The Option Investor Newsletter Sunday 10-27-2002 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: Markets Rally On Bad News, Again Futures Market: Markets close Green for third week in a row Index Trader Wrap: Still bullish, but signs of a market decline are present Editor’s Plays: Time To Climb The Ladder Again Market Sentiment: Waiting for the Break Ask the Analyst: Percentage Play Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Fed Rally Coming? Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 10-25 WE 10-18 WE 10-11 WE 10-4 DOW 8443.99 +121.59 8322.40 +472.11 7850.29 +321.89 - 63.58 Nasdaq 1331.13 + 43.27 1287.86 + 77.39 1210.47 +774.16 - 9.13 S&P-100 455.65 + 6.63 449.02 + 26.34 422.68 + 19.46 - 4.03 S&P-500 897.65 + 13.26 884.39 + 49.07 835.32 + 35.04 - 14.70 W5000 8450.64 +126.86 8323.78 +450.75 7873.03 +274.41 -175.00 RUT 372.64 + 9.27 363.37 + 18.44 344.93 - 3.05 - 14.29 TRAN 2313.31 + 34.22 2279.09 +124.42 2154.67 + 16.99 - 13.39 VIX 36.27 - 3.55 39.82 - 3.62 43.44 - 2.84 + 3.14 VXN 50.39 - 4.94 55.33 - 3.54 58.87 - 1.41 + 2.42 TRIN 0.89 0.80 0.41 1.98 Put/Call 0.77 0.68 0.93 0.97 ****************************************************************** Markets Rally On Bad News, Again by Jim Brown The headline economic number on Friday was the Durable Goods report for September. It was ugly, really ugly with a drop of -5.9% for the month. This was well over the expected drop of -2.0%. It is the largest decline since November 2001. Dow Chart Nasdaq Chart While that number sounded bad on the surface there was actually some good news buried in the facts. A major factor for the decline was the nondefense aircraft orders which dropped -46% and greatly impacted the headline number. Aircraft is very volatile due to timing and dollar volume. There had been two months of large gains previously. The good news was a +9.3% gain in new orders for computer equipment. While this may have been a light under the door for the tech sector the -52% decline in communications equipment far overshadowed the gains in PCs. Nondefense capital goods also fell -12.6%. With computers the only glimmer of hope in a sea of red there was not much to cheer about. That is unless you are a tech bull. The bulls took the one positive number out of the report and the Nasdaq led the charge on Friday. There was an initial spike and mandatory dip at 10:AM but the Nasdaq never looked back after that. Other good news rescued the chip sector once again. Micron was upgraded by Merrill and Salomon Smith Barney due to improved selling price assumptions. They felt below trend capacity expansion signified a favorable environment for pricing. They felt the top DRAM manufacturers like Micron would benefit. A chip upgrade? You mean I don't have to buy bad news? That appeared to be what bulls were thinking. The SOX closed up +14 at 292 again and closing in on the critical resistance at 300. Amazon got taken to the woodshed with multiple downgrades from the constant lack of profit. The stock traded as low as 18.50 before recovering to close at 19.31. This was not as bad as it could have been considering the number of negative comments being made. Also helping the bulls was the news from Emulex. They beat estimates on Thursday night by 3 cents and they raised guidance for the current quarter. If you remember QLGC also raised guidance a week ago. They both expect 2% to 5% top line growth. ELX claimed they were grabbing market share and seeing a strong ramp of new products. ELX jumped +30% (+4.08) to $17.95 and QLGC gained about +2.00. Throw another log on that Nasdaq fire. The health insurance sector was not so lucky. Cigna warned of serious problems last night and again on Friday for the current quarters and for all of 2003. The stock got crushed and dropped -$26.60 to $39.30, a -41% drop. This set the tone for the broader market in the early morning and only the strength in techs kept the market from tanking. The markets moved sideways with only a slight uptrend until about 2:PM and the announcement of the plane crash and death of Senator Wellstone. With the election so close and the control of congress in real doubt any republican win in Minnesota would improve the republican odds. The market weighed the possibilities and quickly started putting money in sectors that might benefit from a republican control win in November. While the accident was tragic the facts remain and the market acted on it. Wellstone was strongly liberal and proud of it. He was a critic of big business and a strong conservationist. The possibility of a pro business, pro defense, pro tax cut republican senator in Minnesota was not lost on traders. In reality the same election confusion continues. There is a possibility that Governor Jesse Ventura, an independent, could now pick an independent or green party candidate to replace Wellstone. In addition to the Durable Goods numbers we also got New Home Sales, which increased to a new record high. The rate of increase was much smaller and there were numerous comments about the slowing boom. Existing home sales also increased very slightly with a +1.9% gain. Sales in the West (-4%) and Northeast (-2%) actually dropped but the headline number was helped by a giant +10% gain in the Midwest. With mortgage rates climbing slightly these numbers are expected to slow and the drops in those two regions could be a leading indicator. The revised Consumer Sentiment number for October was inline with estimates at 80.6 but still showed a decline over Sept. It is now down five consecutive months. The current conditions component dropped -3.4 to 92.4 and the lowest level since 1992. The expectations fell -6.8 points to 73.1 and the lowest level since 1993. Definitely nothing to cheer about here and added to the rapidly slowing Durable Goods orders it shows a consumer that is pulling back into their shell and restricting spending. The outlook for next week is good. That might surprise many readers but there are several factors at work which will keep a bid under the market until after November 6th. The first is the election. The big money will want to maintain the market bounce to give politicians the best chance of reelection. Secondly the Durable Goods orders and Consumer Sentiment today have peaked hopes for a rate cut on the 6th. Next week we will get another Consumer Confidence on Tuesday, GDP, PMI and ECI on Thursday and Nonfarm Payrolls, Personal Income and Spending, ISM and Construction Spending on Friday. A week full of reports where there is no wrong answer. Positive reports will be seen as signs of a recovery. Negative reports will be seen as a guarantee of another rate cut on Wednesday the 6th. Adding to the underlying bid is the extremely high short interest and high put/call ratios of the QQQ/DIA/SPY securities. The QQQ has short interest of nearly 180 million shares with volume of only 70 million on Friday. This is a huge amount of short interest and would take at least ten days to work it off on strong bounce. Adding to this is the 75 million short interest on the SPY with volume on Friday of only 43 million. The DIA has 20 million short with volume of 12 million. The P/C ratio on the DIA is high at 1.64. What this all means is that a sudden uptrend over Dow 8550 next week could explode if the shorts started covering for real. If you were heavily short next week and the market was moving up and there could be a rate cut on the 6th, would you cover? Obviously not everyone would since many traders are short from much higher levels. But, many traders, already nervous about the gains in the last two weeks, will become even more nervous on any rally next week. I think the number one thing traders need to think about next week is not fundamentals. Fundamentals still stink. They need to think about a short squeeze reaction "IF" we get a bounce over 8550 on Monday. The key is the bounce. We came to a dead stop at that level twice last week and failed to break 8450 on Friday. The rally road is not paved with gold just yet. There are traders still selling into every bounce and the bulls will have their work cut out for them. The bearish case is still the fundamentals. Many indicators are pointing to a double dip recession and economic reports next week could make the case even more clear. Still the bears are not likely to make a strong charge in front of the Fed meeting. They may bide their time and wait for the Fed and then sell any bounce. Also, Walter Mondale could easily step up to the plate and take Wellstone's place in the election and he would be very tough to beat. Suddenly the questionable "republican" rally from Friday could become a republican loss on Monday. The elections in Brazil will be over the candidate could thumb his nose at the IMF and take the entire country and continent down with him. My thoughts for Monday are to stay long over Dow 8550 and short under Dow 8500. The upside target if we did get a rally would be strong resistance at 9000-9075. That should draw serious attention from the bears and without 5:1 or better up volume I doubt it will fail. Trade what you see, not what you want to see. Enter Very Passively, Exit Very Aggressively! Jim Brown "Wall Street's graveyards are filled with men who were right too soon " - William Hamilton ************** FUTURES MARKET ************** Markets close Green for third week in a row by Alan Hewko futures@OptionInvestor.com ___________________________________________________ Quotes: 4:00 PM Cash Market Close ES 897, YM 8427, NQ 996 4:15 PM Future's Market Close ES 898, YM 8435, NQ 992 5:00 PM YM Dow Futures close: YM 8432 Note: ES did print 900.00 trades at approx. 4:13 PM Dow 8443 + 126 SP500 897 + 15 COMPX 1331 + 32 Advance/Decline by Volume was bullish most of the day. Abbreviations used by the Futures Market: Ticker ES = E-mini SP500 December futures ES02Z YM = E-mini Dow $5 December futures YM02Z NQ = E-mini NDX 100 December futures NQ02Z ______________________________________________________ A sub-title for Friday might be "What bad news regarding Iraq?" With the Dow closing above the 8320 level, Friday saw the market closing Green for the third week in a row on continued tone of "Buy the expected bad news" as very bearish pre-open economic reports and Cigna (CI)'s warnings did not take the market under some very important market support levels. As written in Thursday's wrap: Wednesday afternoon saw the markets continue their tone of buying bad news (the 2 PM bearish Beige Book), and Thursday afternoon saw some "odd" selling from a CNN report on Iraq kicking out foreign journalists. After reading the full text of the news item, that seemed an unlikely reason for 200 points of Dow selling. Thursday night the Shorts went to bed very happy as the Dow closed under 8300 threatening a break of Dow 8250 support and possibly another Dow -200 type day on Friday. As we've seen so many times this past week, both for bears and bulls; what you expect to happen at 8 PM for the next day often has not been happening. Thursday night saw Japan leak higher in their markets, closing at day highs of 8750 after opening at 8500. At the 3 AM open of the European market found Europe all opening lower and Red, but each index held psychological support levels (France's CAC40 held 3000, Germany's DAX held 3000, UK's FTSE held 4000). US Futures over Thursday night heading into Friday early morning had leaked under 880 support but never pierced the 875 support level. Friday pre-open had two bearish items. Cigna (CI), a large healthcare/insurance stock, warned rather badly. Second bearish item was the very bearish 8:30 AM Durable Goods report. You can see in the below chart the ES futures reaction to the 8:30 AM report. You can also see that while ES came close to piercing its strong support at 875, it never traded below it. One very handy aspect to ES futures is that a trader can instantly tell if some widely watched economic piece of news is bearish or bullish without first reading the actual news release. Friday 9:30 AM market open prices: ES 877-878, YM 8250-60, NQ 967 * Day Lows Friday's open (for the first time this week) didn't have a large gap up or large gap down. Futures were lower by a small amount from their Thursday close levels. Thursday night truly had many traders wondering if the sentiment was actually shifting from a bullish to bearish tone given the amount of the selling Thursday afternoon. All eyes turned to watch if the Dow would hold its key 8250 support (matching the same strong support ES/SPX level of 875. In a sentence, large support HELD, and the markets "leaked higher" the rest of the day. If you look at the above 9:30 AM prices, you can see how the markets basically opened right at key support levels of Dow 8250 and ES/SPX 875. As a trader sitting down on Friday morning, here were all the bearish items. 1. The bearish tone of Thursday's Dow -200 afternoon drop. 2. A very bearish 8:30 AM Durable Goods report 3. It's a Friday which sometimes has seen a reversal of the current sentiment as Longs take profit heading into the weekend. 4. Cigna's warning impacting the healthcare and insurance sector. 5. No "real" Long profit taking of any lasting substance since the October 10th rally started. 6. Markets opening at/near important supports of Dow 8250, ES/SPX 875, COMPX 1300 All of these factors "should have" tanked the market right under Dow 8250 / SPX 875 and perhaps sent the Dow down to its 8100-8150 support levels and ES/SPX's level of 850-855 support. Once again on Friday morning, the markets did NOT do what it "should have done". At 9:45 AM a very slightly bearish Michigan sentiment number was released; and at 10:00 AM a rather bullish Housing number came out. Until later in the afternoon, no other market news came out. The Shorts attempted another short-attempt at approximately 11:30 AM to take ES lower, they were able to take it under the 880 support level, but not under the key 875 number. The market quite simply spent most of the day chopping around between ES 883 and 888 pivot levels, on very low volume between 10:30 AM and 2:30 PM, making slightly higher lows in the process. Near the final 90 minutes of trading, a rally formed. Perhaps from Shorts simply decided to cover late on a Friday once it became clear they would not pierce those key supports to the downside, and perhaps a sad piece of news added to the rally as well. The late afternoon piece of market news that I referred to earlier was the sad news of Senator Wellstone dying in a plane crash. Senator Wellstone is a Democrat from the state of Minnesota. With the elections coming up very shortly, a thought was formed that perhaps the Republicans would now be able to take over control of the US Senate. The general market view is that Republicans in control of national politics is "market bullish". Please note: I'm only reporting on speculation and certainly am not forming the view that his sad, sudden death is "good" or "bullish". Quite the opposite actually: reflect for a moment on how quickly a human life can end. . . A US Senator got on a plane to go home for the weekend and died. Perhaps the next time the market is going 'sideways' for an hour, take that time to go hug your child or share it with someone special in your life, for this tragic accident merely once again shows us all how short our lives can be, and the markets will always be here when you get back. Without trying to answer the "Why" question any better, the markets continued their bullish tone straight into the close. Right near the futures close, ES actually printed 900, and NQ came within an inch of printing 1000. The Dow closed right near its pivot of 8430. Dow 8320: We always talk about this mysterious "THEY". "They" wanted the market (or stock) to close at X, or "they" wanted to run some short stops, etc. The market needed to close over Dow 8320 in order to make the statement "this is the third week in a row the markets have closed Green, and above their prior week. Go look at the below Dow chart and you can see how even as late in the day on Friday of 2:30 PM - 3:00 PM, the Dow could very easily have closed UNDER this Dow 8320 number. I do not know who "they" are [grins], but it seems "they" certainly wanted the Dow closing above it, which it did. Before getting to Friday's charts, NQ - NDX - COMPX - SOX, in other words, the tech sector seems to have been leading the markets higher the last few days. NQ seems the strongest index, with the Dow being the weakest. FRIDAY'S CHARTS ES02Z (E-mini SP500 futures) Friday 9:30 AM - 4:15 PM Below is a Chart of: Dow Industrials (Dow 30) for Friday 9:30 AM to 4 PM Here is a chart of: NQ (NDX futures) from Friday 9:30 AM to 4:15 PM In a paragraph: they all opened slightly lower, went sideways most of the day in a very choppy fashion, and then moved up quite strongly near the 2:30 PM to 3:00 PM area right into the close. Here are two longer term views: 5 day Chart of ES02Z (E-mini SP500 futures) from Monday to Friday (this chart only shows the 'day' session of 9:30 AM to 4:15 PM and does not include any of the overnights) As you can see, the market basically traded in a range from 875 to 900 without any clear breakout over 900, nor any clear breakdown under 875. Another word applies of SIDEWAYS. Many days in the last two weeks were marked by extremely large gap ups or large gap downs with most of the action during the day very "sideways". Will next week be any different? I do not know. I can merely point out those two numbers to watch of 875 and 900. NQ (NDX 100 futures) printed a week high of 1001.50 on Thursday morning and closed right under 1000 on Friday. That also is a number to watch - NQ 1000. Dow had a double top at 8550 on Thursday but never lost 8250 support. VIX spent most of the week at the 40 level, but closed at 36. Taking a longer view of the market, Here is a 3 Month chart of the SPX (SP500 Cash index) This past week's "sideways" action is even more clear on this longer term chart. ______________________________________________________ THOUGHTS FOR MONDAY and NEXT WEEK The market remains in "Buy the expected bad news" sentiment. October earnings are mostly over; however one continues to get the sense that "they" are perhaps keeping the markets higher as we head into the November elections. What does Monday and this coming week bring? As traders, we can HOPE there is a clear break in the action; either: breaking higher over the SPX 900 - Dow 8550 - NQ 1000 - SOX 300 levels -or- breaking lower under SPX 875 - Dow 8250 - NQ 955 level As traders, we must also be prepared for a continuation of this "sideway" chop we have seen the entire last week. ES closed right under the psychological level of 900. NQ closed right under the psychological level of 1000. NQ has been "leading" the way higher. For Monday morning, I would use the ES 895-900 number to signal a break higher, or a break lower to indicate a sense of market direction. ES spent very little time above the 900 level last week, so expect a great deal of chop trading near it before a clearer sense of direction is established. After looking at charts, it seems two possibilities occur, yet another failure to break out over the ES 900-905 level and that sends the market lower again on the double-top failure, or they break through cleanly forming a breakout on the daily chart. FRIDAY FUTURES TRADE SIGNALS I would like this chance to make a comment regarding the Futures Trade Signals given each day in the Market Monitor. The intent has been to slowly introduce trade signals. For the last week, I have not provided any at the 9:30 AM market open time period, instead waiting until after the 10 AM time-frame. Very often, there are great trade signals within the first few minutes of the open, the downside to them is they normally carry a wider stop- loss than the ones I've given so far. The technical staff at OI has been working on a newer version of the Market Monitor, one that shall allow more of a real-time streaming input on trade signals vs. the current auto-refresh time of five minutes. This new version could be ready this week, or it could take weeks to beta test all the bugs out. With the eventual release of this new version in mind, next week I plan to provide (using the existing Market Monitor application) futures trade signals near the open, with corresponding wider stops as well. Naturally, not all days shall have a trade signal right at the open. A very good example of this type trade was on Friday at the open which found YM (Dow $5 futures) opening at 8260-80 level. I had considered posting right near 9:30 AM a signal of "Go LONG YM at MARKET, currently YM is 8270; when filled, use a very wide stop of Dow Cash 8230". The reason for that stop would have been that if the Dow lost 8250 it likely was heading for 8100-8150, but wished some cushion if near 8250, hence the 8230 stop. That signal was not given as I wished to first talk about the risk of such a large stop, as well as talk about the large risk of putting down a futures trade right at the open BEFORE its more clear which direction the market is going from the open. These type trades can be either very good or very bad for the stop-loss must be larger than normal given the nature of the market usually not being very clear what it wants to do at 9:31 AM. On the positive side, they can be the best type trades, for you are already in the trade BEFORE it becomes clearer 2 hours later what it did at 9:31 AM. It's not a 'coin-toss' trade, in the "oh, lets just guess" mindset. It's an viable trade signal using the best data available, but not one that always works. Also, the fact this LONG YM at/near 8270 level would have actually gained 150 Dow points is not the point, for it could just have easily been stopped out for a 40 YM point loss if the market had gone down. FRIDAY FUTURES TRADE SIGNALS GIVEN After deciding to wait until the last of Friday's economic reports was out at 10 AM to provide any Trade Signals, none presented until later in the day: Signal 1: 12:22 PM Short NQ at 985.50 1:35 PM Covered 1/2 size position at 980.00 for + 5.50 NQ pts 2:04 PM Covered 1/2 size position at 985.00 for breakeven + 0 Signal 2: 2:59 PM Short ES at 986.00 with target of 3 point gain 3:13 PM Cover ES at 983.00 for + 3 target hitting on 1/2 Size 3:32 PM Cover ES at 985.00 for + 1 gain as the trailing Profit stop hit at 985.00 as the signal had wanted ES to lose 892 which would have resulted in selling to close vs the buying to close that actually occurred. I have received many reader emails regarding margin and possible profit/loss gains from futures, so shall use the above example to answer those of you that have asked questions of that type. As most of you are familiar with OEX Equity Options, I'll use that with my example: With OEX strike price XYZ trading at 11.50 x 12.00 you could buy 5 of them for $6000.00 Futures margin varies greatly from one broker to another, but I shall continue to use $1000 margin per each futures contract as an average figure. The same $6000 will allow you to daytrade up to 6 futures contracts at one time. Using the two above signals: NQ = NDX 100 futures, and is worth $20 for each 1 point move. Total Profit/Loss Short 6 NQ at 985.00 Cover 3 NQ at 980.00 for + 5 NQ points = + $100 + $300 (3 contracts x 5 NQ points x $20 per point = $300) Cover 3 NQ at 985.00 for + 0 NQ points = + $ 0 + $ 0 (3 contracts x 0 NQ points x $20 per point = $0) TOTAL on this Trade is + $ 300 ES = SP500 futures, and is worth $50 for each 1 point move. Total Profit/Loss Short 6 ES at 896.00 Cover 3 ES at 893.00 for + 3 ES points = + $100 + $450 (3 contracts x 3 ES points x $50 per point = $450) Cover 3 ES at 895.00 for + 1 ES points = + $150 + $150 (3 contracts x 1 ES points x $50 per point = $150) TOTAL on this Trade is + $ 600 TOTAL on both trades is a Gain of + $ 900 Using the $6000 margin figure, this is Total gain of 15% in this example. Alan Hewko As always, any questions or comments, please email them to futures@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Still bullish, but signs of a market decline are present Stocks finished the week in positive territory on Friday, which had the major indexes showing gains for a third consecutive week. However, bulls are on the lookout for potential weakness in equities as Treasuries found buying this week after three consecutive weeks of selling. It was back in our weekend wrap on Sunday, October 6th http://members.OptionInvestor.com/itrader/marketwrap/100602_1.asp that the DIVERGENCE between the major market indexes and Treasuries served as an alert for a turn higher. It is this week's divergence between Treasuries and equities which now warrants attention. Here's a quick look at this week's percentage gains and losses for the major indexes and various sectors. I've also left in place our "flow" diagram from the October 6th update on where we thought cash might have been flowing. I've placed "green Xs" by those indexes that "beat" the S&P 500 Index (SPX.X), which is generally called "the market." The two "red Xs" mark incorrect analysis on where cash from Treasury selling would have rotated to. I do think that the bearishness or at least drastic underperformance of the Oil (OIX.X) and Oil Service (OSX.X) sectors the past several weeks has been my inability and perhaps the MARKET'S inability to accurately predict what unfolds in the Middle East. As such, I usually try and AVOID trading in those sectors. My major point of focus after the conclusion of this week is the DIVERGENCE I see with the benchmark 10-year YIELD turning lower, which is caused by buying in Treasuries. It becomes rather apparent that equities benefited the week FOLLOWING 10/04/02 selling in Treasuries, and its this week's renewed buying in Treasuries, that has us on the alert for potential weakness in equities. Weekly Index/Sector Changes There wasn't a HUGE rush back into the benchmark 10-year Treasury this week. It is not accurate to actually try and calculate a percentage gain/loss from the YIELD figures, but it does serve as an observation of money flows. On price, the December 10-year Treasury futures (ty02z) 113'045 rose +0.73% this week. The shorter-term and "less risky" 5-year Treasury futures (fv02z) 112'125 rose 0.75% this week, while the longer-term and "riskier" 30-year Treasury futures (us02z) 109'00 gained rose 0.72%. This shows rather broad buying in the Treasuries and has me thinking, "something's got to give." While I don't focus on the very short-term 2-year Note, I'll make mention that today's action saw the 2-year Note December futures (tu02z) 107'007 +0.69% jumped sharply today. Again, the shorter- term treasuries are considered "less risky" and today's action hints of money moving to safety, either to park there for the weekend, or perhaps a little longer. My major market index prediction from last weekend was that the smaller cap Russell-2000 Index (RUT.X) 372.64 +1.80 would be this weeks best risk/reward trade for a bull. While the Russell-2000 Index iShares (AMEX:IWM) 74.44 +2.18% gained 2.8% on the week, they didn't "outperform" the larger capitalized NASDAQ-100 Index (NDX.X) nor the broader NASDAQ Composite. This has me thinking two things. There is still a heck of a lot of institutional short covering taking place in the NASDAQ-100 and MARKET bulls just were not very aggressive and willing to take on further risk in the small-caps this week. One reason I feel that short-covering is still taking place is that in recent weeks, the more institutional Dow Industrials and S&Ps kept pace with the NASDAQ-100. This weeks "lag" in gains by the Dow Industrials and S&Ps hints to me that bullish institutions just aren't in a chasing mode right now. The above spreadsheet shows a trader/investor where the gains are heaviest and the need to be raising some snug stops under bullish positions. If cash flows into Treasuries for a second week, and I'm correct in my thinking that bulls are getting a little more conservative and lack aggression, then we would expect a pullback in the coming week. Since we're monitoring the supply/demand relationship between stocks and bonds, lets look at the point and figure charts of the various indexes. Just remember, Xs are up (demand) and Os are down (supply). These may well be charts that the institutions are monitoring as they tend to view things on a larger scale and more fundamental basis. Dow Industrials Chart - $50 box Today's action had the Dow dipping back to 8,258.52, but that wasn't enough to have the point and figure chart giving a double- bottom sell signal at 8,250.00. By session's end, the Dow had rallied to close near its session high of 8,445.30. As such, the Dow still looks strong, but first sign of weakness would be a trade at 8,250. It would take a trade at 8,450 (3-box reversal) to have the Dow's chart back in a column of X. One thing I'll be monitoring this week is a pattern similar to that found back in August at the 8,750 level where the Dow's p/f chart gave a triple-bottom sell signal, when was the beginning of the eventual decline to the 7,200 level. Today's action had the Dow Industrials Bullish % ($BPINDU) remaining unchanged at 53.33% for a fourth-straight session. This can be compared to last Friday's reading of 43.33% and relative low reading of 6.66% in early October. While this bullish % only contains 30 stocks, the "no change" in bullish % gives the observation that the internals are still strong, but perhaps "stalling out a bit." Maybe some of the cash that rotated back toward Treasuries this week has something to do with that. S&P 500 Index Chart - $5 box From an institutional perspective, the SPX took a little rest recently, but the pullback near 880 was just too much for buyers to resist. By the close, the SPX had rallied to close at 897.65 +1.71%. The p/f charting discipline only allows a chartist to make one directional chart entry per day. However, I've placed 3 question marks on the chart to reflect today's intra-day reversal higher. Should the SPX open at 895 or higher on Monday and NOT trade 875, which would have the chart simply extending the current column of O, then bears that are short/put the SPX had better see resistance come in below 905. Should the SPX trade 905, that would be a triple-top buy signal and have a bear immediately assessing risk to 920-925 at a minimum. The 900 level has been tested twice and if cash continues to rotate back toward treasuries, it will be difficult to push the SPX higher from here. The first sign of weakness currently would come with a trade at 870. We can also look at a p/f chart of the SPDRS (AMEX:SPY) $90.20 +2.08%. Instead of looking at the SPY on conventional scale of $1.00, the p/f charts at www.stockcharts.com allows a trader to change the box size to his/her liking. Let's introduce a little "noise" into the chart of the SPY and change the box scale to $0.50 increments. This may help a SPY trader get a better grasp of supply/demand as well as risk/reward. When we do this, you begin to see the similarities between the SPX and SPY. SPDRS Chart (AMEX:SPY) - $0.50 box With the SPY chart set at $0.50 box scale, it looks similar to the SPX chart. It is at least interesting to notice from a bar chart that the 50-day SMA of $87.92 matches the support that shows up on the p/f chart at that level. You know and I know there were some shorts that actually anticipated a break lower today at the open, right at a current support level. Hey, I bought a small put position on a 1-lettered stock today at the open. It finished down 3-cents from its open!!!! While every bear has his/her convictions on future price action, don't shrug things off if the SPY were to trade $91.00, especially if short a FULL POSITION. Look back at a past triple- top that I marked on 08/14/02. The only "positive" a bear may have going for him/her is that at that time, the bullish % was just getting bullish at 36%. Today's action had the S&P 500 Bullish % ($BPSPX) showing a net gain of 3 stocks to p/f buy signals and has the bullish % inching up at 48.8% and status remains "bull alert." This compares to last Friday's reading of 37.6%. Should the SPY eventually give a sell signal on the above chart, I'd look for near-term support to be found near SPY $85.50- $86.00. That's right where a triple-top buy signal was given and I'm thinking that some bears shorting the rallies to $85.50 may be looking to get squared up a little. And now.... perhaps the most interesting chart of all! The S&P- 100 Index (OEX.X). S&P 100 Index Chart - $5 box scale Here's something that I hadn't noticed until tonight (Friday). The OEX has rallied to challenge its bearish resistance trend, which is considered the longer-term bearish trend. Also note that we've got crisscrossing resistance coming in from our bullish resistance (blue dashed) trend. What's interesting is that for the first time since the rally off the bottom, the OEX bullish % saw a net loss of 1 stock to a sell signal. That 1 stock only accounts for 1% of the bullish %, but I find it interesting, if not a slight tad bearish, that we see some buying in bonds this week, the OEX rallies to bearish trends, and an ever so slight amount of internal weakening is found. From a risk/reward perspective, bear would short here, stop 465, and target a pullback near 430, where the recent double-top buy signal was generated. Note that in July, the OEX reached a bottom at 385, when the bullish % at that time fell to just 8%. Remember just recently that the bullish % for the OEX ($BPOEX) fell to 18% before reversing up? See the long column of X from 390-455 and how it saw a little pullback into O from 450 to 420? That was kind of like the OEX taking a little rest after a nice move off the bottom. With some cash moving back into Treasuries this week, it might be time for the OEX and other indexes to also take a rest. I don't know about you, but I'll be watching Treasuries closely next week! Again, the OEX Bullish % ($BPOEX) saw a net LOSS of 1 stock to a sell signal on Friday. This still has the S&P 100 in "bull alert" status at 53%. It would take a decline to 48% to have the OEX reversing back into "bear confirmed" status, but further gains to 60% would have the OEX in "bull confirmed" status. Do you see how the current bearish resistance trend (red +) and the bullish percent levels play in with each other? If the OEX bullish % falls back into "bear confirmed" status, guess what the OEX chart will be doing? It would most likely deflect lower from current trend wouldn't it? Conversely, if the OEX bullish % continues higher as internals strengthen, I'd expect the OEX to break ABOVE the downward trend and 465 level. Now, for you bar chartist's, remember our discussions of how the OEX was holding ABOVE our "old" longer-term downward trend. One thing we wanted to monitor on the OEX was that for WEAKNESS, it would fall back below that trend at about the 440 level. From a risk/reward basis, if a bear is going to short 440, where is his/her stop on the point and figure chart? It's still up at 460 or 465 right? Watch those bond's closely next week. If we see buying in bonds Monday morning and the OEX gets a little pop higher on some continuation bullishness from Friday, don't be afraid to ease in with a 1/4 or 1/2 short in the OEX, or other indexes. Just understand that doing so has you trading bearish with a tight stop on a smaller position. Then, in a couple of days, if the trade begins working in your favor and we see any deterioration in the bullish %, a bear can always leg in further. Now for the NASDAQ-100 Index (NDX.X) 995 +3.17%. Here's the conventional chart of the NDX that most institutions look at. Big rally in the NDX in recent weeks right? NASDAQ-100 Index (NDX.X) - $50 box This is a "scary" chart for bull's that are certain a bottom has been found in big technology. Sometimes it helps to look at a chart like this and understand why we are seeing such "bullishness" in the NASDAQ-100. It seems crazy to think that there could possibly be short-covering taking place at current levels of NDX 995 after a 195 point move off the bottom, which represents about a 24% rebound. When will the short-covering end? I'm thinking it ends when it has in the past couple of years. When Treasuries see buying and bears begin to understand that the only ones they're battling are the bears themselves. However, if the NASDAQ-100 and big tech have found their bottom, then I'm thinking SMART bears from the 1,900 levels will continue to cover, especially if bonds see SELLING. Just as we introduced some "noise" into the SPDRS chart by reducing the box size, lets try and do the same thing with the NDX. NDX traders will better understand now how important the bullish % charts become when trying to assess MARKET RISK as the NDX is quite volatile. While the $50 box does a very good job of taking out noise and giving very accurate "sell" signals and limiting the number of "buy" signals, when we change box size to smaller increments, we're introducing noise into the chart, but also trying to get a different perspective on things. Let's cut the box size in 1/2 to $25. Take note that the first level of resistance on the $50 box where the NDX would give a "buy signal" is at 1,100. NASDAQ-100 Index (NDX.X) - $25 box While the NASDAQ-100 Bullish % ($BPNDX) was rising in July and August (red7 and red8) the NASDAQ-100 Index was falling during that time! Why? Because MSFT was falling. Was MSFT falling because something was wrong with it while other NASDAQ-100 stocks were more fundamentally strong and therefore attracting bullish capital? Heck no! MSFT was falling because every mom and pop was calling their equity mutual funds and redeeming their shares, then turning around and buying bonds! What was left for the fund managers to do after they'd already locked in 20-30% losses in their weak technology stocks? They had to sell their BIG LIQUID STOCK MSFT that was actually putting numbers to the bottom line, unlike about 90% of other tech stocks. Friday's action saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and it still reads "bull alert" at 55% bullish. It would take a reading of 62% to reach "bull confirmed" status, while a reversal lower to 48% is currently needed to have this index back in "bear confirmed" status. Last Friday's reading was 42%. While I (Jeff Bailey) may perceived MSFT as THE tech stock to own, the only way MSFT will go up and take the NASDAQ-100 with it, would be for the MARKET to stop buying bonds and leave cash available to buy the NASDAQ-100 stocks! I've tried to show various price levels where MSFT has traded in relation to the NASDAQ-100. YOU can pull up a FREE point and figure chart of MSFT at this link http://www.stockcharts.com/webcgi/Pnf.asp?S=MSFT&N=A&T=off and look at a point and figure chart of MSFT on conventional $1 box scale. In my mind, it DOES NOT matter how bullish MSFT's earnings are if the MARKET puts its money into bonds. It takes CASH to buy stocks in order for them to go up. Thinking about SHORTING or PUTTING MSFT in an attempt to outperform the NASDAQ-100 on a downward move? DON'T DO IT!!! Here's a relative strength chart of MSFT versus the NASDAQ-100 Index (NDX.X) http://www.stockcharts.com/webcgi/Pnf.asp?S=MSFT&N=A&RS=on&M=$ndx&T=off . You will note that it tends to go HIGHER longer-term than it does lower. This week, MSFT fell 0.88%, while the NASDAQ-100 rose 4.1%. I still think the bulk of the NASDAQ-100 rally has been short- covering and not necessarily "bullish" buying. MSFT just can't seem to bust a move above $54. In my opinion, if the index heavyweight can't bust a move above $54, then the NASDAQ-100 becomes susceptible to the downside. Give me $1,000 and I place a bullish $500 bet on MSFT, and a $500 bearish bet on the NASDAQ- 100. Even if Treasuries do find buying, I think a 50/50 split on MSFT versus the NASDAQ-100 would be a winning bet. At least it has been since October of 2000. Final note. Think of what "SMART" money has been shorting the past two years and where those shorts have made the best money. It hasn't been with MSFT. As such, it may make sense that MSFT isn't necessarily leading the move higher with 10% gains in a day. Why? Because there aren't as many shorts in MSFT as there is in INTC, CSCO, CIEN, etc. Early this next week, I'll not be too eager to put on a trade. I want to monitor bonds closely on Monday and Tuesday. If I see any type of "pop" on Monday and don't see SELLING in Treasuries, then be on the lookout for any type of "quick" reversal lower in the indexes. Remember past "traps" we've noted in prior commentaries. I'm eye-balling Thursday's little SPIKE in the SPX above 900, with a trade at 902.94 (just above a nice round number) and then quick reversal lower as somewhat suspicious. Combine that with Friday's rebound in the indexes, which was NOT confirmed with selling in Treasuries, and we might be ripe for a move lower this coming week. As always, Friday's bond market action may well have been just a "defensive" move toward safety before the weekend, just in case something took place with Iraq. We could well see renewed selling in Treasuries next week and have the indexes move higher. This is why I want to try and make Monday an "observation" day. I think we know what to look for 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 ************** Time To Climb The Ladder Again Here we are nearing the last two weeks of the option month and a major event in our future. The major event is the possibility of a pre-Fed rally based on expectations of a rate cut on Nov-6th. There is also a good chance that we will see some positive impact from the pre-election hoopla. The strategy I am suggesting this Sunday is a laddered put entry on the Semiconductor holders. (SMH) The SOX rallied +42% since October 10th. There is a good chance that the sector, which is heavily shorted will see another run to the 300 level and above between now and the Fed meeting. After the Fed meeting, regardless of the outcome the chances are very good that the sector will collapse on profit taking and poor fundamentals. We are going to hedge this PUT position with CALLS on the QQQ because they are cheaper and the strikes are closer together. The basic concept is to acquire a 50 contract PUT position on the SMH for an estimated average cost of $.75 cents per share. If the profit taking happens as anticipated the puts would have an estimated value of $1.75 per share at the SMH target of $22. That would be a profit of $5,000 on a $3,750 investment. There are always two challenges with this type of investment. First, the sector could just keep rising and make the entire investment worthless. We will deal with that by hedging with QQQ calls. Secondly, the SMH may not rally all the way to our upside target of $25.00. That is the reason for the ladder play. If you KNEW in advance that it would hit the $25 level then there would be no reason to ladder the entry and you would just wait for $25 and buy 50 contracts. By using the ladder concept we will always have a put position in place and can profit from any post Fed crash. Game Plan: We are going to buy put contracts at 24, 24.50, 24.75 and 25. We will buy 10 contracts at every price point except $25 and we will buy 20 contracts at that level. It looks like this: Buy 10 NOV $22.50 PUTS if SMH hits $24.00 (est price $.93) Buy 10 NOV $22.50 PUTS if SMH hits $24.50 (est price $.80) Buy 10 NOV $22.50 PUTS if SMH hits $24.75 (est price $.73) Buy 20 NOV $22.50 PUTS if SMH hits $25.00 (est price $.66) If every point was hit your estimated cost of the puts would be $3,750. The target exit point is $22.50 on a roll over. Here are the price estimates by price point on a drop. SMH 23.00 NOV $22.50 PUT = $1.32 Estimated profit = $2,850 SMH 22.50 NOV $22.50 PUT = $1.52 Estimated profit = $3,850 SMH 22.00 NOV $22.50 PUT = $1.78 Estimated profit = $5,150 SMH 21.50 NOV $22.50 PUT = $2.05 Estimated profit = $6,500 SMH 21.00 NOV $22.50 PUT = $2.34 Estimated profit = $7,950 The challenge is what happens if the sector just keeps going up. We are going to hedge this challenge by purchasing 40 contracts of the QQQ NOV $26 CALLS at the open on Monday. Estimated price is $.50 cents making the total outflow of $2,000. If the SMH hits $25 the QQQ should hit $26. The prices do not correlate exactly as the QQQ is already trading above the SMH levels we are targeting but they should match exactly on the repeat. The QQQ cannot rise without the semis and either should help pull the other up. If the QQQ does hit $26 next week the NOV $26 CALLS should be worth $1.50 or a total of $6,000. Subtract the $2,000 you paid for them and you have a $4,000 profit and your SMH puts are now free. If the SMH rolls over before the top number is hit then the increase in value in the SMH puts will offset any loss in the QQQ calls. The decision will have to be made to sell the calls when you see the top appear and not let them roll back to a loss. This trade needs some management and baby-sitting but if the rally/crash scenario plays out it would be very profitable. SMH Chart SOX Chart QQQ Chart Remember, all these prices are estimates and I make no claims of specific profits. This is an example only and actual results will never match the example exactly. This is a very profitable way to enter a directional play as long as things are going in your direction. Once the market decides to go against you it will require a decision on when and what to liquidate. Do not get caught thinking the market will only go up or down next week and simply react to what happens and profit from it. I will recap this trade in the newsletter next Sunday and we will see how the forecast went. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Waiting for the Break by Steven Price The feel good vibes of the week made their way into Friday's close, with the Dow up 126.65, the Nasdaq Composite up 32.42 and the S&P 500 up 15.15 on the day. While today's rally left investors confident heading into the weekend, we have yet to take out the next significant levels of resistance to the upside. The Dow was unable to crack 8450; the S&P was unable to crack 900; and the Nasdaq has yet to break 1350. Of course, we also found support at the 50-dma once again in the Dow (8241) and the S&P (875), so the market appears rangebound for the moment. With another heavy week of earnings ahead, that range is unlikely to contain the market, but so far has at least given us some guidance as to when a breakout is taking place. The fact that we have not yet broken through to the upside may actually be a piece of a puzzle that looks somewhat bearish when we involve the bond market. During the rally of the last two weeks, we have seen a sell-off in bonds, indicating an asset allocation as firms shift dollars from treasuries to equities. However, the last two days have seen a buying of bonds once again, indicating that there may not be the cash flow to boost the equities through resistance. This morning's economic data showed Consumer Sentiment at a nine- year low, after falling for the fifth straight month. The index fell to a reading of 80.6 and seems to be foreshadowing a rough holiday shopping season. According to the survey, consumers are worried that the stock market drop will make businesses reluctant to invest and hire and more than half expect the economy to worsen in the next year. Researchers also said that more consumers mentioned a decline in wealth than at any time in the last 50 years. With consumers expecting the worst, it is hard to imagine much splurging in the next few months. New orders for durable goods were down 5.6% in September, highlighting business cutbacks in capital spending. The drop was far worse than the consensus of -1.8%. This was the biggest drop since last November, and included a 12.6% decline in orders for new capital goods. The only positive data out this morning was in the housing sector, which showed a record number of new home sales. Existing home sales also showed an increase. However, the overall numbers didn't really tell the story. Almost the entire increase in new homes was located in the Northeast part of the country. There was weakness in the South and Midwest and an increase in the number of new homes on the market. While housing still remains strong, it is starting to show signs of a slowdown. The semiconductor stocks bounced back from yesterday's drop, with the Semiconductor Index (SOX) finding support at the 50-dma. The index closed at 292.48 and now appears stuck between the 50-dma of 276 and a ceiling of 300. This actually appears bullish, since the group is finding support on pullbacks and setting higher lows. While a vast majority of the news in the sector continues to be bad, shorts should wait for a 50-dma breakdown, and those looking to speculate to the long side should look for a breakout above 300. One interesting observation is the action in the Market Volatility Index (VIX). The index reflects the premium in the OEX at the money options and can be used to gauge fear of the downside. The VIX has remained close to 40, in spite of previous market rallies this week. This morning, the VIX headed lower ahead of the rally and continued downward all day. Friday usually brings out premium sellers looking to capture time decay over the weekend. However, the past few weeks have still had enough fear built in that option sellers have had little conviction to go short over the weekend, worrying that Monday could bring a sell- off. That fear appears to be subsiding, as the VIX has reached its lowest close since August. If nothing else, it appears we are returning to normal Friday behavior. While the tone of this column is bearish, I will once again repeat the mantra of trading what you see. I would like to just go blindly short, seeing nothing but questionable results and resistance holding its line. However, until we get a breakdown in support, I will be selective and remember that the market will provide many opportunities over time, as long as I can come back and play tomorrow. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7286 Current : 8443 Moving Averages: (Simple) 10-dma: 8301 50-dma: 8241 200-dma: 9329 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 897 Moving Averages: (Simple) 10-dma: 881 50-dma: 875 200-dma: 1008 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 995 Moving Averages: (Simple) 10-dma: 955 50-dma: 918 200-dma: 1178 ----------------------------------------------------------------- Dow Jones Home Construction Index (DJUSHB): The homebuilders got mixed news this morning. New home sales reached record levels, but the increase was concentrated almost entirely in the northeast region. The housing market appears to be cooling in the South and Midwest. The index has run into resistance at its third straight lower level, indicating investors are not as enamored with the homebuilding stocks now that mortgage rates are on the rise. If the overall number of new home sales begins to drop, this sector could hold some good short opportunities. 52-week High: 394 52-week Low : 214 Current : 318 Moving Averages: (Simple) 10-dma: 312 50-dma: 314 200-dma: 339 ----------------------------------------------------------------- Market Volatility The VIX is at its lowest point since the end of August. With a week of heavy earnings reports still ahead, this is curious. However, with most of the big reports behind us, apparently the weekend sellers are back, less fearful and trying to capture the 3-day time decay. Support levels having held in the Dow, S&P and SOX may be contributing to the sense of safety, as well. CBOE Market Volatility Index (VIX) = 36.27 –3.63 Nasdaq-100 Volatility Index (VXN) = 50.39 –4.19 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.77 440,849 340,664 Equity Only 0.65 339,527 218,993 OEX 1.06 17,506 18,588 QQQ 1.25 31,702 39,630 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 36 + 0 Bull Confirmed NASDAQ-100 55 + 0 Bull Alert Dow Indust. 53 + 0 Bull Confirmed S&P 500 49 + 1 Bull Alert S&P 100 53 - 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 0.85 10-Day Arms Index 0.89 21-Day Arms Index 1.10 55-Day Arms Index 1.26 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 1894 1996 NASDAQ 859 1101 New Highs New Lows NYSE 24 57 NASDAQ 42 74 Volume (in millions) NYSE 1,584 NASDAQ 1,461 ----------------------------------------------------------------- Commitments Of Traders Report: 10/22/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added to both long and short positions, however increased shorts by an additional 11,000 contracts. Small traders left long positions virtually unchanged, but reduced the short side by 11,000, taking the opposite approach. Commercials Long Short Net % Of OI 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%) 10/22/02 432,775 463,827 (31,052) (3.5%) 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 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 23.3% 10/22/02 134,641 72,681 61,960 29.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials increased their long contract positions by 3,400 contracts, while increasing shorts by 2,100. Small traders left longs unchanged, while reducing shorts by 3,600. Commercials Long Short Net % of OI 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%) 10/22/02 48,954 54,088 (5,134) ( 4.9%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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% 10/22/02 10,202 8,892 1,310 11.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL In a continuing trend with other markets, commercials increased short positions by 2,000 more contracts than they increased longs. Small traders reduced longs positions by 1,600 and shorts by 1,000. Commercials Long Short Net % of OI 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% 10/22/02 22,189 13,448 8,741 24.5% 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 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%) 10/22/02 4,445 9,270 (4,825) (35.1%) 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 *************** Percentage Play by Steven Price Question: Hello, I would like to know your thoughts on SBUX. Looks like it is coming out of a long base..."A REAL business" in this weak economy...Moving nicely in the past few months. Looks like if it breaks out of this basing, the move upside could be significant. Thanks. Cheers, Padhu Answer: Starbucks (SBUX) is an example of a stock that is definitely in an upward trend, although a look at almost every street corner in America leaves me wondering where the company can grow. In spite of that casual observation, SBUX is planning an expansion of 1,200 stores in 2003 and planning to boost revenues by 20%. These plans were revealed at a recent analyst meeting, where the company also said it expected same store sales growth of 3-7%, a key to profitability with such aggressive expansion plans. SBUX also raised earnings guidance for 2003 to 0.65-0.66 per share. The company is aiming at 20-25% earnings growth over the next 5 years, along with 20% sales growth. It plans on expanding from its current total of almost 6,000 stores, to 10,000 by the end of 2005. CIBC World Markets Analyst John Glass, who attending the analyst meeting, said "Though it provided little new news, it did re- enforce what we'd believed for a long time about the business: that it is an exceptionally well-run business with substantial growth opportunities and strong near-term momentum." He also wrote, "Starbucks is clearly one of the few consumer brands in the world today with significant global unit growth still ahead of it." Glass raised his 12-month price target from $22 to $24. A look at the charts shows a stock that has experienced a slow, upward trend, ever since the stock was listed. While it did pull back from $25 to $15 during the recent market swoon, that was still a higher low on the monthly chart and did not break the trend. The stock has made up that loss and sits close to $25, finishing the week at $23.87. The other bullish signal I see on the chart is that is has now broken back above its 200-dma. SBUX has pulled back to that level (22.41) and found new support there. New long entries on the following plays who are looking for a less expensive entry point can target a pullback to that level. Because SBUX does move slowly and time decay is a factor in a slow uptrend, I prefer a vertical call spread. While it does limit upside potential, the sale of an out of the money call helps pay the price of the lower strike call that is purchased. Two of the spreads I see that would be more of a percentage play than an outright long play, with the goal of doubling your investment, are the Jan 2004 25-30 call debit spread, offered at $2.45, which could max out in value at $5.00. The other one I see is the April 25-30 call spread, offered at $1.50, which can also max out at $5.00. Because the stock has run into resistance at $25, there may be another pullback. However, the long term prospects still look good and by investing less and looking for a reasonable profit, a trader protects the downside by reducing the initial investment. The maximum loss on either of these spreads is the initial investment. Also these plays allow plenty of time for a pullback and surge forward again, since they do not expire until April 2003, or January 2004. Obviously you pay more for more time. Those traders simply looking to go long SBUX, without initiating a spread, should wait for a move above $25 and then support at that level. So far, $25 has been a resistance level in both 200o and 2002, and although the stock has broken through on occasion, it has yet to finish a month above that level. Therefore, I would wait for support after a breakthrough if investing in a higher priced call. Monthly Chart of SBUX Daily Chart of SBUX 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 28th ========================================= ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ADVP AdvancePCS Mon, Oct 28 After the Bell 0.38 AXP American Express Mon, Oct 28 -----N/A----- 0.51 AWK American Water Works Mon, Oct 28 Before the Bell 0.60 ARI Arden Realty Mon, Oct 28 After the Bell 0.65 SAN Banco Santander-Chile Mon, Oct 28 -----N/A----- 0.34 CX Cemex, S.A. de C.V. Mon, Oct 28 After the Bell 0.40 CUZ Cousins Properties Mon, Oct 28 After the Bell 0.56 GGP General Growth Prop Mon, Oct 28 After the Bell 1.41 HIG Hartford Finl Srvcs Mon, Oct 28 After the Bell 1.11 HUM Humana Mon, Oct 28 05:00 am ET 0.31 ICST Integrated Crcut Sys Mon, Oct 28 Before the Bell 0.20 K Kellogg Mon, Oct 28 Before the Bell 0.48 KIM Kimco Realty Mon, Oct 28 After the Bell 0.75 KG King Pharmaceuticals Mon, Oct 28 Before the Bell 0.34 WFR MEMC Elec Materials Mon, Oct 28 After the Bell -0.19 MCY Mercury General Mon, Oct 28 -----N/A----- 0.64 NFS Nationwide Finl Serv Mon, Oct 28 After the Bell 0.79 NWL Newell Rubbermaid Mon, Oct 28 Before the Bell 0.45 IX Orix Corporation Mon, Oct 28 Before the Bell N/A PNW Pinnacle West Mon, Oct 28 Before the Bell 1.45 PVN Providian Financial Mon, Oct 28 After the Bell 0.04 IQW Quebecor World Mon, Oct 28 -----N/A----- 0.62 RCII Rent-A-Center Mon, Oct 28 After the Bell 1.12 RSG Republic Services Mon, Oct 28 After the Bell 0.37 RHA Rhodia S.A. Mon, Oct 28 -----N/A----- N/A RSE Rouse Mon, Oct 28 -----N/A----- 0.97 SAFC SAFECO Mon, Oct 28 Before the Bell 0.44 SHR Schering A G Mon, Oct 28 -----N/A----- N/A SNE Sony Corporation Mon, Oct 28 Before the Bell N/A TP TPG NV Mon, Oct 28 -----N/A----- 0.22 UDR United Dominion Rlty Mon, Oct 28 After the Bell 0.40 WRI Weingarten Realty Mon, Oct 28 Before the Bell 0.82 ------------------------- TUESDAY ------------------------------ ATVI Activision Tue, Oct 29 -----N/A----- 0.10 ASX Adv Semicon Eng Tue, Oct 29 Before the Bell 0.01 AGU Agrium Tue, Oct 29 After the Bell -0.01 AMLN Amylin Pharm Tue, Oct 29 Before the Bell -0.30 AVE Aventis Tue, Oct 29 -----N/A----- N/A BVF Biovail Corporation Tue, Oct 29 Before the Bell 0.46 BOW Bowater Tue, Oct 29 Before the Bell -0.88 BP BP plc Tue, Oct 29 05:00 am ET 0.64 BTI British American Tob Tue, Oct 29 Before the Bell N/A BPO Brookfield Properties Tue, Oct 29 -----N/A----- 0.59 CAJ Canon Tue, Oct 29 -----N/A----- N/A CBL CBL & Ass Properties Tue, Oct 29 After the Bell 1.01 CRL Charles River Lab Tue, Oct 29 After the Bell 0.36 CSB CIBA SPEC CHEM HLDG Tue, Oct 29 01:00 am ET 0.63 CIT CIT Group Tue, Oct 29 Before the Bell 0.73 CCU Clear Channel Comm Tue, Oct 29 Before the Bell 0.32 CTC Comp Tele de Chile Tue, Oct 29 After the Bell 0.02 CEFT Concord EFS Tue, Oct 29 Before the Bell 0.17 CAM Cooper Cameron Tue, Oct 29 Before the Bell 0.37 CVH Coventry Health Care Tue, Oct 29 Before the Bell 0.63 COX Cox Communication Tue, Oct 29 Before the Bell -0.04 ELE Endesa, S.A. Tue, Oct 29 -----N/A----- N/A ENR Energizer, Inc. Tue, Oct 29 -----N/A----- 0.42 EOP Eq Office Prop Trust Tue, Oct 29 Before the Bell 0.77 FOE Ferro Tue, Oct 29 Before the Bell 0.37 FMC FMC Tue, Oct 29 After the Bell 0.78 FTE France Telecom Tue, Oct 29 -----N/A----- N/A FMS Fresenius Med Care Tue, Oct 29 -----N/A----- 0.24 FDP Fresh Del Monte Prod Tue, Oct 29 Before the Bell 0.41 HGSI Human Genome Sciences Tue, Oct 29 Before the Bell -0.38 IM Ingram Micro Tue, Oct 29 -----N/A----- 0.11 IVX Ivax Tue, Oct 29 Before the Bell 0.16 JP Jefferson-Pilot Tue, Oct 29 After the Bell 0.85 LAF Lafarge North America Tue, Oct 29 -----N/A----- 1.87 MXIM Maxim Integ Products Tue, Oct 29 After the Bell 0.22 MUR Murphy Oil Tue, Oct 29 After the Bell 0.62 MYL Mylan Laboratories Tue, Oct 29 Before the Bell 0.50 NXTP Nextel Partners Tue, Oct 29 -----N/A----- -0.29 GAS Nicor Tue, Oct 29 After the Bell 0.41 NVO Novo-Nordisk Tue, Oct 29 -----N/A----- N/A OMC Omnicom Group Tue, Oct 29 Before the Bell 0.68 OHP Oxford Health Plans Tue, Oct 29 Before the Bell 1.02 PFGC Performance Food Tue, Oct 29 Before the Bell 0.40 PER Perot Systems Tue, Oct 29 Before the Bell 0.17 PAA Plains All Am Pplne Tue, Oct 29 Before the Bell 0.38 PDS Prec Drill Corp Tue, Oct 29 -----N/A----- 0.12 PG Procter & Gamble Comp Tue, Oct 29 -----N/A----- 1.10 PEG Public Serv Enter Grp Tue, Oct 29 08:30 am ET 1.08 RGIS Regis Corporation Tue, Oct 29 Before the Bell 0.43 SANM Sanmina-SCI Corp. Tue, Oct 29 After the Bell 0.02 SVM ServiceMaster Tue, Oct 29 Before the Bell 0.18 TEVA Teva Pharmaceutical Tue, Oct 29 -----N/A----- 0.68 EL Estée Lauder Co Inc. Tue, Oct 29 Before the Bell 0.26 TRP TransCanada Pipelines Tue, Oct 29 -----N/A----- 0.23 RIG Transocean Inc. Tue, Oct 29 Before the Bell 0.27 BER W.R. Berkley Tue, Oct 29 After the Bell 0.77 WSH Willis Grp Hldng Lmtd Tue, Oct 29 Before the Bell 0.28 ----------------------- WEDNESDAY ----------------------------- AW Allied Waste Ind Wed, Oct 30 After the Bell 0.27 APCC Am Power Conversion Wed, Oct 30 After the Bell 0.17 APPB Applebee`s Intl Wed, Oct 30 After the Bell 0.36 BLDP Ballard Power Systems Wed, Oct 30 Before the Bell -0.38 BE BearingPoint, Inc. Wed, Oct 30 Before the Bell 0.09 BHP BHP Billiton Ltd Wed, Oct 30 4:30 pm ET 0.10 CDX Catellus Development Wed, Oct 30 Before the Bell 0.41 CB Chubb Wed, Oct 30 Before the Bell 1.11 CLX Clorox Wed, Oct 30 Before the Bell 0.54 COCO Corinthian Colleges Wed, Oct 30 Before the Bell 0.23 GLW Corning Wed, Oct 30 Before the Bell -0.08 CXR Cox Radio Wed, Oct 30 Before the Bell 0.15 CVS CVS Wed, Oct 30 Before the Bell 0.38 DRE Duke Realty Corp Wed, Oct 30 -----N/A----- 0.60 EDMC Education Management Wed, Oct 30 Before the Bell 0.07 EDS Electronic Data Sys Wed, Oct 30 After the Bell 0.12 ETR Entergy Wed, Oct 30 -----N/A----- 1.45 EXC Exelon Corporation Wed, Oct 30 Before the Bell 1.56 FIC Fair Isaac &Co Wed, Oct 30 After the Bell 0.43 FRT Fed Rlty Invest Trst Wed, Oct 30 -----N/A----- 0.64 GRMN Garmin Ltd. Wed, Oct 30 Before the Bell 0.24 GT Goodyear Tire Rubber Wed, Oct 30 -----N/A----- 0.08 GXP Grt Plains Energy Wed, Oct 30 After the Bell N/A HAR Harman Intl Ind Wed, Oct 30 -----N/A----- 0.24 HTV Hearst-Argyle TV Wed, Oct 30 Before the Bell 0.23 KMG Kerr-McGee Wed, Oct 30 Before the Bell 0.73 LH Laboratory Corp. Wed, Oct 30 After the Bell 0.44 LVLT Level 3 Comm Wed, Oct 30 Before the Bell -0.79 LNC Lincoln National Wed, Oct 30 Before the Bell 0.55 LUX Luxottica Group Wed, Oct 30 -----N/A----- N/A MKL Markel Wed, Oct 30 Before the Bell 2.05 MC Matsushita El Ind Wed, Oct 30 -----N/A----- N/A MDP Meredith Corporation Wed, Oct 30 Before the Bell 0.31 MX Metso Corporation Wed, Oct 30 05:00 am ET N/A MON Monsanto Co. Wed, Oct 30 Before the Bell -0.57 NBL Noble Energy, Inc. Wed, Oct 30 Before the Bell 0.09 OCAS Ohio Casualty Wed, Oct 30 -----N/A----- 0.23 OKE ONEOK Inc. Wed, Oct 30 After the Bell 0.15 PIO Pioneer Corporation Wed, Oct 30 -----N/A----- N/A PT Portugal Telecom Wed, Oct 30 -----N/A----- N/A PLD ProLogis Trust Wed, Oct 30 After the Bell 0.61 STR Questar Wed, Oct 30 After the Bell 0.25 O Realty Income Corp Wed, Oct 30 -----N/A----- 0.70 RCI Renal Care Group Wed, Oct 30 After the Bell 0.46 RMD ResMed Wed, Oct 30 After the Bell 0.28 COL Rockwell Collins, Wed, Oct 30 Before the Bell 0.36 SO Southern Company Wed, Oct 30 Before the Bell 0.79 SV Stilwell Financial Wed, Oct 30 -----N/A----- 0.15 TXU TXU Corp. Wed, Oct 30 Before the Bell 0.90 UN Unilever N.V. Wed, Oct 30 -----N/A----- 1.02 UL Unilever PLC Wed, Oct 30 Before the Bell 0.61 UMC United Micro Corp Wed, Oct 30 -----N/A----- 0.02 VLO Valero Energy Wed, Oct 30 Before the Bell 0.23 VSH Vishay Intertech Wed, Oct 30 Before the Bell 0.13 WBK Westpac Banking Wed, Oct 30 After the Bell N/A WGL WGL Holdings Inc Wed, Oct 30 After the Bell -0.43 XL XL Capital Wed, Oct 30 After the Bell 1.60 ------------------------- THURSDAY ----------------------------- AET Aetna Thu, Oct 31 Before the Bell 0.70 AC All Cap Mana Holding Thu, Oct 31 -----N/A----- 0.50 ATK Alliant Techsystems Thu, Oct 31 Before the Bell 0.72 APC Anadarko Petroleum Thu, Oct 31 -----N/A----- 0.69 AU Anglogold Limited Thu, Oct 31 -----N/A----- 0.44 CPT Camden Property Trust Thu, Oct 31 After the Bell 0.82 CCJ Cameco Thu, Oct 31 -----N/A----- N/A CVX ChevronTexaco Corp. Thu, Oct 31 Before the Bell 1.30 CEG Cnstlation Enrgy Grp Thu, Oct 31 Before the Bell 1.05 DTC Domtar Thu, Oct 31 -----N/A----- 0.12 DQE DQE Thu, Oct 31 After the Bell 0.48 ETM Entercom Comm Thu, Oct 31 Before the Bell 0.27 EPD Enterprise Pr Prtnrs Thu, Oct 31 Before the Bell 0.24 XOM Exxon Mobil Corp Thu, Oct 31 Before the Bell 0.43 FIA Fiat S.p.A. Thu, Oct 31 Before the Bell N/A GILD Gilead Sciences Thu, Oct 31 After the Bell 0.07 GR Goodrich Corporation Thu, Oct 31 Before the Bell 0.64 HPC Hercules Thu, Oct 31 Before the Bell 0.18 ICI Imperial Chem Ind Plc Thu, Oct 31 -----N/A----- N/A NDE IndyMac Bancorp Inc. Thu, Oct 31 Before the Bell 0.64 IRM Iron Mountain Thu, Oct 31 Before the Bell 0.17 JEC Jacobs Engin Grp Inc Thu, Oct 31 Before the Bell 0.52 JHF Jhn Hancock Finl Serv Thu, Oct 31 After the Bell 0.71 JNY Jones Apparel Thu, Oct 31 Before the Bell 0.96 LR Lafarge Thu, Oct 31 -----N/A----- N/A LYO Lyondell Chemical Thu, Oct 31 -----N/A----- -0.01 MLM Martin Marietta Mat Thu, Oct 31 Before the Bell 0.81 NFX Newfield Exploration Thu, Oct 31 -----N/A----- 0.37 NMR Nomura Holdings, Inc. Thu, Oct 31 Before the Bell N/A OCR Omnicare Thu, Oct 31 Before the Bell 0.38 PNP Pan Pacific Retail Thu, Oct 31 -----N/A----- 0.74 PCZ Petro-Canada Thu, Oct 31 -----N/A----- 0.75 PD Phelps Dodge Thu, Oct 31 Before the Bell -0.37 RD Royal Dutch Petroleum Thu, Oct 31 05:00 am ET 0.69 SMG Scotts Thu, Oct 31 Before the Bell -0.41 SC Shl Trnsprt Trdng Co Thu, Oct 31 04:00 am ET 0.57 SPG Simon Property Group Thu, Oct 31 Before the Bell 0.93 SRCL Stericycle Thu, Oct 31 After the Bell 0.26 TDK TDK Thu, Oct 31 -----N/A----- N/A PZB The Pittston Company Thu, Oct 31 Before the Bell 0.43 WMI Waste Management Thu, Oct 31 -----N/A----- 0.38 WON Westwood One Thu, Oct 31 Before the Bell 0.24 ------------------------- FRIDAY ------------------------------- LNT Alliant Energy Fri, Oct 25 Before the Bell 0.68 CI CIGNA Fri, Nov 01 Before the Bell 1.99 DDR Devel Diver Realty Fri, Nov 01 Before the Bell 0.61 HSP Hisp Brdcstng Company Fri, Nov 01 Before the Bell 0.11 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CPBI CPB Inc. 2:1 10/25 10/28 EASI Engineered Support Sys. 3:2 10/31 11/01 -------------------------- Economic Reports This Week -------------------------- The economic calendar is a bit more packed this week with GDP, PMI, the ECI report on Thursday and vehicle sales and payroll data on Friday. However, 3Q earnings will remain the spotlight aside from any Iraqi developments. ============================================================== -For- Monday, 10/28/02 ---------------- None Tuesday, 10/29/02 ----------------- Consumer Confidence(DM) Sep Forecast: 90.2 Previous: 93.3 Wednesday, 10/30/02 ------------------- None Thursday, 10/31/02 ------------------ Initial Claims (BB) 10/26 Forecast: NA Previous: 389K GDP-Adv. (BB) Q3 Forecast: 3.6% Previous: 1.3% Chain Deflator-Adv.(BB) Q3 Forecast: 1.3% Previous: 1.2% Employment Cost Index(BB)Q3 Forecast: 0.9% Previous: 1.0% Chicago PMI (DM) Oct Forecast: 50.0 Previous: 48.1 Help Wanted Index (DM) Sep Forecast: N/A Previous: 41 Friday, 11/01/02 ---------------- Auto Sales (NA) Sep Forecast: 5.7M Previous: 5.5M Truck Sales (NA) Oct Forecast: 7.6M Previous: 7.3M Nonfarm Payrolls (BB) Oct Forecast: -10K Previous: -43K Unemployment Rate (BB) Oct Forecast: 5.8% Previous: 5.6% Hourly Earnings (BB) Oct Forecast: 0.3% Previous: 0.3% Average Workweek (BB) Oct Forecast: 34.2 Previous: 34.3 Personal Income (BB) Sep Forecast: 0.4% Previous: 0.3% Personal Spending (BB) Sep Forecast: -0.2% Previous: 0.3% ISM Index (DM) Oct Forecast: 49.0 Previous: 49.5 Construction Spnding(DM)Sep Forecast: -0.3% Previous: -0.4% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? 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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 10-27-2002 Sunday 2 of 5 In Section Two: Stock Pick: Hottest Sector Daily Results Call Play of the Day: AZO Put Play of the Day: IP Dropped Calls: CTAS, UNH 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 ********** BRCD - Brocade Communications - $8.25 Strategy: Long stock with put insurance The Storage Networking sector was one of the hottest when IT spending and Internet growth seemed to have no limits. Since then, a tremendous amount of air has been let out of the speculative NASDAQ balloon, and the eventual winners in this war of attrition are starting to appear. BRCD is a leading provider of storage area networks (SANs), offering a product family of Fibre Channel fabric switches that provide an intelligent networking foundation for SANs. While that may sound like so much technology marketing mumbo-jumbo, the company's balance sheet certainly gives us a rosy picture in a weak IT spending environment. While nothing like the huge growth seen a few short years ago, revenues have been steadily advancing in each of the past 3 quarters, and earnings are growing again. The sharp selloff in anything Technology-related earlier this month drove the stock down to just above $5, which is interestingly, just above the level (split-adjusted) at which it IPO'ed back in 1999. That level seems to be providing significant support and the stock is in the middle of a pretty impressive rally right here, having gained more than 55% from its recent lows. Clearly, BRCD will need to back off a bit after such a strong run, but the next dip ought to provide a solid entry into the stock in anticipation of growing revenues driving the stock even higher. While a dip back to the $7 level might hold as support, we'd feel better about holding out for a retreat back near the $6.50 level, before opening new positions. That dip should allow the stock to build a floor for a run at its first really serious resistance level up at $10.50. Once the bulls manage to crest that level, they'll be setting their sights on a push up to the $14 level, the site of the stock's major breakdown in early September. The play is to go long BRCD stock in the $6.50-7.00 range and go long one contract of the Jan-2003 $5.00 puts BQB-MA at $0.50 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 BRCD or the rest of the Network Storage industry. Option 1: If BRCD is not above $9.00 by Jan 2nd, close both positions and exit the play. Option 2: If BRCD is below $6.00 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 BRCD is above $9.00 by Jan 2nd then close the put position for any remaining premium and set a stop loss on the stock at your entry point of $6.50-7.00 plus any short fall on the put premium. Brocade Communications (BRCD) Daily Chart *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AZO 85.95 2.11 –1.06 1.17 –3.47 0.30 New, Entry CI 37.00 0.98 2.19 -2.74 –1.40–25.80 New, Bounce JNJ 57.76 1.61 -0.98 -0.87 –0.24 0.20 Holding Up MEL 28.88 0.77 0.10 0.85 –0.34 2.07 New, breakout PNRA 32.85 -1.36 -0.39 -0.48 0.55 1.85 Still rising QCOM 35.39 0.95 0.07 0.02 –1.13 0.58 $35 support TRMS 51.24 1.51 -0.03 -0.13 –1.00 1.22 Bounced at $50 UNH 97.09 -0.58 -0.38 1.39 –2.09 –2.81 Drop, ranging PUTS CTAS 50.10 1.70 -0.11 1.38 1.79 2.00 Drop, no entry IBM 74.56 1.90 -0.01 0.20 –2.50 0.91 Look for break IP 36.50 1.45 -0.25 -0.36 –0.15 –0.85 New, deep debts NTRS 36.56 0.71 0.04 0.52 –0.98 –0.91 entry point ************************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: ********************* AZO – AutoZone, Inc. $85.95 (+0.16 last week) See details in play list Put Play of the Day: ******************** IP - International Paper - $36.50 -0.34 (-1.30 for the week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ CTAS $50.10 +1.35 (+1.95 for the week) In our write-up of this put play, we suggested traders wait for intraday resistance under $50 and the Dow to breakdown below 8300 and show resistance there, as well. We also stated that we were concerned about a pullback above the 200-dma and move higher. Those concerns were well founded, as the stock pulled back and then found legs to rally back through $50. Rather than wish and hope for the play to go our way, we will simply close it, since we didn't get the entry point that we were looking for. If CTAS can break below the $47.45 200-dma, then we will re-visit the play as a possible short. --- UNH $97.09 -1.19 (-2.64 for the week) Unitedhealth dropped as fellow HMO Cigna sold off 42% on news that it missed earnings and lowered guidance. The difference is that Cigna had not managed their premium risk well enough to cover rising health care costs. UNH, on the other hand, has done a good job of keeping up with cost increases. Regardless of the fundamentals, UNH was sold off in sympathy and we will close the play, rather than fight what appears to be a range between $101 and $95, we will close the play and wait for a breakout above $101.00 to reconsider a long play. 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 10-27-2002 Sunday 3 of 5 In Section Three: New Calls: CI, AZO, MEL Current Calls: TRMS, PNRA, QCOM, JNJ New Puts: IP ************************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 ************** CI - Cigna - $37.00 -26.60 (-26.20 for the week) Company Summary: CIGNA Corporation, headquartered in Philadelphia, and its subsidiaries constitute one of the largest publicly owned employee benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and services; group life, accident and disability insurance; retirement products and services; and investment management. As of December 31, 2001, CIGNA Corporation had consolidated assets of $91.6 billion and shareholders' equity of $5.1 billion. Full- year 2001 revenues totaled $19.1 billion. Why We Like It: Cigna was today's big loser, dropping $26 after missing earnings and revising its outlook. Yes, this is the call section and no, we are not crazy. The company lowered its forecasts to $1.47 per share from the previous forecast of $1.90 to $2.05 per share. It also lowered 2003 estimates to $6.25-$6.50 per share, which had been forecast at $8.84. That's a decrease of 22-26%, which we feel may not justify a loss of 42% on the stock. Considering that the losses were due in part to CI's failure to manage its premium risk, not raising them fast enough to cover health care cost increases, there is a light at the end of the tunnel. One thing they do have the ability to do is raise premiums more aggressively in the future, which should help take away some of the pain. Most health insurers that have posted impressive numbers this year, such as Unitedhealth and Wellpoint, have estimated rising health care costs more effectively, and CI will simply have to adjust how it forecasts the future. There are also issues regarding higher spending in relation to subscriber levels and performance of the equity markets, as they relate to pension liability. CI also indicated it may be cutting staff to help trim costs We are not playing Cigna as a call because it has wonderful fundamentals; we simply feel the selling was overdone and the stock is due for a bounce. This should be considered an elevated risk play, however we will wait for the right technical signals to enter. The stock bounced today at $34.70 and another pullback to the $35 area, with support, could be considered a possible entry point. If the stock does re-test $35, we will not jump the gun - we will wait for support before going long. We also would like entry on a trade of $38.00, which would be a 3-box reversal on the point and figure chart. The bounce may be good for a move to the mid 40s; however, we will close the play if we sense a rollover. If the stock gaps up on Monday by more than $2, wait to enter on a pullback, as we don't want to chase it. Traders should also be aware of high premiums in CI options, as implied volatility is extremely high after such a big drop. Expect implied volatility to drop precipitously if the stock settles in, so more conservative traders may want to stay on the sidelines, as waiting for premiums to settle will most likely miss the move. Place stops at $34, as this would suggest a new round of sellers and we don't want to try and catch a falling knife. Earnings are released next Friday, so we will be closing the play before then, even though the company already warned. We have provided a list of both November and December options, but we will be looking at November ourselves because of earnings. BUY CALL NOV-30 CI-KF OI= 12 at $10.20 SL=6.00 BUY CALL NOV-35*CI-KG OI= 306 at $ 5.70 SL=2.80 BUY CALL DEC-30 CI-LF OI= N/A at $10.80 SL=6.00 BUY CALL DEC-35 CI-LG OI= 155 at $ 7.20 SL=3.60 Average Daily Volume = 1.12 mln --- AZO – AutoZone, Inc. $85.95 (+0.16 last week) Company Summary: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why We Like It: Consistency is a wonderful thing, especially in a volatile market like we have seen over the past several months. So when we find a stock that continues to behave in a predictable manner, we tend to keep going back to the well. While the Retail sector has been a mixed bag over the past year, shares of auto parts retailer AZO have been a refreshing bullish story. In reality, AZO has provided proof that earnings DO matter, as the company has absolutely annihilated earnings estimates the past 3 quarters. Most recently, the company bested quarterly estimates of $1.41 with $1.73 on September 25th, clearly surprising even the most bullish investors, as the stock tacked on better than a $6 gain that day. Since then, AZO has continued its 3-month trend of posting higher highs and higher lows, obediently rebounding every time it encounters the ascending trendline connecting the lows. That trendline currently rests at $81.50, which just happens to be the site of the previous price peak in early October. As long as the company continues to deliver on the earnings front, investors will likely keep rewarding it with a higher stock price. Along with the rest of the market, AZO started showing signs of weakness on Thursday, dropping back near the $84 level before finding support and rebounding into the close of trading on Friday. While that is encouraging, we think we've got a fair chance at getting an even better entry point next week. Look for a dip into the $82-83 area, where the stock found a top in May and June, also the site of the 20-dma ($82.74) to provide for a great entry opportunity into the play before the bulls take a fresh run at new highs. Take a look at the AZO chart, and you can see how each push to new highs put in place a near term top, followed by a mild decline leading to the next solid entry point. For this reason, we don't want to target entries on breakout moves. Rather, a breakout to new highs will be a signal to lock in gains on existing positions and then wait for the next entry. Our stop is initially set at $81.50. BUY CALL NOV-85*AZO-KQ OI=1187 at $4.10 SL=2.50 BUY CALL NOV-90 AZO-KR OI= 745 at $1.45 SL=0.75 BUY CALL DEC-85 AZO-LQ OI=1331 at $6.60 SL=4.50 BUY CALL DEC-90 AZO-LR OI= 737 at $4.10 SL=2.50 Average Daily Volume = 1.26 mln --- MEL – Mellon Financial Corporation $28.88 (+1.93 last week) Company Summary: Mellon Financial Corporation is a provider of financial products and services in domestic and selected international markets. For companies and institutions, the company provides asset management, trust and custody, securities lending, foreign exchange, defined contribution and defined benefit services. Additionally, MEL provides fund administration, human resources consulting, outsourcing services, investor services and cash management. For relationship customers, MEL also provides credit and capital market services. For individual investors, the company provides mutual funds, separately managed accounts, annuities, private wealth management and private banking. Why We Like It: One widely-accepted premise related to the broad markets is that any substantial rally needs to have the participation of the Financial stocks. Preferably, the Financials would actually lead the rally. The Banking index (BKX.X) got pummeled in early October, as several large banks announced significant increases to their reserves to cover bad loans. Fear of the news getting even worse dragged the good stocks down with the bad, but the strong stocks are starting to make their presence known again. This can first of all be seen in the BKX index, which after putting in a strong double-bottom near 600-610, rocketed back up near resistance. MEL appears to be one of the stronger stocks in the Financial sector right now, as it has really posted a successful double bottom. While it did slightly undercut the July lows, the subsequent rally took a turn for the better on Friday, as the stock pushed above the August highs, closing just below $29. If the BKX can now follow suit with a breakout over its August highs near 800, MEL will have the benefit of sector strength working in its favor. While MEL hasn't yet gone on a PnF Buy signal, it only needs to print $29 to do so, and that resulting Buy signal will generate a bullish price target of $39. A pullback near $28 or even stronger support at $27 could make for a solid entry into the play. But if the market (and MEL) takes off next week, then momentum traders will want to take advantage of a breakout over $29 to initiate new positions. Initial stops are in place at $26. BUY CALL NOV-27 MEL-KY OI= 832 at $2.05 SL=1.00 BUY CALL NOV-30*MEL-KF OI= 355 at $0.75 SL=0.25 BUY CALL DEC-27 MEL-LY OI= 974 at $2.80 SL=1.50 BUY CALL DEC-30 MEL-LF OI=1442 at $1.45 SL=0.75 Average Daily Volume = 2.28 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 ****************** TRMS -Trimeris - $51.24 -0.03 (+1.33 for the week) Company Summary: Trimeris, Inc. is a biopharmaceutical company engaged in the discovery and development of novel therapeutic agents for the treatment of viral disease. The core technology platform of fusion inhibition is based on blocking viral entry into host cells. Trimeris has two anti-HIV drug candidates in clinical development. FUZEON, currently in Phase III clinical trials, is the most advanced compound in development. A New Drug Application (NDA) and Marketing Authorisation Application (MAA) have been submitted for FUZEON with the US FDA and the EU EMEA, respectively. Trimeris' second fusion inhibitor product candidate, T-1249, has received fast track status from the FDA and is in Phase I/II clinical testing. Trimeris is developing FUZEON and T-1249 in collaboration with F. Hoffmann-La Roche. (source: company release) Why We Like It: Trimeris has pulled back to support and then rallied impressively. As we get closer to March, investors are no doubt looking forward to FDA approval of Fuzeon. The company recently received priority review status from the FDA for the drug, which is the first in a new class of HIV drugs called fusion inhibitors. The company recently presented results at the ICAAC conference in San Diego at the end of September, which showed the effectiveness of the drug when combined with current HIV therapies. Many patients develop resistance to HIV therapy and the results of the trials showed twice as many patients achieved a reduction of HIV in their blood to undetectable levels when taking Fuzeon, in addition to older drugs, as those given conventional therapy alone. The most recent data showed that patients did better across all of the studied subgroups - gender, race, age and severity of infection. Fuzeon provided a benefit, no matter how resistant the virus had become to the patient's current regimen. The company also has another drug of the same class in the pipeline, T-1249, which has also showed promising results in HIV therapy. Because Fuzeon will be the first drug of its kind to be approved, it will most likely capture a significant portion of market share in the industry. Projections have been for as much as $1 billion per year in revenue. After closing above $50 for the first time since may, the stock pulled back and tested that level, now finding support there. The next level to be tested on the upside is $52.00, which provided resistance on Tuesday. Conservative traders can wait for a break above $52 to enter the play, or a pullback to $50 to maximize profits. BUY CALL NOV-50*RQM-KJ OI= 1127 at $3.70 SL=2.00 BUY CALL NOV-55 RQM-KK OI= 337 at $1.35 SL=0.75 BUY CALL DEC-50 RQM-LJ OI= 20 at $5.80 SL=2.90 BUY CALL DEC-55 RQM-LK OI= 7 at $3.20 SL=1.60 Average Daily Volume = 523 k --- PNRA - Panera Bread - $32.85 +0.55 (+1.90 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 once again continued its steady climb and appears to have found another higher intraday support level. $32 now appears as though it will be the pullback level if we get any more of them. The stock struggled to break $33 once again, but put in a series of higher highs and higher lows intraday, as well as its highest closing level since August. Our initial target remains $35 and we would certainly like to see a breakthrough of $33, and support there, for the next leg up. The recent pullback to $31.50 established a new support level, which conservative traders can use as an alternate stop loss. That pullback also stopped short of a PnF reversal, showing a lack of conviction on the part of sellers. The stock broke out through its 200-dma of $30.58 on October 21, pulled back slightly, and has taken off since then. PNRA continues to post same store sales increases, and those increases are growing percentage-wise. The August increase was 4.4% and the September increase was 5.5%. Total third quarter same store sales increased 5.1%. We don't recommend new entries at this level, because of the initial target looming just $2.15 above. However, a break through $35 would certainly be a reason to add to the position. New entries can look for that breakout or a pullback to $32, if traders are comfortable with a possible $3 gain in the stock. While we are listing several calls, the 30 strike is preferred because of resistance at $35. BUY CALL NOV-27.50*UPA-KY OI= 234 at $5.90 SL=3.00 BUY CALL NOV-30 UPA-KF OI=1427 at $3.80 SL=1.90 BUY CALL FEB-27.50 UPA-BY OI= 84 at $7.40 SL=3.70 BUY CALL FEB-30 UPA-BF OI= 145 at $5.80 SL=3.00 Average Daily Volume = 983 k --- QCOM – Qualcomm, Inc. $36.52 (+0.32 last week) Company Summary: Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. Why We Like It: The past two weeks have certainly marked a sharp contrast to the incessant selling of September and early October. Instead of the sellers piling on at the first sign of price weakness, each dip is proving to be just another entry point on the way up the chart. After breaking out of its 5-month consolidation, QCOM blasted higher a couple weeks ago and hasn't looked back yet. The move through the 200-dma brought in a fresh wave of buyers, propelling the stock through the $34 resistance level, and even yesterday's dip only dropped the price back to the 10-dma (currently $35.67). When the bears couldn't push QCOM below that level, the buyers came back in today, resulting in a more than 3% advance. Dueling analysts were in the news the past 2 days, with CSFB downgrading it from Neutral to Underperform yesterday. Lehman responded this morning, by raising their estimates for the company, citing solid demand and growth in China and India. The intraday chart shows how the volatility of the past week has support building near $35, and resistance looming near $37. With dips being bought on a consistent basis, any rebound from above the $35 level continues to be an opportunity to enter the play, keeping stops set at $33.50, just below the intraday lows on October 16th. More conservative traders will want to wait for a solid breakout above $37.25, which is just above last week's intraday highs. Speculation that QCOM could have a strong quarter, and more importantly, have good things to say about the future in their earnings report on November 7th should have the stock continuing to rally as that date approaches. BUY CALL NOV-35 AAW-KG OI=19348 at $2.95 SL=1.50 BUY CALL NOV-37*AAW-KU OI=10269 at $1.55 SL=0.75 BUY CALL NOV-40 AAW-KH OI= 4954 at $0.70 SL=0.25 BUY CALL DEC-37 AAW-LU OI= 560 at $2.95 SL=1.50 BUY CALL DEC-40 AAW-LH OI= 763 at $1.80 SL=1.00 Average Daily Volume = 15.4 mln --- JNJ – Johnson & Johnson $57.76 (-1.59 last week) Company Summary: Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the healthcare field. The company conducts business in virtually every corner of the globe. JNJ's activities are divided into three primary business segments; Consumer, Pharmaceutical and Professional. The Consumer division is focused on personal care and hygiene products, while the Professional segment provides a wide range of products used by the healthcare profession. The Pharmaceutical group provides a broad range of over-the-counter and prescription medications for the treatment of afflictions ranging from antifungal to dermatological to pain management conditions. In June of 2001, the company merged with ALZA Corp, a research-based pharmaceutical company which became a direct, wholly owned subsidiary of JNJ. Why We Like It: For the third day in a row, JNJ gyrated around the 200-dma (currently $57.76) as the tug of war between the bulls and the bears continued. The stock is still showing some weakness following Wednesday's downgrade from CIBC World Markets analyst, Mara Goldstein. It is interesting that the downgrade came the day after JNJ won FDA approval for its new drug-coated stent. Despite this analyst's negative view on the stock, the chart presents a picture of strength. JNJ has been posting a series of higher highs and higher lows for the past month, and is now finding support from the combination of the ascending trendline connecting those lows (now $57.50) and the 200-dma. And there is even stronger support just a little lower, with historical resistance turned support at $56, which is just above the rising 50-dma ($55.84). The PnF chart is bullish too, after generating its most recent Buy signal with the breakout over $57 late last month. The current vertical projects up to $74, so the stock definitely has some room to run in a cooperative market environment. Aggressive bulls can take advantage of intraday dips and rebounds from the $56-57 area to initiate new positions, while more conservative players will want to wait for a decisive rally back above the $59 level (just above Thursday's intraday high) before entering new positions. Due to the recent volatile nature of the stock (and broad market), we're keeping a wide stop, currently set at $54.50. BUY CALL NOV-55 JNJ-KK OI= 6440 at $3.90 SL=2.50 BUY CALL NOV-60 JNJ-KL OI=17455 at $0.85 SL=0.40 BUY CALL DEC-55 JNJ-LK OI= 183 at $4.90 SL=3.00 BUY CALL DEC-60 JNJ-LL OI= 2324 at $1.90 SL=1.00 Average Daily Volume = 8.89 mln ************* NEW PUT PLAYS ************* IP - International Paper - $36.50 -0.34 (-1.30 for the week) Company Summary: International Paper is the world's largest paper and forest products company. Businesses include paper, packaging, and forest products. As one of the largest private forest landowners in the world, the company manages its forests under the principles of the Sustainable Forestry Initiative (R) (SFI(SM)) program, a system that ensures the continual planting, growing and harvesting of trees while protecting wildlife, plants, soil, air and water quality. Headquartered in the United States, International Paper has operations in over 40 countries and sells its products in more than 120 nations. Why We Like It: IP hasn't been very popular with analysts recently. The stock has received several downgrades recently, with its only upgrade being from a sell to a hold. Not exactly a ringing endorsement. The company released earnings on Wednesday and although it posted a profit, after losses in the year ago period, the news was met with another downgrade, from Prudential. The firm lowered its price target to $31 and downgraded the stock to a "sell." Prudential said it was concerned about a drop in GAAP net worth to about $2 billion and increase in debt-equivalent liabilities to $16.2 billion. This ratio alone does not look promising, however Prudential also cited seasonal slowdowns in box, wood and catalogue paper demands. IP said it expects more substantial earnings improvement once a consistent and broad based U.S. economic recovery kicks in. Judging by recent reductions in corporate spending, that recovery may still be a ways off. The company also said it is expecting to take a $1.1-$1.4 billion goodwill charge at the end of the year and a pension charge. IP said it would offer $750 million worth of debt on Wednesday and then increased that amount to $1 billion on Thursday. It is attempting to retire part of its $1.2 billion in 8% notes due next July. Moody's currently gives IP's senior unsecured debt "Baa2," its second lowest investment grade. It receives an equivalent rating from Standard and Poor's. IP attempted to rebound from recent lows, as the Dow rallied and the stock followed along. However, the party appears over for IP, after its recent earnings release. The stock bottomed out on Friday at $35.88 and is one box shy of a 3-box PnF reversal down. Prudential's target of $31 looks like a possibility, as it would match recent lows, just before the Dow put on its rally cap. Even with the Dow continuing its rally, IP has reversed direction the last several days and is finding support only from its 50-dma of $35.86. We will look for a break below that 50-dma as a signal to go short. There may be some support at $35, as that level has acted as previous resistance in late September and early October. A break below $35 could get us to our objective quickly. The Forest & Paper Product Index (FPP.X) has also begun to rollover, an important factor when looking at the sector. The FPP has found resistance at its own 50-dma and put together a series of lower lows. Look to initiate a short below the 50-dma and then place stops at $39, above the recent high. BUY PUT NOV-37.50 IP-WU OI=2422 at $2.05 SL=1.00 BUY PUT DEC-37.50 IP-XU OI=2422 at $2.90 SL=1.50 Average Daily Volume = 3.31 mil ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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The Option Investor Newsletter Sunday 10-27-2002 Sunday 4 of 5 In Section Four: Current Put Plays: IBM, NTRS Leaps: 4 Days And Counting Traders Corner: The Couch Potato Portfolio – Let The Games Begin! Traders Corner: Reversal Patterns: Bull and Bear Traps Traders Corner: The Fed's Open Market Operations- Daily Tides in the Financial Sea ************************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 ***************** Company Summary: International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. Why We Like It: Aggressive bears watched IBM carefully on Friday as the stock led the broad market rally, gapping higher and then going on to gain nearly 3.5% by the close. Is this the stuff winning put plays are made of? Perhaps. Recall the premise of our play, which is that IBM has run much too far, too fast, on the heels of an earnings report that just wasn't as bad as many investors had expected. Early last week, the stock ran smack into the $76 resistance level and after posting a lower high on Thursday morning, it looks like the early stages of the rollover that we want to play. The closer IBM gets to the $76 resistance level (without breaking through it, of course), the better the entry point gets, as we can better manage risk with our $76 stop. IBM has essentially traded flat over the past week, as volume has continued to dry up. Daily Stochastics are starting to roll over, and once the southbound train gets moving, IBM should take out $70 support on its way back to filling in a few of those gaps down below. Strong support in the $66-67 area looks like a good initial bearish target. More conservative traders that want to see evidence of the stock's weakness can wait for IBM to fall back under its 10-dma ($71.46) and intraday support at $71 before entering the play. BUY PUT NOV-75*IBM-WO OI= 4411 at $3.40 SL=1.75 BUY PUT NOV-70 IBM-WN OI=16235 at $1.45 SL=0.75 Average Daily Volume = 9.92 mln --- NTRS – Northern Trust Corp. $36.57 (-1.52 last week) Company Summary: Northern Trust Corporation is the holding company of The Northern Trust Company (Bank). The company also owns national bank subsidiaries with offices in Arizona, California, Colorado, Florida and Texas; a federal savings bank with offices in Michigan, Missouri, Nevada, Ohio, Washington and Wisconsin; a trust company in New York. Additionally, NTRS has various other non-bank subsidiaries, including an investment management company, a securities brokerage firm, an international investment consulting firm and a retirement services company. Why We Like It: Following the sharp selloff on Thursday afternoon, it looked like Friday could turn into a real bearish party. But when they couldn't take the markets down (even with the significant buying in the Bond market), they turned around and drove them up ahead of the weekend. A solid performance from the Banking index (BKX.X) set the tone for the afternoon, as the index rebounded from critical support near $736, ending right below the $762 resistance level. While this solid performance was encouraging to the bulls, our NTRS play demonstrated its relative weakness by gaining only 1%, only reclaiming about half of Thursday's losses. This relative weakness likely stems from the company's recent disappointing earnings report, largely due to a sharp increase in allowances for loan losses. After dipping near the $35 support level early in the session, the stock managed to gradually grind up the chart, topping out just below $37 before weakening a bit in the final hour. The afternoon rally moved the stock that much closer to an ideal entry point, as there is significant resistance near the $37.25 level. This is the site of broken support (now resistance) from recent weeks, as well as the location of the descending trendline connecting the lower highs beginning on October 17th. While the combination of the bottom of the October 15th gap and the 20-dma (currently $35.74) provided support on Friday, when that support level gives way, NTRS should continue down until finding solid support near $31-32. Traders that want to see the fledgling weakness confirmed before playing, will want to look for a decline under the $35 level on solid volume before entering the play. Should the broad market rally again on Monday, we could get an even better aggressive entry point on a failed rally up near the $38, but keep in mind that our stop is set at $39. If NTRS is able to claw through that firm resistance level, we'll definitely want to be out of the play. BUY PUT NOV-40 NRQ-WH OI=110 at $4.10 SL=2.50 BUY PUT NOV-35*NRQ-WG OI=646 at $1.20 SL=0.50 Average Daily Volume = 1.76 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 ***** 4 Days And Counting By Mark Phillips mphillips@OptionInvestor.com That's right, there are only 4 more trading days in the month of October. So what, you might wonder, is significant about the first of November. Besides moving into a new month, it brings into focus the inane prediction of Dick Hoey on CNBC a few weeks ago. (Yes, Dick. Some of us are watching and keeping score.) As I reported here on the week that it happened, Mr. Hoey predicted a new SECULAR BULL market by the first of November. Not a little cyclical bull market, but a secular one like we had from 1982-2000. Here's a hint. It ain't gonna happen, Dick. Do you like your crow baked, or deep fried? GRIN Back when that ridiculous prediction came out, I fired off an email to CNBC, challenging them to have Mr. Hoey back on after November 1st to explain why he was wrong. Needless to say, I'm resending that email again on November 1st. I wonder if anything will come of it? SLY GRIN Enough of that, let's get to what is going on in these crazy markets. We had another volatile week, but in the end, the bulls won with all of the major market averages posting their third consecutive weekly gain. Before you go getting too excited, keep in mind that we got 5 consecutive weeks to the upside in late July and most of August before the bottom fell out yet again. The bulls will have something to crow about when they can push the major averages above the August highs. That means the S&P 500 needs to push through 965, the DOW needs to clear 9100 and the NASDAQ-100 has the 1055 area to contend with. While those levels are certainly within reach for those indices, we need to ask how much gas is left in the tank? My method of answering that question is to go back and look at the Bullish Percent figures, like we've been doing these past several weeks. Bullish Percent: Index July Low October Low Current S&P 500 12% 19% 48% -- Bull Alert DOW 3% 7% 53% -- Bull Confirmed NASDAQ-100 8% 13% 55% -- Bull Alert These bullish percent readings have come an awfully long way in less than 3 weeks, working off the majority of the deep oversold condition in the process. But we really haven't changed anything about the overall trend of the market (it's down) and the majority of the risk is now to the downside again. Don't get me wrong. This rebound has been encouraging, and I think it actually might have another week or two left in it (maybe even a bit more). But I haven't seen the kind of conviction from long-term buyers that will be necessary to extend this rally into the end of the year. The institutions have been notably absent from this latest rally, with the majority of buying volume coming from short-covering and the hedge funds. There has been no dramatic upsurge in buying volume to confirm momentum building to the upside. Traders have been buying into a string of pretty abysmal news that indicates any economic recovery has yet to make its presence known. But apparently earnings have not been as bad as expected, and so we get a relief rally. Just to recap, we're likely going to war with Iraq by the end of the year, there is no recovery in the IT spending environment, Auto sales are falling, there is no recovery in the employment picture, and if the economy IS recovering, you need a tunneling electron microscope to see it. And don't forget about the looming underfunded pension problem. Make no mistake, this is a HUGE problem, and it is not getting anywhere near the attention in the press that it deserves. Here are a couple of recent examples to put the problem in perspective. For fiscal year 2001, Deere & Co. (NYSE:DE) (you know, the tractor guys), expected its pension plan to produce gains of just over $650 million. In reality, they posted a loss of about $1.4 billion, for a net difference between the expectation and the reality of more than $2 billion! With the broad market down again over the past 12 months, I can't imagine the picture at DE has gotten any better. How about mighty General Motors? The world's largest car maker warned earlier this month that its 2003 earnings will be cut by $1 billion or more due to the cost of funneling extra cash into its $67 billion pension find, which has shrunk by 3% in just the last 9 months. The company had assumed a growth rate of -- get this -- 10%! Hello, McFly. It's a bear market. Where are you going to get that kind of return on investment? Earlier this month, S&P cut GM's credit rating to a couple notches above junk, saying the company's pension obligations may be underfunded by a whopping $28 billion. I wonder how many cars GM will have to sell at 0-down, 0% financing to recoup that loss? I'm betting it is a lot more than they are going to sell. My point here is not to beat up on GM and DE. It is to point out that they are likely the tip of the iceberg, which is just now approaching the Titanic (the stock market). According to CSFB, 325 of the 360 companies with defined pension funds will have shortfalls this year. In a sign that nothing has really changed in financial reporting, UBS Warburg points out that 118 companies in the S&P 500 continue to report a pension surplus on their balance sheet (which by the way can legally be used to pad earnings results), even after they are in fact running a deficit in the wake of the market's third consecutive year in the red. This problem is hazy and has not yet been brought into focus. But mark my words, it will become more and more important to balance sheet analysis in the next year. Ask yourself this question. If a company with free cash flow of $1 billion has a cumulative pension fund shortfall of $5 billion, how long will it take the company to make up that shortfall (which by law, they must)? If you guessed 5 years, you're on the right track. But that would only be accurate if you assumed ALL of the operating cashflow would be channeled into the pension funds. Call me crazy, but I don't think any of the corporate chieftains would be willing to commit professional suicide in such an obvious manner. The bottom line is that this is a HUGE problem, and it isn't going to go away overnight. Alright, coming back to the markets, there is really only one important development in the past week that I think is meaningful to the short-term direction of the market, and that is the VIX. Recall that it has been finding solid support near the 39 level for weeks now. That came to an end on Friday, when it absolutely collapsed, losing more than 9% to end the day at 36.27. With the broad markets all up on Friday, we would have expected some downside action in the VIX, but the magnitude hints that there was something funny (Funny, strange. Not funny, ha ha.) going on. In fact, if you look at the intraday charts, you can see that the vast majority of the decline in the VIX took place BEFORE the market started on its strong rally in the final 2 hours of the day. By the time the market took out its morning highs (and held the breakout) around 2:20pm ET, the VIX had already fallen to around 37, 3 full points below where it ended on Thursday. My read on this development is that whatever factor (or factors) was keeping investors nervous and option writers demanding high premiums, it changed significantly on Friday morning. While we don't know what that change was, it will likely become better known in the days and weeks ahead. I'd like to spend some more time on the topic of the VIX, continuing with the discussion of last Wednesday, but there obviously isn't time or space to do so here this weekend. I'll delve into both more analysis of what is happening with the VIX relative to the market currently, as well as look at the indicator from more of a historical perspective. But that will have to wait until my Options 101 time slot on Wednesday. Be sure to tune in then. And without further ado, let's take a look at our current list of plays. Portfolio: LEN - Wow, that was close! Ahead of Tuesday's earnings reports from the likes of CTX, PHM and RYL, LEN rocketed higher on Monday, closing at $59.90, just a dime below our stop. Since then, the sector has reverted into sell the news mode and LEN fortunately bell back from that formidable resistance level. I still like the prospects for this play, and expect it will start to perform in the weeks ahead. Additional failed rallies near the $59-60 area still look good for initiating new positions. JNJ - There was lots of news in the market this week pertaining to JNJ, from FDA approval for their new drug-coated stent, along with the resultant analyst downgrade, claiming that the financial impact of the new stent was already factored into the stock price. No matter, JNJ technically is still looking strong, with another bounce right at the 200-dma. Traders still looking to enter the play can use a rebound from the $56-57 area to enter the play. Note that the bullish price target is up at $74, so the stock has plenty of room to run. Be patient and give this slow mover time to perform. Watch List: MO - It appears that the first leg of the rebound off the lows near $35 has just about run its course. On this pullback, we'll get to see just how strong or weak shares of MO are. The $42-43 level had been major support, and now it will likely be significant resistance. Any significant selling should send the stock down near the $38 level and that should provide an attractive opportunity to initiate the play. Once filled, we can manage the play with a stop at $35, which is the site of major support going back to 1998-1999. MSFT - This is simple. We are currently experiencing a bear market rally, and MSFT has been pinned under the $53 resistance level since the middle of July. There is no way I'm crazy enough to chase the stock higher until the stock (and the rest of the market) can provide some proof that it is serious about charging higher. Until I see a close over the 200-dma (currently just below $54), we're going to leave our entry target down in the $48-49 area. If we get a dip into that area, the rebound could very likely be the one that gives us a solid breakout. But it is too difficult to control risk without getting that pullback first. NEM - And the range continues to build. After almost tripping us into the play the prior week on the low side, NEM rallied right to $25 on Tuesday. Not enough to get us into the play, and it looks like the next downward leg is underway. I still favor entries down at the $22.50 level (the site of the gradually ascending trendline), but will accept a breakout over $25 as well. QQQ - The QQQ is similar to MSFT. While we have had a nice rally off the lows, I'm not convinced of its intentions of heading significantly higher without a decent pullback. I'm just not willing to chase the NASDAQ higher, especially when a large part of the rally has come from the Chip stocks amidst a continuous stream of abysmal news. Keep the entry target in place and wait for a pullback to allow us in. If we don't get what we're asking for, then we'll just let it go. That is far preferable to chasing an entry, catching it and then wishing we hadn't. DJX - I know it may sound like a broken record, but our DJX play is stubbornly refusing to come back to our desired entry target. Could the DJX break out and just plow higher for 600-800 points from here? Sure, but I think the odds of that happening are pretty slim. While the developments on the VIX front on Friday are definitely encouraging, I'm not interested in chasing the DOW higher any more than I am interested in chasing the NASDAQ higher. I'm content to wait for the fat pitch, knowing that if I miss this one, another one will be along shortly. While I like the fact that the markets are holding onto the lion's share of their recent gains, I am concerned by the lack of profit taking and the fact that the internals really haven't shown much strength. New highs are still running well below new lows on a daily basis. Volume is not showing me any conviction, yet the Bullish Percent figures are already almost back to where they were when the August rally ran out of steam. All these things are classic signs of a bear market short-covering rally. The lone factor that looks bullish to me right now is the action of the VIX on Friday, but I certainly wouldn't enter trades right here just on the basis of the VIX. My advice is to have your action plan in place and stick to it. If you get the entry setup you want, then take it. Otherwise let it go and wait for the next one. There are new opportunities every week, and our primary job is to make sure that we (and our accounts) are around to take advantage of them. One final note: Last week I teased you with the question of where the saying "Close, but no cigar" comes from. I had lots of interesting suggestions, but I have to say that nobody got it right. So until I get the right answer, I'm going to keep you all in suspense. Just kidding!! Remember the 'good old' days, when the extent of a man's involvement in childbirth was providing the initial genetic material, and then waiting in the waiting room for the announcement of whether the new bundle of joy had arrived? Do you remember the ritual that would commence after the glorious event? The proud father would pass out cigars to all of his friends and family. So when anyone would ask if the baby had arrived, the expectant father would respond with "close, but no cigar". At least that's the way I heard it from dear old dad. 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 $ 7.00 + 7.69% $54 '05 $ 60 ZJN-AL $ 9.10 $10.10 +10.99% $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: GM 10/27/02 $40-41 JAN-2004 $ 35 LGM-MG $37-38 JAN-2005 $ 30 ZGM-MF New Portfolio Plays None New Watchlist Plays GM - General Motors $35.54 **Put Play** Isn't it interesting how the stocks of the major auto manufacturers have really failed to participate in the most recent rebound in the broad markets? Could it be that the investing public is finally coming to terms with the dismal outlook for this group for the next couple years? Following the terrorist attacks of last September, free financing was taken to a new level, and while touted as a temporary incentive, it has really taken on an air of permanency. The bottom line is that the cheap financing has stolen buyers from the future to keep sales numbers high. But anecdotal evidences is pointing to the likelihood that the October sales numbers are going to be dismal, and there is little else GM can do to boost sales, other than give the cars away for free. Add in the debt recent debt downgrade from S&P as well as the HUGE and growing pension funding issues that are referenced in my commentary tonight, and you can see why the stock remains near its multi-year lows. Look for any near-term market strength to give GM a bit of a lift, with first resistance coming into play in the $37-38 area, and then really stiff resistance at $40-41. With weekly Stochastics just emerging from oversold territory, we don't need to be in a hurry to enter the play. Let the oversold rebound continue, and look to enter on a rollover up near the $40 level. Then use a stop at $42, to protect against the unexpected. Aggressive traders that are concerned about missing out on the play, can consider initiating half positions on a rollover near the $37-38 area and then add to those positions on a drop back under $34. BUY LEAP JAN-2004 $35 LGM-MG BUY LEAP JAN-2005 $30 ZGM-MF Drops None ************** TRADERS CORNER ************** The Couch Potato Portfolio – Let The Games Begin! By Mike Parnos, Investing With Attitude Last week I had a long talk with the dean of the Couch Potato Trading Institute. It wasn’t a pretty sight. Soda cans were crushed, Pringles were broken, and my Taco Bell mouse pad was nearly destroyed. Fortunately, I’m insured. I maintained that the CPTI student body was ready for action. He was more concerned about the student “head.” They have, as a whole (both head and body), performed admirably on the Option IQ Quiz. Plus, the email questions have become increasingly astute. With apologies to Rex Harrison, “By George, I think they’re getting it!!” Due to the popularity of the QQQ Strangle and the BBH Iron Condor trades we tracked over the past several weeks, we decided that it’s time to start a “CPTI Portfolio.” We’ll use some of the strategies discussed in previous columns -- updating progress on Thursdays and Sundays and noting any necessary adjustments. If you adhere to the Warren Buffet school of thought, the portfolio should be full of stocks you understand. If that were the case, I’d be investing in TV makers, cable operators, pizza chains and phone companion companies. We should probably broaden our horizons a bit. Sorry Warren, nothing personal. We’ll use a hypothetical trading account valued at $50,000. If it sounds like small potatoes, it’s because it is. Remember, option trading should be done with risk capital. Don’t put your ass on the line unless you have a spare cheek in the bedroom closet. Folks out there with deeper pockets can adjust their hypothetical portfolios accordingly. There are three weeks left until November expiration. Let’s see how much pizza money we can generate before Thanksgiving. I’ve even included a few equities for our “stock” (as opposed to “index”) traders out there. _____________________________________________________________ Position #1: Iron Condor – Back By Popular Demand! An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The objective is that the underlying, at expiration, finish anywhere within the spread. Since it worked reasonably well last time around, let’s use BBH (Biotech Index) again. It’s currently trading at $87.35. Looking at the chart, the range is still intact, but we’re going to narrow it slightly. The support at $80 once again seems strong enough and resistance at $95 should give BBH enough room (15 points) to bounce around for three weeks. So we will: Sell 10 contracts of the BBH Nov. $80 puts @ $1.35 Buy 10 contracts of the BBH Nov. $75 puts @ $ .75 Sell 10 contracts of the BBH Nov. $95 calls @ $ 1.00 Buy 10 contracts of the BBH Nov. $100 calls @ $.35 The credit for our bull put spread is $.65 and for the bear call spread is $.60. Total credit (and potential profit) for the position is $1.25. Risk is $3.75 ($5.00 - $1.25). Total margin requirement is $10,000 ($5,000 for each credit spread). The return on risk is 33.3%. Pretty damn good for three weeks. The Iron Condor strategy was originally discussed at the following link, in the second part of the column: http://www.OptionInvestor.com/traderscorner/070702_1.asp _________________________________________________________________ Position #2: Short Strangle – Taking A Chance A Short Strangle is an unhedged position consisting of a short put and a short call with the same expiration month at different strike prices. TTWO is trading at $26.76 and has been in a trading range between about $22.50 and $30. We’re going to see if it will stay in that range for the next three weeks. It has 7½ points to bounce around in for us to make maximum profits. So we will: Sell 10 contracts of the TTWO Nov. $30 calls @ $ .80 Sell 10 contracts of the TTWO Nov. $22.50 puts @ $.70 The credit for our short strangle is a total of $1.50. The $1.50 will be in our account on Monday and is the maximum amount of profit we can make. The risk is (are you ready?) unlimited. We’re going to keep a close eye on the position and will be prepared adjust in case of any dramatic movement in either direction. Our profit range is from $21.00 to $31.50. The margin requirement will be about $4,000. If you read Thursdays discussion on margin calculation, you remember that most broker’s software will recognize short strangle (and straddle) positions and normally only require maintenance on one side of the position. The return on risk is $37.5%. _________________________________________________________________ Position #3: Iron Condor – Comfortable Risk Reward Once again, an Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The objective is that the underlying, at expiration, finish anywhere within the spread. MMM (3M), trading at $127.73, seems nice and comfortable trading in the $120 to $130 range. It recently came out with earnings, but still couldn’t penetrate the resistance at $130. Although it traded down below $120 when the marked tanked in July and September, it has since recovered and returned to the range. Sell 10 contracts of the MMM Nov. $120 puts @ $1.35 Buy 10 contracts of the MMM Nov. $115 puts @ $ .75 Sell 10 contracts of the MMM Nov. $130 calls @ $2.35 Buy 10 contracts of the MMM Nov. $135 calls @ $ .75 The credit for our bull put spread is $.60 and for the bear call spread is $1.60. Total credit (and potential profit) for the position is $2.20. Risk is $2.80 ($5.00 - $2.20). Our profit range is from $117.80 to $132.20. Total margin requirement is $10,000 ($5,000 for each $5 credit spread). The return on risk is 78.6%. Wow! _________________________________________________________________ Position #4: In-The-Money Strangle – The QQQs – One More Time! The QQQ In-The-Money (ITM) Strangle we used so successfully a few months ago seems ripe for a return engagement. The ITM Strangle we used consists of buying a put and a call about two months out, each about $1 in the money. We have three weeks left until November expiration and December is a five-week expiration months. That gives us a full eight weeks for the QQQs to work their magic. Our objective is to anticipate the somewhat predictable $3 moves in the QQQs. Once the stock moves sufficiently in one direction, its value should come close to paying for the entire trade. That leaves a long position that is essentially free in anticipation of a reversal and a substantial (hopefully at least $3) move. The QQQs finished Friday at $24.62. Since $24.62 is not near a round number ($24 or $25), we have to make a major decision. Do we have a bullish or bearish bias? If we’re bullish, we buy the $23 call and buy the $25 put. If we’re bearish, we buy the $24 call and the $26 put. What’s the difference? In a bearish position, the $26 is preferable because it is an additional $1 in the money. Thus, the delta is slightly higher. As the QQQs go down, the $26 put would appreciate in value faster than the $25. Since I am still slightly bearish, that will be my choice. So we will: Buy 10 contracts of the QQQ Dec. 26 puts @ $2.40 Buy 10 contracts of the QQQ Dec. 24 calls @ $2.05 Our out-of-pocket cost is $4.45. However, there is $2 of intrinsic value that will always be there, so our risk is only $2.45. There is no margin requirement on this trade because we are long both options. For your review, the QQQ ITM Strangle strategy was initially discussed at: http://members.OptionInvestor.com/options101/082502_1.asp. There were at least two follow-up columns that addressed specific questions on this strategy (August 22 & 29 in Traders Corner). _________________________________________________________________ Out of our initial $50,000 account we’ve used: BBH Position: $10,000 maint. - $1,250 credit = $8,750. TTWO Position: $4,000 maint. = $4,000. MMM Position: $10,000 maint. - $2,200 credit = $7,800. QQQ ITM Strangle: $4,450 cost = $4,450. Total: $25,000. We’ll keep some of our powder dry for adjustments, emergency meals and extra batteries. I realize there will be a lot of questions. No problem. Send them along. Hopefully, we’ll all learn as we track these four trades. If you are a more conservative trader, you can move another strike price out of the money in Positions 1-3. The return will be less, but the sleep will be more. We’re going to keep a close watch as we track these positions. As Mark Twain said, “If you place all your eggs into one basket, WATCH THAT BASKET!!” And so we shall – during the commercials, of course. ____________________________________________________________ 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 ************** Reversal Patterns: Bull & Bear traps By Leigh Stevens lstevens@OptionInvestor.com I’ve noticed that there is a lot of bearish “sentiment” on this recent rebound in the market and doubt relating to the staying power of a rally. If we are at the end of the bear market, this would be a typical or an expected point of view. A major bear market would not typically end until or only after there is LOT of bearish conviction. Certainly, there is reason to anticipate possible further economic troubles ahead and to question whether some of the recent earning’s reports that were better than expected were the start of a turnaround - or, just a temporary respite. The play of market “sentiment” and strong and widespread conviction on the future price trend and direction of the market is one of things that “sets up” or precedes trend reversals. I may have heard the term elsewhere, but technical analyst Jack Schwager, during the time that we worked together at PaineWebber especially, drummed into me the terms bull and bear traps – describing, in the case of a bull trap, a rally that goes to a new high after which the advance then collapses. A bear trap is the reverse situation where a decline exceeds or takes out a prior low and then is followed by a strong rebound in prices. While it was not a dramatic new low, the recent upside reversal in the indices has the flavor and look of a bear trap reversal pattern. The bears are “trapped” so to speak as they just don’t believe that any substantial and sustained rally will develop. In bull trap reversals, as in 2000, many stocks went to new highs and then started to fall or the bull market basically started collapsing – it seemed that the bull “trap” developed after the “last” bullish investors were lured into the market. There was this friend I remember who had only ever invested in Real Estate who finally bought some stocks only to see them go down for the next year – this was an example of how even unlikely investors are eventually caught up in bull fever. Recent price action in the S&P 100 (OEX) Index is an example of a bear trap reversal as outlined in the chart below – The move to a new low followed by a close ABOVE the prior day’s HIGH also could be described as a “key” reversal – a key upside reversal. However, here I am describing a chart pattern (also) “classified” as a bear trap reversal. Prices would not have to rebound to above the prior bar’s high to classify it as a bear trap, just that there is a fairly immediate rebound after a new low and that the rally keeps going. After a time, “confirmation” of a trend reversal is provided by other technical factors like a breakout above/below a significant trendline or channel or an upside or downside chart “gap” – both are seen after the Bear Trap example in the chart above; i.e., there is both an upside chart gap and a breakout above the daily chart downtrend channel. For more on chart GAPS, see – http://www.OptionInvestor.com/traderscorner/092602_2.asp And, for more on price CHANNELS you can go to – http://www.OptionInvestor.com/traderscorner/092202_2.asp I would emphasize that it’s best to think of a bear or bull trap as applying to any time frame; e.g., on an hourly, daily, or weekly chart basis. In a bull trap, the rally that takes out a prior high tends to bring in new buying because this so often signals a new up “leg” – another wave or price movement of intermediate proportions. Otherwise, the new high serves to convince those long a stock or other security that they are on the right side of the market. If this rally then “fails”, by reversing to the downside, it has the effect of “trapping” the bulls or those with the conviction that prices will keep rising – hence the term, bull trap or bull trap reversal. An example is shown in the McDonald’s Corp. (MCD) chart below – Another example is provided below of the hourly chart below of the Nasdaq Composite (COMPX) this past August (2002). The collapse in the COMPX started in the next trading session, which was the next day. However, as the reversal occurred on the next bar, the downside reversal is also of the bull trap variety as the next bar is within an “immediate” time frame – immediate here refers to what happens in the next bar or bars. You can find other examples in the same chart above of a move to new high followed by a pullback – so, how do you tell if a correction is temporary or a reversal of the trend? Often, the tip off is a related technical event like the break of a trendline or the downside chart gap also seen in the COMPX hourly chart above. You can find many examples of bull and bear traps in stocks and indices, often on the same chart. Examples of both Bear and Bull Trap reversals are seen in the chart below, which is also a weekly chart example – In the case of the bear trap above: after a sideways to lower trend has been underway for some time, there is a sharp fall which exceeds the prior weeks’ lows by a comfortable margin – however this time the lower low was followed by a rapid and good- sized advance. Renewed selling had no doubt come in as there was a move well below the prior (trading) range. Sellers, or buyers who had finally liquidated their positions, would have had expectations of another downswing or another down “leg”. In the example above with the IP chart, many of the bears and short sellers are trapped by the rapid upside move. Of course, they are only “trapped” as long as they don’t cover short or put positions - but there is often a considerable period of disbelief that a trend reversal is actually occurring. To confirm a trend reversal, the index or stock has to exceed its prior swing high or low and prices may have to travel some distance before this occurs. Of course in the chart above, IP did manage to apparently break out of its trading range and the stock looked like it was going to perhaps see another up leg – NOT! Instead the apparent “breakout” move to a new high was followed by a lengthily decline after the Bull Trap reversal. The lesson provided in the concept of bull and bear traps is that it pays to be leery of situations when prices correct sharply (go the other way) after a series of higher highs or lower lows. There are implications of the trend reversals, of the type described here as bull and bear traps, that go beyond the significance of affirming that market trends can reverse suddenly, even after exceeding prior lows and highs. Very often, such trend failures and reversals after a lengthy trend, offer excellent opportunities to take a position in the direction of a new trend, as there is a good chance for a good- sized move. Price moves reach a point of exhaustion, where the forces driving prices in the direction of the trend “exhaust” themselves. After almost everyone who is a potential buyer, or potential seller as the case may be, has bought or sold, there are few traders or investors not already with a position (already committed) that can keep the trend going. In a downtrend, when there are few or no sellers left, only a modest amount of buying can drive prices back up sharply. When there are few or no buyers left, just a modest amount of selling can drive prices sharply lower. This is what is meant in the saying that “bull markets die of their own weight” – a market that has few left to buy stocks can fall simply due to the removal of new buying. As seen in the examples provided and you can find more, these price swing “failures” have a record of offering some major profit opportunities. If you are long puts for example, after a possible bear trap (upside) reversal and you don’t want to reverse positions and buy calls, you can at least exit at a point that protects some or most of your profit. Moreover, I take this and every opportunity to caution against the intent or a “intent” to exit versus actually having a index or stock price “trigger” that you will definitely use to take action; e.g., after an apparent bear trap (where you hold puts), a following move that goes above the prior hourly or weekly rally high. In other words have a specific plan – not that you are going to “watch” the market and make up your mind at some point. After you get “habituated” to a trend and there is some unexpected strong reversal, the effect can be like a deer caught in the headlights -- paralysis – I’ve been in that position enough times to know. Don’t get caught up in a point of view so much as observing what the technical action of the market is telling you. ************** TRADERS CORNER ************** The Fed's Open Market Operations- Daily Tides in the Financial Sea By Jonathan Levinson From the New York Fed's website: "Seeing the Federal Reserve Bank of New York, visitors' first impressions are of the building's formidable architecture. Stored inside the vaults of this imposing structure is hundreds of billions of dollars of gold and securities. But what is most significant about the Bank is its broad policy responsibilities and the effects of its operations on the nation's economy." It would be more accurate to say "on the world's economy," as the Fed is arguably the single most influential presence in the financial world. There is a debate as to who owns and controls the Fed, whether it is the US Congress or the world's largest banks. For traders, particularly small or non-institutional traders such as ourselves, it's an irrelevant issue, as the Fed acts as a primary force in the financial markets. The Federal Reserve's primary role for us small traders is as the controller of liquidity in financial markets across most timeframes. Prior to Chairman Greenspan's tenure, the Fed's focus was domestic monetary conditions, but it has since become a commonplace that the Federal Reserve concerns itself with global financial liquidity and stability, acting in all markets just as the US asserts its will in the world political arena. In order to understand the importance of the Fed, one must consider the impact of liquidity on financial markets. My favorite analogy is of the markets as a liquidity meter- they rise or fall depending on the availability or scarcity of money. The Fed seeks to achieve financial stability by controlling the availability of money in different markets. Like sailor holding a course by making continuous corrections at the helm, the Fed is continuously using subtle and not-so-subtle mechanisms to manage liquidity as it sees fit. We have all seen the short-term impact of interest rate hikes and cuts, which I would characterize as an example of not-so-subtle liquidity management. By raising rates, the Fed increases the cost of money to banks, thus restricting liquidity and, theoretically, deflating financial markets. More subtle, however, is its ongoing Open Market Operations (OMO), which are done on a daily basis. During the past months, I have been following the Fed's OMOs, and have found this to be an indispensable tool in predicting short term market bias. The Fed's Open Market Operations will be the focus of this discussion. Before looking under the hood of the Fed's OMO procedures, an example from our favorite book, Reminiscences of a Stock Operator by the legendary Jesse Livermore, published under the pen name Edwin Lefèvre in 1923. Livermore tells the story of the crash of October 1907 during which lenders had run out of cash. Reports from the money crowd early indicated that borrowers would have to pay whatever the lenders saw fit to ask. There wouldn't be enough to go around. That day the money crowd was much larger than usual. When delivery time came that afternoon there must have been a hundred brokers around the Money Post, each hoping to borrow the money that his firm urgently needed. Without money they must sell what stocks they were carrying on margin - sell at any price they could get in a market where buyers were as scarce as money - and just then there was not a dollar in sight. Livermore was, of course, short the entire market. The president of the Stock Exchange, Mr. R. H. Thomas, so I heard later in the day, knowing that every house in the Street was headed for disaster, went out in search of succor. He called on James Stillman, president of the National City Bank, the richest bank in the United States. Its boast was that it never loaned money at a higher rate than 6 per cent. Stillman heard what the president of the New York Stock Exchange had to say. Then he said, "Mr. Thomas, we'll have to go and see Mr. Morgan about this." The two men, hoping to stave off the most disastrous panic in our financial history, went together to the office of J. P. Morgan & Co. and saw Mr. Morgan. Mr. Thomas laid the case before him. The moment he got through speaking Mr. Morgan said, "Go back to the Exchange and tell them that there will be money forthem." "Where?" "At the banks!" So strong was the faith of all men in Mr. Morgan in those critical times that Thomas didn't wait for further details but rushed back to the floor of the Exchange to announce the reprieve to his death-sentenced fellow members. Then, before half past two in the afternoon, J. P. Morgan sent John T. Atterbury, of Van Emburgh & Atterbury, who was known to have close relations with J. P. Morgan & Co., into the money crowd. My friend said that the old broker walked quickly to the Money Post. He raised his hand like an exhorter at a revival meeting. The crowd, that at first had been calmed down somewhat by President Thomas' announcement, was beginning to fear that the relief plans had miscarried and the worst was still to come. But when they looked at Mr. Atterbury's face and saw him raise his hand they promptly petrified themselves. In the dead silence that followed, Mr. Atterbury said, "I am authorized to lend ten million dollars. Take it easy ! There will be enough for everybody!" Then he began. Instead of giving to each borrower the name of the lender he simply jotted down the name of the borrower and the amount of the loan and told the borrower, "You will be told where your money is." He meant the name of the bank from which the borrower would get the money later. I heard a day or two later that Mr. Morgan simply sent word to the frightened bankers of New York that they must provide the money the Stock Exchange needed. "But we haven't got any. We're loaned up to the hilt," the banks protested. "You've got your reserves," snapped J. P. "But we're already below the legal limit," they howled. "Use them! That's what reserves are for!" And the banks obeyed and invaded the reserves to the extent of about twenty million dollars. It saved the stock market. The bank panic didn't come until the following week. He was a man, J. P. Morgan was. They don't come much bigger. Livermore's story is one, which we've seen repeated several times this year, except that the entire has become automated through the Federal Reserve System. Sometimes these operations rescue the market, but they are now used as more subtle preemptive measures as well. Back to the Fed's Open Market Operations. The staff of the New York Fed's Trading Desk continuously monitors global financial conditions and the state of banking reserves each day. After extensive deliberation beginning early each morning and a conference call with all of the regional feds, it determines whether or not it will add to, drain from, or leave unchanged the level of banking reserves. This is carried out on a daily basis. A plan of action is established for the day, and the Fed executes it by moving huge amounts of money through its network of 22 primary dealers, which are banks and securities brokerages that deal in US government securities. To give you an idea of the money flows being executed, these 22 dealers averaged $375B per day in trading volume of US government securities in March, 2002, according to the New York Fed website. The most frequent transactions are called "repurchase agreements" or repos (RP) for short, which are described as short term transactions whereby the Fed purchases securities from the dealers, who agree to repurchase them from the Fed by a specified date at the specified price. When the repos mature, the added reserves are automatically drained. The Fed pays for the securities and takes delivery thereof simultaneously. When they mature, often the next day as we've seen in the Market Monitor (known as "overnight repos"), the securities are returned and the funds reimbursed by the dealers to the Fed. The reverse of a repo is called a matched sale-purchase transactions (MSP's), whereby securities are sold to the dealers for cash, and then repurchased from the dealers upon maturity. Both Repos (RP's) and matched sale-purchase transactions (MSP's) are temporary open market operations. Sometimes the Fed will sell securities to or purchase securities from the dealers outright, which affects the dealers' reserves on a permanent basis. If you're all still awake, or haven't yet dashed off to apply for jobs with the Fed, here's the kicker. The effect of these OMO's on the 22 dealers' reserves has a direct influence on the level of liquidity in the markets, just as we saw in Livermore's 1907 example. When the dealers have excess reserves, they are free to play with those funds until such time as the funds must be returned. This liquidity finds its way into the markets, purchasing securities. On days when reserves are drained, the liquidity finds its way out of the market. During the past months, there has been a tendency to see market strength on days when large repos of 5-10B have been announced. When these repos expire, if they are not replaced with new repos, we often see market weakness. This year, because we are in the grip of a bear market, the tendency has been to see repos. I have only seen one instance of an MSP this year, although I've only been following the Fed for the past few months. The trouble for traders is in knowing which markets will be affected by each Open Market Operation, and within each market, which securities. Repo money can go into equities or fixed income securities, currencies, or whatever else the dealers wish on that day. I have read arguments to the effect that companies such as MSFT are prime targets for Fed money because they are listed on multiple indices, and so buying or selling in MSFT gives the Fed's dealers the greatest bang for their buck. Remember that the Fed's goal is to encourage the stability of financial markets. When these markets are in jeopardy, smart traders watch for the Fed's morning announcement and consider which markets need it most. When the SPX broke 775 this month, an overnight repo of $4.5B was announced, which is at the upper end of modestly sized for repos this year, and equities bounced off their lows, which then triggered a selloff in the extremely toppy bond market, more money flowed into equities, and the rest we know well. During the summer, I watched large orders that would show up like a battalion at critical support levels on QQQ – 30,000 to 50,000 share bids that would line up 5 deep all at once, and the subsequent matches would protect the support level that had been in jeopardy. So what? We'd also see more such bids that would line up just below key resistance levels after an extended runup and the orders would power the index above them. I'd always thought that the goal of traders seeking a profit is to buy low and sell high, though perhaps buying high to sell a little higher works as well. In any event, none of us would think of using our own money to put on bullish positions just below key resistance levels after significant runups. This is the action of participants manipulating the markets using OPM (other people's money) in the interest of protecting those markets from what are deemed to be critical breakdowns. Tracking the Fed's Open Market Operations gives the trader a window on how much money will be available to the markets that day relative to past days. Experience will permit you to assess the impact of different sums- is a $1B drain substantial? Might the markets tank or just drift? Generally, all that one can know is how the Fed's daily activity will bias the markets, and so it is far from a magic indicator. Many traders I know and respect will not put on bearish positions on a day in which the Fed has announced a repo for more than a few billion dollars. Follow us in the Market Monitor each day and start to get a feel for the impact of the Fed's Open Market Operations. Like most other indicators, it will eventually help to fill in your overall market picture in its own particular way. I have been posting the Fed's daily Open Market Operations in the Market Monitor and will continue to do so. To follow along yourself, bookmark the following link: http://app.ny.frb.org/dmm/mkt.cfm ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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The Option Investor Newsletter Sunday 10-27-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Understanding Human Nature In The Market Naked Puts: Options 101: Limiting Risk With Trading Stops Spreads/Straddles/Combos: Market Bulls Firmly In Control! 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: Understanding Human Nature In The Market By Mark Wnetrzak Anyone who has invested money in the stock market knows that a person's judgment can be affected by emotions. Unfortunately, human nature is just one of the many obstacles that traders must overcome before they can be successful in the market. Each and every position has the potential to be affected by some emotion and the influence of these feelings is the biggest single factor one must understand if he expects to profit on a consistent basis. It is common knowledge that psychological biases often interfere with the decision-making process, however investors who understand these biases can prevent them from influencing their own choices, and they can profit from the biases in others. One approach that seeks to benefit from misjudgments by the investing public is the "contrarian" method; going against mainstream opinion and opposing the crowd mentality. A popular expert frequently associated with this unique approach is David Dreman, author of "The New Contrarian Investment Strategy." In his book, Mr. Dreman suggests that many of the psychological biases occur because of way humans are taught to process information in their daily lives. Apparently, we focus heavily on mental short-cuts and intuitive reactions and when these methods are applied to the stock market, the results are less than stellar. Some of the examples he offers include: basing investing decisions on information that is insufficient and drawn from an unrepresentative sample, misreading probabilities and putting too much emphasis on recent or emotional events, ignoring the outcomes of prior situations that are similar (hindsight blindness), and avoiding the proper assessment of past errors, which prevents the investor from learning from his mistakes. Mr. Dreman also points out that institutional investors and brokerage research analysts are particularly prone to "running with the crowd" and this type of confirmation and agreement simply contributes to the herd mentality. Not surprisingly, market overreactions tend to occur when many of these factors are combined and some experts would say the recent recovery rally is a good example of this effect. The latest data from the Investors Intelligence Advisors' Sentiment Survey reflects a pronounced reversal from the recent bearish outlook. Last week, before the October rally began, the number of market bulls dropped to an eight-year low at only 28.4%, versus 43.2% market bears. In the last few days the bulls have decisively overwhelmed the bears, putting the new ratio at 38.9% bullish, compared to 35.6% bearish. In addition, over 80% of the market's technicians, strategists and economists are now identifying October 2002 as the "turning point" for the three-year decline in U.S. stocks. Steven Hochberg, chief market analyst at Elliott Wave International and a student of the contrarian approach, says the bull-bear debate reveals a lot about investor psychology. Rather than side with the popular majority, he suggests that those who defy conventional thinking, especially in light of the recent rally, will eventually benefit from eroding value of stocks. Indeed, a large number of contrarian analysts believe the current "irrational" optimism is a sign of impending market meltdown. As well, many economists agree with that view based on the opinion that the recent share-price activity does not accurately represent the true value of equities. Those who promote the Efficient Market Hypothesis believe that at any given time, stock prices fully and completely reflect all the information available to the market's participants. However, the amount of information available to the retail trader is incredibly vast and when all of this data is reviewed and evaluated, the most important decision remains: Will you simply join the masses or be an independent investor -- one who utilizes proven indicators, both technical and fundamental, rather than the opinion of the majority, to determine what stocks to buy and sell. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield WWCA 2.71 2.94 NOV 2.50 0.50 *$ 0.29 9.5% PCS 2.82 3.49 NOV 2.50 0.50 *$ 0.18 8.4% SNDK 14.30 20.77 NOV 12.50 2.75 *$ 0.95 7.1% VOXX 7.40 8.43 NOV 7.50 0.45 *$ 0.55 6.9% VSAT 8.47 8.69 NOV 7.50 1.40 *$ 0.43 6.6% BCGI 10.30 12.49 NOV 10.00 1.10 *$ 0.80 6.3% TMCS 18.14 23.40 NOV 17.50 1.80 *$ 1.16 6.2% MACR 9.15 9.70 NOV 7.50 2.00 *$ 0.35 5.3% GNSS 12.29 10.29 NOV 10.00 2.75 *$ 0.46 5.2% FDRY 6.02 7.71 NOV 5.00 1.35 *$ 0.33 5.1% MEDI 24.95 25.16 NOV 22.50 3.70 *$ 1.25 5.1% MCHP 23.18 24.04 NOV 20.00 4.20 *$ 1.02 4.7% CVH 37.55 36.02 NOV 35.00 3.90 *$ 1.35 4.4% CPB 22.59 22.63 NOV 22.50 1.05 *$ 0.96 3.9% BCGI 11.26 12.49 NOV 10.00 1.60 *$ 0.34 3.8% CREE 14.98 17.14 NOV 12.50 2.90 *$ 0.42 3.8% MENT 7.50 7.93 NOV 5.00 2.70 *$ 0.20 3.6% *$ = Stock price is above the sold striking price. Comments: The major averages managed to eek out another positive week as we move into the end of October, now isn't that scary! Is the rally just end-of-year fund manipulation, a most sadistic bear- trap rally? Or is it the beginning of the end of a bear market? Time will tell as each week will continue to offer clues to the long-term picture. The key is to remain disciplined and keep emotion (bullish euphoria?) in check. The covered-call portfolio continues to benefit from the bullish momentum though there are a couple issues on the early-exit (adjustment) watch list that are acting a bit weak: Genesis Microchip (NASDAQ:GNSS), MedImmune (NASDAQ:MEDI), and Microchip Technology (NASDAQ:MCHP). 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 IMCL 8.16 NOV 7.50 QCI KU 1.25 1341 6.91 21 12.4% IVX 12.95 NOV 12.50 IVX KV 0.80 1491 12.15 21 4.2% MANU 3.17 NOV 2.50 ZUQ KZ 0.85 176 2.32 21 11.2% MU 17.30 NOV 15.00 MU KC 2.85 18351 14.45 21 5.5% REGN 15.21 NOV 15.00 RQP KC 1.25 94 13.96 21 10.8% SEPR 8.72 NOV 7.50 ERQ KU 1.55 597 7.17 21 6.7% UAL 2.59 NOV 2.50 UAL KZ 0.35 16377 2.24 21 16.8% 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 UAL 2.59 NOV 2.50 UAL KZ 0.35 16377 2.24 21 16.8% IMCL 8.16 NOV 7.50 QCI KU 1.25 1341 6.91 21 12.4% MANU 3.17 NOV 2.50 ZUQ KZ 0.85 176 2.32 21 11.2% REGN 15.21 NOV 15.00 RQP KC 1.25 94 13.96 21 10.8% SEPR 8.72 NOV 7.50 ERQ KU 1.55 597 7.17 21 6.7% MU 17.30 NOV 15.00 MU KC 2.85 18351 14.45 21 5.5% IVX 12.95 NOV 12.50 IVX KV 0.80 1491 12.15 21 4.2% 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). ***** IMCL - ImClone $8.16 *** Martha's Bane Still In A Range *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product candidate, Erbitux (cetuximab), is a therapeutic monoclonal antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. ImClone's next most advanced product candidate, BEC2, is a cancer vaccine. In addition to the development of its lead product candidates, the company conducts research, both independently and in collaboration with academic and corporate partners, in a number of areas related to its core focus of growth factor blockers, cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. Recently, ImClone announced that they and Bristol-Myers Squibb (NYSE:BMY) are beginning a new round of clinical tests of Erbitux. With all the "bad" news surrounding ImClone, traders have been speculating on an eventual recovery in the stock. This position takes advantage of the over-priced options and the short-term trading range of an issue that shows support at our cost basis. NOV 7.50 QCI KU LB=1.25 OI=1341 CB=6.91 DE=21 TY=12.4% ***** IVX - IVAX $12.95 *** Stage I Base *** IVAX (AMEX:IVX) is a multinational company engaged in the research, development, manufacture and marketing of pharmaceutical products. IVAX manufactures and/or markets several brand name pharmaceutical products and a variety of brand equivalent and over-the-counter pharmaceutical products, primarily in the U.S. and the United Kingdom. The company also has subsidiaries located throughout the world, some of which are significant pharmaceutical companies in their markets. IVAX has been forming a Stage I base for the last several months with strong support around $11.00. With earnings due October 29, we simply favor the bullish technical indications and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. NOV 12.50 IVX KV LB=0.80 OI=1491 CB=12.15 DE=21 TY=4.2% ***** MANU - Manugistics $3.17 *** Takeover Target? *** Manugistics Group (NASDAQ:MANU) is a global provider of enterprise profit optimization solutions. The company provides solutions for supply chain management, supplier relationship management, pricing and revenue optimization and service and parts management. The Manugistics NetWORKS family of products is designed to coordinate, optimize, measure and analyze across each of the key business processes: design, source, buy, make, store, move, price, market, sell and service. The company also provides strategic consulting, implementation and customer support services. Manugistics' shares climbed Friday after the company announced Warburg Pincus will gain a seat on its board of directors, and suggested the investment firm may acquire more shares of the company's stock. There were also some rumors that the company could be a potential takeover target for PeopleSoft (NASDAQ:PSFT). We favor the recent rally on heavy volume that suggests further upside potential. Cheap speculation in a rebounding stock: try target shooting a lower net-debit to lower the cost basis and improve the target yield. NOV 2.50 ZUQ KZ LB=0.85 OI=176 CB=2.32 DE=21 TY=11.2% ***** MU - Micron $17.30 *** Riding The Bullish Wave *** Micron Technology (NYSE:MU) and its subsidiaries are principally engaged in the design, development, manufacturing and marketing of semiconductor memory products. The company offers products that include dynamic random access memory, synchronous dynamic random access memory, double data rate dynamic access memory, legacy dynamic random access memory products, static random access memory products and Flash products. Like them or hate them, the semiconductor issues are on fire. Is it the bottom? We don't know but that is why we offer this position as a way to profit conservatively on the current bullish momentum in the sector with a cost basis closer to support. NOV 15.00 MU KC LB=2.85 OI=18351 CB=14.45 DE=21 TY=5.5% ***** REGN - Regeneron $15.21 *** Bottom Fishing: Part II *** Regeneron Pharmaceuticals (NASDAQ:REGN) is a biopharmaceutical company that discovers, develops and intends to commercialize therapeutic drugs for the treatment of major medical conditions. The company's product pipeline includes product candidates for the treatment of obesity, rheumatoid arthritis and other inflammatory conditions, cancer and related disorders, allergies, asthma and other diseases and disorders. Regeneron is another stock that has been forming a Stage I base for the last several months. Make sure you do your "due diligence" as this position offer a favorable cost basis near support for those interested in adding Regeneron to their long-term portfolio. NOV 15.00 RQP KC LB=1.25 OI=94 CB=13.96 DE=21 TY=10.8% ***** SEPR - Sepracor $8.72 *** Post-Earnings Rally *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The company's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which the company refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to currently marketed products. Sepracor's shares rallied sharply over the last few days after the company reported a narrower 3rd-quarter loss on increased sales of its allergy and asthma treatments. The bullish change of character is encouraging and this position allows investors to obtain a low risk cost basis with a reasonable expectation of profit. NOV 7.50 ERQ KU LB=1.55 OI=597 CB=7.17 DE=21 TY=6.7% ***** UAL - United Air Lines $2.59 *** Cheap Speculation *** UAL (NYSE:UAL) is a holding company, the principal subsidiary of which is United Air Lines, Inc. (United), which is wholly owned. United accounted for most of the company's revenues and expenses in 2001. United is a major commercial air transportation company throughout the United States and abroad. United's network provides transportation service within its North America segment and to international destinations within its Pacific, Atlantic, and Latin America segments. This position offers a favorable entry point in the issue with reasonable reward potential for those who want to speculate on UAL's recovery and their attempt to avoid bankruptcy. NOV 2.50 UAL KZ LB=0.35 OI=16377 CB=2.24 DE=21 TY=16.8% ***** ***************** 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 NVDA 11.10 NOV 10.00 UVA KB 1.75 8939 9.35 21 10.1% MDCO 12.90 NOV 12.50 MQL KV 1.10 83 11.80 21 8.6% OSUR 5.63 NOV 5.00 QTP KA 0.90 118 4.73 21 8.3% DLTR 26.35 NOV 25.00 DQO KE 2.50 1073 23.85 21 7.0% RMBS 5.65 NOV 5.00 BNQ KA 0.85 3351 4.80 21 6.0% RSTO 5.98 NOV 5.00 URF KA 1.15 1116 4.83 21 5.1% GENZ 27.52 NOV 25.00 GZQ KE 3.20 2144 24.32 21 4.0% WBSN 17.50 NOV 15.00 DQH KC 2.90 5 14.60 21 4.0% BBY 22.78 NOV 20.00 BBY KD 3.30 1610 19.48 21 3.9% ***************** NAKED PUT SECTION ***************** Options 101: Limiting Risk With Trading Stops By Ray Cummins One of our readers asked that we review the use of trading stops with option selling strategies such as writing "naked" puts. The need for a system to limit losses in any trading strategy is obvious but with a limited-profit/unlimited-loss technique such as selling "naked" puts, the requirement is even more critical. Before you can choose the most appropriate technique for your portfolio, it is necessary to be familiar with the basic forms of trading stops: mental and mechanical. A "mechanical" stop order is a posted request to close a specific position any time it moves beyond a specified price. This type of order is placed with your online brokerage or a through a personal broker, but the physical execution of the trade generally goes through a floor specialist at one of the major exchanges. A stop order to "buy" becomes a market order when the option contract trades, or is bid at or above, the stop price. A stop order to "sell" becomes a market order when the contract trades, or is offered at or below, the stop price. Regardless of what method you employ to select the stop-loss price, using a mechanical order is generally the best means to limit losses or protect profits as it does not require the position to be monitored on a continuous basis. In contrast, using a "mental" stop loss places all the responsibility on the trader. The investor determines a specific stop loss and closes the position if the option trades beyond that price. Considering the market activity we have experienced over the past few months, it's obvious a trader using mental stops would need to constantly oversee the position. There is an alternative for traders whose brokers use proprietary systems, such as the one at Preferred Trade, that allow option orders to be triggered by the price of the underlying issue. In that type of system, the guidelines for establishing protective stops suggest that the initial or opening limit should be placed at a point where important technical support (or a recent trading range bottom) is evident. Most often, this will be a relatively small range reflecting the low of a basing pattern, a trend-line, or a moving average established prior to entering the position. Due to the increasing number of traders using mechanical systems on a regular basis, the functionality of the stop-loss order has improved dramatically in recent years. However, there are still many short-term strategies that are better suited to manual order executions. Just keep in mind these techniques require almost continuous monitoring of the position to make sure the entry and exit trades are executed in a timely manner. In all cases, the first and foremost objective of any stop-loss technique is to preserve capital if the play goes badly and yet provide every opportunity for the position to achieve its profit potential. Learning to correctly manage portfolio positions -- maximizing gains while limiting losses -- is probably the most important aspect of successful trading. In fact, the need to establish a pre-planned exit strategy before opening a position is critical to the success of any trade. The logic behind this approach is simple: the most common reason for losing money in the market is failing to close a position in a timely manner, regardless of whether the action is to limit losses or lock-in gains. A large percentage of new traders achieve favorable profits, but end up giving most (or all) of them back because they don't establish a sensible plan to manage each position. As you would expect, the majority of market professionals use limit orders in conjunction with profit targets and protective stops to curb losses. Yet, even with this knowledge, the retail trader continues to be far less proficient in this practice and the difference in results is overwhelmingly apparent. Those who survive the market long enough to "learn the ropes" find that using stop orders and other common loss-limiting techniques eliminates the risk of emotional or reaction-based judgments in difficult situations and removes human nature from the trading equation. Indeed, a mechanical and disciplined method for achieving profit is the key to consistent success and allowing the market to make the exit decision is much more precise than relying on our complex human intuition. 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 VXGN 10.40 11.77 NOV 7.50 0.35 *$ 0.35 15.6% AMZN 19.04 19.30 NOV 15.00 0.50 *$ 0.50 12.6% AMLN 16.95 17.68 NOV 15.00 0.75 *$ 0.75 11.7% AMZN 18.46 19.30 NOV 15.00 0.55 *$ 0.55 10.7% HOLX 11.74 12.70 NOV 10.00 0.50 *$ 0.50 10.5% TMCS 20.33 23.40 NOV 17.50 0.55 *$ 0.55 10.2% HLYW 17.20 19.96 NOV 15.00 0.60 *$ 0.60 8.2% NOK 14.44 16.89 NOV 12.50 0.40 *$ 0.40 8.2% QCOM 31.37 36.52 NOV 25.00 0.65 *$ 0.65 8.2% AMLN 15.80 17.68 NOV 12.50 0.40 *$ 0.40 8.1% QCOM 36.20 36.52 NOV 30.00 0.65 *$ 0.65 7.9% KDE 23.77 28.80 NOV 20.00 0.70 *$ 0.70 7.9% COCO 37.75 37.05 NOV 30.00 0.75 *$ 0.75 7.9% OVER 30.07 28.18 NOV 22.50 0.45 *$ 0.45 7.6% PPDI 26.99 28.95 NOV 22.50 0.45 *$ 0.45 7.2% AFFX 23.99 24.79 NOV 17.50 0.30 *$ 0.30 6.4% VZ 35.19 36.57 NOV 30.00 0.70 *$ 0.70 6.3% GENZ 23.57 27.52 NOV 17.50 0.35 *$ 0.35 6.0% SYMC 39.00 39.75 NOV 30.00 0.45 *$ 0.45 5.9% OVER 27.51 28.18 NOV 20.00 0.40 *$ 0.40 5.9% INVN 35.05 33.70 NOV 25.00 0.40 *$ 0.40 5.9% *$ = Stock price is above the sold striking price. Comments: The bullish theme in the stock market is becoming readily apparent as more traders "buy the dip" rather than "sell the rally." In fact, buyers seem to emerge whenever the market retreats to a short-term moving average and the current outlook is for a test of the August highs near 950 (SPX). However, the first area of resistance is slightly above Friday's closing levels and any negative news could be a catalyst for retreat from this price range. With a cautiously optimistic forecast in mind, traders are reminded to remain vigilant in position management and exit or adjust any positions on issues with less than outstanding technical indications. 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 AFCO 13.19 NOV 10.00 UOF WB 0.25 40 9.75 21 12.5% DRD 19.70 NOV 17.50 DRD WW 0.30 125 17.20 21 7.3% GETY 26.41 NOV 22.50 QGT WX 0.40 300 22.10 21 8.2% JWN 20.98 NOV 17.50 JWN WW 0.35 718 17.15 21 9.6% KOSP 15.25 NOV 12.50 KQW WV 0.30 35 12.20 21 11.9% QCOM 36.52 NOV 30.00 AAW WF 0.40 9403 29.60 21 6.8% QLGC 33.15 NOV 22.50 QLQ WX 0.25 1887 22.25 21 5.3% TMPW 17.68 NOV 15.00 BSQ WC 0.30 497 14.70 21 9.3% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AFCO 13.19 NOV 10.00 UOF WB 0.25 40 9.75 21 12.5% KOSP 15.25 NOV 12.50 KQW WV 0.30 35 12.20 21 11.9% JWN 20.98 NOV 17.50 JWN WW 0.35 718 17.15 21 9.6% TMPW 17.68 NOV 15.00 BSQ WC 0.30 497 14.70 21 9.3% GETY 26.41 NOV 22.50 QGT WX 0.40 300 22.10 21 8.2% DRD 19.70 NOV 17.50 DRD WW 0.30 125 17.20 21 7.3% QCOM 36.52 NOV 30.00 AAW WF 0.40 9403 29.60 21 6.8% QLGC 33.15 NOV 22.50 QLQ WX 0.25 1887 22.25 21 5.3% 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). ***** AFCO - Applied Films $13.19 *** Stage II Underway? *** Applied Films Corporation (NASDAQ:AFCO) is a provider of thin film deposition equipment to the flat panel display (FPD), the architectural, automotive and solar glass, and the consumer products packaging and electronics industries. The company has also developed a barrier coating solution technology for the plastic beverage bottle industry. Its deposition systems are used to deposit thin films that enhance the characteristics of a base substrate, such as glass, plastic, paper or foil. These thin films provide conductive, electronic, reflective, filter, barrier and other properties that are critical elements of its customers' products. Applied's thin film deposition systems provide its customers with high yield and throughput, flexible modular configurations and coating and process technologies. The company also processes and sells thin film coated glass to the FPD industry. AFCO shares have recently moved out of an intermediate-term base and the increasing volume suggests there is good potential for further upside activity. NOV 10.00 UOF WB LB=0.25 OI=40 CB=9.75 DE=21 TY=12.5% ***** DRD - Duane Reade $19.70 *** Rally Mode! *** Founded in 1960, Duane Reade (NYSE:DRD) is the largest drug store chain in the metropolitan New York City area, offering a variety of prescription and over-the-counter drugs, health and beauty care items, cosmetics, hosiery, greeting cards, photo supplies and photo finishing. As of September 28, 2002, DRD operated 221 stores. On Friday, DRD reported higher third-quarter profit as a rise in prescription sales offset higher costs to open new stores and expenses to cut debt. The company also forecast that fourth quarter profits would fall within consensus expectations, and the news drove its stock price 15% higher on heavy volume. The recent technical support near the cost basis makes this a viable position for investors who wouldn't mind owning the stock. NOV 17.50 DRD WW LB=0.30 OI=125 CB=17.20 DE=21 TY=7.3% ***** GETY - Getty Images $24.61 *** Entry Point! *** Getty Images (NASDAQ:GETY) is the world's leading imagery company and markets the largest collection of contemporary and historical photography and film footage available. Every day, Getty Images collaborates with some of the most talented photographers and cinematographers to provide creative professionals and industries with unique, current and striking imagery for inclusion in a wide range of visual communications; advertising, motion pictures and television, books and the Web. Getty Images is a global business, with headquarters in Seattle and customers in over 50 countries. Getty recently announced it generated net profit and revenue well above forecasts in the third quarter and was "on track" for its first full-year profit in five years. The company also said its board of directors approved a share buyback of up to $50 million of its common stock over the next six months. Investors who want to own GETY can establish a low risk cost basis in the issue with this position. NOV 22.50 QGT WX LB=0.40 OI=300 CB=22.10 DE=21 TY=8.2% ***** JWN - Nordstrom $20.98 *** Sector Rally! *** Nordstrom (NASDAQ:JWN) is a specialty store that sells a selection of apparel, shoes, and accessories for women, men, and children. The parent firm operates approximately 80 large specialty stores across the United States. Nordstrom also operates 45 stores under the name Nordstrom Rack, one clearance store under the name Last Chance, two freestanding shoe stores under the Nordstrom name in Hawaii, and four specialty boutiques in California, New York and Texas under the name Façonnable. Analysts say high-end and luxury merchants have been outperforming the retail segment, due in part to easy comparisons to last year's sales, when the 9/11 attacks emptied the shopping malls, as well as favorable demographics in the current economy. Nordstrom is one of the leaders in the group and traders who think the recent really will continue can profit from that outcome with this position. NOV 17.50 JWN WW LB=0.35 OI=718 CB=17.15 DE=21 TY=9.6% ***** KOSP - KOS Pharmaceuticals $15.25 *** New Deal With Merck! *** KOS Pharmaceuticals (NASDAQ:KOS) is a fully integrated specialty pharmaceutical company engaged in the development of proprietary prescription products for the treatment of chronic cardiovascular and respiratory diseases. The company manufactures its marketed products, Niaspan and Advicor, and markets such products directly through its own specialty sales force and through a sales force provided by a contract sales organization. Their cardiovascular products are based on controlled-release, once-a-day, oral dosage formulations. The company's respiratory products in development consist of aerosolized inhalation formulations to be used mainly with its proprietary inhalation devices. Shares of KOS rocketed Friday after the company agreed to license two of its cholesterol treatments to Germany's Merck KGaA (G.MRK) in a deal worth up to $61 million, including upfront and milestone payments. Merck will pay KOS $15 million up front for exclusive international rights to Niaspan and Advicor outside North America and Japan, and KOS will also receive 25% of net sales of the products, which the company will manufacture and supply to Merck. NOV 12.50 KQW WV LB=0.30 OI=35 CB=12.20 DE=21 TY=11.9% ***** QCOM - Qualcomm $36.52 *** Entry Point! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. The company offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology, enhanced component integration and interoperability, as well as reduced time to market. Qualcomm recently announced that strong demand for next-generation chips for wireless phones prompted it to raise its shipment guidance for the fiscal fourth quarter. The news helped the issue break out of a 4-month trading range and move to a 6-month high. Now the stock is comfortably established in a new range near $35 and this position offers investors reasonable reward potential at the risk of owning the company at a cost basis of $29.60. NOV 30.00 AAW WF LB=0.40 OI=9403 CB=29.60 DE=21 TY=6.8% ***** QLGC - Qlogic $33.15 *** On The Rebound! *** QLogic (NASDAQ:QLGC) designs and supplies unique storage network infrastructure components and software for server and storage subsystem manufacturers. The company's products are based on SCSI, iSCSI, Fibre Channel and Infiniband standards. The firm is an end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Products include its SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool Kit management software. QLogic is the only HBA vendor to support SCSI, Internet Protocol, Virtual Interface and FICON protocols with the same Fibre Channel HBA. In addition, the company designs and supplies controller chips used in hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure. Shares of Emulex (NYSE:ELX) enjoyed a sharp rally after the firm guided up revenue for the fourth quarter and the news boosted a number of other issues in the group. Qlogic was a beneficiary of Emulex's announcement and traders who believe QLGC's stock will continue to recover can speculate conservatively on that outcome with this position. NOV 22.50 QLQ WX LB=0.25 OI=1887 CB=22.25 DE=21 TY=5.3% ***** TMPW - TMP Worldwide $17.68 *** Spin-Off Announcement! *** TMP Worldwide (NASDAQ:TMPW) is a recruitment-advertising agency and executive search and selection agency. The company also operates Monster (www.monster.com), an Internet-based global career management Website. Job seekers look to manage their careers through the company by posting their resumes on Monster, by searching Monster's database of job postings, either directly or through the use of customized job searches, and by utilizing its extensive career, education and relocation resources. Many employers and professional recruiters, who are TMP's clients, look to it to help them find the right employee at all levels, from an entry-level candidate to a chief executive officer. The company is also a yellow pages advertising agency, and operates under six major product lines, including Monster, Advertising & Communications, eResourcing, Executive Search, Directional Marketing and Monstermoving.com. Shares of TMP Worldwide soared last week on news that it will spin off two staffing businesses in a move expected to bolster the prospects of its online job site, Monster.com. The news prompted Banc of America Securities to raise their rating on the stock and traders who believe the bullish activity will continue should consider this speculative position. NOV 15.00 BSQ WC LB=0.30 OI=497 CB=14.70 DE=21 TY=9.3% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield JDEC 12.26 NOV 10.00 QJD WB 0.30 340 9.70 21 14.8% WEBX 15.91 NOV 12.50 UWB WV 0.30 373 12.20 21 12.5% SNDK 20.77 NOV 17.50 SWQ WW 0.45 337 17.05 21 11.9% GYMB 19.80 NOV 17.50 GQU WW 0.50 112 17.00 21 11.8% VSEA 22.65 NOV 17.50 UES WW 0.40 118 17.10 21 11.8% ELX 17.88 NOV 15.00 ELX WC 0.35 607 14.65 21 11.0% CMX 18.91 NOV 17.50 CMX WW 0.40 926 17.10 21 8.8% CPKI 26.92 NOV 25.00 CUH WE 0.55 27 24.45 21 8.5% PPD 21.58 NOV 15.00 PPD WC 0.25 1809 14.75 21 7.9% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Market Bulls Firmly In Control! By Ray Cummins Stocks rallied again today, lifting the major equity averages to another week of solid gains as hopes of a long-term recovery continued to circulate among investors. The Dow Jones Industrial Average soared 126 points to 8,443 amid strength in semiconductor giant Intel (NASDAQ:INTC) and drug maker Merck (NYSE:MRK). Cigna (NYSE:CI) was the only sore spot among blue-chip stocks, losing a third of its value after the health insurer slashed profit estimates. The technology-laden NASDAQ Composite index climbed 32 points to 1,331 with computer hardware stocks leading the way. The broader Standard & Poor's 500-stock index rose 15 points to 897 as buying emerged in biotech, drug, consumer, retail and financial shares while oil service issues were snubbed. Trading volume was 1.33 billion on the Big Board and 1.47 billion on the technology exchange. Advancers sailed past decliners by roughly 2 to 1 on both the NYSE and the NASDAQ. Bonds were higher as well with the 10-year Treasury note adding 7/32 to yield 4.09% while the 30-year government bond edged up 1/32 to yield 5.08%. On the fund flow front, Trim Tabs estimated that all equity funds had outflows of $1.8 billion in the week ending October 16 compared with outflows of $9.7 billion in the prior week. Equity funds that invest primarily in U.S. companies had outflows of $900 million versus outflows of $9.3 billion the prior week. ***************** 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 SLM 96.58 106.16 NOV 80 85 0.50 84.50 $0.50 Open UNH 93.49 97.09 NOV 80 85 0.60 84.40 $0.60 Open WTW 45.40 49.00 NOV 35 40 0.50 39.50 $0.50 Open ABK 63.21 64.30 NOV 50 55 0.60 54.40 $0.60 Open CHIR 42.51 39.59 NOV 35 38 0.30 37.20 $0.30 Open Chiron shares tumbled midweek, despite reporting strong quarterly profits, after Analyst Eric Schmidt at SG Cowen expressed concerns about "a lack of near-term product candidates" at the company. Goldman Sachs followed suit with a downgrade to "market perform" and based on the current uncertain outlook, conservative traders may consider an early exit from the position. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status FITB 57.47 65.72 NOV 70 65 0.65 65.65 ($0.07) Open? LEN 53.67 57.14 NOV 65 60 0.80 60.80 $0.80 Open LMT 62.45 56.63 NOV 75 70 0.55 70.55 $0.55 Open MMM 120.60 127.73 NOV 140 135 0.50 135.50 $0.50 Open AIG 63.71 65.41 NOV 75 70 0.60 70.60 $0.60 Open GD 76.58 79.80 NOV 90 85 0.55 85.55 $0.55 Open Fifth Third Bancorp (NYSE:FITB) cycled lower during the week but rebounded to close above $65 during Friday's session. However, the overhead supply near the current price provides reasonable opposition to further upside activity and traders with a more aggressive outlook can monitor the issue for a move above $67, on increasing volume, before exiting or adjusting the position. SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V (G/L) Status ERTS 67.73 67.61 NOV 75 60 0.40 0.50 0.90 Open SCHL 47.43 45.89 NOV 55 40 0.25 0.60 0.85 Open DLTR 25.12 26.35 NOV 30 20 0.00 0.30 0.30 Open NXTL 9.69 10.23 JAN 12 7 0.10 0.20 0.30 Open The recent rally in Electronic Arts (NYSE:ERTS) ended with its earnings report however, there is some potential for renewed upside activity in the position. Scholastic (NASDAQ:SCHL) has already offered a favorable "early-exit" opportunity and both Nextel (NASDAQ:NXTL) and Dollar Tree Stores (NASDAQ:DLTR) have achieved small profits. SYNTHETIC (BEARISH) ******************* No Open Positions BULL CALL SPREADS ***************** Symbol Pick Last Month L/C S/C Debit M/V B/E Status LUME 5.80 3.07 JAN 5 7 1.00 0.90 6.00 Closed CHTT 42.99 45.47 NOV 35 40 4.20 4.40 39.20 Open Lumenis (NASDAQ:LUME) announced Tuesday that it now expects lower third-quarter revenues and a net loss, due in part to foreign exchange losses and the costs of a U.S. Securities and Exchange Commission investigation. The issue in unlikely to recover from this news in the near-term, thus the position should probably be closed to limit losses. CALENDAR SPREADS **************** Symbol Pick Last Long-Opt Short-Opt Debit M/V Status LPNT 33.04 37.00 FEB-35C NOV-35C 1.25 2.00 Open WAT 26.61 24.81 MAY-30C NOV-30C 2.20 2.00 Closed CREE 14.98 17.14 JAN-17C NOV-17C 1.00 1.25 Open HNT 25.75 26.00 JAN-30C NOV-30C 0.75 0.60 Open Shares of Waters (NYSE:WAT) tumbled last week after reporting that quarterly earnings rose less than analysts expected. Waters said the shortfall was caused by fewer shipments of mass-spectrometers, machines that can identify unknown compounds and analyze material that is known. A timely exit in the long option (MAY-30C) allowed a minimal loss in the position, provided the issue remains below $30 for the next three weeks. SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit M/V Status AES 2.92 1.18 J04-7.5P J03-2.5P 4.50 4.25 Open IMCL 7.77 8.16 J04-15P JO3-5P 8.00 7.75 Open CREDIT STRANGLES **************** No Open Positions 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. ***************** SPECULATION PLAYS ***************** These positions are based on recent increased activity in the stock and underlying options. All of these plays offer favorable risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ***** NVDA - Nvidia $11.10 *** Bottom-Fishing! *** Nvidia (NASDAQ:NVDA) designs, develops and markets graphics and media communication processors and related software for personal computers (PCs), workstations and digital entertainment platforms. The company provides an architecturally compatible top-to-bottom family of high performance 3-D graphics processors and graphics processing units (GPUs) that set the standard for performance, quality and features for a broad range of desktop PCs. They range from professional workstations to low-cost PCs and mobile PCs, and from performance laptops to thin-and-light notebooks. NVIDIA's 3-D graphics processors are used for a wide variety of applications, including games, digital image editing, business productivity, the Internet and industrial design. Nvidia's graphics processors are designed to be architecturally compatible backward and forward between generations, giving its original equipment manufacturers (OEMs), customers and end users a low cost of ownership. This speculative short-put combination utilizes Jim Brown's (OIN Founder/Chief Editor) popular technique of writing "in-the-money" Puts to profit from upward movement in the underlying issue. A near-term Put is also purchased to limit downside risk in the position, if the recovery does not begin in the next few months. More information on this unique strategy can be found at: http://members.OptionInvestor.com/archive/editorplays/2001/042201_1.asp PLAY (speculative - bullish/short-put combination): SELL PUT JAN04-20.00 KMF-MD OI=131 B=$10.70 BUY PUT JAN03-7.50 UVA-MU OI=935 A=$0.70 INITIAL NET CREDIT TARGET=$10.00-$10.20 TARGET PROFIT=$3.50-??? Note: There is a collateral requirement for the sold (short) Put, whether it is partially covered in the initial spread or exists "naked" when the long option expires. Please review the terms of the collateral requirements with your broker. **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. ***** HGSI - Human Genome Sciences $11.34 *** Earnings Speculation! *** Human Genome Sciences (NASDAQ:HGSI) is a unique genomics and biopharmaceutical firm focused on therapeutic product development and functional analysis of genes using its proprietary technology platform. Human Genome Sciences discovers, develops and intends to commercialize novel compounds for treating and diagnosing human disease based on the identification and study of genes. The firm focuses its internal product development efforts on therapeutic proteins, antibodies, peptides and fusion proteins, and other uses as well as collaborations for the development of gene therapy products and small-molecule drugs. The company's earnings are due on 11/29/02. Strategy Explanation: A bullish and more speculative 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. PLAY (very speculative - bullish/calendar spread): BUY CALL DEC-15.00 HQI-LC OI=34 A=$1.00 SELL CALL NOV-15.00 HQI-KC OI=2406 B=$0.50 INITIAL NET DEBIT TARGET=$0.40-$0.45 TARGET PROFIT=$0.35-$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. ***** CDWC - CDW Computer Centers $50.61 *** Solid Earnings! *** CDW (NASDAQ:CDWC), ranked #414 on the Fortune 500, is a leading provider of technology solutions for businesses, government agencies and educational institutions nationwide. CDW is a principal source of technology products and services including top name brands such as Cisco, Compaq, Computer Associates, Hewlett-Packard, IBM, Intel, Microsoft, and Toshiba. The firm distributes contracts to various end users for both customized and standardized on-site services supplied directly by providers such as HP Services and Unisys and for training programs provided by firms such as KnowledgeNet and Productivity Point International. CDWC was founded in 1984 as a home-based business and today employs 2,800 coworkers whose efforts generated net sales of $4 billion in 2001. CDW's direct model offers one-on-one relationships with its knowledgeable account managers; purchasing by telephone, fax, the company's award-winning site or customized CDW@work(TM) extranets; custom solutions and daily shipping; flexible financing solutions; and pre- and post-sales technical support, with factory-trained and A+ certified technicians on staff. PLAY (conservative - bullish/credit spread): BUY PUT NOV-40 DWQ-WH OI=882 A=$0.55 SELL PUT NOV-45 DWQ-WI OI=1270 B=$1.10 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$44.40 ***** CEPH - Cephalon $50.58 *** Provogil Results! *** Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products are comprised of Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management, and Gabitril for the treatment of partial seizures associated with epilepsy. PLAY (conservative - bullish/credit spread): BUY PUT NOV-40 CQE-WH OI=5349 A=$0.55 SELL PUT NOV-45 CQE-WI OI=2511 B=$1.05 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$44.45 ***** CTSH - Cognizant $69.54 *** Solid Quarterly Earnings! *** Cognizant Technology Solutions Corporation (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology services are delivered through the use of a seamless on-site and offshore consulting project team. The firm's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen, ADP, Brinker, Computer Sciences, Dun & Bradstreet, First Data, IMS Health, Metropolitan Life Insurance, Nielsen Media Research, PNC Bank, and Royal & SunAlliance USA. PLAY (conservative - bullish/credit spread): BUY PUT NOV-55 UPU-WK OI=565 A=$0.90 SELL PUT NOV-60 UPU-WL OI=404 B=$1.40 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$59.45 ***** AGN - Allergan $55.27 *** Pharmacia Settlement! *** Allergan (NYSE:AGN) is a technology-driven, global healthcare firm that develops and commercializes specialty pharmaceutical products for ophthalmic, neurological, dermatological and other specialty markets, as well as ophthalmic surgical devices and contact lens care solutions. Its worldwide consolidated revenues are primarily generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intraocular lenses and other ophthalmic surgical products, and also contact lens care products. The company's products are sold to drug wholesalers, independent and chain drug stores, pharmacies, optical store chains, opticians, mass merchandisers, food stores, hospitals, ambulatory surgery centers and medical practitioners, including neurologists, dermatologists and plastic surgeons. PLAY (conservative - bearish/credit spread): BUY CALL NOV-65 AGN-KM OI=451 A=$0.15 SELL CALL NOV-60 AGN-KL OI=447 B=$0.60 INITIAL NET CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$60.50 ******************* NE - Noble Corporation $31.45 *** Declining Revenues *** Noble Corporation (NYSE:NE) is a provider of diversified services to the oil and gas industry. The firm performs contract-drilling services with a fleet of 49 offshore drilling units located in key markets worldwide. Its fleet of floating deepwater units consists of 9 semisubmersibles and 3 dynamically positioned drill-ships, 7 of which are designed to operate in water depths greater than 5,000 feet. Its premium fleet of 34 independent leg, cantilever jack-up rigs includes 21 units that operate in water depths of 300 feet and greater, 4 of which operate in water depths of 360 feet and greater, and 11 units that operate in water depths up to 250 feet. Its fleet also includes 3 submersible drilling units. Over 60% of the fleet is deployed in international markets, principally the North Sea, Brazil, West Africa, the Middle East, India and Mexico. Noble also provides labor contract drilling services, well site and project management services, and engineering services. PLAY (conservative - bearish/credit spread): BUY CALL NOV-37.50 NE-KU OI=252 A=$0.20 SELL CALL NOV-35.00 NE=KG OI=342 B=$0.50 INITIAL NET CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$35.30 ******************* 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. ***** CAI - CACI International $39.21 *** Bullish Outlook! *** CACI International (NYSE:CAI) delivers information technology and communications solutions to clients through four areas of expertise or service offerings: systems integration, managed network services, knowledge management and engineering services. Through this range of service offerings, the company provides comprehensive, practical information technology and communications solutions by adapting emerging technologies and continually evolving legacy strengths in the areas of information assurance and security, reengineering, logistics and engineering support, automated debt management systems and services, litigation support systems and services, product data management, software development and reuse, voice, data and video communications, simulation and planning, financial and also human resource systems and geo-demographic and customer data analysis. PLAY (speculative - bullish/synthetic position): BUY CALL DEC-45 CAI-LI OI=197 A=$1.35 SELL PUT DEC-35 CAI-XG OI=209 B=$1.20 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $1,275 per contract. *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** PPD - Pre-Paid Legal $21.58 *** Premium Selling! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. Legal services include unlimited attorney consultation, traffic violation defense, auto-related criminal charges defense, letter writing/document preparation, will preparation and review and a general trial defense benefit. PLAY (very aggressive - neutral/credit strangle): SELL CALL NOV-25.00 PPD-KE OI=4064 B=$0.70 SELL PUT NOV-17.50 PPD-WW OI=2147 B=$0.65 INITIAL NET-CREDIT TARGET=$1.30-$1.35 POTENTIAL PROFIT(max)=23% UPSIDE B/E=$26.30 DOWNSIDE B/E=$16.20 ******************** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ Loading up in either direction To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_102702.asp ************** MARKET POSTURE ************** Skeptical Optimism To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/mp_102502.asp ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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