=56 A=$1.00 SELL PUT NOV-85.00 SLM-WQ OI=56 B=$1.40 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$84.50 ***** UNH - UnitedHealth Group $93.49 *** Bullish Sector! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The firm's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes the UnitedHealthcare and Ovations businesses; Specialized Care Services, and Ingenix. PLAY (conservative - bullish/credit spread): BUY PUT NOV-80.00 UHB-WP OI=223 A=$0.75 SELL PUT NOV-85.00 UHB-WQ OI=197 B=$1.30 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$84.40 ***** WTW - Weight Watcher's Intl. $45.40 *** Get Fit, Not Fat! *** Weight Watcher's International (NYSE:WTW) is a global branded consumer company and a provider of weight-loss services, operating in 30 countries around the world. The company's programs help people lose weight and maintain their weight loss, and, as a result, improve their health, enhance their lifestyles and build self-confidence. At the core of the company's business are weekly meetings, which promote weight loss through education and group support in conjunction with a flexible, healthy diet. Each week, more than one million members attend approximately 39,000 Weight Watchers meetings, which are run by over 14,000 classroom leaders. The firm conducts its business through a combination of company-owned and franchise operations. Company-owned operations accounted for approximately 65% of total worldwide attendance in 2001. PLAY (conservative - bullish/credit spread): BUY PUT NOV-35 WTW-WG OI=23 A=$0.35 SELL PUT NOV-40 WTW-WH OI=212 B=$0.80 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$39.50 ***** LMT - Lockheed Martin $62.45 *** Premium Selling *** Lockheed Martin (NYSE:LMT) is a customer-focused, worldwide enterprise engaged in the research, design, development, manufacture and integration of advanced technology systems, products and services for government and commercial customers. The corporation's core business areas are systems integration, aeronautics, space and technology services. The company's Systems Integration segment engages in the design, development, integration and production of electronic systems for undersea, shipboard, land and airborne applications. Space Systems is engaged in the design, development, engineering and production of commercial and military space systems. Aeronautics designs, researches and develops, produces, and supports combat and air mobility aircraft, surveillance/command, reconnaissance, platform systems integration and advanced development programs. Technology Services provides information management, engineering, scientific and logistic services. PLAY (conservative - bearish/credit spread): BUY CALL NOV-75.00 LMT-KO OI=132 A=$0.25 SELL CALL NOV-70.00 LMT-KN OI=526 B=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$70.55 ***** MMM - 3M Corporation $120.60 *** Premium Selling *** 3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an integrated enterprise characterized by intercompany cooperation in research, manufacturing and sale of products. 3M's business has developed from its research and technology in coating and bonding for coated abrasives, the company's original product. Coating and bonding is the process of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper (repositionable notes). The company conducts business through six operating segments: Industrial Markets; Transportation, Graphics and Safety Markets; Health Care Markets; Consumer and Office Markets; Electro and Communications Markets, and Specialty Material Markets. PLAY (conservative - bearish/credit spread): BUY CALL NOV-140 MMM-KH OI=317 A=$0.40 SELL CALL NOV-135 MMM-KG OI=567 B=$0.80 INITIAL NET CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$135.45 ******************* 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. ***** SCHL - Scholastic Corporation $47.43 *** On The Rebound! *** Scholastic Corporation (NASDAQ:SCHL) is a global children's publishing and media company. It is a publisher and distributor of children's books. The firm creates educational, entertaining materials and products for use in school and at home, including children's books, textbooks, magazines, technology-based products, teacher materials, television programming, videos and toys. The company distributes its products and services through a variety of channels, including school-based book clubs, school-based book fairs, school-based and direct-to-home continuity programs, retail stores, schools, libraries, television networks and the Internet. The company's Website, Scholastic.com, is a site for teachers, classrooms and parents and a destination for children. PLAY (conservative - bullish/synthetic position): BUY CALL DEC-55.00 USC-LK OI=38 A=$0.95 SELL PUT DEC-40.00 USC-XH OI=14 B=$0.95 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.75-$0.95 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $1,250 per contract. *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** EBAY - eBay Inc. $56.20 *** Still In A Trading Range! *** eBay (NASDAQ:EBAY) is a Web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. PLAY (moderately aggressive - neutral/credit strangle): SELL CALL NOV-65.00 QXB-KM OI=2324 B=$0.80 SELL PUT NOV-45.00 QXB-WI OI=3238 B=$0.95 INITIAL NET-CREDIT TARGET=$1.75-$1.85 PROFIT(max)=13% PROBABILITY OF PROFIT (100-day HV)=86% UPSIDE B/E=$66.75 DOWNSIDE B/E=$43.25 ***** ************************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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