The Option Investor Newsletter Sunday 10-20-2002 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: Bulls Will Not Be Denied Futures Market: Neither Bulls nor Bears got what they expected today Index Trader Wrap: With a fall rally at hand, bullish leaves should begin to Russell Editor’s Plays: Make Money With High Premiums Market Sentiment: What I Do, Not What I Say Ask the Analyst: Trade What You See Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Another Day in Denial Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 10-18 WE 10-11 WE 10-4 WE 9-27 DOW 8322.40 +472.11 7850.29 +321.89 7528.40 - 63.58 -284.57 Nasdaq 1287.86 + 77.39 1210.47 +774.16 436.31 - 9.13 - 22.00 S&P-100 449.02 + 26.34 422.68 + 19.46 403.22 - 4.03 - 10.68 S&P-500 884.39 + 49.07 835.32 + 35.04 800.28 - 14.70 - 18.03 W5000 8323.78 +450.75 7873.03 +274.41 7598.62 -175.00 -150.63 RUT 363.37 + 18.44 344.93 - 3.05 347.98 - 14.29 - 5.51 TRAN 2279.09 +124.42 2154.67 + 16.99 2137.68 - 13.39 + 1.15 VIX 39.82 - 3.62 43.44 - 2.84 46.28 + 3.14 - 1.41 VXN 55.33 - 3.54 58.87 - 1.41 60.28 + 2.42 - 1.22 TRIN 0.80 0.41 1.98 2.09 Put/Call 0.68 0.93 0.97 0.90 ****************************************************************** Bulls Will Not Be Denied by Jim Brown Bad news in all flavors failed to hold the markets back and the markets finished with big gains for the week. For traders this was the week from hell. It did not make a difference which side you were on as there was plenty of movement in the opposite direction. We are three weeks deep into October and with only two weeks to go the bulls are convinced the bottom is behind us. Dow Chart Nasdaq Chart Friday started off bad despite the good news from Microsoft. The fact that the earnings were a one time event and they lowered guidance for the 4Q kept them from rocketing like IBM earlier in the week. MSFT added +2.37 on Friday but IBM was still climbing with another +2.05 at 74.25. One of the factors influencing IBM was short covering by traders that had refused to believe the market reaction and just "knew" IBM would sell off by the weekend. Instead the pain just intensified. The October rally is firmly underway. I know this due to the total disregard for the fundamentals. I reported on the massive drop in the book-to-bill ratio for semiconductor orders on Thursday night. The headline dropped to .84 and the lowest number in a year and -30% lower than the average of the last five months. http://www.semi.org/web/wpress.nsf/url/booktobill This is VERY bad news for the tech sector and semiconductor stocks especially. You would have expected a bad day for semi stocks on Friday. Instead the SOX closed at the high of the day and on the verge of a breakout. Business is getting significantly worse but nobody seems to care. Semiconductor Index Chart Book-To-Bill Chart from Economy.com Economically there were a couple of negative events on Friday. The ECRI Leading Indicators almost doubled the decent from the prior week which was twice as bad as the prior month. The 6-month Growth Rate dropped -3.4% for the week ended Oct-11th and is the lowest level since November 2001. Hello, George McFly, there is no recovery! The Trade Deficit rose to a record -$38.5 billion for August. Money is flowing out of the U.S. at a record rate. I give up trying to analyze the psychology of the markets in October. Fundamentals don't matter. Money is flowing into equities with estimates of $100 billion from pension funds alone over the four week period beginning last week. It appears the "fix" is in and the markets not only climbing the wall of worry but hopping from gap to gap. The Dow closed at 8331 and ever closer to the significant resistance of 8400-8600. The Nasdaq also moved closer to the magic 1300 level. We are far from out of the woods despite the comments above. If you think trading this market is hard for retail investors your right. Shucks, if you could just hire the best traders you could find and round up about $1 billion in trading capital you would be set, right? Don't kid yourself. Beacon Hill Asset Management, one of the biggest hedge-fund managers in the business, announced that it was closing its biggest hedge funds and selling its remaining positions. After losing more than 50% or more than $400 million over the last couple months it was suspending redemptions for six months until the funds could be liquidated. Beacon Hill was heavy in the bond market. There was a rumor Friday night that Bank One (ONE) was going to buy JPM. This may only be a rumor OR there is a deal to take JPM out because of an impending failure. There has been a rumor that JPM has a massive derivative problem that could be taking them under. Having a white knight with cash show up could help solve some of those problems while giving the knight a sweet deal in the process. Monday we have earnings from MMM before the bell. 3M is the largest weighted stock on the Dow and any move in MMM is greatly exaggerated in the Dow. There are many conflicting opinions on the MMM earnings outlook. 3M has made a point of saying that they are cutting costs aggressively which, while it may help them hit their estimates, does not always influence investors. The strongest rumors are that they will hit estimates but then attempt to talk down the outlook and claim very low visibility. IBM successfully spun its report this week and 3M will also try on Monday. How that news would normally be critical but with fundamentals being ignored we cannot be sure. Other well known names announcing on Monday are ALTR, ANAD, CD, JDAS, LXK, VRTS, VTSS. The focus will be on earnings almost exclusively next week. The economic calendar is very light with the only material reports being the Beige book on Wednesday and Durable Good and Sentiment and Home Sales again on Friday. As I stated above the actual earnings do not appear to be of interest to the October bulls. The estimates have been lowered so many times that even Enron could probably beat earnings this quarter. As I showed you on Thursday the PE ratios are skyrocketing and stocks are trading at higher multiples now than during the bubble in October 2000. Investors are simply tired of the bear market and they want the October 10th low of 7197 to be the low. Period. I have to caution you. Even though I am planning to go long on Monday morning, market willing, it is usually times when the most traders are bullish that the market suddenly tanks. You might disagree with me about traders being bullish but you only need to look at the gains in KLAC, NVLS or MXIM from last week and compare them to the book-to-bill report. If that is not irrational exuberance I don't know what is. One third of the S&P have announced earnings for the quarter with mediocre results. Alan Abelson, from Barron's, once noted that companies which announce early tend to post better results than those who announce later. We will see if he was right and more importantly if anyone cares. Enter Very Passively, Exit Very Aggressively! Jim Brown "In this game, the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch. " - Warren Buffett ************** FUTURES MARKET ************** Neither Bulls nor Bears got what they expected today by Alan Hewko futures@OptionInvestor.com Quotes: 4:00 PM Cash Market Close ES 883, YM 8293, NQ 959 4:15 PM Future's Market Close ES 883.25, YM 8296, NQ 961.50 Dow 8322 + 47 SP500 884 + 5 COMPX 1287 + 15 The above Dow, SP500, Compx numbers sound sort of boring, and while 1/2 of Friday was indeed very boring with low volume sideways action, it wasn't all boring... A test: Pick one from the list below: 1. the Dow was + 47 for the day 2. the Dow was - 200 from its overnight highs to morning lows 3. the Dow was +180 from its morning lows to its close If you said ALL of the above are true, you win. [grins] As previously done, I shall use these abbreviations for this article, and the same "ES, YM, NQ" is often in the intra-day Market Monitor commentary: Ticker ES = E-mini SP500 December futures ES02Z YM = E-mini Dow $5 December futures YM02Z NQ = E-mini NDX 100 December futures NQ02Z If you are not familiar with these futures tickers, but wish to be: may I gently suggest writing the above 3 lines on a Post-It for your monitor. _______________________________________________________________ This marks the second week in a row of Green weekly closes. Best weekly gains since Sept. 2001 Friday in one paragraph: A surprise gap down (vs the expected gap up) resulted in 30 minutes of Longs taking profit (when their expected gap up did not occur, they took long profits at the open). The market gaped down at 9:30 AM and then sold off for 30 minutes. By 10 AM, supports at Dow cash was 8150 and ES 867 held and from a level of Dow 200 points lower than its overnight highs, Shorts covered to 11 AM, followed by a 50% retrace lower by Noon, low volume sideways action until 3 PM's Bond close then had the market finding a bid into the close. _______________________________________________________________ RECAP OF THE LAST 24 HOURS One can gain additional intra-day comments from reading Thursday night and Friday's commentary in the Market Monitor archives. And yes, I actually did wake up at 3 AM with that signal to short futures at 888 off of Europe as the Market Monitor shows - I don't suggest everyone get up at 3 AM, but it beats reading a book if you can't sleep [grins] Thursday night MSFT had earnings to the upside, and the resulting rally in futures of ES to 888 +10 points from Thursday's close, and YM to 8350 +100 points from Thursday's close. Futures went sideways the rest of Thursday late night's session. This past week has consisted most of very large morning Gap days (in the area of Dow +/- 150 point gaps); so when traders left for the day on Thursday: Bulls were expecting another similar Gap Up Friday morning, and were looking forward to exiting Longs at Dow 8350 area. By the same token, Bears were expecting the very same large gap to the area of Dow 8350 and were looking forward to opening a Short near that level. Guess what? That didn't happen. Friday morning at 3 AM, when Europe opened with their own gap up; quotes were: 3 AM: ES 889, YM 8342, NQ 962. US futures then did something not-unusual : shortly after Europe opened at 3 AM, they reversed their trend on an exhaustion top right under ES 890, and sold off all night long and quotes by Friday's 9:30 AM open were: ES 872-873, YM 8185-8195, NQ 939-940 Compare the Friday 9:30 AM open numbers with the levels above from Friday 3:00 AM. Instead of the Gap Up that both Bulls and Bears were expecting, we actually got a Gap Down. Factor in that Friday was Option Friday and you truly had traders scratching their heads at the Open. Here's a chart of what bulls and bears saw to their expected gap up Friday morning. Chart: ES (E-Mini SP500 futures) Thur 3 PM to Fri 4 PM including the overnights Notice the huge move higher from MSFT and the hard selling once Europe opened at 3 AM straight into the Friday market open. You can also see the chart resistance at ES 887-889 levels. (remember this ES 888 number, I shall refer to it later) Friday Key times of day: Chart: ES (E-mini SP500 Futures) Friday 9:30 AM - 4:15 PM 9:30 AM Market (to the surprise of both bulls and bears) gaps down ES 872-873, YM 8185, NQ 940. Bulls are surprised, and simply decide to take long profits. 9:30 - 10:00 AM I've mentioned a few times in the last 2 weeks, how sometimes reversals occur at +/- Dow 200 levels. Last night, YM (Dow futures) were 8350, and at 10 AM were 200 points lower at 8150, and a reversal occurred. ES 867 was also this Tuesday's opening lows, and therefore a support pivot. Indices are Red at this point, with the Dow in the -100 area. 10:00 AM ES 867, Dow Cash 8150 * Day Lows * 10:00 - 11:00 AM ES 887-888, Dow Cash 8325, NQ 969 * Day Highs * One straight hour of buying leads to 11 AM's exhaustion top at ES 887 level, matching the 3 AM highs. 2 retracement levels I'd like to point out: 877 : 50% of day low/high 867/887 = 877 879.50 : 50% of 872/887 = 879.50 (872 being the lower band of 872-875 "chop" area, as well as 872 being the breakout level around 10:30 AM 12:30 - 1:30 PM The 2 above retracement levels of 877 and 879.50 provided a rather boring area of night chop trading, before the market broke out of this range to a pivot high at 2 PM 2:00 PM There's a small ES pivot at 883, it was pierced to the upside but ES at 2 PM failed to take out 885 and possibly re-test that 887- 888 level, and the market leaked lover to 3 PM. 3:00 PM Bond Close ES did a double bottom at 877 50% retracement level, matching the 12:30 PM level; and slow steady buying/covering had the markets closing rather strongly and at afternoon highs. 4:15 PM Futures Close ES 883.25, YM 8296, NQ 961.50 Chart: YM (Dow $5 Futures) [not Dow Cash] for Thursday 2-3 PM through Friday close including the Overnight session Here is one last chart of Friday: Chart: NQ (E-mini NDX futures) for Friday 9:30 AM to 4:15 PM _______________________________________________________________ THIS COMING WEEK'S EARNINGS This past had a tremendous amount of earnings, most of them inline or slightly beating the vastly lowered expectations. This coming week, the earnings calendar is still heavy. The Key earnings this week are: Monday: MMM (Dow stock), LXK, VRTS Tuesday: T (Dow stock), BLS, MCD (Dow stock), Taiwan Semi (TSM), UPS, AFL, CA, KLAC Wednesday: DCX, DD (Dow stock), LLY, AMGN, AOL, WLP Thursday: AIG, BMY, DOW, EK (a Dow stock), AMZN, FLEX, JDSU, VRSN Friday: LMT, VZ, ERTS As you can see, the difference from the number of key earnings this past week to next week is vastly reduced. The big Monday earnings pre-open is MMM $125 (a Dow stock) _______________________________________________________________ THOUGHTS FOR MONDAY & NEXT WEEK To help put some perspective on this, let's examine a chart: Chart: SP500 (SPX) 3 month with Fibonacci retracement: Notice the bottoms on July 24 and Oct 10th, along with the high in the middle of August. If you scroll up, I asked you to remember the ES (Emini SP500 futures) number of 888. You can see in above chart how 888 is the 61.8% Fib retracement as well as chart resistance several times this week as well. ES close: 883 ES Up pivots: 885, 887-888, 892-895, 900, 902-905, 912, 928 ES Down pivots: 879.50, 877, 872-875, 867, 862, 852-858, 848 Dow cash remains in a tight 8200-8300 range, with dip buyers a bit under 8200, and sellers a little over 8300. NQ has broken out to upside over 935 resistance, currently at 960. NQ resistance to upside: 972, 988, 1000 NQ lower support: 950, 935, 912-15, 902-905 _______________________________________________________________ If you read last Sunday's Futures Wrap column, I talk a great deal about the importance of October Options, and "why" they are so important. Now that all of October options are over with, and ignoring the possible "unusual" market action as Option market makers square up their long or short stock positions that were put down to hedge the October options they sold/bought; the one thought I have given the lack of Earnings this coming week, is shall the market change its existing tone and become "Sell the News" ? Or what catalyst will have stocks to continue going higher now that this past week's huge amount of earnings are over with. Chart wise remains bullish, as the charts look quite strong, but are coming up to some serious resistance levels, such as SPX 900, Dow Cash 8350-8400, Compx near 1300. A perfect scenario is that 3M (MMM) - (a Dow stock) misses on earnings pre-open Monday, and then warns with their guidance and that's the trigger for 1-3 days of solid selling, back to about Dow 7800 The market also thought it had a great setup for Friday morning, only to be surprised so let's assume MMM doesn't do miss or warn; all the charts I've just spent some time looking at indicate two things: 1. Either Chart Break-out to upside - or - 2. Chart resistance hits very soon and we begin a logical, healthy retracement downward. I plan to use MMM's earnings and ES 885-888 to provide an answer Monday morning as to market direction. Lastly, compare Oct 2001 with Oct 2002. In Oct 2001, a month after 9-11, there was "hope" that the 9-11 event would trigger a bottom and that business would starting spending again for we knew Q4 2001 earnings would be terrible (and they were), but we had "hope" that Q1 2002 earnings would be great (they weren't). The only thing that kept the economy from falling apart was the consumers spending and the housing sector. Now, Q3 2002, business and IT spending still is terrible, the consumer is starting to crack given the many Retail stocks warning (most recent being Sears) but the market remains in "buy any good or inline news/earnings and ignore all bad news" mindset. As Jim Brown pointed out so well last night, MSFT earnings for Q3 were greatly comprised of one-time events which won't repeat. MSFT CFO did have some bearish comments, and even though the street closed its ears to the bearish aspect of MSFT's earnings - the underlying facts remain the same. How many of you are planning large consumer purchases this Christmas or winter period ? How many are planning to buy a new PC, a new large TV set or expensive hi-end stereo, a laptop, new cell phone, new car, etc. One interesting note: prior to Friday's open, the Broker sector and Semi SOX sector both had bad news - Brokers such as GS closed on day lows, while the SOX index closed green and at day highs. Odd. One of the "good" things about Q3 earnings is there seems to be a believable quality to them - remember Arthur Anderson? remember the Fortune 500 CEOs having to swear their prior financials were correct? All of that helped to seemingly create "more honest" earnings numbers. This is good. Perhaps ten years overdue, but still a good thing. SUMMARY The market "should" sell off next week on some logical Long profit taking. That doesn't mean it will. It may breakout to the upside over the nearby resistance - trapping even more shorts in the process, as well as having mutual funds chasing it higher as they fear being left behind. Is Dow 8500 or even 8750 "possible"? Sure, but so is Dow 7800 or 7500-7600. I have also written a Futures related article this weekend, discussing Futures Entries and Exits, explaining the meaning of an order such as "ES is 867, go long at market at 869 "or better" and "ES is 876, go long at MIT 878" The Link for this article is: http://members.OptionInvestor.com/marketwrap/101302_2.asp Alan Hewko As always, your questions and comments are welcome: email to futures@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** With a fall rally at hand, bullish leaves should begin to Russell With an October mid-election year rally at hand; the major indexes now post gains greater than 6% for the month of October. All except for one that is. With a whirlwind of bullish enthusiasm giving lift to the large caps, then the next two weeks may bode well for the small-caps and the Russell-2000 Index (RUT.X). Each Friday we try and "step back" and look at the weekly, quarterly and yearly % changes for the indexes, looking for divergence and opportunity. Two weeks ago it was the DIVERGENCE we found in the 10-year YIELD, which ended up being the "heads up" for an equity rebound. For a bull that's been hesitant to "chase" the major indexes, I'm looking for the smaller-caps to be the "out performers" this week in an attempt to play catch up with their larger cap brethren. Weekly Index / Sector Changes So far this quarter, it's the Russell-2000 Index (RUT.X) lagging the October move, but on a year-to-date basis, has been an out performer when compared to the broader NASDAQ Composite (COMPX) and narrow NASDAQ-100 Index (NDX.X). The RUT.X has been an "inline" performer on a year-to-date basis with the S&P's, but as expected, it's lagged the more institutionally held Dow Industials (INDU). However, the next couple of weeks, under a bullish blanket of enthusiasm, I think the Russell-2000 becomes the "best" risk/reward trade for bulls as there are perhaps less tradable profits to be sold by bulls, when compared to the other indexes. For a supply/demand guy like myself, that would equate to more limited supply. Last Friday, a bull wanted to see the financials get out of their slump on the scenario of market theory being that financials helps lead an advance. Boy did that happen this week with brokers leading the gains, most likely on the thought that trade revenues and potential investment banking deals could grow with a more bullish equity market. Disk Drives (DDX.X) lead technology gains after IBM (NYSE:IBM) $74.25 surged 16% on the week. While IBM is not a component of the Disk Drive Index (DDX.X), one can make the association between IBM and its impact on sector action. DDX component SanDisk (NASDAQ:SNDK) $19.70 surged 37% on the week after reporting better than expected earnings. And most important for an equity bull to note and continue to monitor is the massive round of selling in Treasuries this week with the benchmark 10-year YIELD (TNX.X) jumping to 4.13%, freeing up cash that obviously flowed toward equities. Let's take a quick look at the Russell 2000 iShares (AMEX:IWM) $72.40, which track the Russell-2000 (RUT.X) 363. For some fundamental breakdown, subscriber's can visit Indexfunds.com at this link http://www.indexfunds.com/data/ETFScreener.php?id=IWM for sector breakdown. The major sector weightings are Financials (22.5%), Consumer Staples (17.4%), Technology (15.6%), Services (14.6%) and Health (11.7%). The Russell 2000 iShares do trade options. Russell-2000 Index iShares (AMEX:IWM) - Daily Chart If its true that a bull needs selling in Treasuries, to generate cash for institutions to snap up their favorite institutional "blue chips" in the early stage of a rebound and that the smaller capped stocks begin to benefit as after a nice move higher in the large caps, then bullish traders look for the smaller-caps to play some catch up near-term. I like 1/4 positions "at market" and would look for any type of pullback near $70.05 to have round-out position for 1/2. Then, perhaps in a couple of weeks, look for a break above $75.00 to round to full with December/January targets of mid-to-upper $80's. Dow Industrials Chart - Daily Interval From a perceived risk/reward basis, I would think a Dow bull is pretty happy after this weeks 6% gain, compared to a NASDAQ-100 (NDX.X) gain of 7.4%. Upside market responses to CAT, IBM and MSFT earnings helped drive bullishness. This week, MMM, MCD, DD and IP are scheduled to report. Key stock here would be MMM, which has been a strong performer this year. 3m Company (NYSE:MMM) $125.00 hasn't been able to break much above $130, but series of higher lows hints pressure is building. Recent decline to $110 came right down to the point and figure chart's bullish support trend and price action from there hints that institutions were lurking nearby and gobbled up shares. An "upside surprise" with no overhead supply of stock above $130 could have the stock and the Dow still moving higher. However, note that we don't have an upward trend on the Dow chart at this point. Sure, I could draw one on it, but it would NOT BE A REASONABLE TREND that we'd expect to last for any duration. This Friday's Dow Industrials Bullish % ($BPINU) reading is "bull confirmed" at 43.33%, compared to last Friday's reading of "bull correction" at 13.33%. Who says the bullish % charts don't give hint of who has risk? Not me. Would currently take a reading of 70% to be considered "overbought" from an institutional perspective, and a reading of 36% to have the bullish % reversing back down to "bull correction" status. Bulls have the football, while bears are playing some defense for a change. Speaking of "reasonable trend" lets use a technique that I call "cloned regression" to get a feel for the S&P 500 Index (SPX.X) and bullish trend channel. S&P 500 Index Chart - Daily Interval This week's action saw the S&P 500 Index (SPX.X) surge 5.9% and looks higher still. This week, I'd have to sell some bullish gains on any move into the 900-914 zone as this is where I've got some crisscrossing resistance from "cloned" regression and 80.9% retracement. "Ideal" pullback bullish entry early this week would be the 835-856 zone. I've labeled the 11/18/02 date on the above chart to get me in the mindset that the current upward support trend from "cloned" regression would be at the 915 level. This may give the options trader a feel for what type of strike/expiration/premium that would make sense, or more importantly NOT make sense when looking to implement a bullish trade. For instance, I DO NOT think it would make sense to be buying OUT-THE-MONEY Nov. 925's (SXBKE) for $13.00 (925+13 = 938). If a bull is going to risk $5k on November expiration, I would prefer 1 Nov. 880 call (SPXKP) for $33.50 (880+33.50=913.50) for now, then should the SPX pull back into 835-856 zone, look for firming, then round out with another Nov. 880 call (guessing $17.00?), with a stop below the upward trend. Both trading strategies would be bullish, but a $5K bet at 880 strikes more "reasonable" and greater probability of profit. Remember... there are still "Iraq concerns" and other "terrorist concerns" that could be in play and impact markets. Buying out- the-money with Market Volatility (VIX.X) 39.82 still rather high stands a greater chance of becoming a LOSING MAN'S BET. This week saw the S&P 500 Bullish % ($BPSPX) rise from last Friday's "bear confirmed" 21.6% reading to this Friday's "bull alert" reading of 37.6%. It would currently take a reading of 60% to get this index back into "bull confirmed" status, and a lower reading of 30% to reversed back into "bear confirmed." S&P 100 Index Chart - Daily Interval I believe the OEX outperformed the SPX this week as it has a little more exposure to the financials in percentage terms than does the SPX. Also helping perhaps was bullishness from IBM and MSFT offsetting some weakness in INTC. A point and figure chartist will note that the Dow Industrials ($INDU) is currently battling its bearish resistance trend. As it relates to the OEX, the p/f chart's bearish resistance trend is up at 460 right now. Bulls look for continued gains in financials to help boost the OEX to 460. At some point, there's got to be some profit taking and I'd expect firm support in the OEX at 430 this week on any type of pullback. I really like our retracement here as the 430 level marks the p/f chart "buy signal" at 430 and that would have been an ultimate stopping out point for bears as risk immediately was assessed to 460. Ask any OEX bear still holding short/put where he/she wished they had stopped out and my guess would be 430. Look for that to be a support level on any pullback. This weeks action saw the OEX Bullish % ($BPOEX) reverse up from last Friday's "bear confirmed" reading of 20%, to Tuesday's "bull alert" reading of 36% and current reading of 42%. No longer "oversold," and still a ways to go before being "overbought" on an institutional level of 70%. It would currently take a reading of 60% to get this index back to "bull confirmed" status, and a reading of 36% to reverse back lower to "bear confirmed." NASDAQ-100 Index Tracking Stock (AMEX:QQQ) - Daily Interval Friday morning's "rejection" near $22.97 hints there's either some very skittish bears or some eager bulls in the NASDAQ-100 and near-term and that now becomes a level that traders will monitor as short-term support. I do believe that Cisco Systems' (NASDAQ:CSCO) $10.51 earnings, which are to be released on November 6th (also the next FOMC meeting) will be key for continued bullishness. As a trading strategy, bulls in the Q's might look to sell gains into the 24.21-25.45 zone ahead of Cisco's numbers. In recent sessions, many firms have been bringing down their estimates. This may make for an easy beat, or in line, but with Intel (INTC) still saying it hasn't seen a pickup in IT spending, CSCO's outlook may be the same. "My" $22.21 support can be used as an "ultimate" level of support by which bullish traders can assess downside risk to. 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 ************** Make Money With High Premiums Everybody has seen a promising stock and rushed to the options montage only to see call prices that would choke Warren Buffett. In frustration you click off and go find another stock like GE or CSCO with option prices in pennies instead of dollars. Unfortunately with lower option premiums you typically get slower movement. Everything is relative. One strategy I have not written about in quite some time is Naked Puts or Bull Put Spreads. The reason is simple. They are bullish strategies. You don't want to assume liability in a bear market. I am not going to call this a bull market or recommend that everyone rush out and buy calls or sell puts next week. However, one of the perks of this position is that I get hundreds of emails from readers every week and you can tell from the questions what the general investor is thinking. This week I got more questions about naked puts and bull call spreads than I got in the last six months. This should be a clue as to what direction investors are leaning. There are multiple ways to make money with puts in a bullish market. You can sell them naked, which means you "write" or "sell to open" a put position. This requires naked writing capability and much more margin in your account. You receive the premium in your account and you want the stock to rise significantly to where you can buy the puts back for a substantial profit. The downside is you are liable to purchase the stock for the strike price you sold. This concerns traders way too much since the only risk is that the stock falls below the price it was when you sold the put. To remove this risk you can use the Bull Put Spread strategy instead. This means you buy a put that is out of the money and then sell a put that is higher. This limits your risk to the lower strike price minus any premium received. I am going to give a couple examples of each. Using LLTC as an example at $27.55. If you sold the $35 put naked for Friday's closing price of $7.40 then you would be liable for any risk of the stock trading under $27.50. Any move over $27.50 would result in a profit as the option price declines almost penny for penny as the stock moves up. (there is the bid/ask spread to conquer of 50 cents but after that it is all profit) The risk is that you can be put the stock at any time. If it rose to $30 and you were put the stock at $35 you sell the stock for $30 and you would make $2.40. $35 - 7.40 premium = cost basis of $27.60. Being put the stock is not a bad thing as long as it is above the $27.55 price where you started the play. Being put the stock at a lower price is not bad either AS LONG as you still plan on continuing the play. If the stock dropped to $25 and you were put at $35 you would "technically" be out $2.60. BUT, as long as you sell the stock and resell the put exactly at the same time at the open you would receive $10 for the put the second time instead of $7.40. That $2.60 difference makes up for the drop in the stock. The key here is you can't keep doing this forever. This is a bullish strategy and is not meant to be used on stocks that may drop. Reselling a put stock once is a repair strategy but doing it several times is crazy, UNLESS you have insurance. Using the LLTC example you can turn this into a bull put spread by purchasing a $25 put for $1.15. Now your total risk is the difference between $27.55, the current stock price, and your long $25 put, ($2.55) plus the cost of the insurance put, $1.15. This makes your total risk $3.70 compared with your total profit potential of $7.40. Obviously that is a 1:2 risk ratio. The ratio is governed by the distance from the current stock price for the insurance put and the distance above the current stock price for the put sold. Selling the $50 put on LLTC puts $21.90 in your account and changes the risk/reward ratio to nearly 1:6. The risk is EXACTLY the same whether you sell a $30 put or a $50 put. You are covered by the amount of premium you received on each. You would receive $20 MORE premium on the $50 put than the $30 put. You have to be realistic. The odds of LLTC hitting $50 in November are almost zero. You can construct a 1:20 risk reward ratio but the odds are 20:1 against a full profit. In these days of low expectations I think $10-$15 out of the money is about as far as you can expect the stocks to move despite wild hopes. Therefore selling farther away does no good. You do want to sell about $5 farther than you think the stock can actually reach. As long as the short put is in-the-money it will have no time value. Once it is at-the-money or out-of-the-money it will have only time premium and that premium decays much more slowly. In order to capture the maximum profit you need to close the play by buying back the short put when the stock reaches its maximum gain. In a bull market you can move out more than one month to sell an even higher strike and allow the stock to move higher before you close the play. During a rally in a bear market (now) you need to stick with the current month and use stocks with the maximum rate of gain. Try to pick a stock that is between strikes like LLTC at $27.50. This makes the insurance puts cheaper because they are already out of the money. Just remember the distance between the strike you buy and the current stock price is risk. Using a stock like QCOM which at $36.20 is right between $35 and $37.50 strikes. You can pay $2.00 for the $35 strike and your risk is $2 plus the amount of the stock price over $35 or $1.20 making your total risk $3.20. (out of pocket $2.00 but total risk $3.20) If you bought the $37.50 strike at $3.20 your out of pocket is $3.20 but your risk is only $1.90, because the put is already $1.30 in-the-money. However, if the stock goes up your profits are reduced by $3.20 rather than $2.00 on the lower strike. You have to decide if it is worth risking the extra $1.20 of lost profit to have $1.40 of less risk. An example of a 1:4 risk reward play would be MOLX. At $25.17 you can buy the $25 put for $1.80 and sell the $35 put for $9.60. You are 100% protected under $25 and receive maximum profit over $35. In reality the stock would probably finish the month in the $32 range and produce a $5 profit for a $1.80 investment. MOLX Chart Some stocks I screened that would work for the bull put spread would be: CTXS, TLAB, NXTL, RATL, NVDA, CYTC, GNSS, CEFT, NVLS, GENZ, QLGC, KLAC, DELL and QCOM. A stock I would write naked with just a stop loss would be ERTS. If you are going to write naked I like to do it on a dip. Take a company like ERTS and wait for one of these big gap down market days. The premiums will spike instantly and as soon as the market turns you sell the put at the inflated premium. ERTS Chart Do not use limit orders and do not use sell more than 10 contracts at a time. Normally you will get an instant fill at the bid. If you put in a limit order the market maker will change the bid in a heart beat rather than have his money sit in your account for a month. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** What I Do, Not What I Say by Steven Price What appeared to be a slam-dunk rally never quite materialized this morning, instead dropping quickly at the beginning of the session. After last night's earnings surprise from Microsoft, the Dow resistance levels between 8300 and 8400 looked like they would be nothing more than a shattered glass ceiling. However, that glass looked more like Plexiglas at the open, with the Dow falling quickly more than 100 points in the morning. By the end of the day, we had rallied back and posted a gain of 47.36, which looked impressive, but wasn't exactly the furious rally many had expected. It was significant in that it broke through the 50-dma and the previous support level of 8305, which had previously appeared to serve as resistance. The average did stop short of the 61.8% Fib number of 8359, but the Dow does seem to be forming a new base in the current area. This consolidation looks bullish after the 1000-point, four-day rally, has paused and crept higher, rather than falling back. The rally was impressive, but I'm left wondering how it will sustain itself with the constant outflow of assets from stock funds. During the week ending October 16, funds saw withdrawals of $9.3 billion, after losing $2.7 billion the week before. This money is coming out of the market during an upswing! August was the first time in 14 years that stock funds had seen net redemptions during a month in which the market increased in value. The outflow in August was around $5 billion total for the month. Unless there is a sudden influx of cash, which seems unlikely given the recent surge of layoffs, this month will more than double August's redemptions. That's an awfully heavy anchor to haul up the hill. We seem to be seeing a large asset allocation from bonds into stocks, as yields have soared in the 5-year, 10-year and 30-year treasuries during the recent rally. This represents a selling of bonds, which was most likely triggered when bonds hit astronomical levels (as evidenced by extraordinarily low yields), and stocks dropped to their July lows. The bulls see this as evidence of real money flowing back into stocks, while bears wonder if the allocation will shift back in the other direction, as stocks increase in value, in spite of weak economic fundamentals. We have seen a number of sector rebounds, most notably the banks. The S&P Banks Index (BIX.X) has bounced from a low under 240 just a week ago, to just below its 50-dma of 285. That 50-dma may provide the ceiling, as the Dow hovers near its own. However, other than Citigroup "sort of " beating earnings estimates, by including a one time asset sale, nothing has really changed for the group. We have seen a similar phenomenon in the retail sector, where the S&P Retail Index (RLX.X) has rebounded in the last 10 days from testing support at 250, to finish today at 290. This rally came in spite of the fact that there has been no reversal in the trend of poor retail sales. Wal-Mart came out and said they should meet expectations for 2-4% same store sales growth this month, but those growth estimates have come down from the 4-6% they commonly predicted in previous months. In addition, the preliminary Consumer Sentiment number was five points below expectations, indicating a reluctance to spend on the part of consumers. Of course, I can spout off all I want about why the market shouldn't be going up, and it won't make a bit of difference if it keeps going. Therefore, we need to trade what we see. Right now, we see strength and a rising Dow. If the average can get through the aforementioned Fib level of 8359, there is not much technical resistance until around 8600. However, I will also be keeping an eye on the Semiconductor Index (SOX.X). The SOX foreshadowed the failed rally in August by failing its 50-dma while the other major averages soared through their own. The SOX is currently trading 268, with the 50-dma at 279. Keep an eye on this number and remember to trade what you see. However, if the rally begins to fail, remember that it didn't have much substance behind it to begin with and don't be too anxious to pick a bottom. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7286 Current : 8322 Moving Averages: (Simple) 10-dma: 7834 50-dma: 8263 200-dma: 9370 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 884 Moving Averages: (Simple) 10-dma: 834 50-dma: 877 200-dma: 1015 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 956 Moving Averages: (Simple) 10-dma: 882 50-dma: 915 200-dma: 1196 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): With the broader markets in rally mode, it is time to start looking to the SOX for indication of possible failure. In August, the rally failure was signaled when the VIX failed its 50-dma (now around 280), while the other major averages were breaking through theirs. The Dow, SPX and Nasdaq all broke their 50-dmas this week. Regardless off what old-time bulls may say, our economy is technology driven and the techs will have an important impact on the overall market. If the SOX stalls out again below the 50-dma, be on the watch for another broad market drop. 52-week High: 657 52-week Low : 263 Current : 268 Moving Averages: (Simple) 10-dma: 241 50-dma: 279 200-dma: 441 ----------------------------------------------------------------- Market Volatility The VIX hovered around 40 all day before the weekend premium sellers finally came in this afternoon selling. Part of the phenomenon of expiration Friday is the roll. The CBOE begins deriving the VIX from November and December options a week before October expires, in an effort to avoid using cheap, expiring options with misleading volatility numbers in the calculation. On Friday, many firms that have sold OTM September options for higher premium levels, come back and buy them in for pennies on expiration Friday. At the same time, they "roll out" to November and sell premium in that month, lowering volatility. Therefore, unless the market experiences a big move on expiration, volatility drops are common. CBOE Market Volatility Index (VIX) = 39.82 –0.34 Nasdaq-100 Volatility Index (VXN) = 55.33 –0.89 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.68 909,573 617,816 Equity Only 0.58 756,930 437,085 OEX 1.00 57,735 57,510 QQQ 1.41 73,305 103,066 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 32 + 1 Bull Correction NASDAQ-100 42 + 1 Bull Alert Dow Indust. 43 + 0 Bull Confirmed S&P 500 38 + 1 Bull Alert S&P 100 42 + 1 Bull Alert 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 0.95 10-Day Arms Index 1.02 21-Day Arms Index 1.27 55-Day Arms Index 1.33 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 1348 1352 NASDAQ 1670 1518 New Highs New Lows NYSE 28 66 NASDAQ 36 68 Volume (in millions) NYSE 1,655 NASDAQ 1,650 ----------------------------------------------------------------- Commitments Of Traders Report: 10/15/02 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 Not much change for the commercials, who added 2,000 long contracts and 4,000 shorts, for a net increase of 1600 short contracts, but not much % change. Small traders increased both positions for a net overall increase of only 300 long contracts. Commercials Long Short Net % Of OI 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%) 10/15/02 429,448 449,138 (19,690) (2.2%) 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 09/24/02 124,232 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% 10/15/02 134,507 83,714 50,793 23.37% 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 made little change to the long side, but reduced shorts by almost 4,000 contracts. Small traders, on the other hand, left long positions virtually unchanged, while more than doubling their short contract positions; adding a total of almost 7,000 short contracts. Commercials Long Short Net % of OI 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%) 10/15/02 45,578 51,969 (6,391) ( 6.6%) 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 09/24/02 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% 10/15/02 10,185 12,478 2,293 10.1% 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 by 1,400 contracts, reducing shorts by 2,000. Small traders reduced the long side by 1,800 contracts, while slightly increasing shorts. Commercials Long Short Net % of OI 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% 10/15/02 20,914 9,630 11,284 36.9% 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 09/24/02 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%) 10/15/02 6,040 10,329 (4.289) (26.2%) 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 *************** Trade What You See by Steven Price Question: May we have your opinion on CTAS as a PUT play? Thanks Answer: Cintas is a classic example of a "trade what you see'" stock. In a suffering economy, this is a stock that I'd really love to short, simply because common sense tells me to. Cintas' primary business is company uniforms. It designs and rents corporate identity uniforms to businesses ranging from small services to large manufacturers. They also provide services such as cleaning supplies and first-aid kits for businesses, but their primary business is the uniforms. The company supplies its product to a wide range of industries. As such, it would seem to suffer in a failing economy, as many small businesses close up shop, while large companies have do the same or trim staff. The company released earnings on September 19, and the comments sounded ominous. It did meet expectations, but lowered revenue guidance for the full year, trimming between $100 million and $200 million from previous estimates. The CFO said, "Our lowered guidance reflects a more pessimistic view for the economy." The CEO added, "Although our sales force continues to be very successful in adding new customers, we continue to experience lower sales volume with our existing customers as they shrink their work forces, eliminate shifts and departments and even close operations." However, CTAS also still expects next quarter's earnings to come in line with previous estimates. The comments still seem awfully bearish, yet the stock gave a classic fake-out back on October 9. As the Dow broke down, taking many stocks with it, only to rebound in dramatic fashion since then, CTAS gave what looked like a sure-fire quadruple bottom point and figure breakdown. Because point and figure still terms this a triple bottom, that is how I will refer to it, but the fourth bottom simply looked that much worse. The breakdown turned out to be a "bear trap," which is a one box triple bottom breakdown, followed by a quick reversal. And what a reversal it has been. Point and Figure Chart of CTAS (source: Stockcharts.com) Looking at the PnF, while the stock appears much overextended, the best shorting opportunity may have to wait for a rollover below resistance at $50. The stock's recent strength has taken it through its 200-dma of $47.46 and continued on through the next round number at $48. Still, the little bear on my shoulder screams "SELL!" Of course a look at the daily chart below would have told me the same thing at $46. However, when we combine the PnF and daily charts, we see the resistance at $50 as much more significant. Even when we get to $50, we will have to decide whether to jump on a failure at that level. With the 200-dma just below to give support, a pullback to that level is likely once the stock reaches toward $50, even if it is going to continue upward. I would most likely look for a rollover below $50 AND a break of the 200-dma to the downside, knowing there is plenty of room to fall if we get that breakdown. For now, however, we must trade what we see. What we see is CTAS still acting strong and continuing upward. A little patience usually pays off, and this stock is a classic example. Daily Chart of CTAS Thanks for all of your suggestions. For those I didn't address in today's column, look for my comments on the Market Monitor. Please send your questions and suggestions to: Contact Support ************* COMING EVENTS ************* ========================================= Market Watch for the week of October 21st ========================================= ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- MMM 3M Company Mon, Oct 21 Before the Bell 1.38 ALTR Altera Corporation Mon, Oct 21 After the Bell 0.06 AME AMETEK Mon, Oct 21 After the Bell 0.64 ASH Ashland Mon, Oct 21 Before the Bell 0.72 BKNG Banknorth Group Mon, Oct 21 Before the Bell 0.52 BSG BISYS Group Mon, Oct 21 After the Bell 0.20 BG Bunge Limited Mon, Oct 21 Before the Bell 0.84 CP Canadian Pac Rlwy Mon, Oct 21 After the Bell 0.41 CRR CARBO Ceramics Mon, Oct 21 After the Bell 0.35 CECO Career Education Mon, Oct 21 After the Bell 0.28 CD Cendant Mon, Oct 21 After the Bell 0.28 CF Charter One Financial Mon, Oct 21 After the Bell 0.61 CNF CNF Inc. Mon, Oct 21 Before the Bell 0.39 DNB D&B Corp. Mon, Oct 21 After the Bell 0.43 XRAY DENTSPLY Intl Mon, Oct 21 After the Bell 0.44 DOV Dover Corporation Mon, Oct 21 After the Bell 0.33 EPN El Paso Enrgy Partnrs Mon, Oct 21 Before the Bell 0.27 EOG EOG Resources Mon, Oct 21 After the Bell 0.20 RE Everest Reinsurance Mon, Oct 21 After the Bell 1.50 ESA Extended Stay America Mon, Oct 21 After the Bell 0.22 FHR Fairmont Htl Resorts Mon, Oct 21 -----N/A----- 0.45 FISV Fiserv Mon, Oct 21 After the Bell 0.34 FTI Fmc Technologies, Inc Mon, Oct 21 Before the Bell 0.24 HAS Hasbro Mon, Oct 21 Before the Bell 0.37 HCA HCA Inc. Mon, Oct 21 Before the Bell 0.55 IDXX Idexx Laboratories Mon, Oct 21 Before the Bell 0.36 ICBC Indpendence Comm Bank Mon, Oct 21 After the Bell 0.57 LXK Lexmark Intl, Inc Mon, Oct 21 Before the Bell 0.78 LPNT LifePoint Hospitals Mon, Oct 21 After the Bell 0.30 LNCR Lincare Holdings Mon, Oct 21 -----N/A----- 0.43 MCK McKesson Corporation Mon, Oct 21 After the Bell 0.42 NHY Norsk Hydro Mon, Oct 21 Before the Bell N/A NU Northeast Utilities Mon, Oct 21 Before the Bell 0.24 OXY Occidental Petroleum Mon, Oct 21 Before the Bell 0.76 RYN Rayonier Mon, Oct 21 After the Bell 0.41 RGC Regal Entrtnmnt Grp Mon, Oct 21 Before the Bell 0.24 RNR RenaissanceRe Hldngs Mon, Oct 21 After the Bell 1.07 TXN Texas Instruments Mon, Oct 21 After the Bell 0.10 TZA TV Azteca S.A. C.V. Mon, Oct 21 -----N/A----- 0.14 UBSI United Bankshares Mon, Oct 21 Before the Bell 0.52 X US Steel Corp. Mon, Oct 21 Before the Bell 0.64 VRTS Veritas Software Mon, Oct 21 After the Bell 0.13 ZMH Zimmer Inc. Mon, Oct 21 After the Bell 0.30 ------------------------- TUESDAY ------------------------------ NDN 99 CENTS Only Tue, Oct 22 Before the Bell 0.19 ABY Abitibi-Consolidated Tue, Oct 22 Before the Bell N/A ACXM Acxiom Tue, Oct 22 After the Bell 0.15 ACS Affiliated Com Serv Tue, Oct 22 -----N/A----- 0.50 AFL AFLAC Tue, Oct 22 After the Bell 0.40 ALD Allied Capital Tue, Oct 22 Before the Bell 0.52 T AT&T Tue, Oct 22 Before the Bell 0.05 AVB Avalonbay Communities Tue, Oct 22 After the Bell 0.87 AVY Avery Dennison Tue, Oct 22 During the Market 0.72 BPC Banco Com Portugues Tue, Oct 22 After the Bell N/A BLS BellSouth Tue, Oct 22 Before the Bell 0.50 BBI Blockbuster Tue, Oct 22 Before the Bell 0.31 BWA BorgWarner, Inc. Tue, Oct 22 -----N/A----- 1.14 BSX Boston Scientific Tue, Oct 22 After the Bell 0.22 EAT Brinker Intl Tue, Oct 22 Before the Bell 0.45 BNI Burlngtn No. Santa Fe Tue, Oct 22 Before the Bell 0.51 BOBJ Business Objects S.A Tue, Oct 22 After the Bell 0.10 CHRW C.H. Robnsn Worldwide Tue, Oct 22 After the Bell 0.29 CAI CACI International Tue, Oct 22 Before the Bell 0.31 CNI Canadian Natl Railway Tue, Oct 22 After the Bell 0.83 CAH Cardinal Health Tue, Oct 22 Before the Bell 0.66 CTX Centex Corporation Tue, Oct 22 Before the Bell 1.75 CEY Certegy Tue, Oct 22 Before the Bell 0.40 CKFR CheckFree Tue, Oct 22 After the Bell 0.12 CTXS Citrix Systems Tue, Oct 22 After the Bell 0.06 COH Coach Tue, Oct 22 Before the Bell 0.21 BVN Comp Minas Benavntra Tue, Oct 22 -----N/A----- 0.46 CA Computer Ass Intl Tue, Oct 22 After the Bell 0.02 CBE Cooper Industries Tue, Oct 22 Before the Bell 0.72 ECL Ecolab Tue, Oct 22 Before the Bell 0.53 EW Edwards Lifesciences Tue, Oct 22 After the Bell 0.31 ELUX Electrolux Ab Tue, Oct 22 -----N/A----- 0.80 FII Federated Investors B Tue, Oct 22 After the Bell 0.43 G Gillette Tue, Oct 22 Before the Bell 0.33 HET Harrah`s Entertain Tue, Oct 22 -----N/A----- 0.88 HHS Harte-Hanks Tue, Oct 22 After the Bell 0.26 HCP Health Care Property Tue, Oct 22 Before the Bell 0.87 HMA Health Mgmt Ass, Inc. Tue, Oct 22 Before the Bell 0.24 HRH Hilb, Rogal&Hamilton Tue, Oct 22 Before the Bell 0.46 HNI Hon Industries Tue, Oct 22 Before the Bell 0.45 IMN Imation Tue, Oct 22 Before the Bell 0.45 IMO Imperial Oil Limited Tue, Oct 22 -----N/A----- N/A N Inco Tue, Oct 22 -----N/A----- 0.21 IPCR IPC Holdings Tue, Oct 22 After the Bell 0.94 JEF Jefferies Group Tue, Oct 22 Before the Bell 0.41 KMB Kimberly Clark Tue, Oct 22 Before the Bell 0.89 KLAC KLA-Tencor Tue, Oct 22 After the Bell 0.23 LRY Liberty Prop Trust Tue, Oct 22 -----N/A----- 0.83 LOGI Logitech Intl Tue, Oct 22 During the Market 0.30 MCD McDonalds Corporation Tue, Oct 22 -----N/A----- 0.38 MHP McGraw-Hill Tue, Oct 22 Before the Bell 1.40 MDU MDU Resources Tue, Oct 22 -----N/A----- 0.70 MWV MeadWestvaco Tue, Oct 22 Before the Bell 0.13 MDG Meridian Gold Tue, Oct 22 After the Bell 0.11 MGM Metro-Goldwyn-Mayer Tue, Oct 22 -----N/A----- -0.05 MCO Moody`s Tue, Oct 22 After the Bell 0.40 NOI National-Oilwell Tue, Oct 22 Before the Bell 0.22 NEU Neuberger Berman Tue, Oct 22 Before the Bell 0.42 NBP No. Border Partners Tue, Oct 22 After the Bell 0.68 ORLY O`Reilly Automotive Tue, Oct 22 After the Bell 0.45 OEI Ocean Energy Tue, Oct 22 Before the Bell 0.29 OVER Overture Serv, Inc. Tue, Oct 22 After the Bell 0.21 OI Owens Illinois Tue, Oct 22 After the Bell 0.62 PCAR Paccar Tue, Oct 22 Before the Bell 0.76 PTV Pactiv Tue, Oct 22 After the Bell 0.35 PTEN Patterson-UTI Enrg Tue, Oct 22 Before the Bell 0.00 PHA Pharmacia Corporation Tue, Oct 22 Before the Bell 0.44 PDG Placer Dome Tue, Oct 22 After the Bell 0.08 PL Protective Life Tue, Oct 22 After the Bell 0.63 PHM Pulte Homes Inc. Tue, Oct 22 Before the Bell 1.81 RJR R.J. Reynolds Tobacco Tue, Oct 22 Before the Bell 1.54 RSH Radio Shack Corp Tue, Oct 22 Before the Bell 0.24 RJF Raymond James Tue, Oct 22 -----N/A----- 0.31 RYL Ryland Group Tue, Oct 22 Before the Bell 1.52 SRE Sempra Energy Tue, Oct 22 Before the Bell 0.62 SHW Sherwin-Williams Tue, Oct 22 Before the Bell 0.70 SIAL Sigma-Aldrich Tue, Oct 22 After the Bell 0.56 SLAB Silicon Laboratories Tue, Oct 22 After the Bell 0.11 SSCC Smurfit-Stne Con Corp Tue, Oct 22 Before the Bell 0.13 SNA Snap-On Tue, Oct 22 Before the Bell 0.33 SPW SPX Tue, Oct 22 Before the Bell 2.25 JOE St. Joe Company Tue, Oct 22 Before the Bell 0.14 STM STMicroelect N.V. Tue, Oct 22 After the Bell 0.14 SEO Stora Enso Tue, Oct 22 -----N/A----- 0.12 STK Storage Technology Tue, Oct 22 After the Bell 0.18 TSM Taiwan Semi Manu Co Tue, Oct 22 Before the Bell 0.06 TMO Thermo Electron Tue, Oct 22 After the Bell 0.23 TDW Tidewater Tue, Oct 22 Before the Bell 0.39 TMK Torchmark Tue, Oct 22 Before the Bell 0.88 TRI Triad Hospitals Tue, Oct 22 After the Bell 0.36 UPS United Parcel Service Tue, Oct 22 Before the Bell 0.54 VMC Vulcan Materials Tue, Oct 22 After the Bell 0.75 WFSL Wash Fed Savings Bank Tue, Oct 22 -----N/A----- 0.56 WAT Waters Corporation Tue, Oct 22 Before the Bell 0.30 WY Weyerhaeuser Tue, Oct 22 Before the Bell 0.14 WYE Wyeth Tue, Oct 22 Before the Bell 0.52 XTO XTO Energy Tue, Oct 22 Before the Bell 0.36 YRK York International Tue, Oct 22 After the Bell 0.70 ----------------------- WEDNESDAY ----------------------------- ADO Adecco SA Wed, Oct 23 -----N/A----- N/A AMG Affiliated Man Grp Wed, Oct 23 -----N/A----- 1.05 AFFX Affymetrix Wed, Oct 23 After the Bell 0.02 ARG Airgas Wed, Oct 23 After the Bell 0.24 ALB Albemarle Wed, Oct 23 Before the Bell 0.42 AXL Am Axle & Manu Hldng Wed, Oct 23 -----N/A----- 0.69 AMGN Amgen Wed, Oct 23 After the Bell 0.32 BUD Anheuser-Busch Wed, Oct 23 -----N/A----- 0.71 AOL AOL Time Warner Wed, Oct 23 After the Bell 0.18 ADM Archer Daniels Mdld Wed, Oct 23 -----N/A----- 0.12 AJG Arthur J. Gallagher Wed, Oct 23 After the Bell 0.46 AWE AT&T Wrls Services Wed, Oct 23 -----N/A----- 0.00 AVX AVX Corporation Wed, Oct 23 Before the Bell 0.01 BOH Bank of Hawaii Corp Wed, Oct 23 Before the Bell 0.43 BCE BCE Wed, Oct 23 Before the Bell 0.28 BLC Belo Wed, Oct 23 Before the Bell 0.20 BMS Bemis Wed, Oct 23 Before the Bell 0.80 BDK Black & Decker Wed, Oct 23 Before the Bell 0.84 BXP Boston Properties Wed, Oct 23 -----N/A----- 0.97 CHIR Chiron Wed, Oct 23 After the Bell 0.40 CYH Community Health Sys Wed, Oct 23 After the Bell 0.23 CVG Convergys Corporation Wed, Oct 23 -----N/A----- 0.33 CVD Covance Wed, Oct 23 After the Bell 0.22 CFR Cullen/Frost Bankers Wed, Oct 23 Before the Bell 0.57 CYTC CYTYC Wed, Oct 23 -----N/A----- 0.10 DCX DaimlerChrysler Wed, Oct 23 -----N/A----- 0.71 DASTY Dassault Systemes SA Wed, Oct 23 -----N/A----- 0.20 DBD Diebold Wed, Oct 23 Before the Bell 0.60 DRYR Dryr`s Grand Ice Crm Wed, Oct 23 Before the Bell 0.59 DST DST Systems Wed, Oct 23 After the Bell 0.44 DD DuPont Wed, Oct 23 Before the Bell 0.35 LLY Eli Lilly Wed, Oct 23 Before the Bell 0.68 EXPE Expedia Wed, Oct 23 After the Bell 0.40 ESRX Express Scripts A Wed, Oct 23 After the Bell 0.67 FNF Fidelity Natl Fncl Wed, Oct 23 Before the Bell 1.24 FR First Indl Realty Wed, Oct 23 After the Bell 0.95 FMBI First Midwest Bancorp Wed, Oct 23 Before the Bell 0.47 FRE Freddie Mac Wed, Oct 23 -----N/A----- 1.26 FBN Furniture Brands Intl Wed, Oct 23 After the Bell 0.44 GETY Getty Images Wed, Oct 23 After the Bell 0.08 GSK GlaxoSmithKline Wed, Oct 23 Before the Bell 0.51 GG Goldcorp Wed, Oct 23 After the Bell 0.09 GLK Great Lakes Chemical Wed, Oct 23 After the Bell 0.25 TV Grupo Televisa, S.A. Wed, Oct 23 -----N/A----- 0.37 HLT Hilton Hotels Corp Wed, Oct 23 Before the Bell 0.10 HLYW Hollywood Entertain Wed, Oct 23 Before the Bell 0.26 ROOM Hotels.com Wed, Oct 23 Before the Bell 0.42 IP International Paper Wed, Oct 23 Before the Bell 0.31 ISIL Intersil Wed, Oct 23 After the Bell 0.18 ITT ITT Industries Wed, Oct 23 Before the Bell 0.90 JCI Johnson Controls Wed, Oct 23 Before the Bell 2.02 KMT Kennametal Wed, Oct 23 -----N/A----- 0.30 LM Legg Mason Wed, Oct 23 Before the Bell 0.68 LSI LSI Logic Wed, Oct 23 After the Bell -0.02 LZ Lubrizol Wed, Oct 23 Before the Bell 0.55 LU Lucent Technologies Wed, Oct 23 Before the Bell -0.65 MGG MGM MIRAGE Wed, Oct 23 Before the Bell 0.47 MCHP Microchip Technology Wed, Oct 23 After the Bell 0.17 MCL Moore Corporation Wed, Oct 23 After the Bell 0.12 NBR Nabors Industries Wed, Oct 23 -----N/A----- 0.11 NSANY Nissan Motor Co. Ltd. Wed, Oct 23 -----N/A----- N/A NRD NORANDA INC Wed, Oct 23 After the Bell N/A NSC Norfolk Southern Wed, Oct 23 Before the Bell 0.32 NCX Nova Chemical Wed, Oct 23 Before the Bell 0.00 NUS Nu Skin Wed, Oct 23 Before the Bell 0.19 PAS PepsiAmericas Wed, Oct 23 Before the Bell 0.33 PMI PMI Group Wed, Oct 23 Before the Bell 0.97 POT Potash Corp Ssktchwn Wed, Oct 23 -----N/A----- 0.27 PX Praxair Incorporated Wed, Oct 23 Before the Bell 0.85 RDN Radian Group Wed, Oct 23 After the Bell 1.11 RTN Raytheon Co. Wed, Oct 23 After the Bell 0.57 RBK Reebok International Wed, Oct 23 Before the Bell 0.78 RCL Royal Caribbean Wed, Oct 23 -----N/A----- 0.99 DNY RR Donnelley Wed, Oct 23 -----N/A----- 0.53 R Ryder System Wed, Oct 23 Before the Bell 0.51 SNY Sanofi Synthelabo Wed, Oct 23 -----N/A----- N/A SNY Sanofi Synthelabo Wed, Oct 23 -----N/A----- N/A SEE Sealed Air Wed, Oct 23 -----N/A----- 0.63 SRA Serono S.A. Wed, Oct 23 Before the Bell 0.13 SPC St. Paul Companies Wed, Oct 23 Before the Bell 0.81 SU Suncor Energy Wed, Oct 23 -----N/A----- 0.28 TLTOB Tele2 AB Wed, Oct 23 -----N/A----- N/A EXBD The Corp Exec Brd Co Wed, Oct 23 After the Bell 0.20 FAF The First Am Corp Wed, Oct 23 Before the Bell 0.57 VARI Varian, Inc. Wed, Oct 23 After the Bell 0.38 WLP WellPoint Health Net Wed, Oct 23 After the Bell 1.13 WWY Wm. Wrigley Jr. Wed, Oct 23 -----N/A----- 0.46 XRX Xerox Wed, Oct 23 Before the Bell 0.02 ------------------------- THURSDAY ----------------------------- TW 21st Century Ins Thu, Oct 24 Before the Bell 0.10 ABB ABB Ltd. Thu, Oct 24 Before the Bell N/A RKY Adolph Coors Thu, Oct 24 Before the Bell 1.26 AG AGCO Thu, Oct 24 Before the Bell 0.18 APD Air Products Chem Thu, Oct 24 Before the Bell 0.64 ACV Alberto-Culver Thu, Oct 24 During the Market 0.66 ACL Alcon Inc. Thu, Oct 24 -----N/A----- 0.34 AGN Allergan Thu, Oct 24 -----N/A----- 0.45 AMZN Amazon.com Thu, Oct 24 After the Bell -0.04 AHC Amerada Hess Thu, Oct 24 -----N/A----- 1.22 AIG American Intl Grp Thu, Oct 24 -----N/A----- 0.88 AVZ AMVESCAP PLC Thu, Oct 24 Before the Bell 0.20 APA Apache Thu, Oct 24 Before the Bell 1.00 ABI Applied Biosystems Thu, Oct 24 Before the Bell 0.15 ARW Arrow Electronics Thu, Oct 24 -----N/A----- 0.00 AZN AstraZeneca PLC Thu, Oct 24 -----N/A----- 0.36 ANZ Aus New Zea Bank Grp Thu, Oct 24 -----N/A----- N/A AN AutoNation Thu, Oct 24 Before the Bell 0.30 BHI Baker Hughes Thu, Oct 24 Before the Bell 0.21 BLL Ball Thu, Oct 24 Before the Bell 0.88 ABX Barrick Gold Thu, Oct 24 -----N/A----- 0.06 BMC BMC Software Thu, Oct 24 After the Bell 0.04 BYD Boyd Gaming Thu, Oct 24 After the Bell 0.25 CBT Cabot Thu, Oct 24 After the Bell 0.34 CMX Caremark Rx Thu, Oct 24 Before the Bell 0.28 CELG Celgene Thu, Oct 24 Before the Bell -0.01 CTL CenturyTel, Inc. Thu, Oct 24 Before the Bell 0.50 CINF Cincinnati Financial Thu, Oct 24 -----N/A----- 0.41 CIN Cinergy Thu, Oct 24 -----N/A----- 0.78 COLM Columbia Sportswear Thu, Oct 24 After the Bell 1.34 CFB Commercial Federal Thu, Oct 24 Before the Bell 0.55 CCR Countrywide Crdt Ind Thu, Oct 24 Before the Bell 1.64 CSX CSX Thu, Oct 24 Before the Bell 0.55 DP Diagnostic Products Thu, Oct 24 Before the Bell 0.38 DLTR Dollar Tree Stores Thu, Oct 24 After the Bell 0.16 DOW Dow Chemical Thu, Oct 24 Before the Bell 0.16 DUK Duke Energy Thu, Oct 24 -----N/A----- 0.57 EMN Eastman Chemical Thu, Oct 24 After the Bell 0.35 EK Eastman Kodak Thu, Oct 24 Before the Bell 0.86 ELX Emulex Thu, Oct 24 -----N/A----- 0.16 EEP Enbridge Enrg Prtnrs Thu, Oct 24 After the Bell 0.44 EC Engelhard Thu, Oct 24 Before the Bell 0.47 FLEX Flextronics Thu, Oct 24 After the Bell 0.08 BEN Franklin Resources Thu, Oct 24 After the Bell 0.44 HSC Harsco Corporation Thu, Oct 24 -----N/A----- 0.68 HCR HCR Manor Care Thu, Oct 24 Before the Bell 0.36 HNT Health Net, Inc. Thu, Oct 24 After the Bell 0.54 HR Healthcare Rlty Trust Thu, Oct 24 After the Bell 0.68 IDT IDT Corporation Thu, Oct 24 -----N/A----- N/A IKN Ikon Office Solutions Thu, Oct 24 Before the Bell 0.21 IGL IMC Global Thu, Oct 24 Before the Bell 0.05 IDCO Interactive Data Corp Thu, Oct 24 Before the Bell 0.16 ITMN InterMune, Inc. Thu, Oct 24 After the Bell -0.93 IVGN Invitrogen Thu, Oct 24 After the Bell 0.46 SFI iStar Financial Inc. Thu, Oct 24 Before the Bell N/A JDSU JDS Uniphase Thu, Oct 24 After the Bell -0.07 KSE KeySpan Corporation Thu, Oct 24 Before the Bell 0.05 KB Kookmin Bank Thu, Oct 24 -----N/A----- N/A LR Lafarge Thu, Oct 24 -----N/A----- N/A MFC Manulife Financial Thu, Oct 24 -----N/A----- 0.44 MRO Marathon Oil Corp. Thu, Oct 24 Before the Bell 0.52 MEDI MedImmune Thu, Oct 24 Before the Bell -0.14 NFG National Fuel Gas Thu, Oct 24 After the Bell 0.06 NCR NCR Thu, Oct 24 Before the Bell 0.34 NXTL Nextel Communications Thu, Oct 24 Before the Bell 0.04 NE Noble Corporation Thu, Oct 24 -----N/A----- 0.37 NST NSTAR Thu, Oct 24 -----N/A----- 1.38 ONB Old National Bancorp Thu, Oct 24 Before the Bell 0.45 ORI Old Republic Intl Thu, Oct 24 -----N/A----- 0.77 POC P & O Prncess Cruises Thu, Oct 24 -----N/A----- 0.91 PPE Park Place Entertain Thu, Oct 24 -----N/A----- 0.15 PY Pechiney Thu, Oct 24 -----N/A----- 0.32 POM Pepco Holdings, Inc. Thu, Oct 24 -----N/A----- 0.89 PXD Pioneer Natural Res Thu, Oct 24 Before the Bell 0.13 PDE Pride Intl Inc. Thu, Oct 24 After the Bell 0.00 RGA Reinsurance Grp of Am Thu, Oct 24 After the Bell 0.69 RESP Respironics, Inc. Thu, Oct 24 Before the Bell 0.32 SLE Sara Lee Thu, Oct 24 -----N/A----- 0.34 SBC SBC Communications Thu, Oct 24 Before the Bell 0.54 SGP Schering-Plough Thu, Oct 24 Before the Bell 0.28 SCIO Scios Thu, Oct 24 Before the Bell -0.54 SCRI SICOR Thu, Oct 24 -----N/A----- 0.20 SFG StanCorp Fincl Grp Thu, Oct 24 Before the Bell 1.01 HOT Starwood Htls & Rsrts Thu, Oct 24 Before the Bell 0.26 STE Steris Thu, Oct 24 Before the Bell 0.24 SDS SunGard Data Systems Thu, Oct 24 After the Bell 0.28 SUN Sunoco Thu, Oct 24 Before the Bell 0.40 TECH Techne Thu, Oct 24 Before the Bell 0.25 MNI The McClatchy Company Thu, Oct 24 Before the Bell 0.69 TRH Transatlantic Hldngs Thu, Oct 24 Before the Bell 1.15 TYC Tyco International Thu, Oct 24 Before the Bell 0.32 UNP Union Pacific Thu, Oct 24 Before the Bell 1.42 UCL Unocal Thu, Oct 24 Before the Bell 0.54 UPM UPM-Kymmene Group Thu, Oct 24 Before the Bell 0.50 USAI USA Interactive Thu, Oct 24 Before the Bell 0.09 VCI Valassis Thu, Oct 24 Before the Bell 0.60 VAR Varian Medical Thu, Oct 24 After the Bell 0.45 VVC Vectren Thu, Oct 24 After the Bell 0.24 VRSN VeriSign Thu, Oct 24 After the Bell 0.14 VVI Viad Thu, Oct 24 Before the Bell 0.35 WDR Waddell&Reed Finl Thu, Oct 24 Before the Bell 0.27 WFT Weatherford Thu, Oct 24 After the Bell 0.29 WEN Wendy`s International Thu, Oct 24 -----N/A----- 0.52 ------------------------- FRIDAY ------------------------------- LNT Alliant Energy Fri, Oct 25 Before the Bell 0.68 AT Alltel Corporation Fri, Oct 25 Before the Bell 0.80 AEP American Elec Power Fri, Oct 25 -----N/A----- 1.06 BEC Beckman Coulter Fri, Oct 25 Before the Bell 0.52 BC Brunswick Fri, Oct 25 Before the Bell 0.27 KOF Coca-Cola FEMSA, Fri, Oct 25 Before the Bell 0.48 CTC Comp Telecom de Chile Fri, Oct 25 -----N/A----- 0.02 DCN Dana Fri, Oct 25 -----N/A----- 0.26 RDY Dr. Reddy`s Lab Fri, Oct 25 -----N/A----- N/A EAS Energy East Fri, Oct 25 After the Bell 0.16 ERIE Erie Indemnity Fri, Oct 25 -----N/A----- 0.73 FMX FEMSA Fri, Oct 25 Before the Bell 0.81 LMT Lockheed Martin Fri, Oct 25 Before the Bell 0.65 PGL Peoples Energy Fri, Oct 25 Before the Bell 0.02 RDA Reader`s Digest Ass Fri, Oct 25 Before the Bell 0.02 ROH Rohm and Haas Fri, Oct 25 Before the Bell 0.41 SCG SCANA Fri, Oct 25 Before the Bell 0.70 SNRA Sonera Group plc Fri, Oct 25 Before the Bell N/A SYT Syngenta AG Fri, Oct 25 -----N/A----- N/A SYY Sysco Fri, Oct 25 Before the Bell 0.28 TROW T. Rowe Price Fri, Oct 25 Before the Bell 0.37 VRC Varco Fri, Oct 25 Before the Bell 0.22 VZ Verizon Comm Fri, Oct 25 Before the Bell 0.77 WEC Wisconsin Energy Fri, Oct 25 Before the Bell 0.50 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable SPW SPW Corp. 2:1 10/24 10/25 CPBI CPB Inc. 2:1 10/25 10/28 EASI Engineered Support Sys. 3:2 10/31 11/02 -------------------------- Economic Reports This Week -------------------------- The new home sales numbers and sentiment report on Friday are the big economic reports this week but third quarter earnings will remain the headlining attraction on Wall Street. ============================================================== -For- Monday, 10/21/02 ---------------- Leading Indicators (DM) Sep Forecast: -0.2% Previous: -0.2% Treasury Budget (DM) Sep Forecast: $43.0B Previous: $35.4B Tuesday, 10/22/02 ----------------- None Wednesday, 10/23/02 ------------------- Fed’s Beige Book (DM) Thursday, 10/24/02 ------------------ Initial Claims (BB) 10/19 Forecast: 405K Previous: 411K Friday, 10/25/02 ---------------- Durable Orders (BB) Sep Forecast: -2.0% Previous: -0.4% Mich Sentiment-Rev (DM) Oct Forecast: 81.0 Previous: 80.4 New Home Sales (DM) Sep Forecast: 985K Previous: 996K Existing Home Sales (DM)Sep Forecast: 5.35M Previous: 5.28M 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 ********************* Another Day in Denial Expiration Friday was filled with promise. Several times the indexes rallied right to resistance at 8300/1285/450 only to roll over again. Alas, but it was not to be. +1100 points in a week and there is no profit taking in sight. 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 10-20-2002 Sunday 2 of 5 In Section Two: Stock Pick: Important Conclusions Daily Results Call Play of the Day: ERTS Put Play of the Day: GM Dropped Calls: ITMN, NPSP Dropped Puts: None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** Stock Pick ********** PLCM - Polycom, Inc. - $9.65 Strategy: Long stock with put insurance One week into the heart of the Q3 earnings season, there are a couple of important conclusions that can be drawn. For the most part, earnings are not as bad as many market participants had feared, and investor relief is leading the broad markets higher. The second important realization is that the environment for corporate spending is still abysmal, and continues to be almost nonexistent visibility for when it will improve. If we listen to the language of the market, the net result is that companies that continue to deliver solid earnings and cater to a portion of the economy that is likely to grow both near-term and longer-term, will be rewarded with investor loyalty and consequently, a higher share price. PLCM is a worldwide leader in the convergence of interactive voice, video, data and web communications. With corporations trying to streamline expenses until the next growth phase arrives, one way to cut those costs is to use the technology PLCM specializes in, to allow employees to collaborate and meet online, rather than physically traveling. Judging by the company's earnings report last Wednesday, corporations are starting to wise up to the benefits of this form of interaction. The company reported pro-forma earnings of 9-cents per share, a penny ahead of consensus estimates on revenues of $106 million. Looking at the company's earnings history, it is encouraging to see a solid trend of year-over-year revenue growth. While not yet truly cash-flow positive, PLCM is getting closer every quarter, and the business trends described above should continue to work in the company's favor. Breaking down with the rest of the Technology market, PLCM broke below the $10 level back in July, and after apparently finding support near there, broke down again last month to trace a new multi-year low just below $6.50. Investors then came off the sidelines with some enthusiasm, recognizing the stock's inherent value. Since then PLCM has risen to test the $10 level as resistance on a couple of occasions. While we obviously expect that level to be broken by the bulls, we're looking for a dip back to support first, so that the buyers can get a running start. The ideal entry will consist of a pullback to the $8.00-8.50 area, which now looks like decent support. Obviously, the first hurdle will be for PLCM to clear the $10 level to the upside, before meeting solid resistance at $12.25. This was support until last Summer, and will likely take some serious buying interest to clear. Perhaps in anticipation of a strong Q4 earnings report? As shown on the chart below, the longer-term objectives for the play are $19 and then $22.50. So the play is to go long PLCM stock in the $8.00-8.50 range and go long one contract of the Jan-2003 $7.500 puts QHD-MU at $0.65 for each 100 shares you are long. There is no requirement to go long the put but it does prevent all but a very minimal loss should something unexpected happen to PLCM. Option 1: If PLCM is not above $10.00 by Jan 2nd, close both positions and exit the play. Option 2: If PLCM is below $7.50 on Jan 2nd then you have the option of closing the put for a slight profit and lowering your basis in the long stock play by the amount of the put premium received or closing both positions and exiting the play. Option 3: If PLCM is above $12.50 by Jan 2nd then close the put position for any remaining premium and set a stop loss on the stock at your entry point of $8.00-8.50 plus any short fall on the put premium. Polycom (PLCM) Weekly Chart *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week ERTS 70.14 1.26 0.57 0.65 0.19 3.64 New, new highs FNM 71.89 1.36 1.73 -0.60 –1.29 6.99 New, bonds ITMN 36.00 1.88 1.29 -0.52 0.89 3.67 Drop, profits NPSP 25.21 0.40 2.02 -0.23 0.67 1.01 Drop, offer PNRA 30.95 1.37 -1.20 -0.21 0.73 3.32 New, above $30 UNH 99.73 1.38 1.73 1.48 –2.12 6.40 New, strong PUTS EBAY 59.96 2.00 0.45 -0.08 0.15 4.46 $60 failure GIS 41.69 1.33 -0.02 -0.17 –0.25 0.19 slow but sure GM 34.31 -1.57 0.79 -1.91 –0.14 -0.52 New, rolling KSS 55.15 0.99 -0.81 -1.34 –2.16 2.65 weak rebound OMC 59.25 1.54 -0.46 -0.54 –2.94 3.18 under $60 ************************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: ********************* ERTS - Electronic Arts - $70.14 +0.82 (+2.55 for the week) See details in play list Put Play of the Day: ******************** GM – General Motors $34.31 (-0.51 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 ^^^^^ ITMN $36.00 (-0.10) our patience eventually paid off with ITMN, which was entered at $33.99. The stock has traded as high as $37.44 and traded over $37 on 3 of the last 4 days. Unfortunately it seems to have found a temporary top at that level and we would rather not watch our option premiums decay while it struggles there. We will take our profits and close the play. If it is able to break the $37.50 mark, there may be some additional upside, but we will re-examine it at that time. --- NPSP $25.21 (+1.01) So much for that relative strength! Following its recent breakout over the $25 level, NPSP pulled a fast one this morning when the company announced a 4 million share stock offering. That knocked the stock back from the $27 level to below $25.50, where it spent the entire session in a fairly tight range. While the stock could rebound next week, the additional shares that are going to come to market are likely to keep the price depressed. Rather than wait and hope, we'll lick our wounds and move on to the next winning play. If still in the play, keep your stop in place at $24 and look to exit on any rally attempt up into the $26-27 area. PUTS ^^^^ None *********** 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 10-20-2002 Sunday 3 of 5 In Section Three: New Calls: ERTS, UNH, PNRA, FNM Current Calls: None New Puts: GM ************************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 ************** ERTS - Electronic Arts - $70.14 +0.82 (+2.55 for the week) Company Summary: Electronic Arts, headquartered in Redwood City, California, is the world's leading interactive entertainment software company. Founded in 1982, Electronic Arts posted revenues of more than $1.7 billion for fiscal 2002. The company develops, publishes and distributes software worldwide for the Internet, personal computers and video game systems. EA markets its products under four brand names: EA SPORTS(TM), EA GAMES(TM), EA SPORTS BIG(TM) and EA.COM(SM). (source: company release) Why We Like It: ERTS continues to perform like a champ and we haven't even hit the holiday shopping season. The stock hit another all-time high in today's trading session and also cracked the $70 resistance level. This is the third higher high since the July low. The trade of $70 also created a fresh buy signal on the point and figure charts and the bullish vertical count is now $89. The stock gapped up on Thursday, came back on Friday, filled the gap and then took off. The stock struggled with $70 throughout much of the afternoon, until the buyers finally overwhelmed sellers at that level and the hold over $70 at the close looks bullish. ERTS continues to dominate the video game market, and its share is still growing. The company forecasted revenue of over $1 billion for the fiscal third quarter, ending in December. This is the first time a purely games company has taken in that much in a quarter and is more than the full-year forecast of any of its competitors. With leading games, such as Madden 2003, Harry Potter and Lord of the Rings, the company expects continued growth through the holiday season and beyond. One of the biggest factors contributing to the success of ERTS is that their primary audience now includes consumers over the age of 21. While the company is still a leader in the younger age groups, the fact that their target consumer now includes those "gamers" with jobs and money will prevent them from relying solely on kids who have to wait for the holidays for their parents to spend $50 on a new game. The stock has tacked on almost $8 in a week, so a pullback is likely at some point and we will use $66, which is just below recent closing levels, as a gauge for the current trend's continuation. New entries can look for a pullback above $66 for an ideal entry level. However, the strength of the recent move is impressive and if we don't get a pullback, then we will look for intraday support at $70 for new entries. Now that the stock has broken through $70, a show of new support at that level could catapult it quickly toward our initial target of $75. BUY CALL NOV-65*EZQ-KM OI= 1915 at $7.30 SL=3.60 BUY CALL NOV-70 EZQ-KN OI= 5704 at $3.90 SL=1.80 BUY CALL DEC-65 EZQ-LM OI= 1442 at $8.90 SL=4.50 BUY CALL DEC-70 EZQ-LN OI= 1535 at $5.80 SL=3.00 Average Daily Volume = 4.93 mil --- UNH - United Healthcare - $99.73 +2.03 (+6.24 for the week) Company Summary: UnitedHealth Group is a diversified health and well-being company that provides a broad spectrum of resources and services to help people achieve improved health and well-being through all stages of life. UnitedHealth Group offers products and services through five primary operating companies: UnitedHealthcare, Ovations, Uniprise, Specialized Care Services and Ingenix. (source: company release) Why We Like It: UNH, as well as other HMO stocks have been on a tear lately. UNH released earnings on Thursday that rose 53% from a year ago. The company reported its 16th consecutive quarter of double digit growth and also raised estimates for this year and next. The company has diversified itself to keep ahead of rising medical costs by expanding into areas such as dental care and mental health coverage. The recent earnings came in at $1.12 cents per share, beating forecasts of $1.04. UNH has done a good job of estimating costs and raising premiums quickly enough to cover those costs. They have maintained a favorable medical cost ratio, a profitability measure which takes into account premium dollars spent on costs such as hospitals and doctors. The results propelled the stock to just over $100 on Thursday, before the HMO sector experienced a pullback and landed the stock back to unchanged. On Friday, however, UNH traded back over $100 again, finding a top for the second day in a row right around $100.50. UNH has put together a series of higher highs and higher lows since dropping to around $82 during the July market swoon. It is currently working on the third higher high after the second higher low. The stock is far above its 50-dma and 200-dma, which are consistently rising. The stock's point and figure buy signal came down at $94 and the current column of "X"s does look a little extended. However, the fact that even it's pullback stopped short of a three-box reversal indicates that we may not see a reversal above the breakout level. There had been previous resistance at $97 on both the daily and PnF charts, which has now been broken. Ideally, we would like a pullback to support, around that previous resistance level ($97), for a long entry. We favor the 95 call for that pullback. However, if the strength in UNH continues and does not give us that entry point, then a show of intraday support at $100 or above would be our trigger to enter long. In that case, the 100 strike would be preferred. Place stops at $95. BUY CALL NOV-95 *UHB-KS OI= 2687 at $6.90 SL=3.50 BUY CALL NOV-100 UHB-KT OI= 2168 at $3.60 SL=1.80 BUY CALL DEC-95 UHB-LS OI= 1285 at $8.50 SL=4.25 BUY CALL DEC-100 UHB-LT OI= 993 at $5.40 SL=2.70 Average Daily Volume = 2.44 mil --- PNRA - Panera Bread - $30.95 +0.95 (+3.19 for the week) Company Summary: Panera Bread Company owns and franchises bakery-cafes under the Panera Bread and Saint Louis Bread Co. names. The company is a leader in the emerging specialty bread/cafe category due to its unique bread combined with a quick, casual dining experience. (source: company release) Why We Like It: Panera looked as though it was ready for a breakdown in the middle of September, and we played it as such, only to be disappointed in the sudden upward reversal. We're going back to the well on this one, as it has been building a series of higher highs and higher lows, culminating with today's move through the 200-dma of $30. 46. The stock traded as high as $31.15, before settling in for the day at $30.95. A look at the point and figure chart shows the stock currently in the middle of a reversal off its lows at $24, where it bounced off the bullish support line twice. There is some resistance at $35 and again at $36, but so far Panera has been a disappointment only to the shorts. The stock topped out at $30.04 on Tuesday and Thursday, but then broke through that barrier and $31 on Friday, showing continuing strength at successively higher levels. Both days closed on upswings near their highs of the day. Most impressive, however, was the fact that the stock saw a struggle between buyers and sellers at $30 at the end of the day on Thursday and most of the day Friday before the breakthrough. Once that round number resistance was gone, it was a quick trip up to $31, which was broken without much effort. While many retailers and restaurants have seen declining same stores sales growth, or decreases in many cases, over the last several months, Panera has continued to grow its business. Its August same store sales were up 4.4% and the company recently announced a deal to develop 30 more stores in southern California. We like entry for new longs on either a pullback and show of support at $30, or a break back above $31, with evidence of intraday support at that level. Place stops at $28, just below the 50-dma BUY CALL NOV-27.50*UPA-KY OI= 236 at $4.30 SL=2.15 BUY CALL NOV-30 UPA-KF OI= 797 at $2.50 SL=1.25 BUY CALL FEB-27.50 UPA-BY OI= 84 at $6.20 SL=3.10 BUY CALL FEB-30 UPA-BF OI= 147 at $4.50 SL=2.25 Average Daily Volume = 983 k --- FNM – Federal National Mortgage Assn. $71.89 (+6.81 last week) Company Summary: Commonly known as Fannie Mae, the Federal National Mortgage Association is a company that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. FNM does not directly lend money to homebuyers, but works with lenders to ensure that there is no shortage of funds available for mortgage loans. The company accomplishes this by purchasing mortgages from a variety of institutions that make up the primary mortgage market. Primary market lenders include mortgage companies, savings and loans, commercial banks, credit unions and state and local housing finance agencies. These are the businesses where the mortgages are originated and the funds are loaned directly to the borrower. FNM then buys the mortgage, thus allowing the primary market lender to replenish their funds and lend more money to homebuyers. Why We Like It: It has been interesting to note how the possible bubble in the Housing market has gotten so much more air time that the equity bubble ever did. It seems everyone has an opinion about whether it is a bubble, how big it is and how it might resolve itself. This speculation, along with bond yields moving to multi-decade lows recently raised the question of how FNM was going to be hit by having to rebalance its bond portfolio. That scenario prompted investors to dump the stock, selling it off to below the $60 level at the end of September. That was before the company came out and announced that they had already taken corrective action, narrowing its duration gap from 14-months to 10-months. That news appears to have cheered investors, as they have propelled the stock through some important resistance levels in the past week. First up was $66, and after clearing that on Monday, the bulls pushed steadily higher throughout the week (following the company's upside earnings surprise on Tuesday), closing on Friday above the 50-dma ($70.39), with the stock posting a nearly 5% gain. The stock has now gone on a strong PnF Buy signal and blasted through the bearish resistance line. Significant resistance is waiting just overhead near $72.50, so we want to look for a pullback before initiating new positions. Intraday support is resting in the $69.50-70.00 range with further support near $68 (the site of Friday's intraday low). Use a dip and bounce from these levels to initiate new positions in anticipation of a rally up towards the 200-dma, which is currently sitting at $76. Set stops initially at $67.50. BUY CALL NOV-70 FNM-KN OI= 5772 at $4.10 SL=2.50 BUY CALL NOV-75*FNM-KO OI= 7531 at $1.65 SL=0.75 BUY CALL DEC-70 FNM-LN OI= 3489 at $5.70 SL=3.75 BUY CALL DEC-75 FNM-LO OI=15003 at $3.00 SL=1.50 Average Daily Volume = 5.34 mln ************************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 ****************** None ************* NEW PUT PLAYS ************* GM – General Motors $34.31 (-0.51 last week) Company Summary: Maintaining its position as the world's #1 maker of cars and trucks, GM has managed to diversify its business so that it is more than just a car company. Its automotive business encompasses the Buick, Cadillac, Chevrolet, GMC, Oldsmobile, Pontiac and Saturn brands, as well as others through its affiliations with Suzuki, Saab, and Isuzu. Non-automotive operations include Hughes Electronics (satellites, communications), Allison Transmission (medium and heavy-duty transmissions), and GM Locomotive (locomotives, diesel engines). GM has successfully spun off Delphi Automotive Systems, the world's #1 auto parts maker. Why We Like It: While familiarity may breed contempt, when it comes to plays that continue to perform, that familiarity tends to produce profits. It is becoming increasingly clear that the Automotive industry has painted itself into a corner over the past year. Aggressive price competition and zero percent financing have lured many a consumer into buying new cars earlier than they might otherwise have done. The problem is that there isn't a fresh wave of consumers to follow them, and that is starting to show up as declining sales, despite the continuation of the aggressive financing programs. We played GM to the downside a couple weeks ago, as the stock drilled down from the $40 level all the way to $31. We dropped the play just in time, because after hitting that important support level, the stock rallied a bit into earnings, reaching as high as $37 on Tuesday following the company's earnings release. That proved to just be another bearish entry point, as S&P went on a debt-downgrade safari on Wednesday, dropping their rating on GM's long-term debt to BBB. Investors didn't like the sound of that one bit, driving the stock back down to the $34 level. We saw a bit of a rebound on Thursday with the strong rebound in the broad market, but as Friday's session drew to a close, the price was gravitating back towards that $34 level. There appears to be little in the way of good news for GM shareholders, as the company guided down for the 4Q, and this is being reflected in the price. If the broad market rolls over, that pressure will likely pressure the stock back toward its recent lows near $31. Just for reference, it is interesting to note that the long column of O's on the PnF chart is currently projecting a price target of $11. While it doesn't appear that is in play over the near-term, it certainly provides an indication that the stock is under distribution and will likely remain so until the fundamental picture improves. Use a failed rally at the $35 or $36 intraday resistance levels to initiate new positions. Alternatively, look to enter the play on a decline under $34, using broad market weakness for confirmation. Our stop is initially in place at $37.25. BUY PUT NOV-35 GM-WG OI=8109 at $3.40 SL=1.75 BUY PUT NOV-32*GM-WZ OI= 966 at $2.15 SL=1.00 BUY PUT NOV-30 GM-WF OI=1836 at $1.45 SL=0.75 Average Daily Volume = 6.01 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. 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The Option Investor Newsletter Sunday 10-20-2002 Sunday 4 of 5 In Section Four: Current Put Plays: OMC, C, EBAY, GIS, KSS Leaps: Back At Resistance Already? Traders Corner: Hey Baby, Wanna Get Lucky? Traders Corner: Moving Average Indicators: As Support & Resistance Traders Corner: Futures Trade Signals for Entries and Exits ************************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 ***************** OMC - Omnicom - $59.25 +1.41 (+3.18 for the week) Company Summary: Omnicom Group Inc. is a leading global marketing and corporate communications company. Omnicom's branded networks and numerous specialty firms provide advertising, strategic media planning and buying, direct and promotional marketing, public relations, and other specialty communications services to more than 5,000 clients in more than 100 countries Why We Like It: OMC started the day lower as the Dow fell this morning, only to find buyers just over $56. However, the rebound stopped shy of $60 once again. Thursday's high was $60.00 and today's was $59.50. This was the stock's fourth straight lower high and third rejection at the descending trend line begun in the middle of August. While we don't like the move back above the 50-dma of $58.49, the industry still appears to have problems. Fellow ad agency Interpublic Group recently warned for the second time, citing problems in a number of businesses, including retail advertising, public relations and corporate-identity consulting. Merrill Lynch analyst Lauren Fine said that Inerpublic's estimates were "beyond comprehension," and that," When we issued our third-quarter preview a few weeks ago we indicated that we thought there was risk to our forecast...Interpublic's pre- announcement last night went beyond our imagination." Interpublic also cited revenue declines in Latin America and Japan, indicating a possible slowdown in the worldwide advertising market. This indication is not good for the industry overall, which has already had a tough year. OMC recovered from earlier accounting problems, but the rebound has found a series of lower highs and $60 appears to be the new lower ceiling. We would recommend new entries on continued resistance under $60.00. If the stock breaks that mark to the upside, we suggest stepping to the sidelines and waiting to reassess on another move below that level. BUY PUT NOV-60 OMC-WL OI= 613 at $5.20 SL=2.60 BUY PUT NOV-55 OMC-WK OI= 1181 at $3.30 SL=1.70 Average Daily Volume = 2.60 MIL --- C - Citigroup, Inc. $34.98 (+4.58 last week) Company Summary: Citigroup Inc. is a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers. The company has over 192 million customer accounts in over 100 countries and territories. C's activities are conducted through Global Consumer, which delivers a wide array of banking, lending, insurance and investment services; Global Corporate, which provides corporations, governments, institutions and investors with a broad range of financial products and services and Global Investment Management, which offers a broad range of life insurance, annuities and asset management products and services. Additionally, the company's Investment Activities division consists of the firm's venture capital activities. Why We Like It: Brokerage stocks got a reprieve from the relentless selling last week, triggered in large part by the positive reception of C's earnings report on Tuesday. While the company managed to beat by a penny, there was a lot of talk on the street about the quality of those earnings. What seemed to get a lot of attention was the sale of its headquarters building. While this was clearly a one-time sale, the revenue was treated as part of the core earnings. Both Prudential and Keefe Bruyette pointed out this unusual classification, indicating that it seems to fall short of C's desire to exemplify 'best practices' in corporate governance. Nonetheless, shares of the company rose throughout most of the week, not really running into trouble until hitting the $36 resistance level. While the stock closed in the red on Friday, it wasn't by much as the market makers pinned the stock to the $35 strike for expiration. As if the Brokerage sector needed another albatross around its neck, with the ongoing investigation into these firms' ethical practices and the concern of the quality of their debt, another possible problem surfaced on Friday. Rumors once again arose about a major Japanese insurer that may be going under. Possible exposure by the big firms like C is perhaps another problem these companies will have to face. In just the last 6 sessions, C has risen by nearly $10, and next week is likely to see some give back of those gains, unless the broad market is able to push through some major resistance. Use another rally failure near the $36 level to initiate new positions, and then look to add to those positions as the stock declines under the $35 level. If more weakness appears at the open on Monday, then look to enter on a breakdown under $34. The gap from Tuesday needs to be filled, and that will have us initially targeting the bottom of that gap just above $30. Keep stops set at $36.50. BUY PUT NOV-37 C-WU OI= 205 at $3.40 SL=1.75 BUY PUT NOV-35*C-WG OI=5665 at $1.90 SL=1.00 BUY PUT NOV-32 C-WZ OI=2962 at $1.05 SL=0.50 Average Daily Volume = 26.5 mln --- EBAY – eBay, Inc. $59.96 (+3.66 last week) Company Summary: After developing a Web-based community in which buyers and sellers are brought together in an efficient format, EBAY has emerged as the dominant online auction site. The eBay dynamic pricing format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. Items listed on eBay include collectibles, automobiles, art objects, jewelry, consumer electronics and a host of practical and miscellaneous items. Although based in the United States, through its subsidiaries, EBAY also operates trading platforms in Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. Why We Like It: If you needed proof that investors can't make up their minds in this market, recent trading action in EBAY certainly provided it. After trading up near the $60 level on a couple occasions last week ahead of the company's earnings report, the stock sold off sharply this morning, briefly piercing the $56 support level at the open, before rallying throughout the day to close near that important $60 level as expiration Friday wound to a close. Despite the company beating expectations for last quarter, investors were disappointed by the company's lowered guidance for the full year, which seemed to indicate lowered expectations for Q4. Our attraction to EBAY is based on the fact that the $60 level is both solid historical resistance, as well as the site of the descending trendline that began back in December. If earnings news didn't carry the horsepower to drive the stock through this level, then gravity ought to take effect next week. The $56 level is still strong support, as demonstrated by the rebound from just below that level this morning. It should come as no surprise, that EBAY got pinned to the $60 level on expiration Friday, as many stocks went out near the high open interest strikes. For EBAY, the $60 strike was the ticket on the Call side, while the $55 strike had the highest open interest on the Put side. While Friday's price action may have provided an attractive entry point, we'll have to wait for Monday to see whether this is another near-term top for the stock, or just a resting point before breakout out of its persistent, if somewhat volatile downtrend. Aggressive traders can look to initiate new positions on a failure near current levels, while a slightly more conservative approach will be to wait for the stock to fall back under $58.75, which provided intraday support on Friday. Look for solid confirmation (and an opportunity to add to positions) as EBAY falls back under its next levels of intraday support, first at $58 and then $56.50. Our initial target is $55, followed by $52. Due to the possibility of a breakout attempt next week (which we expect to fail), we want to give the play a bit more room to breathe, so we're raising our stop to $62. More conservative traders may want to keep their stops tight at $60.50. BUY PUT NOV-60*QXB-WL OI=1209 at $3.50 SL=1.75 BUY PUT NOV-55 QXB-WK OI=9477 at $1.85 SL=1.00 Average Daily Volume = 8.72 mln --- GIS - General Mills, Inc. $41.69 (+0.19 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: There's no question that GIS is weak, and the debt downgrade last week certainly didn't help. But at the same time, the stock has been incredibly resistant to the bears' advances. Every time it looks like it is going to break down under the $41 support level, buyers appear to prop it up. The bulk of Friday's session saw the stock under pressure, as it traded right down to that $41 level. But the end of day short-covering popped it back up, keeping it just above that ascending trendline that connects the lows posted in July. The intraday violation of that trendline on Friday was our best indication yet that GIS is eventually going to perform for us. The big question is when? While price action hasn't confirmed just yet, it is encouraging to see that the daily Stochastics tipped over in bearish fashion on Friday without making it even halfway up to overbought. That's a good bearish sign. The intraday highs have also been marching lower over the past few days, and there is now some nice overhead resistance at $42 and then $42.50. The rollover near the $43.25 level provided a great entry for those that took it, as they now have a cushion of gains to sit on while they wait for the expected breakdown. Another failed intraday rally near one of those above-mentioned resistance levels can still be used for entry into the play. Conservative traders will want to see a strong push under the $41 level before taking a position. That breakdown (when it comes) should lead GIS down to $40 and then $38 (the site of the July lows). If the stock trades at $38, it will put the PnF chart back on a Sell signal, which would project a decline down towards the $30 level. Our stop remains at $43.50. BUY PUT NOV-45 GIS-WI OI=241 at $3.90 SL=2.50 BUY PUT NOV-40*GIS-WH OI=244 at $1.15 SL=0.50 Average Daily Volume = 1.27 mln --- KSS - Kohl's Corporation $55.15 (+2.75 last week) Company Summary: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why We Like It: In typical expiration Friday form, the bulls and bears fought to a standstill, at least as far as KSS is concerned. Without any strong buying or selling pressure, the market makers were able to keep the stock pinned near the $55 level. Friday's action formed a small-range Doji candlestick pattern, which is a classic sign of indecision. That likely portends a continuation of the rollover that began mid-week as the Retailers are likely to remain under pressure as earnings season continues. The most recent shock to the Retail sector (RLX.X) came from Sears on Thursday, when the company missed earnings estimates by a country mile, due to having to a sharp increase in credit card delinquencies and defaults. The big gun in the Retail sector is WMT, and they don't report results until the middle of November, so our KSS play will likely trade in line with the overall sector (which looks weak) over the near term. For the RLX, the $290 level is an important resistance level, followed by more overhead at $295. A failed rally in the sector near one of these levels is likely to provide us with an attractive entry into KSS. After rallying up near the $59 level mid-week, the stock rolled over just below the 20-dma (currently $58.58), and with the daily Stochastics in full bearish roll, appears destined to retest its recent closing lows near the $49.50 level. While aggressive traders will want to target shoot entries on the rollover from resistance (first at $56.50 and then $58.50), the more conservative approach will be to wait for a drop under $54, which is just below Friday's intraday low. Look for confirmation of weakness from the RLX index before playing. Keep stops set at $59. BUY PUT NOV-60 KSS-WL OI=1778 at $6.40 SL=4.50 BUY PUT NOV-55*KSS-WK OI=4850 at $3.50 SL=1.75 BUY PUT NOV-50 KSS-WJ OI=2222 at $1.80 SL=1.00 Average Daily Volume = 3.70 mln ************************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 ***** Back At Resistance Already? By Mark Phillips mphillips@OptionInvestor.com That's the nature of bear market rallies. They frequently come out of nowhere, are composed of violent (and large) moves, which often take the form of gaps. While nice to see the broad markets backing away from the abyss they were staring into just 2 short weeks ago, this type of rebound is VERY difficult to responsibly trade, since the technical indications on a daily basis are so muddled. Throughout all the volatility we have seen in the past 2 weeks, the internals of this market have been steadily improving. The question now is how much further can this rally run before the mighty bear reasserts his authority? First let's look at where we have been, and that should help us to gauge the possibility that this fledgling rally continues for more than a few weeks. I think the best tool for gauging the potential upside/downside in a given market is to look at the Bullish Percent PnF chart. I've focused on the current and recent extreme readings of these charts in some recent columns, so let's update that statistic right here. Bullish Percent: Index July Low October Low Current S&P 500 12% 19% 36% -- Bull Alert DOW 3% 7% 43% -- Bull Confirmed NASDAQ-100 8% 13% 42% -- Bull Alert SPX needs to print 60 to go take out the August high. It is interesting that it reversed in August from a high of 59, falling just shy of the 66 level necessary to take out the May high. Will this rally also fail at a lower Bullish Percent high than in August? Or will it really run into the end of the year? The DOW reversed at its bearish resistance line at 60 back in August. So that resistance line (now at 58) will be the first major test for the bulls' resolve. If they can power through, then we could see the DOW Bullish percent moving into overbought territory (above 70) for the first time since early April. The NASDAQ-100 (NDX.X) has its own bearish resistance sitting at 58, just below the site of the August high of 60. So from a Bullish Percent standpoint, this rally should still have some legs, as the oversold condition continues to be worked off. Turning to the long-term descending channel that I have on the S&P 500 (SPX.X), the top of the channel (if the bulls really outdo themselves) is up at 1040. But first they'll have to push through resistance in the 910-925 area, then the August highs near 965 and then the 200-dma, which is currently at 1015. Just getting back to the 200-dma would represent a 32% advance off the October lows, which would be a tremendous move. In the bigger picture though, we can't even start to think about a longer-term bull market until the SPX can break out of this 2-year descending channel. Let me be entirely honest. I would like nothing better than to tell you that this rally is for real, that the bottom is behind us and that the market is embarking on the road to recovery that has been advertised so many times in the mainstream media. But I can't. The business climate is continuing to deteriorate, as we can see by the continuing stream of layoffs throughout the Manufacturing and Technology industries, typically the key engines of growth. The two factors that have kept the economy from completely falling apart, the consumer and housing growth, are starting to teeter. The signs of weakness from the consumer are easier to see, with tepid forecasts coming out of the Retail sector. The earnings miss from Sears last week was particularly ominous, as it was due to a sharp rise in delinquencies and defaults from their credit card division. Consumers may have continued to spend, but they are now unwilling or unable to pay the bills. Housing has continued to be strong throughout the past two years, but that gravy train is also coming to an end. Mortgage rates are nearing a practical floor, and the lack of a continuation of that stimulus that has been provided by lower rates for home purchases and refinancing will have a seriously detrimental effect on that area of prior growth. No, I didn't miss the strong housing numbers last week. They were impressive, but I just don't see much further upside available. Remember the great results that were coming out of the Technology sector in early 2000? What happened next? Until this bear market has breathed its last (which I fear will occur with the markets substantially below where they were a mere 2 weeks ago), we must continue to view each rally with a healthy dose of skepticism. These rallies will continue to be quick and violent, mandating that successful bullish traders enter early, ride out the ensuing volatility and then prudently take profits early. If that sounds difficult, it's because it is. We need to be able to pick both the sector and stocks that will benefit most from the next bull run, and then we need to practically target shoot the bottom and hang on for the volatile ride up to the next bear market peak. A perfect example of how difficult this is would be our attempts to enter a successful bullish play on the QQQ. In the past few months, we tried to pick the bottom twice and missed, both times being stopped out for a loss. I added the QQQ back onto the Watch List last weekend, looking for a slight pullback to give us a solid entry. What happened is a series of violent gap moves that easily kept us out of the play. Now the QQQ is up more than 20% from its early October low. The question now is whether it makes sense to chase it higher, or do we wait for a pullback that never comes? Missing a profitable trade is always preferable to entering one that turns out to be a loser, so we must stick to our objective of balancing risk and reward and not being goaded into chasing stocks higher. Hindsight is always 20/20, and in retrospect we could say that LEAP Calls on any 4-letter stock (that still has earnings) on October 8th would have profited handsomely since then. Look at CSCO, which bottomed near $8 and is now trading north of $10. If we had an idea where the stock would bottom, we could have bought LEAPS near the bottom of that dip and the '04 $10 LEAP would currently be up 50%. The trick is to determine in advance where that bottom is going to be. Those that targeted entries near the double bottom ($11) would still be underwater. My point in this discussion is that we can still profit from the bullish moves when they come along, but we need to stick to a defined trading plan, of entering where we can responsibly manage our risk relative to the potential reward in the trade. And it should go without saying, that we should be using a smaller amount of capital in these perilous market conditions. Will we ever return to the days of buying options and holding them for months at a time before cashing out for a fat profit? I believe we will. But if we refuse to play the game by the new rules in the meantime, we won't be in any position to benefit when that time arrives. The most important rule change for the foreseeable future is that rallies will be quick and explosive, and declines will be more slow and grinding in nature. Based on the Bullish Percent readings that I covered above and the fact that the weekly Stochastics oscillators are now in solid bullish ascent, I think this bear market rally has more room to go. Play it for all its worth, but be ready to bail out when the Mr. Bear comes out of hibernation. So without further ado, let's check on our current list of play candidates. Portfolio: LEN - Following the sharp selling in the Housing sector the prior week, the group went along with the broad market rally last week, correctly predicting the blowout housing numbers that came out on Thursday. LEN went along with the group, continuing its rebound from the $50 level and falling just short of our $60 stop on Thursday. At this point, I don't know if we'll be successful with this bearish play, but at these levels, the risk is definitely easy to manage. I still like new entries on rally failures below our $60 stop. We need to see the $50 level fail as support before I'll be comfortable in lowering our stop. JNJ - Sure and steady, JNJ reported earnings a penny ahead of estimates last week and investors rewarded the stock by pushing it up to close over $60 on Thursday, its highest level since late May. But there could be a bit of weakness early next week following the news out late on Friday that the company has been ordered to pay $150 million in damages to AMGN for inappropriate conduct in the early 1990s. This should be a nonevent, and JNJ indicated as much late Friday when it announced the news, while at the same time reiterating its guidance. We need to see the stock continue to push higher, using prior highs as new support. Traders still looking to participate can consider a dip down near the 200-dma ($57.73) to be an acceptable entry. Note that we've raised our stop to $54 this weekend. Watch List: MO - Back from the dead, MO clawed its way back over the $40 level late last week. While hardly a sign of strong bullish action, it does indicate that the stock has likely seen its lows for awhile. Look for a mild broad market retreat to drop the stock back near the $38 level, enabling us to take an attractive entry point. Our stop will initially be set at $36, just below the recent closing lows. MSFT - Ahead of its earnings report, MSFT went with the whims of the broad market, with most sessions starting out with a sizable gap. The company's own earnings report was pretty impressive on the surface, but the change in the way the company accounts for certain sales was a big part of the upside surprise. With significant resistance overhead, including the 200-dma, I have no interest in chasing the stock higher. The only viable entry will come on a pullback in the next week or so. Look for a fill of last Tuesday's gap down to $49 to provide the next high odds entry point. NEM - Close, but no cigar! By the way, does anyone know where that saying came from? I'll post the answer next week. NEM traded down early in the week, hitting a low of $22.57 before a slight recovery, likely due to the broad market strength. This play is definitely for the patient investor, and we'll stick with our target at $22.50 unless the bulls go crazy and break it out over the $25 resistance level. QQQ - There was nothing wrong with our desired entry point. The market just decided not to deliver it, as the shorts have been covering their profitable positions with a vengeance. Even if our entry target had been set at $22.50 last week, I would have been hesitant to take it, given the wild gap-dominated action in the broad markets. I've raised the target for entries to the $22.00-22.50 area, as trading down to that level would both relieve the near-term overbought condition of the QQQ, as well as test the bottom of Tuesday's gap as support. Once into the play, we'll follow it with a fairly tight stop at $21, which just happens to be the bottom of the October 10th gap. One other note worth covering is that the VIX is right back at that 40 level (39.82) which has been providing a floor for the past month. Either it will plunge below there, or take another run at the top of the recent range. Since my near-term thesis is for a rising market, a falling VIX goes right along with it. But given the fact that we're in the midst of earnings season, I expect one more push higher for the VIX before it finally loses the 40 support level. The important thing to keep in mind is that with the VIX at historically high levels, option premiums are inflated. Keep this in mind when choosing your trading strategy in the weeks ahead. In the broad scheme of things, this is still a bear market. But in the near-term, this rally looks like it still has sufficient room to run, so that we can profit from bullish plays. Keep an eye on those bullish percent charts. So long as they continue northward, then we should have confidence that the bulls are in the driver's seat. Just don't get too complacent when sitting on gains. The bear is vicious, and when he awakens, we'll want to switch sides quickly. Keep those trades small and manageable, and harvest gains when they are available. 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 $ 8.00 +23.08% $54 '05 $ 60 ZJN-AL $ 9.10 $11.10 +21.98% $54 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $ 9.20 + 6.97% $60 '05 $ 50 XFF-MJ $11.20 $12.30 + 9.82% $60 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: MO 08/25/02 $38 JAN-2004 $ 40 LMO-AH CC JAN-2004 $ 35 LMO-AG JAN-2005 $ 50 ZMO-AJ CC JAN-2005 $ 40 ZMO-AH MSFT 09/29/02 $48-49 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 QQQ 10/13/02 $22-22.50 JAN-2004 $ 24 KLF-AX CC JAN-2004 $ 21 KLF-AT JAN-2005 $ 24 ZWQ-AX CC JAN-2005 $ 21 ZWQ-AT DJX 10/20/02 $79-80 DEC-2003 $ 84 ZDJ-LF CC DEC-2003 $ 80 ZDJ-LB DEC-2004 $ 84 YDJ-LF CC DEC-2004 $ 80 YDJ-LB PUTS: New Portfolio Plays None New Watchlist Plays DJX - Dow Jones Industrials $83.22 **Call Play** Just one week into the Q3 earnings season, the DOW has risen an astounding 1100 points from its October 8th low. That has served to raise the index right to a very important level of resistance. The descending trendline that began with the highs in May rests at 8325, and the bearish resistance line on the PnF chart is at 8300. The DJX is an index priced at 1/100 the price of the actual Dow Industrials. Not only does it have LEAPS available, but is preferable to the DIA stock due to greater liquidity of the options. It seems likely that there is some profit taking right around the corner, but given the dramatic improvement in the Bullish Percent readings, it looks like the next dip will lead to a breakout over this important level of resistance. The weekly Stochastics is in a solid bullish ascent and should (absent a major negative event) be sufficient to propel the DOW to at least 8700 and quite possibly up near the 9000-9100 area, which proved to be a top back in August. Trying to catch the initial bottom prior to these explosive bear-market rallies is next to impossible, but if we follow the pattern we saw after the July bottom, the next dip should provide an attractive entry for the next leg up the chart. Daily Stochastics are buried in overbought, so we want to see them relax a bit before we throw our hat in the ring. Investors appear to have discounted most of the bad news that has been coming out over the past couple weeks, and in the absence of the heavy selling pressure, the market is rising like a balloon that had been held under water. Wait for the next decline to major support near the $79-80 area, at which time we should have daily oscillators down near oversold again. Because of the volatile nature of the market right now, we want to start out with a wide stop to prevent premature exit from the play. After entry, we want to place our stop at $75.50. BUY LEAP DEC-2003 $84 ZDJ-LF BUY LEAP DEC-2003 $80 ZDJ-LB **Covered Call** BUY LEAP DEC-2004 $84 YDJ-LF BUY LEAP DEC-2005 $80 YDJ-LB **Covered Call** Drops BA - $29.00 What can I say? I was dead wrong on BA. Not only has there been scarcely a hint of bullish price action, even after hitting our $32 price target, but last week's earnings report was a huge disappointment. BA is losing important business to Airbus, is forecasting declining commercial aircraft sales for the next 2 years and doesn't have any glowing positive comments about the military size of its business. The steady grind lower in price could continue for awhile or the stock could bottom and rebound at any time. But based on the deteriorating fundamental picture, both for the company and the overall industry, I see no merit on continuing to look for that elusive bottom. There are better opportunities available elsewhere. ************** TRADERS CORNER ************** Hey Baby, Wanna Get Lucky? By Mike Parnos, Investing With Attitude When’s the last time you had an offer like that? Never? Well, join the crowd. With the exception of offers from less than endearing telemarketers and high-heeled companions, we’re going to have to make our own luck. Do you have some discretionary dollars that you want to have a little fun with? This week, the CPTI will grant permission for you to take some of that excess six-pack and General Chow's Chicken money and play the option lottery. If you are a Couch Potato Trading Institute student in good standing, you likely put on about four trades a month. You've hedged these positions to where, in a worst-case scenario, you can lose $2.50 per position. That shouldn't happen unless you’ve relapsed to your pre-CPTI state of mind -- or had a frontal lobotomy. Hence the old saying: "I'd rather have a bottle in front of me than a frontal lobotomy." This month, instead of putting on four trades, consider just putting on three. That will give you an extra $2.50 to use for our expiration week adventure. ITM vs. OTM There is a school of thought that advocates the purchase of in- the-money (ITM) options with a lot of time value. They believe that this is safer. They say that it gives you “time to be right.” With the “Let It Ride” strategy, we don’t need the extra time to be right because we’re not going to be right all that often and it’s not worth the extra monetary risk. And we certainly don’t want to pay for additional intrinsic value – because it also increases our risk. An ITM option has a higher delta – and that’s just dandy if you’re right. The option will increase more quickly as the underlying increases. But, if you’re not, it will lose value at the same rapid rate. By the same token, an OTM option will increase (percentage wise) more quickly. Good Stuff Can Happen If you buy an option with one week left before expiration, and five dollars out of the money, it might cost you $.40. If the stock should bounce up $3 in the next 2-3 days, your option is only $2 out of the money and can easily have appreciated to $1.20. In this choppy market, there are any number of spike-ups and downs. That’s a 200% return on your risk. Obviously, the above numbers are approximate. The point is that if you’re right one out of three times, you could break even. And a $3 move is not unrealistic. If the stock spikes up $5 and is at the money, the option could easily be worth $2.00. If you are willing to risk $2,500 per month you on the “Get Lucky” strategy, you should be able to put on 5-6 positions. Other Forces Working For You As we get closer to option expiration, it’s not unusual for volatility to increase. Our little OTM option will benefit. Plus, we’ve learned in the past that, if the underlying is moving toward a high open interest strike price close to expiration, the market makers may do their little manipulative trick. They may inflate the value to take advantage of those buying back the option and rolling it out. Stock Pickin’ What kind of underlyings do you look for? Stocks are more vulnerable to news, hence, more apt to make a big move. Look for stocks that are bouncing off support or resistance. Check out stocks that are about to announce earnings or anticipate FDA acceptance or rejection rulings. Look for a sector that has moved up or down where one stock has lagged. Consider a stock that has spiked up or down -- away from strikes with high concentration of open interest. There are times, especially when dealing with lower priced stocks, that you can pick up one strike OTM options for a nickel or dime with a week left (see example below) -- usually in stocks with 2-1/2 point strike prices. Bad Stuff Can Happen But it isn’t all that bad. You know you’re going to be wrong most of the time. So, when your chosen stocks don’t move, you won’t: a) be surprised; b) be in a food stamp line; or c) take it out on your therapist. Do your homework and your chances of success will increase dramatically. It’s amazing how some of the luck is taken out of the equation when you’re prepared. Keep in mind that this is a bet – pure and simple. In life, you an never make any shots you don’t take. Be careful, but live a little. _____________________________________________________________ Let It Ride! Last week a reader contacted me about an unfortunate situation. He had made a directional trade on the QQQs back in September, trying to catch that falling knife. He had purchased 150 contracts of the October $24 calls for $.95 -- that's about a $15,000 bet. It's like drawing to an inside straight. I want to play poker with this guy -- at least until he learns that you can't bluff the market. With the QQQs at $21.75, and about a week left before October's expiration, the value of his Oct. $24 call had eroded to $.05. The total value was $750. His question was basically, "Help!! What should I do?" I told him he had two choices. He could: a) close the position and salvage the $750; or b) bet the nickel that the QQQs would bounce. The QQQs had already moved up two points the previous week and there seemed to be some short covering and the eternal optimists were coming out of the woodwork to test the water – sort of the stock market's version of Groundhog Day. I believed the nickel was a cheap bet. After all, how many times do we take positions that we are willing to risk $1.00 or $1.50? A nickel? What the hell, let's roll the dice. He held the position and, as of Tuesday morning, the QQQs moved over $23.50. The October $24 calls could be sold for $.30. His $750 position was now worth $4,500!! What a return! 600% on the amount risked. Did he sell and take profits on his nickel bet? I don't know, but it was there for the taking. I would welcome him as a CPTI member, but I heard his Mensa membership application was returned with a short note, "Don't call us. We'll call you!" It was a shame that he initially incurred such a loss, but that's what happens when you play directional and don't hedge your position or have a predetermined exit strategy. What do you do with that nickel or dime that's left? Where else could you put it that will give you a chance for a substantial profit? Sometimes, if the story is right, it may pay to just let it ride. It may be too late to cut the mustard, but you can still lick the jar. ___________________________________________________________ Iron Condor Update: It’s Over – Finally! BBH closed at $88.96 -- comfortably between the $80 and $110 strikes. All options expired worthless. We took in a credit of $1,100 on a 10-contract position. We got bounced around plenty during the life of the position. I calculated eight times we had to protect our short position by shorting BBH at $80 and repurchasing BBH shares as it moved back up above $80. At $10 per transaction, we deduct $160 in commissions and another $200 in slippage. That’s a total of $360. Subtract the $360 from the initial $1,100 credit and profit is $740. The original risk was $3,900. The return on risk was 19% in six weeks. It ain’t a fortune, but it sure beats working for a living. ____________________________________________________________ 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 ************** Moving Average Indicators: As Support & Resistance By Leigh Stevens lstevens@OptionInvestor.com Moving averages are not unlike trendlines - they not only help measure the direction and momentum (the relative angle) of a trend, but can alert us to when a trend has reversed. A moving average is a lagging indicator based on past closes only. A significant difference between trendline use and moving averages is that, whereas the break of a trendline can alert us on a pretty immediate basis that a trend is reversing, we need to wait usually to see if a close puts a stock or index above/below a key moving average. While it’s at the end of the latest period being measured that we see if the most recent close is above or below the moving average, we often see highs or lows bounce off from key moving averages. This can be contrasted to when prices penetrate or pierce a trendline, where this penetration is seen immediately – although it may not be apparent until near the end of the session, if the close will be above or below the trendline which is also the “confirming” moment so to speak. Many analysts, money managers and traders myself included, at least partly define the long-term trend by whether a stock or a market average is trading above or below its 200-day (40-week) moving average. The secondary stock market trend seems fairly well-defined by the use of the 50-day (10-week) moving average. To purchase a stock for an investment that has been in a down or sideways trend, the “minimum” requirement should be a close above its 50-day moving average – even more conclusive is a close above the 200-day moving average. The recent rally and the Friday (10/18/02) close has put the Nasdaq Composite (COMPX), Nas 100 (NDX), the S&P 500 (SPX), 100 (OEX) and Dow Industrial (INDU) indices all above their 50-day simple moving averages, which is the first sign of a turnaround in the intermediate-term trend of the market – The fact that recent closes were ALSO above the top end of the downtrend channel was a definite “confirming” technical indication of a trend reversal. I am always looking for as many technical factors as possible that line up bullishly or bearishly. For example, in mid-March in the Composite (above), when the index was both deflected from the area of its 200-day moving average AND was registering as overbought according to the 14-day stochastic. While there was one close above the average in this example, the lack of follow through the next day, given the overbought conditions, was the tip off to buy index puts and short bellwether stocks in the index. Of course, in the current timeframe at this writing, there is an approaching overbought situation developing with the stochastic model along with or after a crossover above the 50-day moving average. Now should be the time to watch to see if the index holds above the 50-average – I especially would take note of any two consecutive days where one of the major indexes closed back under its 50-day average as bearish. Yet remaining for the major indices are closes above the 200-day moving averages which would suggest that the long-term trend had also reversed from down to up – We can anticipate that a major technical milestone comes with a “test” of the 200-day moving average. When we say that a moving average is “tested” the reference is usually to whether a stock or index close pierces (goes through) the moving average in question or NOT – if prices pierce the moving average, there is then a watch on whether on subsequent hours, days or weeks, prices ALSO stay above or below the moving average in question. As long as this is the case, I’m going to trade more heavily on the long side on pullbacks. For options trading, the key moving averages will tend to be shorter ones; e.g., 5, 10, 15, 21-day lengths on daily charts. In a bearish downtrend, a move up to but not beyond these averages are often put buying opportunities – especially in my estimation in the case of the 21-day average. There are times where there is of course only a ONE close above/below some key moving average as the item in question lacks follow through the next day. In the case of a single close above/below a key moving average and where other technical factors leave you in doubt about whether this event is merely a fake-out move or whether it’s a trend reversal, it can be useful to wait and see if there are TWO consecutive closes above or below the moving average. Typically or most often, a true trend reversal will occur on more than one single penetrating close - whether that close is hourly, daily or weekly – and there will at least two consecutive closes that pierce the moving average. I suggest also using combinations of moving averages. For example – from a trading standpoint, buying puts on an initial downside penetration of the 5-day moving average, especially if there are other bullish chart considerations (e.g., a breakout below a trading range or “rectangle”), but only taking one-half of the number of contracts of a usual purchase. A further purchase could be made after a close below the 10-day moving average. Or, this strategy could be employed by using a combination of the 15 and 21-day moving averages. It is also often appropriate to wait for a time and see if a support/resistance “role reversal” comes into play. If the 50 or 200-day moving average has been coinciding with a series of highs or lows and are frequently stopping or “deflecting” the price moves, such moving averages are “acting as” resistance or support. Just as with prior lows or highs and with trendlines, their can be role reversal – once broken, support “becomes” resistance and resistance becomes support. For example, the 21 or 50-day moving average has been acting as support on a decline or in a sideways trend. Prices then decline below the 50-day average and keep falling in the short-term. On the next rebound the 50-day average “deflects” the rally. This price action relative to the moving average should be assumed, until otherwise resolved, to be a definite sign of a bearish trend reversal. As declines often LOSE ground faster than advances GAIN ground and the price breaks sharper, there will typically be fewer occasions of prices rebounding back up to and then being deflected by, a key moving average - but there are some occurrences of course. Let’s assume the reverse situation and that there’s an upside breakout above some important moving average like the 200-day, which has been previously acting as resistance. But prices rally above the average and keep going in the short-term. If the index or stock then falls back to the average, only to rebound again, this provides an alert technically of a bullish upside reversal. If other technical and fundamental aspects are also “supporting” what is going on with a moving average penetration, the moving average break can provide a reason to initiate a trade. If so, the exit point on long calls might be a move of a certain amount below the moving average – on long puts, a move back above the moving average; e.g., a 3-5% adverse penetration of the moving average. This makes for a stop order that will suggest or trigger an exit DURING the trading session as well as on a closing basis. When a market or individual stock begins a sideways consolidation or goes into a trading range, the 50 and 200-day moving averages will, over time, flatten out. At this juncture the moving averages will act as a support area at times and offer resistance at other times - as can be seen in the chart below – Difficulties are presented in knowing if one should stay in a shifting trend like this. If prices are moving above or below a key moving averages during these sideways trends or non-trending periods, use of exit points based on moving averages can result in being “whipsawed”. Being whipsawed is a way of saying that soon after entry, there develops an opposite trend direction signal as closing prices “whip” back and forth or above and below the moving average(s) in question. To help avoid this frustrating situation, it’s suggested to use whatever technical analysis tools are providing a clear direction, such as provided by any top or bottom formations, trendline analysis and making a use of the key moving averages as a “confirming” or secondary tool – an example is shown in the chart below – ************** TRADERS CORNER ************** Futures Trade Signals for Entries and Exits by Alan Hewko futures@OptionInvestor.com As previously done, I shall use these abbreviations for this article, and the same "ES, YM, NQ" is often in the intra-day Market Monitor commentary: Ticker 1 Point move Symbol is worth ES = E-mini SP500 December futures ES02Z $50 YM = E-mini Dow $5 December futures YM02Z $ 5 NQ = E-mini NDX 100 December futures NQ02Z $20 The purpose of the article is so get you better acquainted with the Futures Trade Signal posts made intra-day in Market Monitor. As a reminder, ES trades in Ticks (or smallest movement) or $12.50 and in price moves of 878.00, 878.25, 878.50, 878.75, 879.00; and 1 ES point or movement is $50 (per contract.) I respect that Futures are a new concept to many readers. Pretend you are an seasoned option trader and are talking to someone who is an experienced stock trader, but someone who has never traded options before. You would spend some time talking about the basics, but at some point, when they were ready to start option trading, you would explain to them about the 5 different option exchanges, or how hitting the ISE option exchange gives great fast fills, and to perhaps avoid the ASE exchange if possible, etc. You might talk about how sometimes Limit orders for an entry are desired, but also that sometimes a Market order is the best method for entry. In a perfect world, I could give you a Futures Signal on where the market is going to be an hour from now, and exactly what Limit Buy price to park your order at to be filled exactly at the bottom tick. Maybe someone can do that all the time, but I would imagine they add a few zeros to their monthly fee. [grins] During the last week, in the Market Monitor, most of the ENTRIES were provided with Limit Orders or perhaps words such as "go long 'close' to ES 858" as its downticking from 865 and likely to bounce near a known support of 858. However, there have also been times when I did not see a trade signal UNTIL IT PRINTED THERE; and in the time it took me to type the signal and suggested LIMIT PRICE to you, it kept changing so much (within 1-2 pts), I found myself deleting, retyping the current price for the LIMIT order, it moved 1/2 point, so delete and retype, etc. And by the time it was sent, it was "too late". This is not an excuse, merely a realization that I need to convey ENTRY points in a slightly different fashion under some market conditions. I believe the EXIT signals on the other hand have worked better than the ENTRY signals, for often the EXIT signals were "from your ENTRY short price "near" 877 (realizing it may have been 876.50 to 877.50), EXIT signals were often given very precisely such as "From Entry price on the short, take 1/2 position profit for +3, and target +5 for the remaining position with a break- even stop" Allow me to give you a perfect example of what I meant by "taking so many attempts to get the right LIMIT order price in the buy signal Market Monitor post, it was gone before it could be posted" Friday morning, here's the chart: ES (Emini SP500 futures): Friday Oct 18 9 AM to 4 PM From Friday's Market Monitor at 9:28 AM (pre open) 10/18/02, 09:28:36 Index Futures As a reminder for those without real-time futures quotes, if you wish to check the overnight futures, and what happened around 3 AM (off of Europe), go to www.livecharts.com and use ticker ES02Z and select Chart, All Sessions, 15minute chart. It's free, but delayed. 2 thoughts on open : Longs rush to take profits as they are not getting their expected gap up, or dip buyers are still in the market. If this was not option expiry, as it is a Friday with a great deal of Long Profits, one would expect some Friday profit taking - however Option Fridays can skew that and make for sometimes difficult to read market days. ES is 873-874 currently, which is the area of Thur's Lows. Overnight high 889. Dow futures indicate Dow cash open of about 8230; NDX futures are also currently trading at yesterday's Lows (940- 941) Will most likely avoid the first 15 minutes and allow a direction to establish. While the 'guess' from pre-open was correct, that Longs not getting their expected gap up, rushed to sell at the open and did for the first 30 minutes. But as it was Option Friday, and sometimes very weird things happen the first 30 minutes, it was a smart decision not to offer a Trade Signal of "Short the Open at Market and target a 3 ES point gain from the short" Next Market Monitor Post was at 10:05 AM 10/18/02, 10:05:54 Index Futures 10 AM: many futures traders either completely avoid Option Friday, or at least the first 30 minutes as Option Market Makers adjust their inventory. ES 867, YM 8140, NQ 928. I'm now looking for a Long Scalp as I expect Dow 8150 to offer some support, and that level is 200 points under last nights high. Without realizing it at the time, that would indeed been the perfect ENTRY for a long as it became day LOWS. This particular post was the one I kept typing for 6 minutes with, and kept changing the "BUY ES AT Limit 866.75" then delete and retype the price to "Buy ES at Limit 877.50" , then delete and retype to 878, then to 877, then to 878.25, etc until I finally just erased it and posted what you read above. I would have loved to have posted "It's 945 AM, and it seems the preopen thought was correct, we have Longs taking profits, ES is 869.50, and lets place a FUTURES TRADE SIGNAL ENTRY at LIMIT 867.00" Some signal posts have been in that fashion, giving a suggest LIMIT ENTRY price 10-30 minutes before they occurred, but in all candor, before 10 AM, I was looking for the 865 level to be bottom, (885-20) and had been preparing a post to that effect, but when I saw Dow Cash 8150 support holding at 10 AM that provided my mental trigger that ES is now a LONG at WHATEVER price it was, in this case 867. The above 10:05 AM post contained all the language to suggest a LONG ENTRY signal, without actually suggesting an entry limit price. :( If you were able to go long yourself off that comment, great. To prevent another situation like this happening again, if the same set of circumstances happened (namely, not really seeing the trade signal ENTRY until it was occurring, and not giving you much setup time, other than the pre-open comment), I shall make a post similar to this "ES 867, YM 8140. TRADE SIGNAL ENTRY LONG: Open a LONG ES at MARKET, but don't pay over 869" That sentence seems less confusing than me typing: "ES 867, YM 8140. TRADE SIGNAL ENTRY LONG: Open a LONG ES at LIMIT 869" But I could see confusion with you thinking, ES is 867.75 x 868.00 right now, and he's telling me to place a LIMIT order 1 point higher than the market - I don't understand. If you read carefully, both above 2 orders are really the EXACT SAME order - they really are :) but I believe the first one is much clearer, and shall post it in that fashion. This would also provide someone who was away for 15 minutes, and comes back to see the ENTRY signal, and with ES now at 872.50 realizes they are too late for that particular entry. (and that is also useful information). Frankly, this is the reason that it is sometimes rather difficult to always post an ENTRY with a LIMIT order. On an average day, ES can easily trade 20 points from its intraday high to its low. That's 20 points. Remember some stocks from 1999-2000 like SDLI, QCOM, IDPH, RMBS, YHOO when it would be nothing for them to run 20-30 points in one day from intraday high to low. And also how quickly they sometimes moved up and down within a 25 cent to 75 cent range sometimes making trading them with LIMIT orders on your ENTRY somewhat difficult and that there were times you simply hit BUY at MARKET and used a LIMIT order on your EXIT. There are similarities to trading those stocks back then to trading futures today. You would love to be able to do every ENTRY with a LIMIT order, but sometimes MARKET orders are the best ENTRY method. A bit of real-world futures trading experience helps determine when a MARKET order is "safe" and when it is not safe. Market orders are "safe" 98% of the time in my view. Another time MARKET orders are sometimes better were the 3 big earnings this week: INTC on Tue, IBM on Wed, and MSFT on Thur. You know that based on their earnings, there's going to be a fast move in the futures up or down and sometimes trying to buy or short LIMIT at the current price after the earnings come out leaves you with no fill. (and not happy as you watch the limit order you tried to be cute with to save $12.50 (one tick), that you didn't get a fill on from being "too cute" just move $300 higher in 10 minutes without you.) There are a few non-complicated ways around that: Example: Wed 4 PM ahead of IBM's earnings You know ES will obviously react up or down off IBM's earnings. ES is currently chopping around 842 to 844. You get 2 different orders ready to go: Order 1 : Buy ES at 846.50 LIMIT Order 2 : Short ES at 839.50 LIMIT (you don't an uptick to short) The moment you see ES react to the IBM number that just came out, you hit the order in the direction it is moving in. IBM beat - then just simply send Order 1, maybe you get filled at 845.75, maybe you get filled at 846.25 with your limit buy at 846.50 (as of course, it can fill at 846.25 or lower) Once you are filled, either you select an EXIT target or perhaps view the Market Monitor for the comments given 5 minutes later. I believe on both Wed and Thur night with IBM and MSFT, either I or someone else had posted very short comment on their earnings, such as "MSFT crushes earnings by 7 cents" and that becomes a long signal for you. There is also yet another way to execute the same above trade. Order 1: Buy ES at 846.50 LIMIT Order 2: Short ES at 839.50 LIMIT (you don't an uptick to short) Except this time, you do not wait to see what the actual earnings are and SEND * BOTH * orders LIVE * moments AHEAD OF THE EARNINGS RELEASE * Why? Both will be live working orders and your order is now in the order queue, and most probably, ONLY ONE will fill ! The one side moving in the direction of IBM's earnings, whether they are good or bad. Does this have danger? You are limiting your risk if you KEEP THE 2nd ORDER LIVE for perhaps 10-15 minutes or longer. IBM beats, you get filled on a LONG perhaps at 845.75 ES is now strongly upticking to 848, 849, 850 and you then cancel the SELL order at 839.50 limit but IMMEDIATELY replace it with another SELL order perhaps at 845 with ES trading at 850. Why? What if IBM had beat the earnings, futures rocketed upward, and then 5 minutes later it came out they were warning going forward rather badly - futures would reverse and sell BUT you have your SELL order already live, so your damage is almost nothing. ________________________________________________________________ Next week, I would expect to make some Market Monitor Futures Trade Signals using the term MIT (Market if Touched) That is a trading term somewhat unique to futures. Example: ES is coming down from a resistance at 885, went to a support at 877, and is upticking slowly from 877 with 1 point of up/down chop action. It would be hard to get the exact LIMIT order. I don't wish to go long at MARKET just yet as I wish to confirm this up move a bit more. I might type to you this: "FUTURES TRADE SIGNAL ENTRY: ES at 876-877 chop currently, go LONG ES MIT 878.00 If filled, use 1 pt stop and target of +3 for exit" If you scroll up to the chart in this article, look at the chop around 3 PM, at 876-877s. Often reversals for 3-4 ES points occur at 3 PM when bonds close, and that was the "why" of the above trade signal. In English, the "go LONG ES MIT 878.00" simply means this: At the FIRST print of LAST PRICE = 878.00 you get filled LONG * AT MARKET in the real-world, this means you would either get filled LONG at 878.00 or possibly 878.25 Let's assume your fill was 878.25 You note your ENTRY, and find the price point of your 1 pt stop which would be 877.25 and immediately -repeat- immediately send a LIVE working order to SELL at 881.25 (your ENTRY of 878.25 + 3 target = 881.25) And you would have gotten filled on your EXIT as ES traded up to 883. Did I see this trade signal a little after 3 PM? Yes. So why didn't I post it? Similar to the 10 AM situation, by the time I saw it, realized that if 877 (a 50% retracement number mentioned a few times today) would hold and maybe bounce to retrace perhaps 1/2 of that 877 level to the 888 high; and started typing an EXACT LIMIT order entry of 877, then 877.50, then 878.25, then ...it was too late to post it, have you see it, and try to get a fill with a LIMIT. However, if I had posted the above "ES is chopping 876-877s, go LONG ES MIT 878.00" You hopefully will now have an idea of the Trade Signal being given and what it means. OCO "Once cancels the other" ES is sideways at 870, it appears it shall either climb up to the gap from this morning at 880 -or- head back lower to make a double bottom at today's low of 858. Whichever way it starts to move should continue given the lateness of the day. FUTURES TRADE SIGNAL ENTRY There are two but we only expect one to fill. ES remains chopping between 869 and 871 Buy ES at Market MIT 873.00 OCO (ONE CANCELS THE OTHER) Short ES at MARKET MIT 867.00 We've already explained what MIT is, but this says in English: IF ES trades at 873 open a LONG at market (as it now appears that once its broken out of this sideways action of 869-871 it will head back up to make a double top near its day highs of 888 If this LONG fills, then the "short at MIT 867 is CANCELED" It's that simple. Some futures offer OCO orders, some do not; and in that case, you the human would need to KILL the remaining unfilled order. "OR BETTER" The last trading term I wish to explain is "OR BETTER" Example: ES is 875.25 and upticking near resistance. FUTURES TRADE SIGNAL ENTRY: SHORT : Open Short ES at 875.75 'OR BETTER' and use stop of 1 point from your entry Perhaps in the 1-3 minutes it took to type and post that Market Monitor message, and for you to read it, ES is now at 877.00 (as 877 is a BETTER price than the posted 875.75 SHORT ENTRY, if you wished to take the signal, you would open a Short at 877, and keep a 1 pt stop. By the same token, if ES was at 873.00, you would NOT take the short signal as 873 is NOT a better price to short than the posted entry of 875.75, and you might place a short at 875.75 to await a possible fill. Reason some signals are given in that format is there are times of great "chop" near support and pivot areas, and realizing there is 2-5 minutes lag between me starting to type a post, posting it, and then having you read it allows for an entry at a 'better' price. ________________________________________________________________ FUTURES BROKERS Many emails have come in requesting information for suggested online futures brokers. In order to serve you the best way possible, discussions are underway currently and hopefully we shall have detailed information for you on the website shortly. Briefly - trading futures online is execution wise JUST AS EASY AS TRADING MSFT STOCK or the QQQs. ________________________________________________________________ Prior Trader Corner articles on Futures that I wrote are below if you wish to either re-read them, or if you missed them the first time: 10-8-02 Using Index Futures to Hedge an Index Option position: http://www.OptionInvestor.com/traderscorner/100802_1.asp 10-7-02 Index Futures Primer http://www.OptionInvestor.com/traderscorner/100702_1.asp 10-16-02 Using Dow Futures to hedge IBM options http://www.OptionInvestor.com/traderscorner/101602_1.asp ________________________________________________________________ If, after reading a section of this twice, still don't understand these examples and terms, or have any questions on anything in this or a prior article, please email me and I shall try and answer. I would like to ask our audience a question. Is this article too complicated? Does it need more explanation on my part? I do not believe it is, if you read it twice; but then again I'm biased since I wrote it. Alan Hewko email: futures@OptionInvestor.com ************************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 10-20-2002 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/d20y_5.asp In Section Five: Covered Calls: Trading Basics: Q&A With The Editor Naked Puts: Options 101: Understanding Risk-Reward (Part II) Spreads/Straddles/Combos: Shhhhh...Don't Make A Sound. You Might Wake The Bear! 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: Q&A With The Editor By Mark Wnetrzak One of our readers asked for some information on covered-calls with indexes and exchange-traded funds. Attn: Covered-Calls editor Subject: Option Trading Strategies Hello, Could you suggest CC on index plays-like the Dow and the QQQs? I would love to see a section on this but in the meantime could you suggest some for November? Thanks. RG Hello RG, Regarding covered-call plays on indexes and exchange traded funds: First, here is a link to the CBOE that lists the majority of exchange-traded funds: http://www.cboe.com/OptProd/ProductSpecs.asp#structured Second, it is fairly difficult to obtain much downside protection in the QQQ or the DIA options as they trade in $1 increments and their movement is dictated by the relative components. Essentially, the success of the overall position would be based more on the anticipated market direction and less on the benefits of writing the call. Remember, these popular instruments are used mainly by day-traders or scalpers, with many experienced "at-home" players trading this security exclusively. You can sell them short without an up-tick, and many are traded on a parallel track with futures counterparts, especially the Chicago Mercantile Exchange's E-mini contracts. This generates arbitrage and hedging by big players, and it also attracts small-position traders who don't have adequate funds to open futures accounts. It's quite a volatile combination than can equate to large moves or quick reversals and that's not the most favorable environment for the conservative trader. Regards, Mark W. coveredcalls@OptionInvestor.com Editors Note: For those of you who are new to stock indexes and futures, read on... Stock indexes are portfolios, which are composed of many different company's shares. Different indexes have different values because of the composite shares' performance and the way they are weighted in the index. The S&P 500 Index for example, is a value weighted combination of 500 different companies, representing approximately 80% of the value of all the shares traded on the New York Stock Exchange. Each company's weight in the index is determined by its relative market importance and their values are then computed by multiplying each company's number of outstanding shares of common stock by the share's current cash market price. These values then are summed and compared to a 1941-1943 base period to determine the final cash value. The cash market values of the S&P 500 Index represent the interaction between a market-wide rate of return and the average growth rate in earnings (and dividends) and will accurately reflect the overall market supply and demand factors. In addition to acting as general market indicators, indexes have been widely adopted as underlying instruments for futures. The underlying interest may be anything from grain to gold and silver or Treasury bonds. In the case of a futures contract, the seller agrees to provide an underlying commodity (or instrument) at a specified price and time while the buyer of the futures contract agrees to buy the product on the same terms. Historically, the need for futures grew out of America's agricultural economy of the early 1900's. Farmers would agree to sell their crops, when harvested, at some specific future date, at a profitable price. Speculators would purchase these contracts with the expectation of reselling the crops at even higher prices, thereby making a profit for themselves. In addition to market speculators, food processors and wholesale manufactures would purchase futures to guarantee the cost of raw materials for future production. In time, the futures contract has become a trading vehicle of its own and it is now offered on a host of underlying interests, including stock indexes. The problem with index futures is the actual delivery of the underlying instrument in the event the seller decides to "exercise" the contract. In reality, only a small percentage of futures are exercised, so physical delivery is not likely. Nevertheless, when a contract is exercised, the seller's duty is to deliver the commodity; wheat, orange juice, or pork bellies to the buyer. In the case of an index future, cash is the actual method of payment. The first derivatives were based on stocks but today options are traded on a number of instruments such as government securities, currencies, and indexes. While options are very different from futures in many ways, they are also used by portfolio managers to hedge market risk. Most options involve the delivery of the underlying interest but with indexes, the exercise of the option results in a cash payment. Trading options on futures, including index futures is much more complicated. When a futures option is exercised, the buyer takes delivery of the futures contract. To take delivery of the cash, the owner has to exercise the futures contract. To protect their holdings against risk, institutional investors must maintain large and often complex positions in the index futures and their options. These portfolios are difficult to manage without the aid of computerized trading programs and that is why most retail traders use simple strategies on common indices such as the S&P 500 Index (SPX), the S&P 100 Index (OEX), and more recently, the NASDAQ 100 Unit Trust (QQQ). 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 3.30 OCT 2.50 0.75 *$ 0.31 15.4% IMCL 7.77 7.83 OCT 7.50 0.75 *$ 0.48 14.9% ISSX 13.65 17.17 OCT 12.50 1.70 *$ 0.55 10.0% MENT 6.17 7.80 OCT 5.00 1.35 *$ 0.18 8.1% NWRE 13.75 13.38 OCT 12.50 1.90 *$ 0.65 7.9% PLMD 26.25 29.31 OCT 25.00 2.35 *$ 1.10 6.7% ISIS 9.15 9.00 OCT 7.50 1.95 *$ 0.30 6.0% MACR 8.49 9.15 OCT 7.50 1.45 *$ 0.46 5.7% GNSS 8.73 12.29 OCT 7.50 1.60 *$ 0.37 5.6% UTSI 16.25 16.70 OCT 15.00 1.80 *$ 0.55 5.5% CVC 9.48 8.78 OCT 7.50 2.50 *$ 0.52 5.4% AMZN 16.55 19.04 OCT 15.00 1.90 *$ 0.35 5.2% QCOM 28.08 36.20 OCT 25.00 4.20 *$ 1.12 5.1% RTIX 8.00 8.54 OCT 7.50 0.75 *$ 0.25 5.0% BSTE 29.40 27.52 OCT 25.00 5.70 *$ 1.30 4.8% NOK 13.95 16.39 OCT 12.50 2.20 *$ 0.75 4.6% NWRE 15.97 13.38 OCT 12.50 4.10 *$ 0.63 4.6% PPD 21.80 20.16 OCT 17.50 5.00 *$ 0.70 4.5% SYMC 34.30 39.00 OCT 30.00 5.20 *$ 0.90 4.5% KDE 23.39 27.25 OCT 22.50 1.55 *$ 0.66 4.4% FLE 6.02 6.47 OCT 5.00 1.30 *$ 0.28 4.3% CMLS 16.85 18.42 OCT 15.00 2.55 *$ 0.70 4.3% UDI 22.58 19.99 OCT 20.00 3.30 $ 0.71 4.0% AES 2.92 1.29 OCT 2.50 0.75 $ -0.88 0.0% PRX 28.20 21.10 OCT 25.00 4.30 $ -2.80 0.0% SNDK 14.30 19.70 NOV 12.50 2.75 *$ 0.95 7.1% VOXX 7.40 7.87 NOV 7.50 0.45 *$ 0.55 6.9% BCGI 10.30 11.26 NOV 10.00 1.10 *$ 0.80 6.3% TMCS 18.14 20.33 NOV 17.50 1.80 *$ 1.16 6.2% FDRY 6.02 6.10 NOV 5.00 1.35 *$ 0.33 5.1% MEDI 24.95 27.70 NOV 22.50 3.70 *$ 1.25 5.1% MCHP 23.18 24.69 NOV 20.00 4.20 *$ 1.02 4.7% CPB 22.59 23.02 NOV 22.50 1.05 *$ 0.96 3.9% MENT 7.50 7.80 NOV 5.00 2.70 *$ 0.20 3.6% WWCA 2.71 2.30 NOV 2.50 0.50 $ 0.09 2.9% *$ = Stock price is above the sold striking price. Comments: Ok, the first part was easy, but now that the market euphoria is beginning to wane, will support hold? Next week should offer some clues on whether this rally has legs or is simply another bear-trap. The lone disappointment this week was Pharmaceutical Resources (NYSE:PRX), which suffered from a federal judge ruling on Monday reference AstraZeneca PLC's patent on Prilosec, a popular heartburn treatment. As for November's positions, the speculation play in Western Wireless (NASDAQ:WWCA) is looking more speculative. Monitor your positions closely as the expected consolidation of the recent "rabid" rally could easily transform into a new leg lower. Positions Closed: Osteotech (NASDAQ:OSTE), Luminex (NASDAQ:LMNX) and Restoration Hardware (NASDAQ:RSTO). 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 BCGI 11.26 NOV 10.00 QGB KB 1.60 10 9.66 28 3.8% CREE 14.98 NOV 12.50 CVO KV 2.90 779 12.08 28 3.8% CVH 37.55 NOV 35.00 CVH KG 3.90 2540 33.65 28 4.4% GNSS 12.29 NOV 10.00 QFE KB 2.75 539 9.54 28 5.2% MACR 9.15 NOV 7.50 MRQ KT 2.00 172 7.15 28 5.3% PCS 2.82 NOV 2.50 PCS KR 0.50 835 2.32 28 8.4% VSAT 8.47 NOV 7.50 IQS KU 1.40 134 7.07 28 6.6% 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 PCS 2.82 NOV 2.50 PCS KR 0.50 835 2.32 28 8.4% VSAT 8.47 NOV 7.50 IQS KU 1.40 134 7.07 28 6.6% MACR 9.15 NOV 7.50 MRQ KT 2.00 172 7.15 28 5.3% GNSS 12.29 NOV 10.00 QFE KB 2.75 539 9.54 28 5.2% CVH 37.55 NOV 35.00 CVH KG 3.90 2540 33.65 28 4.4% BCGI 11.26 NOV 10.00 QGB KB 1.60 10 9.66 28 3.8% CREE 14.98 NOV 12.50 CVO KV 2.90 779 12.08 28 3.8% 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). ***** BCGI - Boston Communications $11.26 *** Own This One! *** Boston Communications Group (NASDAQ:BCGI), an S&P Small Cap 600 Index company and Russell 2000 Index company, is a leader in transaction processing solutions for real-time wireless subscriber management and payment services, delivering prepaid wireless, mobile commerce, ATM Recharge, and other billing services. In 1988, BCGI began providing solutions to carriers through a unique combination of industry-leading proprietary software applications, a scalable transaction processing platform, and its Intelligent Voice Services Network (IVSN). Through this nationwide real-time infrastructure, BCGI provides one or more of its services to over 70 wireless carriers and resellers, including four of the top six national carriers. The firm's software, transaction processing platform, and IVSN make up the company's Prepaid Wireless service offering, a market leader in one of the highest growth segments of the wireless communications industry. Shares of BCGI have been on the move in recent sessions and investors who like the outlook for the company can establish a low risk cost basis in the issue with this position. Earnings are due October 22. NOV 10.00 QGB KB LB=1.60 OI=10 CB=9.66 DE=28 TY=3.8% ***** CREE - Cree $14.98 *** Technical Reversal? *** Cree (NASDAQ:CREE) is engaged in the development and manufacture of compound semiconductor materials and electronic devices made from silicon carbide (SiC), and a developer and manufacturer of optoelectronic and electronic devices made from gallium nitride (GaN) and related materials. The company also produces RF power transistor components and modules for wireless infrastructure applications using silicon-based bipolar and laterally diffused metal oxide semiconductor process technologies. Cree operates its business in two segments, the Cree segment, which consists of its SiC-based products and research contracts, and the Cree Microwave segment, which consists of RF transistors and RF transistor modules based on a silicon platform. Cree reported earnings on Thursday and said it earned $3.88 million, or 5 cents a share as revenue rose 13 percent to $48.8. Investors are apparently happy with the results as the stock rallied almost $2.00. Our outlook is also bullish, due to the recent technical reversal and this position offers a relatively low risk basis in the issue. NOV 12.50 CVO KV LB=2.90 OI=779 CB=12.08 DE=28 TY=3.8% ***** CVH - Coventry $37.55 *** Another "All-Time" High *** Coventry Health Care (NYSE:CVH) is a managed healthcare company. Coventry has approximately 1.84 million members operating health plans under the names Coventry Health Care, Coventry Health and Life, Carelink Health Plans, Group Health Plan, HealthAmerica, HealthAssurance, HealthCare USA, Southern Health and WellPath. Coventry operates a diversified portfolio of local market health plans serving 14 states, primarily in the Mid-Atlantic, Midwest and Southeast regions. The company's health plans are generally located in small to medium-sized metropolitan areas. The price history of Coventry reveals one of the better charts we've seen in the broader-market groups (jinx?) and investors who want to diversify their portfolio into the health care industry should consider this position. Earnings are due on October 29. NOV 35.00 CVH KG LB=3.90 OI=2540 CB=33.65 DE=28 TY=4.4% ***** GNSS - Genesis Microchip $12.29 *** Breaking Out? *** Genesis Microchip (NASDAQ:GNSS) designs, develops and markets integrated circuits that receive and process digital video and graphic images. The company's ICs are typically located inside a display device and process incoming images for viewing on that display. Genesis is targeting the flat-panel computer monitor, flat-panel television and progressive scan cathode ray tube (CRT) television markets and other potential mass markets. Genesis operates through subsidiaries and offices in the United States, Canada, China, India, Japan, South Korea and Taiwan. Genesis has rallied strongly this week as investors anticipate earnings due on October 23. In September, the company raised its fiscal 2nd-quarter earnings and revenue expectations. The technical break-out above a four-month base on heavy volume suggests more upside potential and this position offers favorable speculation for investors who are ready to "bottom-fish" in the semiconductor segment. NOV 10.00 QFE KB LB=2.75 OI=539 CB=9.54 DE=28 TY=5.2% ***** MACR - Macromedia $9.15 *** Earnings Rally! *** Macromedia (NASDAQ:MACR) provides software that empowers millions of developers and designers to create effective user experiences on the Internet. The company's integrated family of software technologies enables the development of a wide range of Internet solutions including Websites, rich media content, and Internet applications across multiple platforms and devices. With an installed base of more than 3 million developers and designers, and with Macromedia Flash Player available to 98% of Web users, the company is a strategic information technology supplier to customers in the business, government and educational markets. Macromedia posted a much narrower loss than expected despite a slight drop in sales, and projected solid growth in revenue for the current quarter. Obviously investors were pleased as the stock jumped almost $2 on heavy volume after the news. This position offers excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. NOV 7.50 MRQ KT LB=2.00 OI=172 CB=7.15 DE=28 TY=5.3% ***** PCS - Sprint PCS Group $2.82 *** Cheap Speculation! *** Sprint (NYSE:PCS) operates a 100% digital personal communication system (PCS) wireless network in the United States, using a single frequency and a single technology. Sprint PCS, a subsidiary of Sprint Corporation, comprises Sprint Corporations' wireless PCS operations. The PCS Group has licenses to serve the entire United States population, including Puerto Rico and the United States Virgin Islands. The PCS Group also includes Sprint Corporation's investment in Pegaso Telecomunicaciones, S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico; SVC BidCo L.P., a joint venture to acquire wireless spectrum rights, and Virgin Mobile U.S.A., a joint venture to market wireless services. Shares of PCS jumped on Friday after the company introduced more competitive price plans in a bid to regain customers and encourage them to try its data service a day after posting its first-ever subscriber loss. Sprint PCS beat analysts' expectations on Thursday as the company narrowed its 3rd-quarter loss. This position offers a reasonable reward for investors who like the recovery prospects for the wireless sector. NOV 2.50 PCS KR LB=0.50 OI=835 CB=2.32 DE=28 TY=8.4% ***** VSAT - ViaSat $8.47 *** On The Mend *** ViaSat (NASDAQ:VSAT) is a provider of advanced broadband digital satellite communications and other wireless networking and signal processing equipment and services to the government and commercial marketplace. The company's defense products include tactical data links, such as advanced multi-function information distribution system (MIDS) product line, simulation and test equipment, ultra- high frequency (UHF) Demand Assigned Multiple Access satellite communications products, and the networks business, where the company's information security segment is gaining traction. VSAT has rallied off its August low after the company said it had booked $80 million in new orders in its first quarter. Recently, the company has reported several new subcontracts and a $10 million contract with the National Security Agency. We simply favor the recent rally above the August and September highs (which now act as support) and our conservative position offers a great way to participate in the future movement of the issue with relatively low risk. NOV 7.50 IQS KU LB=1.40 OI=134 CB=7.07 DE=28 TY=6.6% ***** ***************** 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 CRXA 7.78 NOV 7.50 CVQ KU 0.80 404 6.98 28 8.1% PPD 20.16 NOV 17.50 PPD KW 3.70 812 16.46 28 6.9% ESPD 12.85 NOV 12.50 ENU KV 1.00 74 11.85 28 6.0% PSFT 17.14 NOV 15.00 PQO KC 2.80 1065 14.34 28 5.0% ISSX 17.17 NOV 15.00 ISU KC 2.75 345 14.42 28 4.4% PLMD 29.31 NOV 25.00 PM KE 5.20 41 24.11 28 4.0% INVN 35.05 NOV 30.00 FQQ KF 6.10 632 28.95 28 3.9% SLAB 24.80 NOV 20.00 QFJ KD 5.50 68 19.30 28 3.9% QCOM 36.20 NOV 32.50 AAW KZ 4.80 12553 31.40 28 3.8% CKFR 15.70 NOV 12.50 FCQ KV 3.60 346 12.10 28 3.6% ***************** NAKED PUT SECTION ***************** Options 101: Understanding Risk-Reward (Part II) By Ray Cummins Of all the financial instruments available to the retail investor in the stock market, options offer the greatest reward potential. People buy and sell options in order to make money. Of course, anytime you enter a trade, there is also the possibility of loss. That is the inherent "risk" component associated with financial instruments and in most strategies, potential reward is inversely proportionate to the possibility of loss. As humans, we are very familiar with risk; it is part of our lives on a continuous basis. Almost everything we do entails some level of danger or peril and although a few risks are great, possibly even life threatening, most are hardly noticeable. The reason is, the majority of people are very good at risk-management -- they simply don't realize it. Those who do are quick to learn that that the key to success in trading options is to correctly appraise the risk-reward tradeoff in each prospective position and if the outlook is favorable, use all the available risk control methods to enhance the probability of profit. The first step in developing this ability is to create a simple risk-management process. The procedure begins with identifying and understanding the potential risk in a position. Of course, this includes recognizing any personal attitudes or attributes that could lead to negative results in a trade, such as having unrealistic expectations or allowing emotions to affect your decisions. Among new traders, failing to follow a trading plan that incorporates appropriate profit goals and loss limits is one of the most common faults in this category. Another frequent error stems from a lack of portfolio diversification, a proven risk-management technique that combines a variety of positions in a range of market segments, thus reducing the impact of any one trade on overall performance. Some risks are inherent in all financial instruments. The most obvious example is adverse price movement due to unexpected company events or significant news or economic data. The impact of the recent slump in the economy on corporate profits is well known and that condition often results in negative earnings surprises; a substantial risk for those who favor bullish strategies. In addition, the rise in volatility surrounding an earnings announcement has considerable affect on option premiums and unwary traders can lose money even when they have correctly predicted the movement of the underlying issue. One final risk stems from using trading techniques that are too complex. This is one of the most destructive tendencies among novice market participants because it is impossible to manage or control any risk which you do not completely understand. Once you've identified all the possible (tangible) risks, the next step is to evaluate them. The question you should ask is, "How likely is it that each of these risks will occur and what will the impact be on the outlook for the position?" A correct answer is the key to properly understanding the risk-reward tradeoff, thus all the possible alternatives should be carefully reviewed. Among the factors to be considered are: potential return and draw-down, target time frame and maximum holding period, anticipated trading range of the underlying, and available risk-management strategies. After careful analysis of the components affecting potential profit and loss, the next step is to review the techniques for controlling risk in the specific strategy you are using. Some traders focus on sophisticated (mathematical) position-management strategies while other people utilize simple, proven methods known to even the most inexperienced investor. Among all the techniques used for limiting losses, a mechanical stop-loss order on the option price is easiest to use. However, in recent years, proprietary systems that allow option orders to be triggered by the price of the underlying issue have become more popular. While effective position management is critical to long-term success, incorrect adjustments and untimely transitions or "roll-outs" can often be more detrimental than no management at all. Another oft-repeated mistake among new traders is confusing fluctuation with loss, and until the two conditions are clearly defined, there is little chance of long-term success. After you have identified a position's potential risk and reward, calculated the likelihood of a profitable outcome and evaluated the maximum impact of a loss, and reviewed the available risk control methods, it is time to act. But, reaching this point in the risk-management process does not make the final step any easier. In fact, deciding whether or not to "pull the trigger" is often most difficult choice a trader must make and only with extensive study and preparation can you be confident that your decision is the right one. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule: Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a "buy-to-close" STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** 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 8.78 OCT 7.50 0.25 *$ 0.25 16.2% RGLD 18.70 16.61 OCT 15.00 0.45 *$ 0.45 11.6% PPD 21.41 20.16 OCT 15.00 0.60 *$ 0.60 10.7% ABFS 27.53 30.20 OCT 25.00 0.90 *$ 0.90 10.4% ULAB 18.83 21.94 OCT 15.00 0.40 *$ 0.40 10.4% OVER 23.40 30.07 OCT 20.00 0.30 *$ 0.30 10.4% AG 22.63 25.50 OCT 20.00 0.45 *$ 0.45 9.5% RGLD 18.05 16.61 OCT 15.00 0.50 *$ 0.50 9.3% UTHR 16.50 15.01 OCT 15.00 0.55 *$ 0.55 8.5% QCOM 29.26 36.20 OCT 25.00 0.30 *$ 0.30 8.4% GILD 33.56 34.25 OCT 25.00 0.55 *$ 0.55 8.2% MMSI 20.14 20.10 OCT 18.00 0.35 *$ 0.35 8.1% UDI 22.75 19.99 OCT 20.00 0.25 $ 0.24 7.9% UDI 24.25 19.99 OCT 20.00 0.30 $ 0.29 7.3% BSX 30.18 36.10 OCT 27.50 0.85 *$ 0.85 7.2% AMZN 16.61 19.04 OCT 12.50 0.30 *$ 0.30 7.2% TTWO 29.45 27.03 OCT 25.00 0.35 *$ 0.35 6.6% UTHR 17.01 15.01 OCT 15.00 0.30 *$ 0.30 6.4% COF 38.92 30.17 OCT 27.50 0.60 *$ 0.60 6.2% SYMC 34.30 39.00 OCT 25.00 0.30 *$ 0.30 6.1% CYH 27.10 26.42 OCT 25.00 0.25 *$ 0.25 6.0% TTWO 26.20 27.03 OCT 20.00 0.30 *$ 0.30 5.9% FDS 25.95 27.00 OCT 22.50 0.35 *$ 0.35 5.2% INVN 35.76 35.05 OCT 25.00 0.45 *$ 0.45 5.1% STN 14.15 16.96 OCT 12.50 0.25 *$ 0.25 5.1% PRX 28.20 21.10 OCT 22.50 0.25 $ -1.15 0.0% AMLN 16.95 17.63 NOV 15.00 0.75 *$ 0.75 11.7% AMZN 18.46 19.04 NOV 15.00 0.55 *$ 0.55 10.7% HOLX 11.74 12.20 NOV 10.00 0.50 *$ 0.50 10.5% HLYW 17.20 19.95 NOV 15.00 0.60 *$ 0.60 8.2% NOK 14.44 16.39 NOV 12.50 0.40 *$ 0.40 8.2% QCOM 31.37 36.20 NOV 25.00 0.65 *$ 0.65 8.2% AMLN 15.80 17.63 NOV 12.50 0.40 *$ 0.40 8.1% KDE 23.77 27.25 NOV 20.00 0.70 *$ 0.70 7.9% COCO 37.75 36.99 NOV 30.00 0.75 *$ 0.75 7.9% VZ 35.19 34.97 NOV 30.00 0.70 *$ 0.70 6.3% GENZ 23.57 28.45 NOV 17.50 0.35 *$ 0.35 6.0% OVER 27.51 30.07 NOV 20.00 0.40 *$ 0.40 5.9% *$ = Stock price is above the sold striking price. Comments: Stock prices soared this week, albeit from extremely oversold conditions, and despite the near-term bullish outlook, many analysts believe the current recovery rally will end with a plunge through the July lows. Along those lines, one expert recently noted, "The wave theories, sober valuation analysis, and the macroeconomic backdrop all suggest severe troubles ahead." With that bearish forecast in mind, option traders are reminded to remain vigilant in position management and exit or adjust any plays on issues with less than outstanding technical indications. Positions Closed: Integrated Defense Technology (NYSE:IDE), Meridian Gold (NYSE:MDG), Boyd Gaming (NYSE:BYD), and Right Management Consultants (NASDAQ:RMCI). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AFFX 23.99 NOV 17.50 FIQ WW 0.30 623 17.20 28 6.4% AMZN 19.04 NOV 15.00 ZQN WC 0.50 9276 14.50 28 12.6% INVN 35.05 NOV 25.00 FQQ WE 0.40 1487 24.60 28 5.9% OVER 30.07 NOV 22.50 GUO WX 0.45 931 22.05 28 7.6% PPDI 26.99 NOV 22.50 PJQ WX 0.45 32 22.05 28 7.2% QCOM 36.20 NOV 30.00 AAW WF 0.65 8381 29.35 28 7.9% SYMC 39.00 NOV 30.00 SYQ WF 0.45 4289 29.55 28 5.9% TMCS 20.33 NOV 17.50 QMF WW 0.55 20 16.95 28 10.2% VXGN 10.40 NOV 7.50 UWG WU 0.35 126 7.15 28 15.6% 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 VXGN 10.40 NOV 7.50 UWG WU 0.35 126 7.15 28 15.6% AMZN 19.04 NOV 15.00 ZQN WC 0.50 9276 14.50 28 12.6% TMCS 20.33 NOV 17.50 QMF WW 0.55 20 16.95 28 10.2% QCOM 36.20 NOV 30.00 AAW WF 0.65 8381 29.35 28 7.9% OVER 30.07 NOV 22.50 GUO WX 0.45 931 22.05 28 7.6% PPDI 26.99 NOV 22.50 PJQ WX 0.45 32 22.05 28 7.2% AFFX 23.99 NOV 17.50 FIQ WW 0.30 623 17.20 28 6.4% INVN 35.05 NOV 25.00 FQQ WE 0.40 1487 24.60 28 5.9% SYMC 39.00 NOV 30.00 SYQ WF 0.45 4289 29.55 28 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). ***** AFFX - Affymetrix $23.99 *** Genomic Research Giant! *** Affymetrix (NASDAQ:AFFX) is a pioneer in creating breakthrough tools that are driving the genomic revolution. By applying the principles of semiconductor technology to the life sciences, Affymetrix develops and commercializes systems that enable scientists to improve the quality of life. The firm's customers include pharmaceutical, biotechnology, agrochemical, diagnostics and consumer products companies as well as academic, government and other non-profit research institutes. Affymetrix offers an expanding portfolio of integrated products and services, as well as its integrated GeneChip platform, to address growing markets focused on understanding the relationship between genes and human health. AFFX recently announced it is now taking orders for its new GeneChip re-sequencing array, a powerful DNA analysis tool on the same proven Affymetrix platform that has become the industry standard for mRNA gene expression research. Investors who want to own a popular issue in the genomic industry should consider this position. NOV 17.50 FIQ WW LB=0.30 OI=623 CB=17.20 DE=28 TY=6.4% ***** AMZN - Amazon.com $19.04 *** Internet Retail Leader *** 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=0.50 OI=9276 CB=14.50 DE=28 TY=12.6% ***** INVN - InVision Technologies $35.05 *** Aviation Security *** InVision Technologies (NASDAQ:INVN) is a provider of Federal Aviation Administration (FAA)-certified explosives detection systems (EDSs) used at airports for screening checked passenger baggage. The company has delivered over 160 EDS units to U.S. airports and over 100 EDS units for installation in airports outside of the United States. The company's products are based on advanced computed tomography, which is the only technology for explosives detection that has met the FAA certification standards. InVision Technologies was the first manufacturer, and is one of only two manufacturers, whose EDS products have been certified by the FAA for screening checked baggage. Invision announced some new contract awards this month and investors are expecting the demand for explosives detection systems to result in favorable quarterly earnings for the company. Traders can speculate in a conservative manner on the outcome of that report (due next week) with this position. NOV 25.00 FQQ WE LB=0.40 OI=1487 CB=24.60 DE=28 TY=5.9% ***** OVER - Overture Services $30.07 *** Earnings Are Due! *** 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. Last week, 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 22.50 GUO WX LB=0.45 OI=931 CB=22.05 DE=28 TY=7.6% ***** PPDI - Pharmaceutical Product Dev. $26.99 *** Rally Mode! *** Pharmaceutical Product Development (NASDAQ:PPDI) is a worldwide provider of drug discovery and development services to companies in the pharmaceutical and biotechnology industries. PPD applies innovative technologies, therapeutic expertise and a commitment to quality to help clients maximize the return on R&D investments. With proven early discovery through post-market resources, the company also offers unique partnerships and alliances for virtual drug development. PPD has more than 5,200 professionals in 24 countries around the world. Shares of PPD rallied last week after after the company predicted earnings would be higher than expected in the fourth quarter. The firm also raised its profit estimates for the year, citing strong demand for drug development services. Investors who like the outlook for this company can establish a low risk cost basis in its stock with this position. NOV 22.50 PJQ WX LB=0.45 OI=32 CB=22.05 DE=28 TY=7.2% ***** QCOM - Qualcomm $36.20 *** Hot Sector! *** 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 moved to a 3-month high. The wirelss sector is performing well and this position offers investors reasonable reward potential at the risk of owning the company at a cost basis near $30. NOV 30.00 AAW WF LB=0.65 OI=8381 CB=29.35 DE=28 TY=7.9% ***** SYMC - Symantec $39.00 *** Solid Earnings! *** Symantec (NASDAQ:SYMC) provides a broad range of content and network security software and appliance solutions to enterprises, individuals and service providers. The company is a provider of client, gateway and server security solutions for computer virus protection, firewall and virtual private network, vulnerability management, intrusion detection, Internet and e-mail filtering, remote management technologies and security services to various enterprises and service providers around the world. Symantec has five operating segments: Enterprise Security, Administration, Consumer Products, Services and Other. Last week, SYMC posted a second-quarter profit versus a loss a year ago, handily beating estimates on strong sales of antivirus software. Ongoing demand for anti-virus and firewall software, along with a boost in sales for managed security services, offset slower than anticipated sales in network intrusion detection and vulnerability management software. Investors can speculate conservatively on the near-term performance of SYMC with this position. NOV 30.00 SYQ WF LB=0.45 OI=4289 CB=29.55 DE=28 TY=5.9% ***** TMCS - Ticketmaster $20.33 *** Buy-Out Activity *** 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 last week 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. USAI rallied strongly on the news as the company also said it was planning to acquire all of online travel firms Expedia (NASDAQ:EXPE) and Hotels.com (NASDAQ:ROOM). This position takes advantage of the bullish momentum amid the "buy-out" activity and offers a favorable method to speculate on the near-term performance of the issue. NOV 17.50 QMF WW LB=0.55 OI=20 CB=16.95 DE=28 TY=10.2% ***** VXGN - VaxGen $10.40 *** AIDS Drug Speculation! *** VaxGen (NASDAQ:VXGN) is engaged in the commercialization and development of AIDSVAX, a vaccine designed to prevent infection or disease caused by HIV (Human Immunodeficiency Virus), the virus that causes AIDS. The original AIDSVAX technology was developed by Genentech, and then licensed exclusively to the company. AIDSVAX consists of two primary, biologically active ingredients: an antigen and an adjuvant. An antigen is the ingredient in vaccines that activates the human immune system response. The antigen in AIDSVAX is synthetic gp120 protein. An adjuvant is an active ingredient in vaccines that improves the human immune system response by attracting immune cells to the region where the vaccine is injected. The adjuvant is alum, or aluminum hydroxide. Vaxgen is also under contract with the U.S. government to develop a new and better anthrax vaccine in case of a biological attack. Traders who want to establish a relatively low risk position in a speculative issue should consider this play. NOV 7.50 UWG WU LB=0.35 OI=126 CB=7.15 DE=28 TY=15.6% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield REGN 15.08 NOV 12.50 RQP WV 0.40 71 12.10 28 11.3% ATMI 17.63 NOV 15.00 ASQ WC 0.50 30 14.50 28 11.0% NVLS 27.51 NOV 22.50 NLQ WX 0.55 624 21.95 28 9.1% MOLX 25.17 NOV 22.50 OXQ WX 0.65 1250 21.85 28 8.8% AMHC 20.50 NOV 17.50 QMH WW 0.45 42 17.05 28 8.7% DLTR 25.12 NOV 20.00 DQO WD 0.40 69 19.60 28 8.0% SAP 18.15 NOV 15.00 SAP WC 0.30 111 14.70 28 7.4% SLAB 24.80 NOV 17.50 QFJ WW 0.35 47 17.15 28 7.2% NBR 35.50 NOV 30.00 NBR WF 0.60 247 29.40 28 7.0% GENZ 28.45 NOV 22.50 GZQ WT 0.30 579 22.20 28 5.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Shhhhh...Don't Make A Sound. You Might Wake The Bear! By Ray Cummins Stocks rallied this week as market bears went into hibernation after months of feeding on innocent investors. On Friday, the three major U.S. stock indexes ended their second consecutive week of gains, after almost two months of losses. The The Dow average climbed 47 points to finish at end at 8,322, while the tech-laden NASDAQ composite index rose 15 points to close at 1,288. The broader Standard & Poor's 500-stock index climbed 5 points to end at 884. Blue-chip stocks were led by International Business Machines (NYSE:IBM), SBC Communications (NYSE:SBC), and Home Depot (NYSE:HD) while technology shares were bolstered by a bullish report from Microsoft (NASDAQ:MSFT). In the broad market, specialty retail, automotive, drug-related and healthcare services stocks were among the best performers. Market breadth was mixed with decliners narrowly outpacing advancers on the Big Board while gainers edged past losers on the NASDAQ. More than 1.42 billion shares changed hands on the NYSE and more than 1.66 billion shares were traded on the technology exchange. Treasurys finished with large gains after a volatile session. The 10-year note rose 24/32 to yield 4.11% percent while the 30-year government added 27/32 to yield 5.06%. ***************** 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 43.24 OCT 33 35 0.30 34.70 $0.30 Closed NOC 124.54 100.72 OCT 105 110 0.35 109.65 ($3.65) Closed * UOPX 32.11 31.70 OCT 25 30 0.55 29.45 $0.55 Closed AZO 81.27 85.79 OCT 70 75 0.50 74.50 $0.50 Closed VZ 33.60 34.97 OCT 28 30 0.30 29.70 $0.30 Closed SLM 96.58 105.15 NOV 80 85 0.50 84.50 $0.50 Open UNH 93.49 99.73 NOV 80 85 0.60 84.40 $0.60 Open WTW 45.40 47.25 NOV 35 40 0.50 39.50 $0.50 Open Northrop Grumman (NYSE:NOC) shares tumbled Thursday morning after the defense giant said it missed earnings forecasts by $0.04 and would have trouble meeting expectations for the year. Traders who closed the position after the initial sell-off were able to limit losses due to the remaining premium in the long (OCT-$105) option. Those who "legged-out" during the session had superior results however, there was no way to avoid a loss in the spread on a simultaneous order basis. Previously Closed: Ball Corporation (NYSE:BLL) and S&P 100 Index (CBOE:OEX), both of which ended the expiration period positive. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status PHA 40.86 45.30 OCT 50 45 0.60 45.60 $0.30 Closed OEX 446.00 449.02 OCT 500 495 0.45 495.45 $0.45 Closed SLAB 19.66 24.80 OCT 30 25 0.40 25.40 $0.40 Closed BRL 63.65 61.45 OCT 75 70 0.50 70.50 $0.50 Closed MMM 119.46 125.31 OCT 135 130 0.40 130.40 $0.40 Closed WFC 46.89 50.36 OCT 55 50 0.55 50.55 $0.19 Closed ASD 64.56 67.75 OCT 75 70 0.65 70.65 $0.65 Closed S 40.62 24.16 OCT 50 45 0.30 45.30 $0.30 Closed FITB 57.47 65.73 NOV 70 65 0.65 65.65 ($0.08) Open? LEN 53.67 57.33 NOV 65 60 0.80 60.80 $0.80 Open LMT 62.45 59.38 NOV 75 70 0.55 70.55 $0.55 Open MMM 120.60 125.31 NOV 140 135 0.50 135.50 $0.50 Open As noted last week, positions in which the underlying issue moved above the strike price were candidates for early exit and Fifth Third Bancorp (NYSE:FITB) breached $65 during Thursday's session. However, the heavy overhead supply near the current price offers substantial resistance against further upside activity. Traders with an aggressive outlook can monitor the issue for a move above $67 on increasing volume before exiting or adjusting the position. Previously Closed: Lexmark (NYSE:LXK), which moved above the sold strike last Friday and ended the expiration period with a negative outcome. SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V (G/L) Status ERTS 67.73 70.14 NOV 75 60 0.40 0.50 0.90 Open SCHL 47.43 46.10 NOV 55 40 0.25 0.60 0.85 Open Electronic Arts (NYSE:ERTS) closed at a historical high Friday, suggesting further upside potential in the speculative position. Scholastic (NASDAQ:SCHL) offered an excellent entry point and a favorable "early-exit" opportunity early in the week. Previously closed positions in Boyd Gaming Group (NYSE:BYD) and Cablevision (NYSE:CVC) yielded short-term profits and the speculative play in Taro (NASDAQ:TARO) offered a small gain. The position in Dianon Systems (NASAQ:DIAN) was closed to limit losses. SYNTHETIC (BEARISH) ******************* No Open Positions Brocade Communications (NASDAQ:BRCD) was the "big winner" this month with an overall profit of up to $8.90 as the issue traded at a new 2002 low. Positions in Pfizer (NYSE:PFE), Met-Life (NYSE:MET), Merck (NYSE:MRK) and Progressive (NYSE:PGR) offered profitable trading opportunities. Cognizant (NASDAQ:CTSH) and Citigroup (NYSE:C) were briefly playable during the broad-market downturn, with small potential gains. 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 CHTT 42.99 43.25 NOV 35 40 4.20 4.40 39.20 Open CALENDAR SPREADS **************** Symbol Pick Last Long-Opt Short-Opt Debit M/V Status BAC 58.00 69.32 JAN-50P OCT-50P 2.00 2.70 Closed LPNT 33.04 36.65 FEB-35C NOV-35C 1.25 1.40 Open WAT 26.61 26.75 MAY-30C NOV-30C 2.20 2.00 Open Our new position in Lifepoint Hospitals (NASDAQ:LPNT) continued its bullish activity Friday and the short option (OCT-$35C) in the spread was rolled forward to November for a credit of $1.25. 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 the sharp sell-off in early October. Previously Closed: Schering Plough (NASDAQ:SGP) SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit M/V Status AES 2.92 1.29 J04-7.5P J03-2.5P 4.50 4.25 Open IMCL 7.77 7.83 J04-15P JO3-5P 8.00 7.75 Open CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V (G/L) Status ADRX 24.65 13.40 OCT 40 15 1.10 1.60 (0.50) Closed ISIS 8.97 9.00 OCT 15 7 1.50 0.00 1.50 Closed QCOM 28.58 36.20 OCT 32 22 1.50 1.20 0.30 Closed * PPD 21.80 20.16 OCT 25 17 1.95 0.00 1.95 Closed STJ 36.29 35.75 OCT 40 30 1.00 0.00 1.00 Closed OMC 55.86 59.25 OCT 65 40 0.95 0.00 0.95 Closed As noted last week, the bearish portion of the QualComm strangle was on the watch-list and Monday's move above the sold strike at $32.50 signaled our exit in that position. The cost to buy back the short option (OCT-$32.50) was slightly less than the overall credit in the neutral-outlook play. 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. **************** 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. ***** CREE - Cree Inc. $14.98 *** Sales Are Up! *** Cree (NASDAQ:CREE) is engaged in the development and manufacture of compound semiconductor materials and electronic devices made from silicon carbide (SiC), and a developer and manufacturer of optoelectronic and electronic devices made from gallium nitride and related materials. The company also produces radio frequency power transistor components and modules for wireless infrastructure applications using silicon-based bipolar and laterally diffused metal oxide semiconductor process technologies. Cree operates its business in two segments, the Cree segment, which consists of its SiC-based products and research contracts, and the Cree Microwave segment, which consists of RF transistors and also RF transistor modules based on a silicon platform. Strategy Explanation: A less neutral and more bullish type of calendar or time spread is initiated when the current value of the underlying issue is below the strike price of the options. This type of position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the underlying stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option's strike price. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the trader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are "in-the-money" at expiration, he will have to buy them back to preserve the long-term position. PLAY (speculative - bullish/calendar spread): BUY CALL JAN-17.50 CVO-AW OI=248 A=$1.55 SELL CALL NOV-17.50 CVO-KW OI=33 B=$0.60 INITIAL NET DEBIT TARGET=$0.85-$0.95 TARGET PROFIT=$0.50-$0.75 ************** HNT - Health Net $25.75 *** Earnings Speculation! *** Health Net (NYSE:HNT) is an integrated managed care organization that administers the delivery of managed healthcare services. The firm's health maintenance organizations, insure preferred provider organizations, and government contract subsidiaries provide health benefits to approximately 5.5 million individuals in 15 states through group, individual, Medicare, Medicaid and Tricare programs. The company's subsidiaries also offer managed healthcare products related to behavioral health, dental, vision and prescription drugs, and offer managed healthcare product coordination for multi-region employers and various administrative services for medical groups and self-funded benefits programs. The company operates and conducts its HMO and other businesses through its subsidiaries. The firm operates within two segments, Health Plan Services and Government Contracts/Specialty Services. Health Net's quarterly earnings are due 10/25/02. PLAY (speculative - bullish/calendar spread): BUY CALL JAN-30.00 HNT-AF OI=39 A=$1.25 SELL CALL NOV-30.00 HNT-KF OI=0 B=$0.40 INITIAL NET DEBIT TARGET=$0.75-$0.85 TARGET PROFIT=$0.45-$0.75 ************** 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. ***** ABK - Ambac Financial Group $63.21 *** On The Rebound! *** Ambac Financial Group (NYSE:ABK) is a holding company that, through its subsidiaries provides financial guarantee products and other financial services to clients in both the public and private sectors around the world. The firm provides financial guarantees for municipal and structured finance obligations through its principal operating subsidiary, Ambac Assurance Corporation. Through its financial services subsidiaries, the company provides financial and investment products, including investment agreements, interest rate swaps, funding conduits, investment advisory and cash management services, principally to its financial guarantee clients, which include municipalities and their authorities, school districts, healthcare organizations and asset-backed issuers. PLAY (conservative - bullish/credit spread): BUY PUT NOV-50 ABK-WJ OI=4563 A=$0.55 SELL PUT NOV-55 ABK-WK OI=1110 B=$1.10 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$54.40 PROBABILITY OF PROFIT (100-day HV)=89% ***** CHIR - Chiron $42.51 *** Strong Earnings Expected *** Chiron Corporation (NASDAQ:CHIR) is a global pharmaceutical firm that is focused on developing products for cancer and infectious disease. Chiron continues to build upon its cancer franchise, which has three dimensions, including immune system modulators, monoclonal antibodies and novel anti-cancer agents. In the area of infectious disease, the company has a range of products. The company commercializes its products through three business units, which include biopharmaceuticals, vaccines and blood testing. Chiron Biopharmaceuticals discovers, develops, manufactures and markets a range of therapeutic products. Chiron Vaccines offers more than 30 vaccines for adults and children. Chiron Blood Testing provides products used by the blood banking industry. PLAY (conservative - bullish/credit spread): BUY PUT NOV-35.00 CIQ-WG OI=456 A=$0.45 SELL PUT NOV-37.50 CIQ-WU OI=145 B=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$37.20 PROBABILITY OF PROFIT (100-day HV)=82% ***** AIG - American Intl. Group $63.71 *** Sector Slump! *** American International Group (NYSE:AIG) is a holding company that, through its subsidiaries, is engaged in a wide range of insurance and insurance-related activities in the United States and abroad. AIG's activities include general and life insurance operations as well as financial services, retirement savings and financial asset management. AIG's general insurance subsidiaries are multiple line companies writing substantially all lines of property and casualty insurance. One or more of these companies is licensed to write substantially all of these lines in all states of the United States and in approximately 70 foreign countries. The company's earnings are due 10/24/02. PLAY (conservative - bearish/credit spread): BUY CALL NOV-75 AIG-KO OI=10515 A=$0.30 SELL CALL NOV-70 AIG-KN OI=7026 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$70.60 PROBABILITY OF PROFIT (100-day HV)=76% ******************* GD - General Dynamics $76.58 *** Don't Be Defensive! *** General Dynamics (NYSE:GD) operates businesses that produce information and communications technology, land and amphibious combat systems, and is also engaged in naval and commercial shipbuilding, and business aviation. These are high technology businesses that use design, manufacturing and program management expertise together with advanced technology and the integration of complex systems as part of their everyday operations. The company operates in four primary business groups: Information Systems and Technology, Combat Systems, Marine Systems, and Aerospace. The company also owns other commercial operations. PLAY (conservative - bearish/credit spread): BUY CALL NOV-90 GD-KR OI=2828 A=$0.30 SELL CALL NOV-85 GD-KQ OI=2656 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$85.55 PROBABILITY OF PROFIT (100-day HV)=84% ******************* 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. ***** DLTR - Dollar Tree Stores $25.12 *** Earnings Speculation! *** Dollar Tree Stores (NASDAQ:DLTR) owns and operates discount stores with a variety of products and merchandise at the fixed price of $1.00. Since 1986, Dollar Tree has evolved from opening primarily mall-based stores to opening primarily strip-shopping-center-based stores. Since 1997, the company gradually increased the size of stores that it opened each year as it improved its merchandise offerings and service to its customers. Last year Dollar Tree had 1,975 stores in 37 states. The company's store growth has come from opening new stores and completing selective mergers and other acquisitions. Dollar Tree operates single-price-point stores under the names of Dollar Tree, Dollar Express, Dollar Bills, Only One Dollar and Only $One. The company also operates 12 multi-price point stores under the name Spain's Cards and Gifts. PLAY (very speculative - bullish/synthetic position): BUY CALL NOV-30.00 DQO-KF OI=1385 A=$0.50 SELL PUT NOV-20.00 DQO-WD OI=69 B=$0.40 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.45-$0.60 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $550 per contract. ***** NXTL - Nextel Communications $9.69 *** Sector Recovery! *** Nextel (NASDAQ:NXTL) provides digital mobile communications across the United States by offering integrated wireless services under the Nextel brand name, primarily to business users. The company's digital mobile network constitutes an integrated wireless telecom system utilizing a single transmission technology, the integrated Digital Enhanced Network (iDEN) technology, which was developed by Motorola. Customers are able to access digital mobile telephone services, such as speakerphone, conference calling, voice mail, call forwarding and additional line service; Nextel Direct Connect service, which allows subscribers in the same local calling area to contact each other instantly on a private one-to-one call or on a group call; Internet services, mobile messaging services, e-mail and advanced Java-enabled business applications, marketed as Nextel Wireless Web services, and international roaming capabilities, marketed as Nextel Worldwide. The company's quarterly earnings are due 10/24/02. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-12.50 FQC-AR OI=33868 A=$0.75 SELL PUT JAN-7.50 FQC-MA OI=9089 B=$0.85 INITIAL NET CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.65-$0.90 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $275 per contract. ***** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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