The Option Investor Newsletter Sunday 11-03-2002 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: Betting On The Fed Futures Market: Ready for Takeoff! Index Trader Wrap: Russell? Is that you? Editor’s Plays: Free Money Market Sentiment: Who Needs Logic? Ask the Analyst: An Expanded View Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Trend Change! Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 11-01 WE 10-25 WE 10-18 WE 10-11 DOW 8517.64 + 73.65 8443.99 +121.59 8322.40 +472.11 +321.89 Nasdaq 1360.70 + 29.57 1331.13 + 43.27 1287.86 + 77.39 +774.16 S&P-100 458.16 + 2.51 455.65 + 6.63 449.02 + 26.34 + 19.46 S&P-500 900.96 + 3.31 897.65 + 13.26 884.39 + 49.07 + 35.04 W5000 8502.20 + 51.56 8450.64 +126.86 8323.78 +450.75 +274.41 RUT 383.45 + 10.81 372.64 + 9.27 363.37 + 18.44 - 3.05 TRAN 2315.68 + 2.37 2313.31 + 34.22 2279.09 +124.42 + 16.99 VIX 33.98 - 2.29 36.27 - 3.55 39.82 - 3.62 - 2.84 VXN 49.86 - 0.53 50.39 - 4.94 55.33 - 3.54 - 1.41 TRIN 0.95 0.89 0.80 0.41 Put/Call 0.71 0.77 0.68 0.93 ****************************************************************** Betting On The Fed by Jim Brown After dropping to 8309 on terrible economic news the Dow rebounded on numerous buy programs to close just below key resistance at 8550. They say bull markets are created by bulls trampling over bears. There was some serious road kill on Friday with bewildered bears running about in utter confusion. Dow Chart Nasdaq Chart The morning reports and end of year unwinding by some funds knocked the markets back to support at the open. Leading those reports was a benign Jobs report which showed another loss of jobs in October as expected but was revised up from a -43,000 loss in September to only a -13,000 loss. When most were expecting whisper numbers in the -30,000 range for this month this report, while still negative, was not the end of the world. Manufacturing losses increased to -49,000 from -39,000 for Sept. There were several areas including short term employment where October showed declines that predict worse numbers in the November report. Business services lost -44,000 jobs in October. This entire report shows an economy that is on hold and suggests that it is clinging to the edge of the cliff but may not fall over. The unemployment rate did increase to 5.7% from 5.6%. Construction Spending rose an unexpected +0.6% in September but the prior month was revised down to -0.8% from -0.4%. These are hindsight numbers and therefore are not as compelling but the unexpected gain in September was appreciated. Most analysts claim the economy came to a halt in late September so the October numbers may tell a different tale. Personal Income rose less than expected at +0.4% but Personal Spending fell by -0.4%. We made less money and spent even less. The consumer is definitely pulling back and conserving but that could be simply a lull before the holiday spending begins. Add the falling consumer confidence and you get worry by retailers that they will have to come up with new and expensive promotions to get shoppers into the stores for that holiday season. Automobile sellers have their backs against the wall after seeing record sales in prior months. The numbers released today showed that all the major manufacturers saw huge decreases in sales. GM -32%, Ford -35%, Chrysler -31%, Toyota -20%. The total vehicles sold fell to 15.4 million. This is down from huge numbers over 18 million in July and August. According to reports the sales have dropped significantly but they have also flattened. GM said they thought they would hold their October levels for November and added a new $2000 cash back component to the Zero, Zero, Zero program as an added incentive. While autos have held up the economy for two quarters they are not going to be a player going forward. Nearly everyone who can afford a new car has already bought one. The biggest number on Friday was the ISM Manufacturing Index which fell to 48.5 and below consensus of 49.5. Any number below 50 is considered a contracting economy. This is the single component that could tip the scales in favor of a rate cut next week. This was the second month of contraction and indicated that inventories were continuing to shrink. Nobody is confident enough of the 4Q to invest money to create goods or inventory them if there are no sales ahead. The new orders component rose slightly but not enough to signify a new trend. The ISM has now posted four months of no growth and an increasing rate of decline. A positive sign in some respects was a slight increase in semiconductor billings. They increased +3% in September and were powered by sales of application chips and wireless phones. While this growth is good it is not coming in the PC sector. The reduced capital spending in the sector is still warning of further concerns by the chip makers themselves. The breadth of chips is growing but not the depth. There are chips in almost everything now sold which builds volume but the quantity needed to see high profits is lacking. Everything points to a reduced demand of chips for computers and that means a real recovery is yet to be seen. The economy may not be dropping at the same rate as it was over the last few weeks but the momentum is still slowing. Productivity continues to increase at a meager 4% but that is enough for an eventual recovery. It is just not low enough to build a case for huge rate cuts. The GDP is growing at a +3.0% rate and while not exciting it is growing. The 4Q GDP is expected to be in the +2.0% range or less but the year will still be respectable. Since the rally on Friday was a clear bet on a rate cut next week we should analyze that chance one more time. Over the last two years we have had massive stimulus and are now enjoying an interest rate at decade lows. The economy is growing at a +3.0% annual rate as a result of this stimulus. Any new stimulus would not have a material impact to the current economy. It would be June of next year before any of it filtered down to the business level and the impact would be minimal. Cutting rates adds liquidity into the banking system. With money flowing freely the idea is to loan it out to businesses for capital equipment, construction, home improvements, home loans, etc. Cheaper rates are supposed to influence businesses to buy/spend on projects they would not have done at higher rates. It is hoped they will buy more, produce more inventory, create more value and inject activity into the economy. The problem today is not lack of money. There is plenty of money. The system is awash with it. The only people who want to borrow it are the ones without credit. Nobody wants to build buildings today so they can sit vacant for a couple years until the economy catches fire. Nobody wants to build inventory to fill warehouses and then have to write it down for a loss when customers don't buy it. Ask Cisco, Intel or Lucent if another 25 point cut would make their excess inventory age slower. The only reason for a rate cut next week is because the market needs reassurance from Uncle Alan that they are still on the job and they care about our well being. It has been eleven months since they cut rates and even though they have done the trick the market is begging for more. How many times have we seen the market stuck in some trend that just seems to go on forever and suddenly something comes out of left field to break the trance? Analysts think another rate cut is that event. The market "should" continue to grow. There are signs that it has stopped falling in most cases but it just has not started growing. The conventional wisdom is that a rate cut next week will be an "insurance" cut that will guarantee no further slippage in the economy. We all know there are no guarantees. The economy will improve when it improves. The economy has the flu and just like there is no cure for the flu in people there is no instant cure for the economic flu. Everything has been done that can be done and now we just have to wait for it to pass. The bullish contingent are convinced there is at least a 25 point cut in the wings and maybe even a 50 point cut. If 25 is good then 50 could be better according to the analysts. A 25-point cut is already priced in and therefore will have no real impact to the markets. (their words not mine) If the Fed really wants to make a statement they "have" to cut 50 points. They view the current conditions as similar to Japan which spiraled down over years to its current conditions. They feel a continued diet of 25 point cuts as conditions worsen will only set the Fed up to be in the same shape as the Bank of Japan with zero interest and no cuts left. The bearish view is that there will be no cut. There has been zero Fedspeak that would imply there is a possibility. The only line is the party line of "more than adequate stimulus has already been injected". The Fed needs to retain all the ammo it has left to counter any future terrorist attacks and the possibility of a long war with Iraq. Why give the patient another antibiotic shot when he is already showing signs of improvement? The more antibiotics someone receives the more immune they become to future treatments. Another factor is the European Central Bank. They have been reluctant to cut rates and I am sure the Fed would rather not cut again until they do. If the Fed holds the line this week then the ECB may feel pressured to pick up the pace. The wild card in the rate cut scenario is the election. I think the Fed has not come out to talk down the possibility of a rate cut to keep from negatively influencing the election for the administration. If you think about it the election outcome can influence the Fed's decision. A Republican victory that gives them control would probably lessen the possibility of a rate cut substantially. More items would get approved in Congress in a smaller amount of time. This would be implied stimulus. If the Democrats maintain control then gridlock might prevail and a rate cut might be needed to get the markets mind off the political outcome. The markets normally like gridlock because it means restrictive new laws take forever to pass and can get mired down for years. Currently they would love for gridlock to disappear so that new stimulus programs could be passed and spending increased. Despite analysts comments to the contrary there is no sure answer to the rate cut question for Wednesday just like there is no answer to the election with so many races up for grabs. As investors the side we take depends on our bias. The bulls are buying stocks with the clear assumption that the Fed will cut rates and the markets will soar off into the clouds. Bears are closing shorts just in case the bulls are right. Nobody wants to be short if the Fed pulls a rabbit out of their hat. The difference in opinion sent the market back to resistance one more time and they appear poised to rally again on Monday. As investors we need to be careful in putting too much faith in the rate cut scenario of our choice. A 25-point cut will probably result in an eventual sell off since this size of cut is already priced into the market. A 50-point cut could give the market an initial pop but there is still the possibility of a sell the news event after the remaining shorts cover. No cut at all would generate an immediate drop until the cut expectations were removed. The bottom line is that we have already had a strong run over the last four weeks and it will take a lot more to move it higher. There should be profit taking after the Fed meeting regardless of the outcome. With the Nasdaq up +13% in October and the Dow up +10.6% there is always the risk that new investors will want to wait before joining the crowd. Even if the Fed did cut rates 50 points Cisco announces earnings two hours later. How much is the market going to run with the CSCO axe hanging over their head? What I think is more important this weekend is fundamental events occurring in stocks. Friday after the close the Microsoft antitrust case was decided in the favor of the current penalty settlement. This is very bullish and the stock was up strongly in after hours. This will buoy all the markets simply because MSFT is a major component in the indexes. (Ironically the Microsoft news could actually be detrimental to the rate cut possibilities. If the Fed sees the markets in strong rally mode sparked by Microsoft then they may not feel the urge to cut rates quite as strongly.) Additionally the dockworkers reached an agreement on the west coast and the slowdown should end Monday. Supply lines will fill up promptly and the holiday season may not be hampered. The semiconductor sales numbers I mentioned above will continue to attract investors to the chip sector. There were also some rumors on Friday that there were about to be some large orders released in the networking sector. JNPR soared +18% on the expectation that the dry spell could be over. Cisco could be a bigger key than the Fed next week. With the Microsoft led rally on Monday, a favorable outcome in the elections and any cut from the Fed on Wednesday a positive Cisco earnings event could blow the lid off the market. The reverse is of course true if the rate cut is 25 points or less and Cisco warns then the bears will roar out of hiding. October is over and November started out with a bang. Monday morning is going to look like a stampede as the bulls trip over themselves trying to dive into the new bull market. Explosive rallies breed more explosive rallies as shorts race to cover and the flashing green numbers attract more investors like moths to a flame. For whatever reason the Dow has put together four positive weeks in a row. It will have a head start next week with a Microsoft Monday but the finish could be a struggle. Don't count the bears out just yet there could still be some serious potholes in our future. I apologize for the long winded commentary this weekend but the many emails I received on Friday were begging for an explanation of factors affecting the coming week. There is no simple answer and I hope this helped rather than confused you. Enter Very Passively, Exit Very Aggressively! Jim Brown "If all the economists in the world were laid end to end, they still would not reach a conclusion" - George Bernard Shaw Revised version: "If all the economists in the world agreed a 50-point rate cut was needed the Fed would still ignore them" ************** FUTURES MARKET ************** ------------------------------------------------------------------- Attn: OIN Futures Traders The futures section is undergoing some changes in format and methodology. We have received many comments from readers with many suggestions for improving the content you have been receiving. We are responding to those changes but would like to try and get a better idea of what you would like to see in the commentary, trade suggestions and educational articles. Some of the trade formats presented recently did not appeal to many readers in their frequency and format. Some thought there were too many trades and others thought there were not enough. Many thought they were not descriptive enough. Evidently there is a large amount of interest in futures trading but that interest is divided between position trading using longer term support and resistance levels with one or two trades a week and readers wanting to trade 5-10 times a day or more. The method of presentation also drew numerous comments. We were listing the trade suggestions in the Market Monitor which is viewed in real time by thousands of readers daily. Of those readers in the monitor who responded to our poll approximately 25% were interested in the futures trades. Once those trade suggestions began there was a considerable number of complaints by non-futures traders about the number of futures related posts. Unfortunately we cannot please everybody at the same time in the same medium. We have decided to implement a second "Futures Monitor" once we get the new Java application running smoothly. For those desiring either monitor they can select only the one they prefer or both in the same window. This will not happen next week. It is going to take several weeks to complete. During this period we would strongly appreciate your input on what you want to see in that window when completed. Do you want position trades? Intraday trading, Scalping opportunities? Do you want Emini S&P, Dow and Nasdaq combined or separate? How would you like to see the trade recommendations made? Obviously that differs by style of trading you prefer. We are assuming position traders would like advance planning the night before with intraday updates as the indexes move through the various trigger points. Intraday traders are likely to require fewer reasons why and just more action. You can see our problem. There are so many strategies available that adding them to the current market monitor was just not working. We want to give you the trading vehicle you desire. Unfortunately you must tell us exactly what you want. We do not want to build it only to have everyone complain that it does not fit their needs. You are in control. Decide what you want and send us a descriptive email with plenty of details. Do not be shy! The sooner everyone sends us their want list the sooner we can get it into production. Do it today while it is fresh in your mind. Send your comments and suggestions to: futures@OptionInvestor.com ------------------------------------------------------------------- Futures Wrap 11-01-2002 Until we get a better idea of exactly what you want the futures wrap will be more of just a recap of the days action and projected support and resistance levels for the next trading day. We will expand on the amount of content once we launch the Futures Monitor and begin offering trade signals again. Ready for Takeoff! The Microsoft news after the bell sent the futures through the roof. The Dow futures close the regular session at 8490 but rocketed in after hours to close at 8548 on the Microsoft news. The NDX futures closed at 1020 but BASED on the trading in the QQQ which finished in after hours at 25.75 the NDX would have traded to 1030. (25.75 x 40 = 1030) The S&P is poised to break well over its close at the 100 DMA of 898.50. A quick approximation of Monday's regular market open should see the S&P in the 912 area and the first resistance over the recent trading range. If there is any follow though short covering the next leg up could see a retest of the mid September highs around 927. This would be my ideal entry point for a short position before the Fed meeting as it is likely to hold and there should be plenty of profit taking before the Fed decision. I would not hold a short over the close of the meeting. S&P Futures Chart – Daily S&P Futures Chart - 30 min S&P Futures Chart – Intraday The NDX futures are poised to break the down trend resistance at 1033 at the open. Once broken I would look for resistance to appear in the 1050-1058 range with 1058 being strong resistance from the August highs. I would look to enter a short position at 1050 in anticipation of a pull back before the Fed meeting. NDX Futures Chart – Daily NDX Futures Chart - 30 min NDX Futures Chart – Intraday The Dow futures closed after hours at 8548 and very near the 8580 resistance from mid September. Once short covering begins this level should be broken but the stronger resistance at 8736 if touched should hold. I would look to enter a short position on any failure around the 8700 level. Dow Futures Chart – Daily Dow Futures Chart - 60 min Dow Futures Chart – Intraday Above all do not attempt to short the opening bounce. We have seen many times recently where the dips were bought when everyone expected a drop. The markets have a very high short interest, especially in the Nasdaq and like we saw on Friday they will not want to hold over the Fed meeting. Wait for an exhaustion top and a failure of the last intraday support level before initiating a position. This is one market where trying to pick a top could be very expensive. Jim Brown ******************** INDEX TRADER SUMMARY ******************** Russell? Is that you? The smaller caps as depicted by the Russell 2000 Index (RUT.X) 383 +2.66% were this weeks major index winner as the smaller caps gained 3% on the week in an attempt to catch up with the large caps. Technology stocks supplied the lift to have the NASDAQ-100 Index (NDX.X) 120 +2.98% post a 2.4% gain on the week, with other 4- lettered stocks and the very broad NASDAQ Composite (COMPX) 1,360 +2.3% recovering on Friday to post a 2.2% gain for the week. The very broad NYSE Composite (NYA.X) 480 +1.58% just barely eked out a gain of 0.2% for the week as Insurance, Retail, Home Construction, Healthcare and Forest Paper Products, all which are full of 1,2, and 3-letterd stocks saw their sectors fall during the week. A Friday rally in the Dow Industrials (INDU) 8,517 +1.4%, S&P 500 Index (SPX.X) 900 +1.7% and S&P 100 Index (OEX.X) 458 +1.54% was just enough to have these major indexes finishing the week with marginal gains of less than 1%. Almost in lockstep fashion, the market internals as measured by the bullish percent indicators inched higher. The NASDAQ-100 Bullish % ($BPNDX) finish Friday's session at 59%, and showing a net gain of 4 stocks to point and figure buy signals on the week. The also narrow S&P 100 Bullish % ($BPOEX) saw a net gain of 1 stock getting back on a p&f buy signal with a reading of 54% on Friday. The S&P 500 Bullish % ($BPSPX) inched higher to 50% on Friday, up from last Friday's 48.8% reading (net gain of 6 stocks to p&f buy signals). The very broad bullish % indicators saw the NASDAQ Composite Bullish % ($BPCOMPQ) finish the week at 36.31%, which was up from last Friday's 33.67% and NYSE Bullish % ($BPNYA) rise to 37.68, which was also higher from last week's 35.7% reading. The very narrow Dow Industrials Bullish % ($BPINDU) saw a net gain of 1 stock to a point and figure buy signal this week, with Friday's reading at 56.67%. While the major equity indexes didn't necessarily surge higher this week, they did manage gains despite a second straight week of buying in Treasuries. The benchmark 10-year December futures (ty02z) 114'080 -0.4% traded lower on Friday, but posted a 0.9% gain on the week, which had the 10-year YIELD ($TYX.X) falling to 3.977% compared to last Friday's 4.095% YIELD. Weekly Index/Sector Changes The Fiber Optic Index (FOP.X) was this weeks biggest sector gainer with the Networking Index (NWX.X) running a close second. It's continues to be stocks like Alcatel (NYSE:ALA) $5.30, which jumped 35% on the week and more than 100% from a 52-week low of $2 and once thought to be on the brink of bankruptcy and heavily shorted that are driving the sector action. Cisco Systems (NASDAQ:CSCO) $11.62, one of the few stocks that trades over $10, actually fell -1% on the week. Dow Industrials Chart - Daily Interval The Dow came close to trading 8,550, which would get its point and figure chart back on a buy signal. Look for Friday's favorable court ruling regarding Microsoft (NASDAQ:MSFT) $53.00 -0.87%, which had the stock surging to $56.33 in after-hours trading to boost the Dow above 8,550 and have 8,717 in play. Since were on the subject of MSFT, lets review the NASDAQ-100 of which MSFT is the largest weighted component. NASDAQ-100 Index Chart - Daily Interval NASDAQ futures tacked on another 2 points at 1,020.50 and traded as high as 1,024 after a federal judge endorsed Microsoft's antitrust settlement with the U.S. government and nine states in a victory for the software giant. Other software components saw VRTS $16.09 +5.5% adding 28 cents to $16.37, RATL $6.98 +5.43% gaining 12 cents to $7.10, PSFT $19.01 +5.02% adding 33 cents to $19.34, CHKP $14.25 +3.3% gaining 25 cents to $14.50, ADBE $24.47 +3.5% adding 46 cents to $24.93, and ORCL $10.14 -0.49% edging up 9 cents to $10.23. S&P 500 Index Chart - Daily Interval The SPX has traded sideways for the most part the past 10 sessions. Today's trade at 900 did have the SPX point and figure chart generating a buy signal and negating the previous bearish count. That action now has the vertical count turning bullish to 945, with the first sign of trouble on the p/f chart being a trade at 875. First "hurdle" to upper end of retracement and upper Bollinger Band would be the 909 level. With stochastics turning higher, bulls can look long, but expect some volatility into Wednesday's FOMC meeting. Risk management ahead of volatility says partial positions only. If holding a put, don't be opposed to creating a straddle with an offsetting call to get a trader through next week's FOMC meeting. S&P 100 Index Chart - Daily Interval Not unlike the S&P 500, the narrower S&P 100 Index (OEX) trades rather sideways between 440-460. That's a 4.5% range. If I were seeing some type of internal bullishness from the bullish % charts this week that vastly outweighed this weeks 0.7% gain, then I'd be more bullish. As it is, I have to wait for the bearish resistance trend to be broken and a trade at 465 to get me moving into a new bullish trade here. Summary: One thing I'm noting after this weeks trading is this. The gains in the beaten down telecom equipment sectors like Networking, Wireless, Fiber Optic aren't coming from Cisco Systems (CSCO) or Qualcomm (QCOM), which both lost marginal ground this week. The gains are coming from the stocks that are promising they'll be positive cash flow or earnings by the end of next year that have been trading under $5 and seeing a lot of short-covering. One can see and no longer wonder why the QQQ or NASDAQ-100 is up "only" 2.4%, when the telecom equipment indexes are up 17%, 11%, 18%. We've talked about NDX and QQQ weightings and the stocks that have any weighting like CSCO and QCOM aren't seeing euphoric percentage gains. Institutions are "old hat" in that they aren't going to load up the portfolios in many of these telecom service stocks where debt levels remain very high. In our October 20th Index Wrap http://members.OptionInvestor.com/itrader/marketwrap/102002_1.asp I thought the Russell 2000 Index (RUT.X) might be the "outperformer" to the upside on a risk/reward basis. One of the reasons I thought that way was that it would perhaps be less shorted and look to close in on some of the larger caps that had moved ahead a greater percentage in weeks prior. What we're kind of seeing right now is the larger caps, as depicted by the Dow Industrials (INDU), S&P 500 (SPX.X) and S&P 100 (OEX.X) stall out a bit. At the same time, we could explain this "stalling out" with Treasuries seeing buying again this week. Meanwhile the NASDAQ Composite and NASDAQ-100 are seeing a little more bullishness. Hey, it's great that MSFT is doing well, but isn't this a stock we've thought a trader could go long while short/put the NDX or QQQ? Yes it is. But until this evening in after-hours, even "Mr. Softee" had been stuck in a range. The gains found for the most part have been coming from the bottom of the pile, not necessarily from the larger technology components that would stand to benefit first from certain sector recoveries. The bullishness in all this? Bears are covering for one of two reasons in the bottom heap of the technology pile. I'm thinking the reason for this not necessarily because they "fear" a huge turn in fundamental fortune (reason #1), but that BIG bearish gains are at risk (reason #2) and not unlike the Russell-2000 Index, there is some distance to be closed between a stock like Ciena (CIEN) $4.37 +18.75% and Cisco (CSCO) $11.62. Tuesday is election day, so don't forget to get out there and vote! Normally, this would be a rather calm session, but on Wednesday, we'll have the FOMC decision on interest rates and Cisco Systems' earnings after the bell. This will bring some near-term uncertainty and anxiousness into the markets, and with uncertainty, a trader expects volatility. I learned a long time ago that I don't need to trade. In the past week, I've run about 2 options trades and still hold them (call and put), but multiple short-term trades in stocks where I can limit my capital exposure to short-term and dodge extended uncertainty. Heck, I think we hit two nice trades in PSFT and RATL software in today's market monitor, and both of those from time of profile look to outpace this weeks major index gains. If you're trading some Index options and not liking the way things are going, then move to the sidelines or get the position down to a size where you can sleep through some of the uncertainty of "what's the Fed going to do," or "what's this company going to say when they report earnings." I don't know about you, but I could really care less what the Fed does on Wednesday and I can't wait until we get past it. Heck, all I have to do is turn on CNBC for 5-minutes, listen to two different economists or analysts and understand there is varying opinion on "this would be good" or "this would be bad" comments regarding certain Fed action. Many times it is regarding the SAME type of Fed action. Funny thing is, both arguments will make sense. I talked about this weeks potential lower risk/high reward type trade in the 30-year Calls in today's 11:00 Update. It's not too different than my thinking regarding the Russell-2000 Index a couple of weeks ago. Note that I profiled MARCH expiration on this LONG-TERM bond's YIELD and ONLY 1/2 position. This gets me some exposure BEFORE the Fed meeting, but PLENTY OF TIME to eventually ascertain a market response from the FOMC meeting on Wednesday. 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 ************** Free Money With the Microsoft news after the bell on Friday it appears the stock will rocket at the open on Monday. It traded up over $3 in after hours. I heard two analysts who expected it to reach $70-$75 very quickly. Possibly in the next two weeks. With the four year antitrust cloud now cleared the stock has huge unrecognized value. This company is making far more money now than they were $120 in Jan-2000. They are executing on all fronts and are now free to take on all comers. While everyone I heard spoke in glowing terms I think the stock has serious resistance at $70 and that should slow any runaway inflation of the price. How to profit. First, buying calls at the open is not going to cut it. The premiums are going to be huge So lets use that to our advantage. I have three suggestions. Covered call: Buy the stock at the open and write the November $60 covered call. I am estimating the stock to be $57.00 and the call to be $2.00. That is a pure guess on my part. The odds are very good you will be called away two weeks from now for a $5 profit. That is a 17% profit based on $28.50 margin. The worst case would be a close under $60 and a chance to do t again next month. You could also buy the stock at the open and wait until Tuesday for expectation to be factor in and then sell the December $65 or $70 call depending on your expectations and if called your profit could be significantly higher. Naked put: Since the expectations are for a rapid increase in the stock price over the next couple months there is a very good case for selling naked puts. You will get dollar for dollar price appreciation in the form of premium reduction. Using numbers from Fridays close the puts look like this: Stock at close = $53.00 ($56.30 in after hours) Nov $55 = $ 3.10 (Monday estimated open = $ 1.50) Nov $60 = $ 6.80 (Monday estimated open = $ 4.30) Nov $65 = $11.60 (Monday estimated open = $ 9.50) Nov $70 = $16.50 (Monday estimated open = $14.50) Dec $55 = $ 4.10 (Monday estimated open = $ 2.50) Dec $60 = $ 7.50 (Monday estimated open = $ 5.50) Dec $65 = $11.80 (Monday estimated open = $ 9.80) Dec $70 = $16.60 (Monday estimated open = $14.50) Dec $75 = $21.50 (Monday estimated open = $20.00) If we assume a target price by November expiration of $65 then the only November put to have value at expiration would be the $70 at $5.00. This means that ANY November put sold would expire worthless for a full profit except for the $70 which would need to be repurchased for $5.00. Selling the November $70 put would give you the maximum profit potential and you would have to give back only the unused portion of the premium upon expiration. For every penny MSFT appreciated your put premium would depreciate by a penny. Personally I would rather only sell front month puts but this close to expiration I would have no problem selling the December $75 put for the estimated $20.00 premium. The only worry you have is where MSFT closes in December and anything over $57 (estimated Monday price) is profit to you. If it appreciated to the full $75 price that would be a $20 profit. Bull Put Spread: Since everyone does not have naked writing capability there is another way to accomplish the same thing. That is with a Bull Put Spread. That means you will buy a lower strike put for protection and then sell short a higher put. This does not require naked permission and can be just as profitable. Using the November example and the estimated prices for Monday you could do the following: Buy Nov $55 put (estimated open = $1.50) Sell Nov $70 put (estimated open = $14.50) If MSFT appreciated to $68 by the Nov expiration then you would buy back the $70 put for $2.25 (est) and the Nov $55 put would expire worthless. Your profit would be $14.50 - $1.50 - $2.25 = $10.75 Using the December options: Buy Dec $55 put (estimated open $2.50) Sell Dec $75 put (estimated open $20.00) If MSFT appreciated to $73 by the Dec expiration then you would buy back the $75 put for $2.25 (est) and the Dec $55 put would expire worthless. Your profit would be $20.00 - $2.50 - $2.25 = $15.25 The risk on these spreads is that you could be exercised on the short put and end up with stock in your account. As long as you sold the stock and resold the short put at the open if that happened you would be right back where you started with a minimal loss of only a few cents from the spreads. Microsoft Chart SMH Ladder Recap (see last Sunday's Editors Plays for setup) Boy that was exciting! The Market gapped open last Monday and then fell on Tuesday to take all the time value out of the options. After blowing through the 24.00 to the 24.50 level at the Monday open it did not trigger the remaining positions until Friday afternoon. After the drop on Tuesday I had written the entire play off until it suddenly caught fire on Friday. If you were not scared away from the play on the Tuesday drop these should approximate the fill numbers on the various levels. Buy 10 NOV $22.50 PUTS @ $24.00 (est price $.93) actual .75 Buy 10 NOV $22.50 PUTS @ $24.50 (est price $.80) actual .75 Buy 10 NOV $22.50 PUTS @ $24.75 (est price $.73) actual .55 Buy 20 NOV $22.50 PUTS @ $25.00 (est price $.66) actual .50 If you were filled at the prices in effect when the SMH levels were touched then your average price was .61 for a total investment of $3,050. It has a current value of $2,000. (.40) The insurance on the trade was the Nov-$26 call on the QQQ. Those calls traded for $.55 or less within 10 min of the open on Monday before depreciating significantly on Tuesday's drop. They came roaring back on Friday and with the QQQ only .75 cents below $26 they closed at $.55 again on Friday. If you bought 40 contracts at the open on Monday you spent $2200. If you completed both sides of the trade you have somewhere in the $5,250 range invested with a value today of $4,500. Now is where the fun starts. The object of the game is to sell the QQQ calls when they reach their peak next week. The object is to recover as much money from the calls as possible to offset the premium in the SMH puts. We are assuming there will be profit taking in the SMH soon. Probably after the Fed meeting. I would also assume the QQQ would rocket on Monday since Microsoft was up over $3 in after hours on Friday. This could rocket the QQQ over the $26 resistance to the $27 range if the rest of the tech sector joins in the fun. Short covering should kick in and $28 is possible. At $27 the call should be worth $1.65 to $1.75. For 40 contracts the total is $6600 @ $1.65. This is well over what you paid for the total position and your SMH puts are now free. It is up to you when to sell the calls but remember the bird in the hand concept. If you decided to hold over the Fed meeting an CSCO earnings you could be handsomely rewarded or very disappointed. I always suggest taking a profit when offered. If we do get a strong short covering rally on Monday that closes at the high of the day I would probably look for follow through on Tuesday morning and follow them up with a trailing stop to capture the most gains. Once sold we will look for profit taking in the semiconductor sector after the Fed meeting and Cisco's earnings. The target price on the SMH puts should be in the $22-22.50 range but depending on the early week gains that may be too optimistic. The Fed and CSCO will control our fate. This is why you need to sell the QQQ for enough to cover all costs if possible. That leaves us with a free lottery play on the SMH. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Who Needs Logic? by Steven Price Bad news, pretty much all around, continued to lift the markets. Sound like an oxymoron? Not when investors are hoping for a rate cut. With the FOMC meeting on Wednesday, the bulls got more of what they wanted today. Personal Income rose less than expected, at 0.4%, while personal spending declined more than expected, at -0.4%. Nonfarm payrolls saw an unexpected decline, and the hourly workweek and hourly earnings also came in under consensus. The ISM manufacturing index continued to show contraction and came in worse than expected, as well. The one positive was the unemployment rate, which was 0.1% better than the consensus. The news was bad enough to more than justify a rate cut, IF that is what the FOMC is planning. While it is not a sure thing, the Fed Funds futures are predicting a cut of at least 25 basis points by the end of the year. The close of 98.605 (100-98.605 = 1.395; this is more than .25 less than the current rate of 1.75) actually indicates a cut of more than 25 points. We got a healthy rally of 120.61 Dow points, 30.95 Nasdaq points and 15.20 SPX points. While the Dow remains rangebound between 8200 and 8550, the SPX achieved its first close over 900 since 9/11. The Nasdaq also broke above recent resistance at 1350, managing to close at 1360.70. The news of Microsoft's settlement after hours brought with it a tech rally and if the bulls aren't scared off after digesting the economic data over the weekend, we could see more buying on Monday. Microsoft traded up more than $3 after the bell. As both a Nasdaq and Dow stock, it could lift the Dow through 8550 resistance. If there is any tech stock that can lead a sustained rally, it would be Mr. Softie. While the market action looks bullish, today's rally did fade into the end of the day. It also seems irrationally exuberant (to borrow from Sir Alan), given the economic data. I'd like to think the rally is a result of the numbers being not as bad as we thought they would be, but the fact that they were below consensus estimates tells me otherwise. Another rate cut may help business investment, but I am skeptical after the last 11 cuts did little good. Of course, I may be wrong about the last statement, as Fed watchers may say we'd be much lower without them. In any case, a rally may continue through Wednesday, but without a cut of more than 25 basis points, it seems that the economic data should overwhelm any sense of euphoria. For now, I'll go along for the ride, but a Dow over 8550 would make me more comfortable with a full deck of long plays. I have been targeting SPX 900 for several weeks now, as confirmation of a rally. While my inner bear still tells me things don't look so hot, I got what I asked for, so I'll trade what I see. The retail sector got a reprieve from the sell-off of the last couple of days. That seems odd, given the decrease in personal spending, poor Consumer Confidence and reduction in payrolls. The bounce was minor, so I am expecting renewed selling in the sector, whether it comes on Monday, or Wednesday afternoon. The semiconductors set another relative high, with the Semiconductor Index (SOX) cruising back up through 300, and past resistance at 310 as well. While I'm still trying to figure out who is betting on the sector, I'll go along for the ride until it ends. Which logic tells me should be soon. Of course logic dictated the average remain in the low 200s, as well. This is not the first time the market has rallied on bad news ahead of a rate cut that was not entirely set in stone. In fact, this type of action has been common in the past. The tricky part is figuring out what will happen after the news is out. It is a trader's axiom to fade the first move after the announcement. That works much of the time, but the second move is usually less predictable. After this week's numbers, I will be looking to short a rally, and then close on the pullback. Beyond that I'll stick to what I see, and hope logic doesn't get in the way. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7286 Current : 8517 Moving Averages: (Simple) 10-dma: 8432 50-dma: 8189 200-dma: 9293 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 900 Moving Averages: (Simple) 10-dma: 891 50-dma: 869 200-dma: 1002 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1019 Moving Averages: (Simple) 10-dma: 982 50-dma: 914 200-dma: 1163 The Semiconductor Index (SOX.X): The SOX continues to seek out new highs. It got back above resistance at 300 and broke through the next level at 310. Until we see a turnaround of the current trend we'll stay away from expensive shorts in the sector. The Editor's Plays from last Sunday recommended buying puts on the way up, and certainly the earnings results have been bad enough from the sector to justify the saying "buy them when you can, not when you have to." The 46% gain since October 9 seems unsustainable and unjustifiable. However, it is continuing. When the music stops it could be a long way down, so be very careful when playing long in this group. 52-week High: 657 52-week Low : 214 Current : 282 Moving Averages: (Simple) 10-dma: 288 50-dma: 270 200-dma: 428 Market Volatility The VIX slid today on the market rally. While there is still plenty of downside room if we get a sustained, long term rally (I have traded the VIX under 20 on numerous occasions in upward trending markets), I doubt it will get below 30 before the Fed interest rate announcement on Wednesday. Heading into next week's events, with elections and the FOMC meeting, we got a surprising number of weekend premium sellers. If anything, I might be buying premium at these levels, in anticipation of some big swings next week. CBOE Market Volatility Index (VIX) = 33.98 –1.93 Nasdaq-100 Volatility Index (VXN) = 49.86 –3.13 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.71 596,692 426,509 Equity Only 0.56 468,903 264,578 OEX 0.93 26,791 24,923 QQQ 0.51 72,632 37,085 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 38 + 1 Bull Confirmed NASDAQ-100 59 + 4 Bull Alert Dow Indust. 57 + 0 Bull Confirmed S&P 500 50 + 1 Bull Alert S&P 100 54 - 4 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 1.21 10-Day Arms Index 1.03 21-Day Arms Index 0.99 55-Day Arms Index 1.27 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 1991 741 NASDAQ 2129 1018 New Highs New Lows NYSE 30 39 NASDAQ 48 58 Volume (in millions) NYSE 1,766 NASDAQ 1,832 ----------------------------------------------------------------- Commitments Of Traders Report: 10/29/02 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 loaded up slightly on both sides of their position, adding 5,000 long and short contracts. Small traders treated their positions similarly, adding 3,000 contracts to both sides. Commercials Long Short Net % Of OI 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%) 10/29/02 437,565 468,557 (30,992) (3.4%) 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 10/08/02 131,486 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% 10/29/02 137,740 75,587 62,153 29.1% 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 left positions virtually the same, with a slight reduction to the long side and a slight increase to the short side. Small traders added less than 1,000 contracts to both sides. Commercials Long Short Net % of OI 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%) 10/29/02 47,837 55,261 (7,324) ( 7.1%) 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 10/08/02 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 6.6% 10/29/02 10,584 9,419 1,165 5.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials kept the status quo here, as well, reducing the net long position by 300 contracts, of 0.4% of open interest. Small traders increased longs by 1,200 and shorts by 2,000. Commercials Long Short Net % of OI 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% 10/29/02 21,800 13,337 8,463 24.1% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 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%) 10/29/02 5,602 11,090 (5,488) (32.9%) 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 *************** An Expanded View by Steven Price Question: I would like for you to analyze QLGC. It is a stock that moves nicely. It has had almost a 100% move since Oct 7. It can't sustain that rate. I should have gone long at $20 but didn't. It's always easy to see in hindsight. I haven't been able to find another entry point. Don't want to get on the chopping block now. What kind of pullback might we see? Thank you, Denise Answer: I thought this would be a good time to look at one of the most confounding sectors in the marketplace recently - the chip stocks. QLogic (QLGC) is one of the few stocks in the sector to post an earnings surprise to the upside, beating estimates by $0.02 on October 16. Bear Stearns then raised profit targets for 2003 and 2004, citing the company's "superb" quarterly earnings. The stock has soared from a low of $19.97 on 10/09 to Friday's close of $37.15, for a gain of 86% in 3 weeks. The story here is really more about the sector. The Semiconductor Index (SOX.X) has had a similar meteoric gain, beginning on the same day, and taking most of the stocks in the sector right along with it. I was one of the biggest bears in this sector throughout most of the summer and fall. I was somewhat startled by the sudden turnaround, given the fact that most of the stocks in the sector were still reporting a slowdown in IT spending. As earnings crept out of the group the last two months, many companies in the storage and chip sectors continued to predict decreases in revenue in coming quarters and said they would be reducing capital spending. Sun Microsystems alone reduced its capital spending for 2003 by 75%, taking $1.5 billion out of the money stream. Many of these companies also said they lacked the visibility to see a turnaround any time soon. We stopped playing the sector short as soon as we got a break in the trend of lower highs, and have been on the sidelines since. This is mostly because it is hard to go long in a sector with decreasing revenues and we certainly don't want to short a rising sector and try to catch a falling knife. Many readers have been emailing me in disbelief of the recent run in the SOX, and asking if it is time to short the chip stocks yet. While the 46% gain since 10/09 seems unbelievable, let's look back through the year and see just where we came from. The SOX closed at 522.16 on December 31, 2001. It traded as high as 637.94 on March 8. That leaves us off 40% for the year and 51% down from the year's high, at the current level. The Index traded as low as 209, with a close of 214 on October 9. At that closing price, the SOX was off 59% for the year, and 66% from its March high. My point is that while it may seem that we have seen an unsustainable increase in value, what we may be seeing is a rebound to more reasonable levels, considering the massive drop. Chart of the SOX A look at the point and figure chart also shows an interesting story. The SOX has a nicely defined upward trend. While it looks as though it is due for a pullback from the upper end of its channel, it remains on a buy signal. What is even more interesting is that the current bullish vertical count is actually 396, with bearish resistance at 364. These would also indicate a lot of upside room to the current move. Those traders looking to go long the sector can look to the PnF for reassurance. However, I am not endorsing long trades here. It still seems as though the sector is seeing decreased spending and limited visibility for a rebound. The recent earnings numbers may not have been as bad as expected; however, they were anything but good. I am really just making a point to the shorts out there (who seem reluctant to step out of the way) that the sector is not turning over, and it may not do so for a while. If and when it does, make room for me on the bandwagon, because I'm coming aboard. Point and Figure chart of the SOX The wild card here is the current market rally. While it seems that we are only rallying ahead of a possible rate cut, there was an increase in equipment spending buried in the disappointing GDP report. If the market does sell-off following the FOMC announcement Wednesday, then the above analysis may be all for nothing. However, we need to wait for that to happen before risking too much capital to the short side. I realize the original question had to do with QLogic, but I believe it will move in concert with the SOX, as will most of the chip sector. Therefore, any investor considering individual stocks in the group can refer to the above analysis for my outlook. Thanks for all of your suggestions. For those I didn't address in today's column, look for my comments on the Market Monitor. Please send your questions and suggestions to: Contact Support ************* COMING EVENTS ************* ========================================= Market Watch for the week of October 21st ========================================= ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ABN ABN Amro Holdings Mon, Nov 4 Before the Bell N/A ACDO Accredo Health Mon, Nov 4 Before the Bell 0.36 AFG American Fin Group Mon, Nov 4 Before the Bell 0.62 ATH Anthem, Inc. Mon, Nov 4 Before the Bell 0.99 AIV Apartment Inv & Man Mon, Nov 4 After the Bell 1.09 CHK Chesapeake Energy Mon, Nov 4 After the Bell 0.10 CHD Church & Dwight Co. Mon, Nov 4 Before the Bell 0.39 DTE DTE Energy Company Mon, Nov 4 -----N/A----- 0.76 FHCC First Health Group Mon, Nov 4 Before the Bell 0.32 FSH Fisher Sci Intl Mon, Nov 4 After the Bell 0.49 KEG Key Energy Services Mon, Nov 4 Before the Bell 0.02 MLS Mills Corporation Mon, Nov 4 Before the Bell 0.75 OGE OGE Energy Mon, Nov 4 Before the Bell N/A PRE PartnerRe Ltd. Mon, Nov 4 After the Bell -0.63 PIXR Pixar Anime Studios Mon, Nov 4 After the Bell 0.74 RA Reckson Ass Rlty Corp Mon, Nov 4 After the Bell 0.60 REG Regency Centers Corp Mon, Nov 4 After the Bell 0.69 RYAAY Ryanair Holdings Mon, Nov 4 -----N/A----- 0.63 STO Statoil ASA Mon, Nov 4 Before the Bell 0.19 TLD TDC A/S Mon, Nov 4 Before the Bell N/A TU TELUS Mon, Nov 4 Before the Bell 0.05 TRZ Trizec Properties Mon, Nov 4 After the Bell 0.48 VRTX Vertex Pharm Inc Mon, Nov 4 After the Bell -0.30 ------------------------- TUESDAY ------------------------------ ALS Alstom SA Tue, Nov 5 Before the Bell N/A AMH AmerUs Group Co. Tue, Nov 5 After the Bell 0.90 BJS BJ SVCS CO Tue, Nov 5 Before the Bell 0.21 BAB British Airways Tue, Nov 5 Before the Bell N/A GIB CGI Group Tue, Nov 5 Before the Bell N/A CSC Computer Sci Corp Tue, Nov 5 After the Bell 0.54 CEI Crescent Rl Est Eq Co Tue, Nov 5 Before the Bell 0.43 EMR Emerson Electric Tue, Nov 5 -----N/A----- 0.61 ECA EnCana Corporation Tue, Nov 5 -----N/A----- N/A EQR Equity Residential Tue, Nov 5 During the Market 0.60 EXPD Expeditors Intl WA Tue, Nov 5 Before the Bell 0.28 FOX Fox Entertainment Grp Tue, Nov 5 After the Bell 0.09 GRP Grant Prideco Inc Tue, Nov 5 Before the Bell 0.02 HRC Healthsouth Tue, Nov 5 -----N/A----- 0.21 HSIC Henry Schein Tue, Nov 5 Before the Bell 0.72 ICOS ICOS Corporation Tue, Nov 5 After the Bell -0.57 CLI Mack-Cali Realty Corp Tue, Nov 5 Before the Bell 0.90 MBI MBIA Inc. Tue, Nov 5 Before the Bell 1.07 MET MetLife Inc. Tue, Nov 5 After the Bell 0.60 MRH Montpelier Re Hldng Tue, Nov 5 After the Bell N/A PDS Precision Drill Corp Tue, Nov 5 Before the Bell 0.12 PRU Prudential Finl Tue, Nov 5 After the Bell 0.49 SPI Scottish Power Tue, Nov 5 -----N/A----- N/A SHU Shurgard Strge Cen Tue, Nov 5 Before the Bell 0.78 TEM Telefonica Moviles Tue, Nov 5 Before the Bell N/A NWS The News Corp Lmtd Tue, Nov 5 After the Bell 0.10 TOC The Thomson Corp Tue, Nov 5 -----N/A----- 0.34 ----------------------- WEDNESDAY ----------------------------- AW Allied Waste Ind Wed, Oct 30 After the Bell 0.27 DOX Amdocs Limited Wed, Nov 6 After the Bell 0.17 ARM ArvinMeritor, Inc. Wed, Nov 6 Before the Bell 0.60 BDX Becton, Dick & Co. Wed, Nov 6 After the Bell 0.53 BNN Brascan Corporation Wed, Nov 6 After the Bell N/A VNT C. A. Nac Tele Ven Wed, Nov 6 -----N/A----- N/A CLU Canada Life Financial Wed, Nov 6 -----N/A----- 0.47 CED Can Nat Resources Wed, Nov 6 Before the Bell 0.66 CFFN Capitol Federal Finl Wed, Nov 6 -----N/A----- 0.30 CEPH Cephalon, Inc. Wed, Nov 6 After the Bell 0.28 CSCO Cisco Systems Wed, Nov 6 After the Bell 0.13 CMLS Cumulus Media Inc. Wed, Nov 6 -----N/A----- -0.02 DVA DaVita Wed, Nov 6 Before the Bell 0.44 EVC Entrvsns Comm Corp Wed, Nov 6 After the Bell 0.00 FLR Fluor Corporation Wed, Nov 6 After the Bell 0.55 MME Mid At Med Services Wed, Nov 6 After the Bell 0.49 NAB National Aus Bank Wed, Nov 6 After the Bell N/A RL Polo R. Lauren Corp Wed, Nov 6 Before the Bell 0.51 PFG Principal Finl Group Wed, Nov 6 Before the Bell 0.52 SHPGY Shire Pharm Group Wed, Nov 6 Before the Bell 0.35 TMPW TMP Worldwide Inc. Wed, Nov 6 After the Bell 0.14 UNM UnumProvident Corp Wed, Nov 6 After the Bell 0.64 WPI Watson Pharm Inc. Wed, Nov 6 Before the Bell 0.42 HLTH WebMD Wed, Nov 6 After the Bell 0.05 ------------------------- THURSDAY ----------------------------- AET Aetna Thu, Oct 31 Before the Bell 0.70 AEG AEGON N.V. Thu, Nov 7 -----N/A----- 0.26 BRL Barr Laboratories Thu, Nov 7 Before the Bell 0.86 BRG BG Group Thu, Nov 7 -----N/A----- 0.24 BTY BT Group Plc Thu, Nov 7 Before the Bell N/A CVC Cablevision Sys Corp. Thu, Nov 7 Before the Bell -1.36 CRE Carramerica Realty Thu, Nov 7 After the Bell 0.85 CZN Citizens Comm Co. Thu, Nov 7 After the Bell -0.02 CNA CNA Financial Corp Thu, Nov 7 Before the Bell 0.56 DF Dean Foods Thu, Nov 7 Before the Bell 0.69 DEG Delhaize Group Thu, Nov 7 -----N/A----- N/A DVN Devon Energy Corp Thu, Nov 7 -----N/A----- 0.66 ENB Enbridge Inc. Thu, Nov 7 -----N/A----- N/A GFI Gold Fields Limited Thu, Nov 7 Before the Bell 0.14 HAL Halliburton Company Thu, Nov 7 Before the Bell 0.21 HCC HCC Insurance Hldngs Thu, Nov 7 After the Bell 0.47 HIW Highwoods Properties Thu, Nov 7 After the Bell 0.87 IGT Intl Gaming Tech Thu, Nov 7 -----N/A----- 0.92 JBLU Jetblue Airways Corp Thu, Nov 7 Before the Bell 0.28 KTC Korea Telecom Thu, Nov 7 Before the Bell N/A LTR Loews Corp. Thu, Nov 7 Before the Bell 1.47 MGA Magna Intl Inc. Thu, Nov 7 -----N/A----- 1.19 MTD METTLER TOLEDO Thu, Nov 7 -----N/A----- 0.50 PSC Philadelphia Suburban Thu, Nov 7 Before the Bell 0.29 PCO Premcor U.S.A. Thu, Nov 7 -----N/A----- -0.31 REY REYNOLDS & REYNOLDS Thu, Nov 7 Before the Bell 0.43 ROK Rockwell Automation Thu, Nov 7 -----N/A----- 0.26 RSA Royal & Sun All Ins Thu, Nov 7 Before the Bell N/A SPP Sappi Limited Thu, Nov 7 -----N/A----- 0.28 TI Telecom Italia Thu, Nov 7 -----N/A----- N/A TRLY Terra Lycos Thu, Nov 7 During the Market -0.06 MNY The MONY Group Inc. Thu, Nov 7 Before the Bell 0.11 TRMS Trimeris, Inc. Thu, Nov 7 Before the Bell -1.25 UVN Univision Comm Thu, Nov 7 After the Bell 0.07 DIS Walt Disney Thu, Nov 7 After the Bell 0.11 ------------------------- FRIDAY ------------------------------- BSY Brit Sky Bradcstg Grp Fri, Nov 8 -----N/A----- N/A CEP Centerpulse AG Fri, Nov 8 -----N/A----- N/A EP El Paso Corp. Fri, Nov 8 Before the Bell 0.27 FS Four Seasons Hotels Fri, Nov 8 Before the Bell 0.16 HEW Hewitt Associates Fri, Nov 8 Before the Bell 0.26 IFX Infineon Tech Fri, Nov 8 -----N/A----- - 0.09 ORH Odyssey Re Hldngs Fri, Nov 8 After the Bell 0.31 PBR Pet Bras Petrobras Fri, Nov 8 -----N/A----- 0.63 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CPBI CPB Inc. 2:1 Nov. 8th Nov. 12th -------------------------- Economic Reports This Week -------------------------- Will they or won't they? There is still a steady stream of late third quarter earnings reports to keep the brokerage houses busy and stocks moving as they miss or beat the numbers. Yet the BIG focus this week will be the FOMC meeting on Wednesday. Will they cut, if so by how much, or will they stand pat? ============================================================== -For- Monday, 11/04/02 ---------------- Factory Orders (DM) Sep Forecast: -3.0% Previous: 0.0% Tuesday, 11/05/02 ----------------- ISM Services (DM) Oct Forecast: 53.0 Previous: 53.9 Wednesday, 11/06/02 ------------------- FOMC meeting (AB) Thursday, 11/07/02 ------------------ Initial Claims (BB) 11/02 Forecast: NA Previous: 410K Productivity-Prel (BB) Q3 Forecast: 4.2% Previous: 1.5% Wholesale Inventries(BB)Sep Forecast: 0.3% Previous: 0.2% Employment Cost Index(DM)Q3 Forecast: 0.9% Previous: 1.0% FOMC Minutes (AB) 09/24 Consumer Credit (AB) Sep Forecast: $5.0B Previous: $4.2B Friday, 11/08/02 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* SWING TRADE GAME PLAN ********************* Trend Change! After struggling for two weeks to hold support while trending lower the markets did exactly the opposite of what most traders expected on Friday. Instead of selling off on mutual fund dumping and bad economic numbers the markets rallied instead and closed at the high of the day. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. 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The Option Investor Newsletter Sunday 11-03-2002 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: ERTS Put Play of the Day: LOW Dropped Calls: None Dropped Puts: HIG ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AZO 87.90 -3.14 1.19 -0.18 1.75 1.65 Running ERTS 66.08 -4.58 0.15 1.41 –0.38 –1.70 New, back again FCS 13.30 -0.74 0.22 0.75 0.90 2.50 nice start FRX 100.18 -0.45 1.08 1.00 –1.01 2.03 over $100 INTU 54.01 -0.89 -0.06 1.30 0.93 3.71 New, breakout TRMS 53.92 0.35 0.37 1.35 –0.43 2.77 approval soon WPI 28.34 0.40 0.98 0.29 –0.31 2.14 new base PUTS BAX 24.22 0.07 -0.96 -1.64 –0.35 –3.43 New, consistency HIG 41.10 -1.70 -3.00 -1.83 –0.67 –8.00 Drop, gapped IP 35.19 -0.55 -0.23 -0.40 –0.56 –1.48 new resistance LEH 54.57 -1.13 -0.58 -0.01 –1.89 –2.18 better entry LOW 42.10 -1.37 1.20 -0.77 –1.22 –2.00 bad numbers NTRS 35.63 -0.08 -1.12 0.11 –0.80 –1.07 market bounce RTH 75.43 -2.11 0.15 -0.64 –1.36 –3.82 spending down SPW 42.82 -2.26 -1.44 0.24 0.66 –1.88 small bounce ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* ERTS - Electronic Arts - $66.08 +0.96 (-1.53 for the week) See details in play list Put Play of the Day: ******************** LOW - Lowe's Companies - $41.73 -1.22 (-2.12 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 ^^^^^ None PUTS ^^^^ HIG $41.10 (-6.78) While a large part of HIG's rise on Friday can be attributed to the broad market rebound, the fact that the stock rebounded more than 4% on volume 70% above the ADV hints that perhaps the buying was more than just an oversold bounce. While our stop at $42.50 hasn't yet been violated, we want to get out of the way on the off chance that Financial stocks continue to be in favor between now and the FOMC meeting on Wednesday. Trader's currently in the play can continue to hold for another decline, but need to abide by their stops. We don't advocate initiating new positions here, and would use any decline early next week as an opportunity to exit the play. *********** 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 11-03-2002 Sunday 3 of 5 In Section Three: New Calls: ERTS, INTU Current Calls: WPI, TRMS, AZO, FCS, FRX New Puts: BAX ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** ERTS - Electronic Arts - $66.08 +0.96 (-1.53 for the week) Company Summary: Electronic Arts, headquartered in Redwood City, California, is the world's leading interactive entertainment software company. Founded in 1982, Electronic Arts posted revenues of more than $1.7 billion for fiscal 2002. The company develops, publishes and distributes software worldwide for the Internet, personal computers and video game systems. EA markets its products under four brand names: EA SPORTS(TM), EA GAMES(TM), EA SPORTS BIG(TM) and EA.COM(SM). (source: company release) Why We Like It: Electronic Arts has been a tricky stock to trade through earnings season. The last time we played the stock, fellow game maker THQI warned that it expected soft demand for game consoles during the holiday season. In spite of the fact that analysts expressed the opinion that THQI's warning was due its game line-up, and shouldn't affect ERTS's strong fundamentals, nervous investors sold off stocks in the sector, taking ERTS down to its bullish support line on the point and figure charts. However, ERTS released earnings 2 days later, which not only surpassed expectations, but doubled them. The company earned $0.34 per share, versus expectations of $0.17. Net revenue was up 89% from the previous year, on the strength of games like Madden 2003, Medal of Honor and the Sims. The company raised guidance, and analysts said the strong results showed that game sales during the holiday season were not being squeezed by the slow economy. While that may seem to be a stretch of logic, ERTS numbers support the view for at least this company. ERTS will be not only the first game maker to post quarterly revenues of $1 billion, but that total is more than the yearly revenues of its closest competitor. Each of the stocks recent pullbacks has found support at the bullish support line on the PnF chart, and this was no exception. Four of the last six rebounds have also taken it above the previous high. The stock has experienced a four-box reversal off the bounce and our target on the play is at least the recent high of $73. With the holiday shopping season approaching, we expect ERTS to continue to post solid numbers. For whatever reason, its product has sold through tough economic times and recent guidance indicates that trend has not changed. One of the reasons it cites for this is the fact that many of its customers are in the 21 and over age bracket. This helps them appeal to consumers with jobs, as opposed to just the kids who are dependent on parents' generosity during the holidays. The stock recently broke back above the 50-dma of $65.03 and then found support there the last two days. We like that breakthrough for entries at this level, and will hang our hats on the stock once again. Place stops below recent support at $61. *** November contracts expire in 2 weeks *** BUY CALL NOV-65*EZQ-KM OI= 3492 at $2.80 SL=1.40 BUY CALL NOV-70 EZQ-KN OI= 10929 at $0.70 SL=0.00 BUY CALL DEC-65 EZQ-LM OI= 2769 at $5.10 SL=2.50 BUY CALL DEC-70 EZQ-LN OI= 8168 at $2.65 SL=1.30 Average Daily Volume = 4.93 mil --- INTU – Intuit Inc. $54.01 (+4.08 last week) Company Summary: Intuit is a provider of small business, tax preparation and personal finance software products and services that simplify complex financial tasks for small businesses, consumers and accounting professionals. The company's principal products and services include small business accounting and business management solutions, including its QuickBooks line of products and services, as well as the Intuit line of industry-specific business management solutions, TurboTax consumer tax products and services and Quicken personal finance products and services. Why We Like It: Watching the market internals on a daily basis makes it clear that the recent rally isn't proceeding from a broad base. New yearly lows are still outpacing new yearly highs, and volume is far from convincing. So when you do find a stock that is breaking out to new 52-week highs on strong volume, it makes you stand up and take notice. Two weeks ago, shares of INTU stunned traders by hitting a new high at $52, and believe it or not, they pulled off a repeat performance on Friday by scaling the $54 level. Volume ran about 20% over the ADV too, so we seem to have a stock that is under accumulation. Already on a PnF Buy signal with a price target of $74, Friday's gain underscored the stock's bullish tone with another double-top breakout. To be sure, the price action has been rather volatile of late, but so long as the trend remains up, we ought to be able to harvest some gains on the way up. INTU is a late reporter, and is scheduled to release its earnings results on November 13th. If the recent price action is any indication, investors seem to be expecting a strong quarter. Just as a point of reference, that expectation is not borne out by the earnings estimates, where the company is expected to post a loss of 23 cents vs. last year's loss of 13 cents and last quarter's loss of 9 cents. But as long as the markets are in rally mode, we'll go along for the ride. The best entries will likely come from buying a dip and bounce near intraday support, first at $52 and then at $51. Aggressive dip buyers could even consider buying a rebound from $50, which appears to be strong support. Just keep in mind that is just above the $49.50 stop we have selected for the play. Given the strong rally the stock has experienced over the past 3 days, we want to be very careful about buying into further strength. But if that fits your risk profile, use a trade above $54.50 to initiate the position. *** November contracts expire in 2 weeks *** BUY CALL NOV-50 IQU-KJ OI=2498 at $4.70 SL=2.75 BUY CALL NOV-55 IQU-KK OI=2284 at $1.35 SL=0.75 BUY CALL DEC-55*IQU-LK OI= 539 at $3.00 SL=1.50 BUY CALL DEC-60 IQU-LL OI= 321 at $1.25 SL=0.50 Average Daily Volume = 3.34 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** WPI -Watson Pharmaceuticals - $28.34 +0.85(+2.52 for the week) Company Summary: Watson Pharmaceuticals, Inc., headquartered in Corona, California, is a leading specialty pharmaceutical company that develops, manufactures, markets and distributes branded and generic pharmaceutical products. Watson pursues a growth strategy combining internal product development, strategic alliances and collaborations and synergistic acquisitions of products and businesses. (source: company release) Why We Like It: Watson consolidated for several days after its big move following a recent deal with Ortho-McNeil. WPI will expand is generic drug portfolio to include three popular oral contraceptives when the market exclusivity runs out. Investors ran the stock up following the announcement and completed a reverse head and shoulders pattern on the point and figure, and long-term daily charts. The measuring objective of the head and shoulders on the daily chart is $35 and today's bullish engulfing pattern looks like it has the stock moving toward that end. That announcement followed news from Watson that the FDA accepted the company's New Drug Application seeking marketing approval for the use of Oxytrol in the treatment of overactive bladder. The FDA has provided the Company with a primary user fee goal date of February 28, 2003 for a response on the application. It has now established 6 straight intraday higher highs, and today's close was the first above $28 since March. It has found support the last four days at $27 and entry from this point provides a good risk/reward scenario. The current bullish vertical count is $42 and the bearish resistance line is above that at $48. Our target on the play will be the measuring objective of $35, however the stock is likely to encounter some resistance at $30 and again at $33. New entries at this point should keep these resistance levels in mind, and watch the $27 support level on a market pullback. Watson releases earnings on November 6, so we will be exiting the play before next Wednesday. We will not be updating the play after that, so readers not yet in the play will have to decide whether to enter a play with short-term implications for OI from this point. *** November contracts expire in 2 weeks *** BUY CALL NOV-25*WPI-KE OI= 827 at $4.00 SL=2.00 BUY CALL NOV-30 WPI-KF OI= 827 at $0.85 SL=0.00 BUY CALL DEC-25 WPI-LE OI= 38 at $4.30 SL=2.15 BUY CALL DEC-30 WPI-LF OI= 219 at $1.40 SL=0.00 Average Daily Volume = 600 k --- 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: TRMS Trimeris has had a busy couple of days and has passed one test after another. Thursday's sell-off found support and bounced impressively. That action was followed by a flat-line Friday, until just before the close. The buyers came in at the end of the day and pushed TRMS back toward $54 in the last few minutes. As time draws closer to March, when the FDA will release its decision on Fuzeon, the first in a new class of HIV drugs, investors are looking at the potential $1 billion per year in revenue for TRMS and its partner Roche. TRMS also has another drug in the pipeline, designated T-1249, which is in the same class of drugs and also has proved effective in trials. The point and figure chart shows the stock above recent resistance from earlier in the year at $53, having traded as high as $54.60 early Thursday. The stock's previous resistance points of $50 and $52 appear to now be providing support on pullbacks, which is a positive sign for call holders. The current bullish vertical count on the stock is $83, and while that may not have a chance to be achieved until the company starts selling the drug next year, it does underscore the bullish sentiment currently in the market for the stock. The company releases earnings November 7, so we will be closing the play next week. New entries should keep in mind that they will be on their own after that time. If readers still want to enter the play, then a break over $55, or a pullback to support at $52 look like the most logical entries. $52 was previous before the breakout and $55 is the next resistance level, based on Thursday's action. Leave stops at $50, just below Thursday's low of the day. *** November contracts expire in 2 weeks *** BUY CALL NOV-50*RQM-KJ OI= 1001 at $5.00 SL=2.50 BUY CALL NOV-55 RQM-KK OI= 1596 at $1.70 SL=0.90 BUY CALL DEC-50 RQM-LJ OI= 30 at $7.10 SL=2.90 BUY CALL DEC-55 RQM-LK OI= 39 at $4.10 SL=2.05 Average Daily Volume = 523 k --- AZO – AutoZone, Inc. $87.90 (+1.95 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: Despite more dismal economic news on Friday, the bulls were not to be denied. With expectations still running high for a rate cut next week, virtually every sector finished the day in the green, as the broad market finished with its fourth consecutive weekly advance. Even the beaten-down Retail group staged a modest advance of 1.5%, despite the gloomy outlook for the holiday shopping season. But our AZO play is a bit different from the bulk of the sector, as the company's sales don't depend on seasonal factors. And based on the recent string of outstanding earnings reports, growth is still running well ahead of anyone's estimates. Like clockwork last week, AZO dropped sharply with the rest of the market, perfectly tagging that ascending trendline near $81.50 and beginning a recovery almost immediately. This is the fourth time since the trendline has been in place that it has served as a spring-board for the dip buyers, and judging by the 2.5% gain on Friday, this time it is following the script again. The current rebound ought to have AZO pushing through its most recent high near the $90 level in short order, and our first target should be the $91 level, which is the PnF price target generated in early September. Based on the stock's trading pattern late-comers don't get much of an opportunity to enter the play; it is pretty much a dip to support and then run straight up the chart before pulling back again. A pullback into the $84.50-85.00 area would make for a solid entry, but based on the stock's pattern seems unlikely. Based on the ascending trendline over the past 4 days, traders looking for an entry will likely need to rely on a pullback to the $86.00-86.50 area for an entry point. Aggressive traders can still enter on further price strength over $88.50 (just above Friday's high), but need to be cognizant that profit taking could appear as early as the $91-92 area. We're going to recommend harvesting gains (at least partially) on a trade at $91. Raise stops to $84. *** November contracts expire in 2 weeks *** BUY CALL NOV-85 AZO-KQ OI=2081 at $4.50 SL=2.75 BUY CALL NOV-90 AZO-KR OI= 810 at $1.45 SL=0.75 BUY CALL DEC-90*AZO-LR OI= 926 at $4.30 SL=2.75 Average Daily Volume = 1.20 mln --- FCS – Fairchild Semiconductor Int'l $13.30 (+2.98 this week) Company Summary: Fairchild Semiconductor is a global company that designs, manufactures and market high-performance building block semiconductors critical for multiple end markets, with a focus on developing power and interface solutions. The company's products are used in consumer, communications, computer, industrial and automotive applications. FCS' products are organized into three principal product groups: Analog and Mixed Signal Products, Discrete Products and Interface and Logic Products. Additionally, the company produces non-volatile memory and optoelectronics. Why We Like It: Whether it made sense or not, Semiconductor stocks were in favor again on Friday with the SOX index advancing by more than 6%, and closing in on strong resistance in the 317-320 area. Whether this is real buying, or just jockeying ahead of the Fed meeting, we can't say. Not to be outdone, FCS rocketed higher by nearly 12% on Friday, on continued strong volume. This solidifies the recent breakout over the $11.50 level and gives the impression that the bulls intend to make a serious run at the $15 resistance level. Eager bulls are hoping the pattern of an October bottom holds true and are throwing money at the sexy Semiconductor sector in hopes that it will lead the way higher. With a lack of demand growth currently apparent, this current move is clearly being done as an act of faith. But as traders, we're willing to go along for the ride, so long as it lasts. Those that entered on the breakout on Friday have a little cushion in their position, while the rest of us need to look for the next pullback. Intraday support can be found at $12.25, $11.60 and finally $11.00-11.25. A pullback on profit taking and subsequent rebound from any of these levels looks good for new entries, so long as the SOX continues to post higher lows and higher highs. Aggressive traders can still chase FCS higher from Friday's close, but need to be thinking about the exit as the stock nears $15, as that is the site of some strong resistance. Raise stops to $10.25. *** November contracts expire in 2 weeks *** BUY CALL NOV-12 FCS-KV OI=785 at $1.40 SL=0.75 BUY CALL NOV-15 FCS-KC OI=270 at $0.35 SL=0.00 BUY CALL DEC-12*FCS-LV OI=144 at $1.95 SL=1.00 BUY CALL FEB-15 FCS-BC OI= 97 at $1.55 SL=0.75 Average Daily Volume = 2.20 mln --- FRX – Forest Laboratories $100.18 (+3.03 last week) Company Summary: One of many specialty pharmaceutical companies, Forest Laboratories develops, manufactures and sells both branded and generic forms of ethical prescription and non-prescription drug products. . Some of the company's more notable products are Celexa (for depression), Tiazac (for hypertension and angina), and respiratory products Aerobid, Aerochamber and Tessalon. Additionally, the company produces Infasurf, a lung surfacant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX markets its products directly to physicians using the company's own specialized sales force. Why We Like It: With the broad market looking weak at the open on Friday, it looked like the best we could hope for from FRX would be another rangebound session awaiting a more positive market. But after the initial dip to $97.30 (just above the bottom of week's trading range), FRX rebounded throughout the day, with buying volume increasing throughout the session. By the time the closing bell rang, the bulls had successfully propelled the stock to another close over the $100 level. While buying the dip on Friday (or any other day last week, for that matter) made for a solid entry into the play, what we really need to see is a breakout to the upside (above $102) on strong buying volume. Despite the trend of increasing volume throughout the day on Friday, the day's overall volume was downright anemic, barely half the ADV. Closing back over $100 is encouraging, but it doesn't change the fact that FRX is still in the $95-102 range that it has occupied for nearly 3 weeks. Judging from recent price action, a breakout to the upside should be powerful and carry with it strong volume. So momentum traders can target a breakout to the upside for new entries. Dip buyers got their chance on Friday, but might get another chance. Use a renewed dip into the $97-98 area to initiate new positions ahead of the expected breakout. For now, leave stops set at $95. *** November contracts expire in 2 weeks *** BUY CALL NOV-100 FRX-KT OI=3606 at $2.95 SL=1.50 BUY CALL NOV-105 FRX-KA OI=2044 at $0.80 SL=0.40 BUY CALL DEC-100*FRX-LT OI= 109 at $5.70 SL=3.50 BUY CALL DEC-105 FRX-LA OI= 66 at $3.30 SL=1.75 Average Daily Volume = 2.06 mln ************* NEW PUT PLAYS ************* BAX - Baxter International $24.22 -0.80 (-2.98 for the week) Company Summary: Baxter International Inc. is a global health care company that, through its subsidiaries, provides critical therapies for people with life-threatening conditions. Baxter's bioscience, medication delivery and renal products and services are used to treat patients with some of the most challenging medical conditions including cancer, hemophilia, immune deficiencies, infectious diseases, kidney disease and trauma. (source: company release) Why We Like It: Baxter is one of the few healthcare stocks without even a single positive month since March. It has suffered one technical breakdown after another and has been in a descending channel for seven months. During that time the company has lowered its sales guidance, suffered questions about its dialysis machine tubing causing deaths, and been repeatedly downgraded. A month ago, Baxter lowered sales growth targets for the rest of the year, due to competition in its blood-products business. Just a week ago, the company revealed that sales for the third quarter at its biotechnology unit increased less than expected for the second consecutive quarter. BAX said that sales of its Factor VIII treatment for haemophilia were weaker than expected and that the sluggishness would continue at least through the fourth quarter of this year and first quarter next year. The company's renal business also saw slower demand, following the aforementioned connection to deaths in haemodialysis patients. BAX once again lowered sales estimates for recombinate from 25% to 20%. On Wednesday, Morgan Stanley cut its rating on the stock to underweight, citing Baxter's increasing capacity for production of Factor VIII, in spite of what appears to be decelerating demand. Morgan's analyst said, " "We believe Baxter's long-term earnings growth story is at risk. We also see balance sheet issues overhanging the stock." Baxter has seen increasing volume on each sell-off, which is very bearish, and our target entry of $24.00 will constitute a triple bottom sell signal on the point and figure chart. The last triple bottom resulted in a $5 sell-off, and each sell signal on the PnF has been reliable thus far. Although each sell-off has preceded rebounds, no rebound has been significant enough to create a buy signal since March. According to Professor Robert Earl Davis' chart pattern study, the triple bottom signal is profitable 93.5% percent of the time for an average gain of 23% within 3.4 months. This data is for bear market conditions. While we may not hold the play for that long a period of time, the percentages seem to be in our favor. New entries should look for the $24 sell signal, or can target a failed rebound under recent resistance at $28 for ideal entry, if a rally before the FOMC meeting manages to lift BAX next week. Place stops above that resistance, at $29. *** November contracts expire in 2 weeks *** BUY PUT NOV-25 BAX-WE OI=1985 at $1.45 SL=0.70 BUY PUT DEC-25*BAX-XE OI= 468 at $2.70 SL=1.35 Average Daily Volume = 4.61 MIL ************************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 11-03-2002 Sunday 4 of 5 In Section Four: Current Put Plays: IP, LOW, RTH, LEH, NTRS, SPW Leaps: It's A New Bull Market! Traders Corner: Making Profits When Things Go Nowhere Fast Traders Corner: Dow Theory and Technical Analysis: Part 2 ************************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 ***************** IP - International Paper - $35.19 +0.26(-1.31 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 made a token effort today, following the Dow higher. However, this Dow component could only manage a 0.26 point gain on a day when the index posted a triple digit gain ahead of next week's FOMC meeting. What seems more important is the failure of support at $35. The stock had found support at $35 during the early part of the week, however, has both broken below that level the last two days, and set a series of lower lows. It is awfully hard to get a Dow component to trend down in an upward trending market, but IP has managed to do so. The stock had found support at the 50-dma throughout the early part of the week. However, now that it has broken down through that level, the 50-dma appears to have put a ceiling on it. Both rally attempts the last two days were turned back at that level, making for good risk reward on entries at the current level. The company continues to issue more debt to help retire some of its previous notes. It added to its recent offering today, after completing private placement of $1 billion, by issuing an additional $200 million. The stock recently saw its hold rating lowered to a sell by Prudential, which cited a net worth of tangible assets of around $2 billion, versus $16 billion in debt. The stock has been trending lower since October 22nd, and today's minor bounce did nothing to change that trend. We like the new ceiling, and lack of $35 support, and new entries can initiate with the stock under the 50-dma (currently $35.60). *** November contracts expire in 2 weeks *** BUY PUT NOV-37.50 IP-WU OI=2395 at $2.60 SL=1.30 BUY PUT DEC-37.50 IP-XU OI= 142 at $3.40 SL=1.70 Average Daily Volume = 3.31 mil --- LOW - Lowe's Companies - $41.73 -1.22 (-2.12 for the week) Company Summary: With 2001 sales of $22.1 billion, Lowe's Companies Inc. is a Fortune 100 company that serves more than seven million customers a week at more than 800 home improvement stores in 43 states. The 14th largest retailer in the nation, Wilkesboro, N.C.-based Lowe's is the second-largest home improvement retailer in the world. (source: company release) Why We Like It: Lowe's traded at a new recent low intraday, before riding the afternoon rally to a mild gain of 0.37. The stock had found support at $41.00, but the trade down to $40.75 demonstrated that buyers at that level have been overwhelmed. The trade of $41 established a three-box reversal down on the point and figure chart, and if not for a broad market rally, it seems safe to assume LOW would have ended the day in the red. This morning's economic data only added to the bad news for the retailers. Personal income and personal spending were below expectations, as were payrolls. Following poor Consumer Confidence numbers, there does not appear to be a light at the end of the tunnel for retailers. While the bad news stoked the flames of rate cut expectations, carrying all boats higher, it appears as though it is only a matter of time before retailers once again release disappointing sales data. The only way it seems to avoid missing expectations, is to lower them, as Wal-Mart has done this month. We still like a short play in LOW down to at least the bullish PnF support line of $38. However, if the stock can break below that level, then the August lows around $33 look possible. New entries can look for the stock to break back below $42 and then intraday resistance at that level. *** November contracts expire in 2 weeks *** BUY PUT NOV-42.50 LOW-WV OI= 1049 at $1.90 SL=1.00 BUY PUT DEC-42.50*LOW-XV OI= 39 at $3.00 SL=1.70 Average Daily Volume = 5.59 MIL --- RTH - Retail Holding Company Depository Receipts - $74.60 -1.36 (-3.90 for the week) Company Summary: Retail HOLDRS are Depositary Receipts issued by the Retail HOLDRS Trust which represent your undivided beneficial ownership in the common stock of a group of specified companies that are involved in the retailing industry. The Bank of New York is the trustee. Retail HOLDRS may be acquired, held or transferred in a round-lot amount of 100 Retail HOLDRS or round-lot multiples. Retail HOLDRS are separate from the underlying deposited common stocks that are represented by the Retail HOLDRS. The Retail HOLDRS Trust is not a registered investment company under the Investment Company Act of 1940. (source: AMEX) Why We Like It: The retailers got additional bad news this morning, with the release of a host of economic data. There were lower than expected numbers in payrolls, personal income, personal spending, average workweek, and auto and truck sales. While this data may have driven the market higher temporarily, in anticipation of a rate cut next week, it is certainly negative for the economy. Heading into the holiday shopping season, retailers do not want to see a drops in personal spending, and personal income growing at a less than expected 0.4%. The RTH started the day negative, and surfed the rising tide higher in the afternoon. However, even with the bounce, it came nowhere close to the 50-dma of $76.89. While a rate cut may eventually help the economy after it makes its way through the system six to nine months from now, it will not put many dollars in shoppers pockets in the next 2 months. We have been hearing many specialty retailers complain that mall traffic is weak and now even grocery chain Albertson's has predicted a decline in same store sales for the third quarter. It was reduced from a "reduce" to a "sell" by UBS Warburg, after reducing earnings expectations, citing competition from Wal-Mart, which itself was recently downgraded and removed from Goldman Sachs recommended list. We are expecting holiday sales to continue the trend of missed expectations, and this morning's data only reinforced that sentiment. New entries in RTH can watch for a failed rebound at the 50-dma if the broad market rally continues Monday in anticipation of a rate cut on Wednesday. If the market gives back today's rally, then look for a break back below $75. We will use the PnF bullish support line of $67 for our initial target on the play. *** November contracts expire in 2 weeks *** BUY PUT NOV-75 RTH-WO OI= 1618 at $2.00 SL=1.00 BUY PUT DEC-75*RTH-XO OI= 133 at $3.70 SL=2.00 Average Daily Volume = N/A --- LEH – Lehman Brothers Holdings $54.57 (-1.91 last week) Company Summary: Through its subsidiaries, LEH constitutes one of the leading global investment banks, serving institutional, corporate, government and high-net-worth individuals clients. The company is engaged primarily in providing financial services, including securities writing and direct placements, corporate finance and strategic advisory services, private equity investments and securities sales and trading. Completing its array of banking, research and trading capabilities, LEH also engages in the trading of foreign exchange, derivative products and certain commodities. Why We Like It: The first hour of trading on Friday made it look like we were going to just have a slow bleed lower, as shares of LEH were drifting lower. But the gloomy economic news seemed to revive expectations for a rate cut from the Fed next week, and the rebound began. Shares of LEH found support right at the 50-dma (currently 52.65), before moving strongly up the chart, coming to rest right in the $54.50-55.00 resistance zone that we favor for initiating new positions. That isn't to say LEH can't move higher before exhibiting fresh signs of weakness, but it will take more than a tepid bounce from support to push through that resistance level. If a breakout above that level does occur, the bulls will have to once again contend with the 5-month descending trendline at $57.50, which has consistently turned back several rally attempts. When LEH does roll over, that will make for the next high-odds entry into the play, with our first goal being a breakdown under the 50-dma. More conservative traders will want to wait for a drop under that level before initiating new positions. LEH's rally on Friday was likely due to the strength in the overall Brokerage sector (XBD.X), which pushed right back up to resistance near $414-415. Of course, even if the XBD can get through that level, it will have to deal with resistance in the $425 area, which is the site of the August highs. Look for confirming weakness from the XBD index before initiating new positions in LEH. Until we get the breakdown under $52, our stop remains at $58, just above the trendline. *** November contracts expire in 2 weeks *** BUY PUT NOV-55*LEH-WK OI=2357 at $2.25 SL=1.00 BUY PUT NOV-50 LEH-WJ OI=1884 at $0.75 SL=0.25 BUY PUT DEC-50 LEH-XJ OI=1365 at $2.10 SL=1.00 Average Daily Volume = 2.81 mln --- NTRS – Northern Trust Corp. $35.63 (-0.93 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: The weakness in the Banking stocks has had our attention of late, as we've been focusing on shares of NTRS. Following the early October relief rally, the stock has been slowly drifting lower, pinned under its descending trendline of the past few weeks. Following an early dip, the stock rebounded and slowly crawled higher with the support of the overall market. It took the entire day, but in the final 15 minutes, NTRS reached its descending trendline (currently $36) and promptly reversed on a rush of selling volume. So despite the rebound on Friday, it looks like the bears are still in control on this one. The Financial stocks may be rebounding in hopes of a rate cut next week, but as we know from the past 11, this one isn't going to have any appreciable effect in the marketplace, at least not in the near term. Once that event has passed, NTRS will likely revert to its recent trend, which is down. Use intraday rallies to the descending trendline, or possibly as high as $37 (the current site of our stop) to initiate new positions. Be careful about trading a breakdown, due to the stock's recent pattern of reversing higher after each slightly lower low. We need to see a decisive break under $34 on strong volume before considering momentum entries to the downside. *** November contracts expire in 2 weeks *** BUY PUT NOV-40 NRQ-WH OI=110 at $4.60 SL=2.75 BUY PUT NOV-35*NRQ-WG OI=730 at $1.10 SL=0.50 BUY PUT DEC-35 NRQ-XG OI= 32 at $2.10 SL=1.00 Average Daily Volume = 1.69 mln --- SPW - SPX Corporation $42.82 (-1.10 last week) Company Summary: SPX Corporation is a global provider of technical products and systems, industrial products and services, flow technology and service solutions. The company offers networking and switching products, fire detection and building life-safety products, television and radio broadcast antennas and towers, life science products and services, transformers, dock products and systems, cooling towers, air filtration products, valves, back-flow protection and fluid handling devices and metering and mixing solutions. The company also provides specialty service tools, diagnostic systems, service equipment and technical information services. SPW services a broad array of customers in a variety of industries, including chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecommunications, financial services, transportation and power generation. Why We Like It: Following its big breakdown a couple weeks ago, we've been looking for a bit of an oversold bounce in shares of SPW in order to give us an attractive bearish entry into the play. Going against conventional wisdom, the broad markets have battled back from some dismal economic news in the past 2 days to post their 4th consecutive weekly gain and that's been enough to lift SPW off the mat. While far less than the recent heavy volume on the downside, the buying volume has been impressive, as it is still running well above the ADV, indicating a significant bid in the stock near the $41 level, which is just above major support at $39, the site of the September 2001 lows. But the recent breakdown has left significant supply overhead near $45, which ought to put an end to any euphoric rally attempts in the near-term. The first hints of that supply can be seen in the stock's inability to hold over the $43 level on Friday, and a continued rollover from this level can be used to initiate new positions. We'd prefer a push up near $44 before taking an entry, but we'll have to take what the market gives us. Trader's looking to enter on a breakdown can target a drop under $40, but will need to be careful. There are likely to be buyers waiting just below the recent lows until the stock breaks the $38 level. That breakdown under $38 will make for a much better trigger for momentum entries, as it would open the door for a quick trip down to the $35 support level. For now, keep stops set at $45. *** November contracts expire in 2 weeks *** BUY PUT NOV-42*SPW-WV OI=293 at $2.35 SL=1.25 BUY PUT NOV-40 SPW-WH OI= 74 at $1.30 SL=0.75 BUY PUT DEC-40 SPW-XH OI=760 at $2.95 SL=1.50 Average Daily Volume = 1.15 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 ***** It's A New Bull Market! By Mark Phillips mphillips@OptionInvestor.com Not likely! Oh, to watch the closing action on Friday, you might have thought that was the case, and certainly there was an impressive bid under the market going into the close. And we're likely to open with a positive tone on Monday following the favorable ruling handed to MSFT Friday night after the close of trading. After trading in the $51-54 range for the past 2 1/2 weeks, the stock exploded in the after-hours session, moving as high as $57, a level last visited in April. Barring some unpleasant development over the weekend, that ought to lend a strong bid to the broad market on Monday. I wouldn't be surprised to see the DOW challenging the 8750 resistance level before the FOMC meeting. But then what? The market has already priced in a 25 basis point cut, and if it is delivered as expected, I'd really expect to see a 'Sell the news' reaction. If Uncle Alan tells us that the economy is fine and we don't need a rate cut, I would expect a rapid selloff. And if he gives us the bonus of a 50 basis point cut, I would expect a selloff as investors panic and ask themselves if it is really that bad. My expectation is for a quarter-point cut and then I'll honestly be surprised to see significant further upside in the market. It's just one man's opinion, and I could be dead wrong. I just can't quite see the catalyst that is going to light up the charts and send the DOW screaming through the 9000 level to challenge its 200-dma up near 9300. How about the NASDAQ? It's been driven sharply higher, predominantly on the back of gains in the Semiconductor, Networking and Software sectors in the past 3 weeks. MSFT has delivered the good news Software investors may have been waiting for. CSCO has earnings next Wednesday, and barring euphoria from John Chambers, I don't see anything they have to say as lighting a bullish fire in the Networking group. And Semiconductors have been rallying on the dismal news coming out of virtually every company in the industry. I saw the news about Semiconductor billings being up in September and a whopping 20% above the prior year. Big deal! I want to know where the BOOKINGS are. The abysmal Book to Bill number isn't going to get better unless the bookings (future billings) are on the rise. Otherwise, this current blip will be very short-lived. The action in the VIX a week ago turned out to be rather telling didn't it? That break under 39 gave a clear picture that nervousness in the market was waning, and it just continued downward throughout the week. With Friday's close at 33.98, we're now approaching the top of the historical range, where we'll get another read on the nervousness of investors. If 30 once again provides a floor like it did back in mid-August, then we may need to give serious consideration to a possible upward shift in the 'normal' range of the VIX. Don't panic yet, as we'll need to see the data confirm that premise, but it is something to watch in the weeks and months ahead. One other thing worth noting is that the 200-dma of the VIX is now above 30 (currently 30.67), for the first time EVER. Of course, if the VIX simply plunges back below the 30 level, that will be a strong indication that the seasonal rally just might have some legs. I think the important point to keep in mind is that until we see the markets deviate from their recent pattern of lower highs and lower lows, this is just another bear market rally. To break out of that pattern, the S&P 500 needs to top the 965 level, the DOW needs to rally through 9100 and the NASDAQ-100 needs to power through 1055. All of these are achievable goals, mind you. But I question whether these levels can be broken without some confirmation of a firming of the underlying fundamentals in the market. I've focused a fair amount of attention on the Bullish Percent readings in recent weeks and I think those levels are worth highlighting again this weekend. But the October lows are no longer the important point of comparison. Now we need to be focused on the August highs. If the levels above are to be achieved, then I have to believe that it will be preceded by each of the relevant Bullish Percent readings taking out their August highs. Bullish Percent: Index August High Current Status S&P 500 59% 50% Bull Alert DOW 60% 56% Bull Confirmed NASDAQ-100 60% 59% Bull Alert The bullish percent readings have come an awfully long way in less than 4 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. While this rebound has been encouraging, and I think it actually might have a few more weeks to run. 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 fundamental picture is still pretty awful, highlighted by the sharp drop off in auto sales last month. In case you missed it, sales for all of the major domestic manufacturers fell by more than 30%. That sure hints at a consumer that has lost interest in spending money, no matter how good the deal is. How do YOU think that sentiment is going to play out in the important holiday shopping season? I'll give you a hint. I certainly won't be going long on any stocks that depend on a surge of holiday spending to pad the bottom line. Unless business spending is poised to explode and take up the slack of the tired consumer, I don't see where the economic growth is going to come from. Enough of my growling about the market in general. Let's take a look at the playlist. Portfolio: LEN - That's looking better now. After the earnings-induced run up the charts, LEN came back to earth and now appears to be pinned below the 50-dma, which is just starting to roll over. The picture should get much more bearish (good for our play) when price falls under the 200-dma (currently $54.52) and then the 50-dma falls below that level as well. The Housing market does appear to be slowing, and LEN should now get with the business of heading south. The first major test will be for the stock to fall under the $50 support level. Repeated rally failures below our $60 stop can still be used for new entries, as the weekly Stochastics are just starting to roll over. JNJ - There's been a fair amount of back on forth on JNJ in the past few weeks, as the market has been volatile surrounding the latest batch of earnings results. But JNJ has held tough, rebounding again from the 50-dma near $56 last week. Showing some strength towards the end of the week, the stock pushed back through the 200-dma, keeping it in its moderately bullish mode. Look for a rally back above $60, along with the 50-dma crossing up through the 200-dma to confirm the long-term bullish potential for the stock. Watch List: MO - Despite the strong rebound on Friday, shares of MO don't look attractive at current levels due to formidable resistance in the $42-44 area. The fundamental picture remains unclear for the big Tobacco firms, as they continue to be pressured by the smaller firms. That being said, once a firm base is back in place, MO should continue to perform well due to the diversity of its product lines. But in terms of entries, I see nothing in the fundamental or technical picture that motivates me to chase the stock higher. Continue to look for entries on a decline down near the $38 level and subsequent rebound. MSFT - Mr. Softee remained rangebound again all week, but the favorable ruling by the judge in the antitrust case Friday night should have the stock breaking out big time on Monday. The big question is whether that breakout will be sustainable. I definitely would not advocate initiating new positions on Monday, or even ahead of the FOMC meeting. We'll need to see where MSFT settles out after the surge higher on Monday. Aggressive traders might consider an entry on a pullback to the $53 level, but the LEAPS portfolio is going to abstain from taking an entry, at least for the next week. Time is on our side. QQQ/DJX - It looks like the party is over, and we missed it. I kept waiting for a decent pullback that we could use as an entry point in both of these plays, but it never came. With MSFT's late news on Friday, I expect the markets to gap up on Monday and perhaps trade very strong ahead of the FOMC meeting. But beyond there, I just see no catalyst to keep things moving up. The Bullish Percent charts are nearing their August highs, and while that doesn't mean we head down right away, it certainly limits the upside potential and increases the downside risk. Rather than try to guess where we might gain a favorable entry on either of these plays, I'm going to put them on Hold this weekend. In terms of LEAPS, it is fruitless to try catching the move this week, and I think we are better served by looking for entry setups to the downside. Because of the market's propensity for proving me wrong, I'm not dropping the DJX or QQQ plays just yet. But if we get another up week, they'll be drops next weekend. GM - Last week certainly provided nothing in the way of an entry point into our new GM play, as the stock continued to languish south of $36. But a broad market MSFT-induced rally next week could do the trick. Based on the sharp decline in auto sales last month (30%+ for all the domestic manufacturers), it looks like the sales surge from the great incentives has outlived its usefulness. Look for any rebound next week to find firm resistance first at $37-38, and then up near $40, both of which would make for solid entry points on the rollover. The next week is likely to be quite volatile again, especially on Monday and then again on Wednesday following the FOMC meeting. I would be very hesitant to initiate full positions until the post-FOMC volatility settles out. Remember that lost opportunities are far preferable to lost money! 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 $ 7.30 +12.31% $54 '05 $ 60 ZJN-AL $ 9.10 $10.20 +12.09% $54 NEM 10/30/02 '04 $ 30 LIE-AF $ 3.90 $ 4.00 + 2.56% $22 '05 $ 30 ZIE-AF $ 6.10 $ 6.20 + 1.64% $22 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $ 9.60 +11.63% $60 '05 $ 50 XFF-MJ $11.20 $12.90 +15.18% $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 HOLD JAN-2004 $ 50 LMF-AJ CC JAN-2004 $ 45 LMF-AI JAN-2005 $ 50 ZMF-AJ CC JAN-2005 $ 40 ZMF-AH QQQ 10/13/02 HOLD 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 HOLD 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 SMH 11/03/02 $27-27.50 JAN-2004 $ 25 KBS-ME $25.50 JAN-2005 $ 25 ZTO-ME New Portfolio Plays NEM - Newmont Mining Corp. $26.35 **Call Play** It seemed like it was taking forever, but the price of Gold finally found some traction at its 200-dma near $310 and got some upward momentum going last week, briefly pushing above $320 again on Friday. That seems to have finally given our NEM play the incentive it needed to get back over the $25 resistance level. The first close over that level on Wednesday created our entry into the play, and it was confirmed with Friday's slightly higher close. Weekly Stochastics are just now turning up from oversold, so the technicals are definitely in our favor. In order for the stock to make significant upward progress though, we're going to need to see the price of Gold rally through the $320 level and more importantly close above the $330 level. Remember, our NEM play is not so much predicated on a rally in the equity markets, as it is on a rise in the price of gold. As such, this is more of a hedge play in the event that gold prices rise precipitously due to continuing economic weakness. Traders should only be in the play if they agree with that logic. Our initial stop on the play will be $22, which is just below the early October low as well as just below the long term ascending trendline. BUY LEAP JAN-2004 $30 LIE-AF $3.90 BUY LEAP JAN-2005 $30 ZIE-AF $6.20 New Watchlist Plays SMH - Semiconductor HOLDR $25.25 **Put Play** We had such great results the last time we played the downside in the SOX, that I want to do it all over again. This play is real simple, in my opinion. The fundamentals in the sector are still abysmal, and if you followed many of the earnings conference calls over the past month, there isn't much expected improvement according to the bulk of the CEOs. The sharp rise the in the Semiconductor sector in the past few weeks has been largely driven by short-covering, and then this past week, hopes of a rate cut from the Fed. It doesn't matter what decision the Fed makes, I expect to see the SOX top out this week and then trade significantly lower in the next couple weeks. These gains are just unsustainable. It is worth noting that the $317 level on the SOX is both a prior level of resistance, as well as the 25% retracement of the entire March-October decline. In my opinion, a rollover there could make for a solid entry point. Of course, there's no telling how much of a lift the group will get from Friday's late news from MSFT. There could be enough to push the SOX up near the $343-346 area, which was major support back in July. A rally up to that level is almost sure to fail and would make for the optimum entry point (most likely prior to the Fed meeting). The SMH at $27 roughly corresponds to the $343-346 SOX level, so we'll want to target the $25 strike for our play. Once filled on our entry, we'll set our stop rather loose, up at $29.50. This is near the August highs, and a rally through that level would definitely tell us something is wrong. BUY LEAP JAN-2004 $25 KBS-ME BUY LEAP JAN-2005 $25 ZTO-ME Drops None ************** TRADERS CORNER ************** Making Profits When Things Go Nowhere Fast By Mike Parnos, Investing With Attitude Today, class, we’re going to study insects. The Couch Potato Trading Institute has taken a giant step backwards in order to take two steps forward. Sounds like the Cha-Cha or Rumba, doesn’t it? But, if you look closely, you’ll see we’re making progress as we evolve into The market is churning. It wants to go higher, but all those folks who bought (guessed wrong) on the way down are sitting there, salivating and hoping that their stocks will come back – just high enough so they can get out even. Hence the trader’s lament, “I sure hope I break even because I need the money.” How high will this bear market bounce go? Only time will tell. However, while the market is banging its head against resistance, regrouping and trying again, not much progress is being made. Since volatility numbers are still high, it might be providing us an opportunity to explore a strategy for somewhat stagnant markets. The Butterfly You could call this a passive-aggressive method to make money in a directionless market. It’s a safe way to take advantage of premium decay. The risk reward is very attractive. It’s a great strategy for CPTI students to add to their arsenals. Butterfly spreads can use either puts or calls and can be long or short. It doesn’t really matter which. The risk/reward profiles are the same. So, you should price it out both ways and, obviously, use the method that provides you with the higher credit (short butterfly) or the lowest debit (long butterfly). I wonder why they named this strategy a “butterfly.” Maybe because condor was taken? They could have used “eagle” or “hawk” – something with a little more pizzazz. Hardly one of the great mysteries of life. To simplify things, we’ll use call options in our first butterfly example. We can address other types of butterfly spreads in future columns. A “Call Butterfly” consists of: 1. The purchase of 1 in-the-money (ITM) call 2. The sale of 2 at-the-money (ATM) options. 3. The purchase of 1 out-of-the-money (OTM) call All options will have the same expiration. The object is to take advantage of the higher premiums in the ATM calls, and use those to pay for the other long calls. If it works out, the risk will be minimal and the potential rewards worthwhile. Don’t be too early to the party. No need to be there before the bar opens. Butterflies work best when the time exposure is limited. The less time with your assets exposed, the fewer bad things can happen. Today’s Example: Surprise, surprise. We’re going to use my favorite trading vehicle – the QQQs. Friday they broke above $25, but there’s major resistance waiting for them at $26. It’s a good bet that it will test the resistance at $26 a few times before it either breaks through or heads back down to retest the lows again. We’re only going to be in this position for two weeks. OK. Let’s make a butterfly. We have to get two caterpillars drunk, a little Barry White music and let nature take its course. Do you ever wonder where they put all those little legs when they . . . .?” A butterfly spread consists of a “body” and two “wings.” We’re going to: a) Buy 1 contract – QQQ Nov. 23 calls @ $2.55 = ($2.55) – a “wing” b) Sell 2 contracts – QQQ Nov. 25 calls @ $1.00 = $2.00 – the “body” c) Buy 1 contract – QQQ Nov. 27 calls @ $.25 = ($.25) – a “wing” Our cost, and maximum risk, is $.80 – or $80 per contract. The maximum profit is the difference between the body strike $25 and either wing less the initial debit. That’s is $2.00 less $.80 = $1.20. Maximum profit is achieved if the QQQs finish at exactly $25. Your profit if the QQQs finish anywhere between $23.80 and $26.20. For the more visual CPTI students, if you want to see one of those risk graphs, I’m sure I can find one. I happen to be more verbal (another surprise, I’ll bet). I know a picture is supposed to be worth 1,000 words, but not if you don’t know what the hell you’re looking at. The “What If” Analysis . . . As CPTI students know, the only way to understand a strategy is to examine all possible scenarios. So let’s analyze this puppy. What if the QQQs finish at $22? a) Nov. $23 call expires worthless; b) Both Nov. $25 calls expire worthless; and c) Nov. $27 call expires worthless. You experience the maximum loss of $.80. What if the QQQs finish at $24.25? a) Nov. $23 call is worth $1.25; b) Both Nov. $25 calls expire worthless; and c) Nov. $27 call expires worthless. You make a profit of $.45 ($1.25 less initial $.80 debit). Now $.45 doesn’t sound like much, but what was the risk? $.80. That’s a 56.25% return on risk. What if the QQQs finish at $26.00? a) Nov. $23 call and one Nov. $25 call are exercised – Yielding $2.00; b) The other Nov. $25 call must be bought back for $1.00; and c) Nov. $27 call expires worthless. You make a profit of $.20 ($2.00 less $1.00 buyback less $.80 initial debit). Again, it may not seem like a lot, but it’s still a 25% return on risk for only two weeks of exposure. What if the QQQs finish at $27.75? a) Nov. $23 call and one Nov. $25 call are exercised – yielding $2.00: b) The other Nov. $25 call and the Nov. $27 call are exercised – costing $2.00. The $2.00 profit and $2.00 debit cancel each other out and you experience the loss of the initial $.80 debit. The butterfly, as you can see, is a commission intensive spread. So, if you’re still using a full service broker who charges $5 a contract (by the way, I have this great bridge for sale), you need to figure these commissions into your calculations – as you try and deal with those dependency issues. A butterfly spread may also yield a seemingly small profit. If you decide to partake, it may be wise to do a large number of contracts to minimize the effect of commissions. You won’t make a killing, but, if you’re right, the percentage return is very healthy. Watch for stocks trending sideways, or consolidating in a range – possibly in the handle of a cup-and-handle formation. Try to use, for the body of your butterfly spread, option strikes that have the largest open interest. As we’ve discussed, market makers like to move their stocks towards the high open interest strikes. One step back, two steps forward – Gene Kelly, eat your heart out. While he’s “singin’ in the rain,” we’re going to make some money. _____________________________________________________________ CPTI Portfolio Update (as of Friday’s close) BBH Condor – BBH finished at $86.97 – comfortably in the $80-$95 range. (See last week’s “CPTI Portfolio” column for position description) MMM Condor – MMM finished at $128.05 – comfortably in the $120- $130 range. (See last week’s “CPTI Portfolio” column for position description) QQQ ITM Strangle – QQQs moving up a little at $25.25. We’re looking for that three-point move from our $26/$24 strangle. (See last week’s “CPTI Portfolio” column for position description) TTWO Short Strangle – TTWO finished at $26.13. We are short the $25 and $30 calls. As TTWO dipped below our short $25 call on Monday, we shorted 1,000 shares – using the $25,000 in our portfolio (the powder we’re keeping dry for just such occasions). Then, when TTWO moved back over $25, we covered those shares. All is well. _____________________________________________________________ Note: Due to technical problems, my Thursday column did not appear last week. It will likely run on Tuesday. The CPTI will definitely be on schedule and in session again on Thursday. I thank you for your questions and concern. _____________________________________________________________ I spent last week in Florida, and couldn’t help but notice this sign on a swimsuit store: “Our bikinis are exciting. They are simply the tops.” ____________________________________________________________ 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 ************** Dow Theory and Technical Analysis: Part 2 By Leigh Stevens lstevens@OptionInvestor.com In my recent initial article (see – http://www.OptionInvestor.com/traderscorner/103102_2.asp ) on Dow Theory containing an interpretation on the current market – the NYSE part, not the Nasdaq – I indicated that, based on the recent monthly close holding above the 1998 low or the major low before the 2000 top, there has yet to be a Dow Theory “sell signal”. This claim can be made even though on a monthly closing basis (from peak to low to date), the Dow Industrials has fallen 34% - approximately 1/3. On an “investment” basis and focusing on the long-term outlook, as we might for 401k type holdings, it would be like buying a stock at 100 and seeing it fall over two years to as low as 66 before starting to rebound – the stock has some way to recover before getting back to breakeven, but those with a long-term orientation might feel that the stock (in this example) is worth holding as long as it didn’t exceed say, a 38% retracement. Of possible interest is my prior article on retracements: see - http://www.OptionInvestor.com/traderscorner/100302_2.asp I also indicated however, in my previous introduction to Dow Theory, that there was a lot more that Dow contributed to technical analysis than whether staying invested in the market was warranted or not. What follows are the basic tenets of Charles Dow along with my thoughts on it. I should also tip my hat to the contribution of Robert Edwards and John Magee, who wrote what many consider to be the “bible” of technical analysis, Technical Analysis of Stock Trends, for their descriptions and analogy to the “tide, wave and ripple” effect, although this did not originate with them. THE MARKET DISCOUNTS EVERYTHING Dow determined which stocks; the ones making up his averages, best represented the overall market. Every possible fact and factor relating to the price of a stock within the averages is quickly priced into the current traded price of that stock and hence into the averages. This is because the traded price reflects all knowledge that exists about the company and its current and future prospects in terms of its earnings power. Even so-called “insider” information will show up in the price and volume patterns that can be seen by astute observers of the trading in that stock. This group will in turn act on that information and that activity will become apparent to an ever- widening group. This principle is even truer today, given the extremely rapid and widespread distribution of information that occurs on the financial channels and on the Internet. CYCLES OF BULL AND BEAR MARKETS HAVE THE SAME REOCCURING PHASES The point I emphasis here is that the phases of both bull and bear markets, while different depending on whether it’s a bull market or a bull market, are similar in terms of two factors: - Relative knowledge about the market - Investor “sentiment” (attitude) about the market that ranges from disinterested to indifferent to interested; with varying degrees of intensity within disinterested and interested BULL MARKETS – A bull market comes after a lengthily and substantial decline in stock values that comes about due to a downturn in the economy or a recession. Major market advances are usually, but not always, divided into 3 phases. These phases are marked by who participates in them and what they are doing in each phase. 1. ACCUMULATION In the first phase, there is “accumulation” or buying over a period of time, during which very knowledgeable investors with good foresight about a coming business upturn, are willing to start buying stocks offered by pessimistic sellers who want out. This group of investors will also start to pay higher prices as the willing sellers exit. The economy and business conditions are still often quite negative. The public, and this is mirrored by the financial press, is quite disinterested in the market, to the point of where owning stocks is very unattractive to them and they are out of the market. The people that got “burned”, so to speak, in the last bear market, are actively disgusted with the market. Sound familiar!? Market activity is modest at best but is picking up a bit on rallies, but this is mostly only noticed, if at all, by professional market participants. 2. A STEADY CLIMB The second phase is one of a fairly steady advance, but one that is not dramatic. There is a pickup in business and encouraging economic reports as an improving economy leads to a pick up in corporate earnings. This phase is also a phase where money can be made relatively safely, as technical indicators turn positive and there tends to be an absence of volatile trading swings. 3. MAIN STREET ADOPTS WALL STREET The third phase, which at one and the same time can both be highly profitable and quite risky, is marked by heavy “public” interest and participation in the market. The economic news is good during this period and suddenly front pages of magazines have articles heralding the new bull market. The new issue market gets going as the public now has an appetite for new companies. This is the phase where you will hear banter at parties about the market, how well so and so is doing in stocks and where market-related Internet chat rooms are quite active. Price advances can be huge and volume matches. The more speculative stocks continue to advance but it is here that the “blue chip” stocks of the most established big-name companies start to lag. Some sharp downswings occur among stocks that fall out of favor. Speculation remains intense as seen in increased option activity, the first-day closes of hot new issues and in the level of buying stocks on margin. The end of this phase is always the same, varying degrees of collapse. This can come after a year or two or even after several years has passed from the beginning phase. BEAR MARKETS – The animal analogy is quite apt, as the bear can both be very fierce and unforgiving, or can just go to sleep for a long period. Bear markets can usually also be divided into 3 phases. That this does not always occur is seen in the 1987 bear market that was sharp and steep, but with the decline only lasting two months. After that, there was a slow gradual process of advancing prices during which some bearish sentiment built up and people swore off the market. This phase didn’t reach the typical bearish extremes however; as within 7-10 months the Dow had recovered nearly half of its October-November decline. 1. DISTRIBUTION The first phase of a primary bear market tends to be a period of “distribution”. This really begins in the final phases of the bull market. It is the phase where selling begins by the type of experienced investors that didn’t get overly swept up in the extremes in emotion and price at the bull market peak – this group are the more investors with more foresight and a more balanced point of view. This group has the knowledge to understand that company profits have probably reached their peak and that the price multiples paid (P/E ratios) for those earnings are also at extreme levels. They began to sell or “distribute” stocks to the still eager and willing buyers. Volume of trading begins to slow. The public is still in the market heavily but may be a bit frustrated as the rate of increase slows down and not all stocks participate on rallies. The distribution phase is also one where people who are not usually in the market become buyers of stocks. A story that I used in my book (Essential Technical Analysis) is about a friend of mine who had always only invested in real estate. This person told me near the 2000 top that he had decided to buy some stocks, but had modest expectations – he “only” expected or wanted to make 20% on his money. This kind of expectation for stocks that historically return 10% on average and had already been going up sharply for months, was the final thing that got me out of the market. I had noticed the froth in 2000 and that the volume was slipping and profits harder to come by. Then, my friend’s actions and comment became my “shoe shine boy” event – referring to the famous story of Barnard Baruch, who one day got a stock tip from the fellow that shined his shoes. Baruch went and sold his holdings and said that “when shoeshine boys are giving me stock tips, this was the time to sell”. I was stuck by a similar occurrence in 2000 at Cantor Fitzgerald, where I was working in 2000, when I overheard one of our security guards on the telephone discussing his trading and going on about this and that stock in a very knowledgeable way like one of our floor traders. The distribution phase I already knew well, having been through two earlier ones before this last one. The first was in the silver and gold bull market and bubble of the mid to late-70’s. In the final phase, I finally succumb to the siren call of this market and made an impulse buy of some precious metals. At least I can re-plate my silverware with the silver bars I bought. Then in the late summer of ’86 I was the trader-manager of a stock index program at PaineWebber and had the sense to sell my positions on “black Monday”, but not the conviction to be short, where fortunes were made over a couple of days. (Actually the distribution phase had already completed itself by the preceding Friday and we were about to enter a panic.) The other side of my missed profit opportunity in not being short was that at least I was out - there were a lot of losses incurred, especially if investors panicked or traders had to sell to meet margin calls and didn’t hang on for the ensuing weeks and months of recovery. 2. PANIC SELLING Panic is a major characteristic of the second phase of a bear market. Buyers become scarce, bids falls sharply and sellers become desperate to get out. The downward acceleration becomes extreme and a near vertical drop can ensue – at first, after March 2000 in the Nasdaq, the decline was gradually, occurring over weeks and months although there were some sharp down weeks, especially in the beginning. But then in 2002 as you know, it got pretty brutal as the market went into free fall – this became very much the phase of discouragement which we’ll look at next. The decline goes on longer when there is very strong conviction about the continuation of the bull market that has ended already – the investing public, in general, does not “believe” the potential severity of the bear market or how they will eventually react to it. The handmaiden to fear, so speak, is hope. There is a reluctance to take a loss in stocks, especially a sizable one. Better to hope for a recovery. This is the phase where people will make a point of telling you that they are “long-term” investors. Investors have become conditioned to stocks going up and will maintain their faith in a market rebound for longer than is warranted by facts. Hope springs eternal as is said. 3. DISCOURAGMENT – After the initial part of the decline – sometimes the worst part of the decline – and often where prices are not dropping so steeply often comes the point where the economy has stabilized. Here, there can be a gradual market recovery and a rebound in prices of the stocks of the strongest companies. Or, this may be a long period where the market trends sideways. This is the third phase and is marked by discouraged sellers as the market does bounce back (more typical of BULL markets). There are many that didn’t sell in the panic atmosphere that had prevailed earlier and “give up” on stocks – the so called “capitulation” phase. Selling in the discouragement phase could also be coming from those investors and traders who bought during and after the steepest declines as they thought stocks looked cheap relative the inflated values of the late bull market stage. What causes this discouraged selling is that the rallies aren’t sustained and prices sink lower. There’s an old analogy about the erosion of a bear market being like a faucet dripping. Such slow steady loss, over time, becomes buckets. Business conditions at this stage may deteriorate further. Certainly there is an absence of good news with corporate earnings as the economy slides further. Sound familiar? The stocks that were very “speculative”, in terms of their potential to make money, may lose most of the rest of the their value in this phase. There were many Nasdaq stocks that have lost 80-90% of what they had gained in the prior bull market, in the 2 years after the March 2000 top. Blue chip type stocks tend to decline more slowly because investors hold on to them the longest. A bear market ends when all the possible bad news has been discounted. And it after it ends there is often even more negative news that keeps coming. Keep in mind that the “discounting” mechanism of stocks is always also an attempt to look ahead, so stock values will reflect the expectations of what earnings could be when business conditions improve – for example, about six months ahead. It also should be noted that no two bear markets are exactly alike. The 1987 bear market was amazingly short in time duration and could be measured in weeks, although the price declines were quite severe. Some bear markets skip the panic stage and others end with it as in 1987. Bear markets go on for quite different time and price durations. Of 13 years with significant declines in the 40 years preceding the March 2000 – March 2001 market drop, some have had steeper sell offs in percentage terms then what we have seen to date at least in the Dow. If we measure by the Nasdaq Composite, the 2000-2002 decline to date has brought a drop from closing weekly high to closing weekly low of 77% - 1987’s loss of 37% seems minor compared to this. The key aspect to knowing how it all works – that however steep the price swings are, such as was seen in spectacular last phase of the tech bull market run up of 1998-2000 – keeping in mind the characteristics of each phase will help you keep a level head. You know what is coming when the “excess” phase you are in ends and you can prepare for it. Keep in mind also, that these descriptions were made over 100 years ago. I have added more up to date examples, but the essential nature of the market phase stems from HUMAN nature and this is the “constant” or what doesn’t change much. This relatively unchanged human nature, ours and others, is what you have to deal with in the stock market and it benefits us greatly when we can see which market phase we are in. TRENDS ARE OF THREE TYPES Just as the market tends to have three phases related to mood or market sentiment, market trends can be divided into three types. The most important to investors, those who look to buy and hold stocks for as long as a stock is tending to command an increasing price over time – is the primary or major trend. The primary trend is one lasting a year or more – up to several years. There are counter movements in the direction of the major trend and these trends in the opposite direction, Dow called secondary price movements. Bullish or bearish expectations for the market gets overly one- sided and ahead of the “fundamentals” related to earnings prospects. Eventually a “reaction” develops that causes prices to correct back to a more realistic price level. Reactions or corrections are price swings that are in the opposite direction of the main or major trend. Once these run its course, the primary trend resumes. The segments that make up the price swings that are both in, and against, the direction of the primary trend can also be referred to as intermediate price swings or moves when they last a few weeks to a few months only. Within these intermediate price moves are day-to-day price fluctuations that Dow called minor trends. These can be a few hours to a day or a few days – they’re most often contained within a week period. Both intermediate and minor trends are of importance to traders primarily – minor trends are all that concern a day trader who will likely complete every trade within the same day. Intermediate trends are of some importance to investors when they are looking for the best point to enter the primary trend or to add to their position(s) in a stock or the market. THE PRIMARY TREND The primary or major trend is a price movement that usually lasts for a year or more. The exceptions to this time duration do exist and I pointed out the very short duration of the 1987 decline. One widely accepted measure of what constitutes a bear market is when there is a decline that takes prices more than 20% below the high point reached in the prior advance. Dow didn’t have a “rule” or guideline on this subject. The primary trend is composed of smaller movements of an “intermediate” duration of a few weeks to a few months. These intermediate trends run counter to AND in the same direction as the primary trend - they can also send prices into a sideways movement. Intermediate trends are also called secondary trends. An essential guideline as to a trend being a primary bull market is that each advance within the advancing trend should reach a higher level than the rally that preceded it. And, each reaction or counter-trend move should stop at a level that is above the prior major downswing. The reverse would need to hold true to be considered a primary bear market trend. An analogy to the primary trend is that it is like the tide of the ocean. In the rising tide, each wave comes in to a higher and higher point. And, just as the rising tide lifts all the boats, a bull market takes all stocks higher. The waves in an outgoing tide gradually recede away from a high point and all boats fall with it. A primary up trend is considered to be a bull market and primary down trend, a bear market according to Dow. If you are an investor in terms of your time horizon and investment goals, you should attempt to buy stocks as soon as possible after a bull market has begun. And example is shown in the chart below, taken from the 1990 – 1991 period, showing both a primary down trend or bear market and the primary up trend or bull market that developed following it – You will notice from this period shown in the above chart that the duration of the primary bear market trends were relatively short compared to the duration of the primary uptrends. On average this has been true since the 1950s due to the longer periods of economic expansion and shorter periods of recession – there is more urgency to end a recession. The current bear market is not much older than 2 years – compare this to the multi-year bull market that preceded it; e.g., from about 1994 to 2000; or, taking an even longer view of an overall bull market existing from around 1982 to 2000 (discounting the ’87 “crash” as it was so short-lived). This fact of the relative duration of bull and bear markets also relates to the fact that investors tend to stagger their purchases over the duration of bull markets, providing ongoing buying power, whereas selling out is often a one time decision and would be buyers stay away and don’t “support” the market on the declines, especially in a panic phase. SECONDARY TRENDS The secondary trends are of shorter duration – typically, 3 weeks to 3 months interrupt the major direction of stock prices with a countertrend movement. These are the corrections in a bull market – they “correct” the situation where prices have risen too far, too fast – and the recovery rallies in a bear market. Frequently these secondary countertrends retrace anywhere from a little over a third to as much as two thirds of the prior advance or decline. Very common is to see retracements of 50% of the prior price swing that was in the direction of the primary trend. It is not always easy to decide when and if a secondary trend is underway, but there are technical analysis tools that will help us tell. To continue the ocean analogy, the secondary trend is like the waves of the ocean. They can be big and they can knock you over, but they will come in and go out within the bigger movement of the tide – the primary trend. MINOR TRENDS The minor trends are the price fluctuations that occur from day to day and week to week, although a minor trend will rarely last more than 2-3 weeks. In terms of the overall market trend these are just “noise” and relatively unimportant. They can be compared to the ripples on a wave – the secondary trend. Together, the minor trends make up the intermediate trends. Lastly, we could say that the minor trend could be one that is set off by the actions or words of an individual – for example, the chairman of the Fed when that individual makes a statement hinting at the direction of policy regarding Fed bias toward raising or lowering of interest rates. Or, the precipitating action might be a statement from a key company in a key industry about their actual or expected earnings or profit trends. Last, but not least is the theory of “confirmation” and “divergence” that I discussed in my prior article on Dow theory. For this concept, came all that followed on technical INDICATORS (e.g., RSI) “confirming” or not confirming PRICE moves to new highs or lows. Also, the way that volume is seen as confirming the price trend or diverging from it – if so, a clear warning sign. Dow indicated that volume was a “secondary” indicator to PRICE but it was important to watch as a confirming aspect. On balance, Charles Dow made a huge contribution to the understanding of market behavior or “human” behavior as it manifests in trading and investing in stocks. ************************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 11-03-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Q&A With The Editor Naked Puts: Options 101: Limiting Risk With Trading Stops - Part II Spreads/Straddles/Combos: Recovery Rally Continues! Updated In The Site Tonight: Market Watch Market Posture ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Trading Basics: Q&A With The Editor By Mark Wnetrzak One of our readers asked for an explanation of the calculations involved in a covered-call position. Attn: Covered-Calls Editor Subject: Covered-Call Calculations Hello Mark, Wanted to ask a question in regards to using covered calls. I think I understand the basic premise of you purchase the stock and sell a call against it. You collect the premium for selling the call with the goal of having the stock trading at or above the strike price of the call when it expires, as it will get "called" away. Thus the premium you collect for selling the call will be all profit minus commissions. If the stock is trading below the strike but above you cost basis (purchase price of the stock - call premium collected ) you will still have some profit. If the price of the stock is less then your CB, then you are in a loss position. My question centers on how you figure the amount of return you get when you have a successful trade. For example: Say you purchase CREE at 15.049 and sell the NOV-12.50 call for 2.95. I know that you are measuring on target yield (which maybe I don't understand). However, say if you are looking at the amount of dollars you make if the trade is successful. Using the above example, by selling the call you have collect $295. Isn't the total dollar profit potential for the trade is $295 minus any commissions? If the stock falls below the strike price but stays above your CB, then you would make less then the $295. If the stock price falls below the CB, then you would loss all the $295 and more. Say you purchase 100 shares of CREE for 15.049 - thus your total outlay is $1504.90. You sell 1 Nov 12.50 call and you collect $295. Say the price stays above the 12.50 strike, so you keep the entire $295. How I see it: you would make a 19% return on the $1504 investment (excluding commissions). However, if you run this through the options pricing calculator it comes up with a negative .49 call profit per share. I guess I'm confused or don't understand something. Regards, MM Greetings MM, When you sell an "in-the-money" (ITM) covered-call, the profit will be the difference between the stock price, minus the premium received (your cost basis) and the strike price of the sold call. The cost basis of the position (including the impact of stock and option commissions) must be below the strike price of the sold call to produce any profit. Generally, the cost of commissions for an ITM covered-call will be about 8 cents a share, on a 1000 share position (2 stock plus 1 option commission divided by 1000). Using your example: 100 shares of CREE purchased at $15.05 Sell 1 contract NOV-12.50 call at $2.95 Your cost basis would be: $15.05 - $2.95 = $12.10 plus commissions. Your potential profit is the difference between the sold strike andthe cost basis: $12.50 - $12.10 = $0.40 or $40.00 for a 100 shares. As long as the stock remains above your cost basis (break-even point) at expiration, the position would return a profit (if you sell the stock). Obviously, the cost of commissions would negate any potential profit in this position. To reduce the impact of commissions, most ITM covered-call positions require a minimum purchase of 500 to a 1000 shares. With regard to calculating the potential yield on a covered-call, ROI, or return on investment, is determined by two circumstances when writing covered calls: Return if Called (RC), and return not called (RNC). Most traders use the RNC to evaluate plays since there is no assumption made on the movement of the underlying equity. Essentially, you take the "net" premium received and divide it by the cost basis. The cost basis would be the price paid for the stock minus the premium received; this is the maximum amount of equity required for the duration of the play. Larry McMillan's book, "Options: As a Strategic Investment," details the Covered Write Strategy and the formulas used in evaluating the return on investment. For in-the-money (ITM) RC, net premium would be the option premium minus the difference between the cost of the stock and the strike price. ITM RNC is the same as RC since the sold strike is already in the money -- this is the best return possible. ITM example of RC: XYZ @ $12.00, strike = $10.00, option premium = $2.50 net premium = 2.50 - (12 - 10) = 0.50 cost basis = 12.00 - 2.50 = 9.50 RC = 0.50/9.50 = 5.26% after multiplying by 100. RNC = the same. For out-of-the-money (OTM) RC, the net premium would be the option premium plus the difference between the cost of the stock and the strike price. This approach assumes the stock price will move up! OTM RNC uses just the option premium and assumes the stock price remains unchanged. OTM example of RC: XYZ @ $12.00, strike = $12.50, option prem. = $1.00 net premium = 1.00 + (12.5 - 12) = 1.50 cost basis = 12.00 - 1.00 = 11.00 RC = 1.50 / 11.00 = 13.64% RNC = 1.00 / 11.00 = 9.09% (You wouldn't get the benefit of the stock price moving up to the strike). Since all of our candidates are ITM, I correlate the returns to a monthly basis. Using the above ITM example of 5.26%: if expiration were 3 weeks (21 days) away, I would calculate the Target Yield as follows: 5.26 / 21 * 365 / 12 = 7.61%. Essentially, I annualize the return and divide by 12. This helps people visualize the value of compounding a seemingly small return over and over again. Well MM, I hope this answers your questions. Best Regards, Mark W. OIN SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield UAL 2.59 2.56 NOV 2.50 0.35 *$ 0.26 16.8% IMCL 8.16 7.80 NOV 7.50 1.25 *$ 0.59 12.4% MANU 3.17 3.12 NOV 2.50 0.85 *$ 0.18 11.2% REGN 15.21 15.79 NOV 15.00 1.25 *$ 1.04 10.8% WWCA 2.71 4.20 NOV 2.50 0.50 *$ 0.29 9.5% PCS 2.82 3.87 NOV 2.50 0.50 *$ 0.18 8.4% SNDK 14.30 20.98 NOV 12.50 2.75 *$ 0.95 7.1% VOXX 7.40 7.93 NOV 7.50 0.45 *$ 0.55 6.9% SEPR 8.72 9.09 NOV 7.50 1.55 *$ 0.33 6.7% VSAT 8.47 8.10 NOV 7.50 1.40 *$ 0.43 6.6% BCGI 10.30 13.04 NOV 10.00 1.10 *$ 0.80 6.3% TMCS 18.14 23.70 NOV 17.50 1.80 *$ 1.16 6.2% MU 17.30 16.80 NOV 15.00 2.85 *$ 0.55 5.5% MACR 9.15 11.85 NOV 7.50 2.00 *$ 0.35 5.3% GNSS 12.29 13.16 NOV 10.00 2.75 *$ 0.46 5.2% FDRY 6.02 7.63 NOV 5.00 1.35 *$ 0.33 5.1% MEDI 24.95 25.15 NOV 22.50 3.70 *$ 1.25 5.1% MCHP 23.18 25.98 NOV 20.00 4.20 *$ 1.02 4.7% IVX 12.95 12.80 NOV 12.50 0.80 *$ 0.35 4.2% BCGI 11.26 13.04 NOV 10.00 1.60 *$ 0.34 3.8% CREE 14.98 18.50 NOV 12.50 2.90 *$ 0.42 3.8% MENT 7.50 10.35 NOV 5.00 2.70 *$ 0.20 3.6% CPB 22.59 21.29 NOV 22.50 1.05 $ -0.25 0.0% CVH 37.55 32.59 NOV 35.00 3.90 $ -1.06 0.0% *$ = Stock price is above the sold striking price. Comments: Bad news, good news, no news, and the major averages continue to rally higher! Whether you like it or hate it doesn't matter, you still have to respect the momentum! Most of the positions in the covered-call portfolio are moving in tune to the market or continue to remain in their respective trading ranges. But, a few of the positions are early-exit (or adjustment) candidates: MedImmune (NASDAQ:MEDI), Campbell Soup (NYSE:CPB), and Coventry Health Care (NYSE:CVH). With the current negative environment in the health care sector, we will show Coventry closed in the name of money-management as a move towards $30 seems likely. Disclosure: Short UAL puts (a bullish position). 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 CKFR 16.39 NOV 15.00 FCQ KC 1.95 760 14.44 14 8.4% HAL 17.10 NOV 15.00 HAL KC 2.45 17528 14.65 14 5.2% HPQ 16.31 NOV 15.00 HHY KC 1.60 11341 14.71 14 4.3% ISSX 19.19 NOV 17.50 ISU KW 2.00 1475 17.19 14 3.9% MDCO 14.63 NOV 12.50 MQL KV 2.35 62 12.28 14 3.9% NVDA 14.10 NOV 12.50 UVA KV 2.05 5748 12.05 14 8.1% TTN 13.02 NOV 12.50 TTN KV 0.85 136 12.17 14 5.9% VRST 16.63 NOV 15.00 UVQ KC 1.90 68 14.73 14 4.0% 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 CKFR 16.39 NOV 15.00 FCQ KC 1.95 760 14.44 14 8.4% NVDA 14.10 NOV 12.50 UVA KV 2.05 5748 12.05 14 8.1% TTN 13.02 NOV 12.50 TTN KV 0.85 136 12.17 14 5.9% HAL 17.10 NOV 15.00 HAL KC 2.45 17528 14.65 14 5.2% HPQ 16.31 NOV 15.00 HHY KC 1.60 11341 14.71 14 4.3% VRST 16.63 NOV 15.00 UVQ KC 1.90 68 14.73 14 4.0% ISSX 19.19 NOV 17.50 ISU KW 2.00 1475 17.19 14 3.9% MDCO 14.63 NOV 12.50 MQL KV 2.35 62 12.28 14 3.9% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CKFR - CheckFree $16.39 *** On The Move! *** CheckFree (NASDAQ:CKFR) is a provider of financial electronic commerce products and services. The company operates three business divisions: Electronic Commerce, Investment Services and Software. Through the Electronic Commerce division, CKFR enables consumers to receive and pay bills electronically. The company, through the Investment Services division, provides a range of portfolio management services to financial institutions, including broker dealers, money managers and investment advisors. In addition, through the Software division, it delivers software, maintenance, support and professional services to large financial service providers and other companies across a range of industries. CheckFree appears to have completed a "double-bottom" formation as the stock has now moved above its August and September highs. The company beat analysts’ estimates when it reported earnings a few weeks ago and this position offers a favorable entry point near technical support. NOV 15.00 FCQ KC LB=1.95 OI=760 CB=14.44 DE=14 TY=8.4% ***** HAL - Halliburton $17.10 *** Earnings Anticipation? *** Halliburton (NYSE:HAL) provides a variety of services, products, maintenance, engineering and construction to energy, industrial and governmental customers. The company operates in 2 business segments: the Energy Services Group, consisting of Halliburton Energy Services and Landmark Graphics, and the operations of product service lines; and the Engineering and Construction Group, which provides a wide range of services to energy and industrial customers and government entities worldwide. Halliburton rallied after announcing that its Kellogg Brown & Root unit and Japan's JGC Corp., received a $745 million contract to provide engineering services for a gas project in Algeria. The company also recently amended agreements covering $260 million in letters of credit to remove a provision allowing banks to demand collateral if the company's debt ratings fell below investment grade. With earnings due Thursday, November 7, the stock has now broken above a 4-month base on increasing volume. Traders can speculate on the near-term performance of the issue with this conservative position. NOV 15.00 HAL KC LB=2.45 OI=17528 CB=14.65 DE=14 TY=5.2% ***** HPQ - Hewlett-Packard $16.31 *** Upgrade Booster Shot *** Hewlett-Packard (NYSE:HPQ) is a global provider of products, technologies, solutions and services. The company's offerings span information technology infrastructure, personal computing and access devices, global services and imaging and printing. In May 2002, the company merged with Compaq Computer Corporation. As a result of the merger with Compaq, the two companies' previous businesses and product lines have been integrated and reorganized into four major groups: The Enterprise Systems Group, HP Services, The Imaging and Printing Group, and The Personal Systems Group. On Monday, Hewlett-Packard jumped when Lehman Brothers analyst Dan Niles raised his rating on the company to “overweight” from “equal weight.” Niles said that HPQ has booked a solid 4th-quarter, with printing revenues above expectations. He also said PC revenues increased as the company holds market share, which should offset any weakness in sales of its server computers. Our outlook is also bullish, due to the recent technical strength in HPQ and this short-term position offers a low risk cost basis in the issue. NOV 15.00 HHY KC LB=1.60 OI=11341 CB=14.71 DE=14 TY=4.3% ***** ISSX - Internet Security Systems $19.19 *** Rally Mode! *** Internet Security Systems (NASDAQ:ISSX) is a security software company engaged in information protection solutions dedicated to protecting online assets. The company's security management solutions include software products, managed security services and professional services that are made up of both consulting and training services. The Company offers a comprehensive line of products and services for enterprise, smaller enterprise, consumer and service provider customers. ISSX is another stock that appears to have completed a "double-bottom" formation as the share price has moved above the August high. We 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 17.50 ISU KW LB=2.00 OI=1475 CB=17.19 DE=14 TY=3.9% ***** MDCO - The Medicines Company $14.63 *** Break-Out City? *** The Medicines Company (NASDAQ:MDCO) operates as a pharmaceutical company selling and developing products for the treatment of hospital patients. MDCO acquires, develops and commercializes biopharmaceutical products that are in late stages of development or have been approved for marketing. The company began selling Angiomax, its lead product, in U.S. hospitals in January 2001 as an anticoagulant replacement for heparin. MDCO is developing Angiomax for additional potential hospital applications as a procedural anticoagulant and for use in the treatment of ischemic heart disease. The Medicines Company rallied sharply after reporting earnings earlier this month and has now broken out of a year-long base. Favorable short-term speculation with a cost basis near technical support. NOV 12.50 MQL KV LB=2.35 OI=62 CB=12.28 DE=14 TY=3.9% ***** NVDA - NVIDIA $14.10 *** Short Squeeze = Shorts Screams? *** NVIDIA (NASDAQ:NVDA) designs, develops and markets graphics and media communication processors and related software for personal computers, workstations and digital entertainment platforms. The company provides an architecturally compatible family of 3-D graphics processors and graphics processing units that set the standard for performance, quality and features for a broad range of desktop PCs. Its processors are designed to be architecturally compatible backward and forward between generations, which allows for a low cost of ownership. A nice rally on heavy volume moves NVIDIA out of 3-month base and this position will allow traders to speculate, in a conservative manner, on the future movement of the company's share value. NOV 12.50 UVA KV LB=2.05 OI=5748 CB=12.05 DE=14 TY=8.1% ***** TTN - Titan $13.02 *** Bottom-Fishing *** Titan (NYSE:TTN) is a technology company that creates, builds and launches technology-based businesses. The company operates through four business segments: Titan Systems Corporation, Titan Wireless, Inc., Cayenta and Emerging Technologies and Business. On October 16, 2001, the company adopted a definitive plan to spin off and discontinue the operations of its fifth segment, SureBeam Corp. The spin-off was completed in August 2002. Merrill Lynch recently cut its rating on Titan to "neutral" from "buy," believing any benefit from increased defense spending is already reflected in the stock price. This just after Titan said that it was selected for a contract of up to $533 million from an undisclosed government customer? Hmmm... We simply want to take advantage of bullish momentum in the issue and this position offers a favorable cost basis at technical support for those investors who disagree with Merrill Lynch. NOV 12.50 TTN KV LB=0.85 OI=136 CB=12.17 DE=14 TY=5.9% ***** VRST - Verisity $16.63 *** Change-of-Character? *** Verisity (NASDAQ:VRST) provides proprietary technologies and software products used to verify designs of electronic systems and complex integrated circuits that are essential to virtually every high-growth segment of the electronics industry. VRST’s functional verification products automate critical steps in the process of determining whether systems and ICs conform to their design specifications. A strong rally off the October low that breaks a year-long downtrend and Adams Harkness lowers its rating on Verisity (to “buy” from “strong buy”)? Interesting times indeed! The Internet sector has performed very well in recent weeks and investors who want a long-term position in an industry-leading company can use this position to establish a low risk cost basis in the issue. NOV 15.00 UVQ KC LB=1.90 OI=68 CB=14.73 DE=14 TY=4.0% ***** ***************** 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 UAL 2.56 NOV 2.50 UAL KZ 0.30 16723 2.26 14 23.1% GPS 12.45 NOV 12.50 GPS KV 0.75 6835 11.70 14 13.9% LRCX 13.46 NOV 12.50 LKR KV 1.60 1791 11.86 14 11.7% VRTS 16.09 NOV 15.00 VIV KC 1.65 10580 14.44 14 8.4% NET 16.35 NOV 15.00 NET KC 1.75 840 14.60 14 6.0% ICST 21.25 NOV 20.00 IUY KD 1.75 898 19.50 14 5.6% INTL 27.20 NOV 25.00 TPQ KE 2.80 93 24.40 14 5.3% LF 27.00 NOV 25.00 LF KE 2.60 2 24.40 14 5.3% NSCN 13.72 NOV 12.50 QKN KV 1.45 275 12.27 14 4.1% SUPG 3.02 DEC 2.50 UQG LZ 0.85 0 2.17 49 9.4% JDSU 2.48 DEC 2.50 UQD LZ 0.30 14624 2.18 49 8.5% ASML 8.94 DEC 7.50 MFQ LU 2.10 109 6.84 49 6.0% XMSR 3.43 DEC 2.50 QSY LZ 1.15 150 2.28 49 6.0% RFMD 8.50 DEC 7.50 RFZ LU 1.60 2150 6.90 49 5.4% SEPR 9.09 DEC 7.50 ERQ LU 2.15 407 6.94 49 5.0% ***************** NAKED PUT SECTION ***************** Options 101: Limiting Risk With Trading Stops - Part II By Ray Cummins Last week's article on the use of trading stops with "naked" put positions generated some excellent E-mail replies and one of them deserves further discussion. Attn: Naked Puts Editor Subject: Using Trading Stops Hello Ray, I am relatively new to the options market but have traded stocks for many years with some success (less success in recent months). Because I am more of an investor than a trader, I have almost no experience with the use of stops, especially with options. Since I am selling puts with the idea of earning monthly premium rather than owning the issue, I would appreciate any other thoughts you have on the correct use of trading stops with this strategy. Thanks in advance for your help! MS Regarding the use of trading stops: There is definitely something to be said for stop-loss orders as they are an efficient means to follow the movement in a stock or other instrument while insuring some profit (or limited loss) if the primary trend changes character. Trading with stops is also a great method to eliminate the emotional and reactive decisions that often occur in the financial markets. The most common way traders use this tool is by monitoring the technical outlook for the underlying issue and when a significant changes or correction becomes likely, they tighten the stop (by moving the closing order nearer to the current price) to guarantee a reasonable profit (if "stopped" out) and still allow for a greater position profits upon resumption of the primary trend. In most cases, a simple STOP order is the best way to limit losses and/or protect profits in an option position. As I said last week, the guidelines for establishing protective stops suggest that the initial or opening limit order should be placed at a point where important technical support is evident. Most often, this will be a relatively small range reflecting the bottom of a basing pattern or trend-line established prior to entering the position. Again, the most important objective of the stop-loss order is to preserve capital if the play goes badly and yet provide every opportunity for the position to achieve its potential. If you are using a stop on the stock and the primary trend is directional, the placement of the first stop will differ, depending on your overall risk-reward tolerance. To assist in correctly placing the initial stop, we generally use major trend-lines, minor lows, and current support and resistance areas. One should also take into account the past volatility of the issue when setting the initial loss limit. After the play is initiated, most traders trail the stop loss slightly below the previous day's low to lock-in gains (or preserve capital) if the trend falters. With highly volatile issues, this can be difficult as they often fluctuate by large amounts. If the issue moves strongly in your favor, the stop-loss order can be advanced more aggressively until the target profit is achieved. While these principles work well with the majority of situations, there will always be those cases when even the most common rules do not seem to apply. In particularly fast-moving markets where straight-line advances make the placement of protective stops difficult, arbitrary buy and sell targets might be more advisable. There are also "progressive" stop-order systems for traders who like to fine tune the loss-limiting process to allow for brief periods of technical consolidation. Regardless of the manner in which you determine the placement of stops, there are two common rules for of using loss-limiting orders. After an initial profit is achieved, it is critical to avoid placing stops below a point, which if violated on a closing basis, indicates a change in the primary trend. In addition, protective stop orders under long positions are never moved down, nor are protective stop orders over short issues ever adjusted higher. The reason behind these rules is obvious: You must face the fact that if a trade is going against you, it is prudent to exit in a timely manner because it usually will only get worse. For more information on the subject of trading stops, read these informative articles: http://www.OptionInvestor.com/traderscorner/082602_1.asp and http://members.OptionInvestor.com/archive/traderscorner/2000/tc_062600_1.asp 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 14.99 NOV 7.50 0.35 *$ 0.35 15.6% AMZN 19.04 19.80 NOV 15.00 0.50 *$ 0.50 12.6% AFCO 13.19 15.14 NOV 10.00 0.25 *$ 0.25 12.5% KOSP 15.25 15.23 NOV 12.50 0.30 *$ 0.30 11.9% AMLN 16.95 17.69 NOV 15.00 0.75 *$ 0.75 11.7% AMZN 18.46 19.80 NOV 15.00 0.55 *$ 0.55 10.7% HOLX 11.74 12.93 NOV 10.00 0.50 *$ 0.50 10.5% TMCS 20.33 23.70 NOV 17.50 0.55 *$ 0.55 10.2% JWN 20.98 20.68 NOV 17.50 0.35 *$ 0.35 9.6% TMPW 17.68 15.75 NOV 15.00 0.30 *$ 0.30 9.3% HLYW 17.20 18.88 NOV 15.00 0.60 *$ 0.60 8.2% GETY 26.41 27.88 NOV 22.50 0.40 *$ 0.40 8.2% NOK 14.44 16.90 NOV 12.50 0.40 *$ 0.40 8.2% QCOM 31.37 35.67 NOV 25.00 0.65 *$ 0.65 8.2% AMLN 15.80 17.69 NOV 12.50 0.40 *$ 0.40 8.1% QCOM 36.20 35.67 NOV 30.00 0.65 *$ 0.65 7.9% KDE 23.77 27.88 NOV 20.00 0.70 *$ 0.70 7.9% COCO 37.75 38.73 NOV 30.00 0.75 *$ 0.75 7.9% OVER 30.07 23.05 NOV 22.50 0.45 *$ 0.45 7.6% DRD 19.70 19.25 NOV 17.50 0.30 *$ 0.30 7.3% PPDI 26.99 27.89 NOV 22.50 0.45 *$ 0.45 7.2% QCOM 36.52 35.67 NOV 30.00 0.40 *$ 0.40 6.8% AFFX 23.99 26.24 NOV 17.50 0.30 *$ 0.30 6.4% VZ 35.19 38.59 NOV 30.00 0.70 *$ 0.70 6.3% GENZ 23.57 28.37 NOV 17.50 0.35 *$ 0.35 6.0% SYMC 39.00 40.95 NOV 30.00 0.45 *$ 0.45 5.9% OVER 27.51 23.05 NOV 20.00 0.40 *$ 0.40 5.9% INVN 35.05 35.13 NOV 25.00 0.40 *$ 0.40 5.9% QLGC 33.15 37.15 NOV 22.50 0.25 *$ 0.25 5.3% *$ = Stock price is above the sold striking price. Comments: Despite the optimistic attitude among investors, the market has much to prove if the recent recovery rally is to be believed. The first step would be a move above the current resistance area near 910 (SPX) and a second, more important feat would be a break above the August highs near 965-970. Until those goals are achieved, traders should be on the alert for any bearish indications in their portfolio positions. Overture (NASDAQ:OVER) has been a very productive issue in recent months but this week's sharp drop after a Salomon Smith Barney analyst cut his earnings estimates, price target and rating for the stock suggests it is time to move on. Conservative traders should consider closing the position. 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 BSTE 30.74 NOV 25.00 BQS WE 0.30 779 24.70 14 9.5% BSX 38.40 NOV 35.00 BSX WG 0.35 1140 34.65 14 6.2% CAI 41.29 NOV 37.50 CAI WU 0.40 3 37.10 14 6.6% CIMA 27.17 NOV 25.00 UVK WE 0.45 16 24.55 14 10.7% KLAC 37.39 NOV 30.00 KCQ WF 0.30 23227 29.70 14 8.3% NVLS 33.06 NOV 27.50 NLQ WY 0.40 3991 27.10 14 10.8% TARO 35.39 NOV 32.50 QTT WZ 0.40 64 32.10 14 7.4% WPI 28.34 NOV 25.00 WPI WE 0.45 1804 24.55 14 11.6% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield WPI 28.34 NOV 25.00 WPI WE 0.45 1804 24.55 14 11.6% NVLS 33.06 NOV 27.50 NLQ WY 0.40 3991 27.10 14 10.8% CIMA 27.17 NOV 25.00 UVK WE 0.45 16 24.55 14 10.7% BSTE 30.74 NOV 25.00 BQS WE 0.30 779 24.70 14 9.5% KLAC 37.39 NOV 30.00 KCQ WF 0.30 23227 29.70 14 8.3% TARO 35.39 NOV 32.50 QTT WZ 0.40 64 32.10 14 7.4% CAI 41.29 NOV 37.50 CAI WU 0.40 3 37.10 14 6.6% BSX 38.40 NOV 35.00 BSX WG 0.35 1140 34.65 14 6.2% 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). ***** BSTE - Biosite $30.74 ** Favorable Quarterly Report! *** A leader in the drive to advance diagnosis, Biosite (NASDAQ:BSTE) is a unique research-based company dedicated to the discovery and development of novel protein-based diagnostic tests that improve a doctor's ability to diagnose debilitating and life-threatening diseases. The firm combines integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes. Biosite's "Triage" rapid diagnostic tests are used in approximately 50 percent of U.S. hospitals and in approximately 40 international markets. Last week, Biosite reported strong growth for the third quarter of 2002 and projected continuing growth in fiscal year 2003. The company said that it expects revenues in 2003 to be 35 to 40 percent higher than in 2002, with the possibility for upside from new products and new markets that are currently under development. Traders can profit from continued upside activity in the issue with this position. NOV 25.00 BQS WE LB=0.30 OI=779 CB=24.70 DE=14 TY=9.5% ***** BSX - Boston Scientific $38.40 *** Future Upside Potential? *** Boston Scientific (NYSE:BSX) is a global developer, manufacturer and marketer of medical devices whose products are used in a wide range of interventional medical specialties. The firm's products are offered by two dedicated business groups, Cardiovascular and Endosurgery. The Cardiovascular organization focuses on products and technologies for use in the firm's interventional cardiology, interventional radiology, peripheral vascular and neurovascular procedures. The Endosurgery organization focuses on products and technologies for use in oncology, vascular surgery, endoscopy, urology and gynecology procedures. BSX shares have rallied in recent weeks due to the company's victories in court over rivals in the drug-coated stent market. The question now is, "Does the company's earnings potential justify the current valuation?" Well, as with any other stock, it really doesn't matter in the near-term. What matters is what people "believe" it's worth and traders can speculate on that price in a conservative manner with this position. NOV 35.00 BSX WG LB=0.35 OI=1140 CB=34.65 DE=14 TY=6.2% ***** CAI - CACI International $41.29 *** 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, 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. CACI International recently announced that quarterly profit soared 42% and forecast future growth on strong sales of security products to the U.S. government. Investors were happy with the news and the issue is now testing its all-time highs. Traders can profit from continued bullish activity in CAI's share value with this position. NOV 37.50 CAI WU LB=0.40 OI=3 CB=37.10 DE=14 TY=6.6% ***** CIMA - Cima Labs $27.17 *** A Big Day! *** Cima Labs (NASDAQ:CIMA) develops and manufactures fast-dissolve and enhanced-absorption oral drug delivery systems. OraSolv & DuraSolv, the firm's proprietary fast-dissolve technologies, are oral dosage forms that dissolve quickly in the mouth without chewing or the need for water. The firm manufactures five pharmaceutical brands using its DuraSolv and OraSolv fast dissolve technologies. These comprise three prescription brands and two over-the-counter brands, including Triaminic Softchews for Novartis; Tempra FirsTabs for Bristol-Myers Squibb; AstraZeneca Zomig-ZMT and its equivalent for the European market, Zomig Rapimelt; Remeron SolTab for Organon, and NuLev for Schwarz Pharma. The United States Food and Drug Administration is reviewing a regulatory submission for a product the firm developed, an orally disintegrating dosage form of loratadine, which is likely to be marketed as a generic alternative to Claritin Reditabs. On Thursday, Cima Labs reported a larger profit compared to the year earlier period and offered bullish guidance for the fourth quarter. Investors can establish a conservative entry point in the issue with this position. NOV 25.00 UVK WE LB=0.45 OI=16 CB=24.55 DE=14 TY=10.7% ***** KLAC - KLA-Tencor $37.39 *** Semiconductor Rally! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for semiconductor and related microelectronics products. The firm's comprehensive portfolio of products, software, analysis, services and expertise is designed to help integrated circuit (IC) manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. Semiconductor stocks have led the rally in the technology group and traders who believe the upside activity will continue can profit from that outcome with this position. NOV 30.00 KCQ WF LB=0.30 OI=23227 CB=29.70 DE=14 TY=8.3% ***** NVLS - Novellus Systems $33.06 *** Chip Sector Favorite! *** Novellus Systems (NASDAQ:NVLS) manufactures, markets and services semiconductor processing equipment. The company's products are comprised of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the chip's surface before these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems use chemical plasmas to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. The Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS is another popular stock in the semiconductor equipment sector and traders can profit from a continued recovery in its share value with this position. NOV 27.50 NLQ WY LB=0.40 OI=3991 CB=27.10 DE=14 TY=10.8% ***** TARO - Taro Pharmaceutical $35.39 *** Solid Earnings! *** Taro Pharmaceutical Industries (NASSDAQ:TARO) is a multinational, science-based pharmaceutical firm dedicated to meeting the needs of its customers through the discovery, development, manufacture and marketing of the highest quality healthcare products. The company was founded with the goal of building a pharmaceutical firm in Israel that would provide high quality pharmaceutical products while investing in research to develop an international presence. Last week, Israel's Taro Pharmaceutical posted a 58% rise in third-quarter net income on Thursday, boosted by higher sales and lower expenses. Taro posted a profit of $11.6 million, or 39 cents per share, compared with $7.3 million, or 29 cents per share a year earlier as revenues rose to $55.5 million from $41.0 million. Taro Pharmaceutical is a relatively stable issue with a favorable long-term outlook and drug-sector investors can use this position to a establish a conservative cost basis in the company's stock. NOV 32.50 QTT WZ LB=0.40 OI=64 CB=32.10 DE=14 TY=7.4% ***** WPI - Watson Pharmaceuticals $28.34 *** Earnings Speculation! *** Watson Pharmaceuticals (NYSE:WPI) is primarily engaged in the development, manufacture, marketing and distribution of branded and off-patent (generic) pharmaceutical products. Through its many internal product developments and synergistic acquisitions of other products and businesses, the company has grown into a diversified specialty pharmaceutical company. Watson markets approximately 30 branded pharmaceutical product lines and roughly 140 off-patent pharmaceutical products. The company also develops advanced drug delivery systems designed to enhance the therapeutic benefits of existing drug forms. Watson Pharmaceuticals is due to announce quarterly earnings next week and traders are speculating on the outcome. This position offers a conservative method to participate in that activity. NOV 25.00 WPI WE LB=0.45 OI=1804 CB=24.55 DE=14 TY=11.6% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield UAL 2.56 NOV 2.50 UAL WZ 0.40 16137 2.10 14 63.7% PPD 21.90 NOV 17.50 PPD WW 0.30 2361 17.20 14 13.9% ADRX 18.37 NOV 15.00 QAX WC 0.25 1236 14.75 14 12.8% PHTN 23.34 NOV 20.00 PDU WD 0.35 83 19.65 14 12.0% MANH 22.75 NOV 20.00 MQR WD 0.35 21 19.65 14 11.3% QLGC 37.15 NOV 32.50 QLC WZ 0.45 2775 32.05 14 9.2% STE 27.00 NOV 25.00 STE WE 0.30 198 24.70 14 7.2% QCOM 35.67 NOV 30.00 AAW WF 0.25 9490 29.75 14 6.1% GILD 36.50 NOV 32.50 GDQ WZ 0.20 617 32.30 14 4.0% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Recovery Rally Continues! By Ray Cummins Investors continued to buy stocks Friday despite renewed economic concerns and data suggesting there will be little improvement in corporate earnings in the coming months. The Dow Jones Industrial Average climbed 120 points to 8,517 amid a late session surge that boosted the major equity averages to a fourth consecutive week of gains. Blue-chip investors flocked to SBC Communications (NYSE:SBC), Alcoa (NYSE:AA), J.P. Morgan Chase (NYSE:JPM), Intel (NASDAQ:INTC), Hewlett Packard (NYSE:HPQ), and Phillip Morris (NYSE:MO) among others. In the technology segment, semiconductor, networking and data storage issues were the leaders, helping the NASDAQ to a 30 point gain at 1,360. The broader S&P 500-Stock Index closed up 15 points at 900 on optimistic buying in virtually every sector. Market breadth was positive on the NYSE, where 2,324 stocks rose and 898 fell on 1.45 billion shares traded. On the technology exchange, 1.83 billion shares changed hands with 2,196 stocks advancing against 1,051 decliners. In the treasury market, bonds moved lower. The 10-year Treasury note fell 13/16 point, or $8.125 for each $1,000 invested. The yield, which moves inversely to price, rose to 3.99%. The 30-year long bond was down 23/32 point to yield 5.04%. ***************** 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 96.58 102.94 NOV 80 85 0.50 84.50 $0.50 Open UNH 93.49 92.69 NOV 80 85 0.60 84.40 $0.60 Open WTW 45.40 47.70 NOV 35 40 0.50 39.50 $0.50 Open ABK 63.21 60.97 NOV 50 55 0.60 54.40 $0.60 Open CHIR 42.51 40.09 NOV 35 38 0.30 37.20 $0.30 Open? CDWC 50.61 54.15 NOV 40 45 0.60 44.40 $0.60 Open CEPH 50.58 49.81 NOV 40 45 0.50 44.50 $0.50 Open CTSH 69.54 67.80 NOV 55 60 0.55 59.45 $0.55 Open CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status FITB 57.47 65.57 NOV 70 65 0.65 65.65 $0.08 Open? LEN 53.67 55.21 NOV 65 60 0.80 60.80 $0.80 Open LMT 62.45 56.38 NOV 75 70 0.55 70.55 $0.55 Open MMM 120.60 128.05 NOV 140 135 0.50 135.50 $0.50 Open AIG 63.71 61.85 NOV 75 70 0.60 70.60 $0.60 Open GD 76.58 79.30 NOV 90 85 0.55 85.55 $0.55 Open AGN 55.57 53.24 NOV 65 60 0.50 60.50 $0.50 Open NE 31.45 33.98 NOV 38 35 0.30 35.30 $0.30 Open Fifth Third Bancorp (NYSE:FITB) continues to hover at resistance (near $65), further strengthening the opinion that a catalyst will be necessary to move it above the current range. Traders with an aggressive outlook should monitor the issue for a rally above $67, on increasing volume, before exiting or adjusting the position. Noble (NYSE:NE) has reversed course in recent sessions and the issue is now a candidate for early exit on a close above the sold strike at $35. SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V G/L Status ERTS 67.73 66.08 NOV 75 60 0.40 0.50 0.90 Open? SCHL 47.43 43.82 NOV 55 40 0.25 0.60 0.85 Open? DLTR 25.12 26.56 NOV 30 20 0.00 0.30 0.30 Open NXTL 9.69 12.48 JAN 12 7 0.10 1.30 1.40 Open CAI 39.21 41.29 DEC 45 35 0.10 0.80 0.90 Open Nextel (NASDAQ:NXTL) was the big winner this month, offering up to $1.40 profit in the speculative position. Caci International (NYSE:CAI) has also provided excellent gains and the bullish play in Dollar Tree Stores (NASDAQ:DLTR) has achieved a small profit. The recent rallies in Electronic Arts (NYSE:ERTS) and Scholastic (NASDAQ:SCHL) appear to have ended, thus it may be time to close those positions. SYNTHETIC (BEARISH) ******************* No Open Positions BULL CALL SPREADS ***************** Symbol Pick Last Month L/C S/C Debit M/V B/E Status CHTT 42.99 41.85 NOV 35 40 4.20 4.60 39.20 Open? Shares of Chattem (NASDAQ:CHTT) fell from grace after the firm's board approved a two-for-one split of its common stock and said it was maintained its earnings forecast for the quarter. Maybe there is something we don't know? Also, the bullish position in Lumenis (NASDAQ:LUME) has been closed. CALENDAR SPREADS **************** Symbol Pick Last Long-Opt Short-Opt Debit M/V Status LPNT 33.04 33.57 FEB-35C NOV-35C 1.25 2.00 Open CREE 14.98 18.50 JAN-17C NOV-17C 1.00 1.25 Open HNT 25.75 24.25 JAN-30C NOV-30C 0.75 0.60 Open HGSI 11.34 9.09 DEC-15C NOV-15C 0.40 0.20 Closed Lifepoint (NASDAQ:LPNT) has been very active in recent sessions but the position has already offered a favorable gain and remains profitable. Cree (NASDAQ:CREE) has also become more volatile over the past week and Friday, the issue rallied to a 7-month high. Traders who think the recent upside activity will continue should consider a transition to a diagonal spread, rolling to the DEC-$20 options in the short position. A more neutral adjustment would involve rolling to the DEC-$17.50 options (short) for a credit. The speculative position in Human Genome Sciences (NASDAQ:HGSI) did not move as expected, although the loss was minimal, and the bullish portion of the Waters (NYSE:WAT) calendar spread has been closed to preserve capital. SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit M/D Status AES 2.92 1.98 J04-7.5P J03-2.5P 4.50 4.25 Open IMCL 7.77 7.80 J04-15P JO3-5P 8.00 7.75 Open NVDA 11.10 14.10 J04-20P J03-7P 10.00 9.00 Open Nvidia (NASDAQ:NVDA) was a big winner this week, offering up to a $1.00 profit after only four days in the position. CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V G/L Status PPD 21.58 21.90 NOV 25 17 1.25 1.00 0.25 Open Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. **************** READER'S REQUEST **************** One of our readers requested some synthetic positions on low cost issues in the technology group. All of these stocks have bullish (short-term) trends as well as favorable option premiums. Traders who believe the underlying issues have upside potential may find the risk-reward outlook in these plays attractive. ***** FCS - Fairchild Semiconductor $13.30 *** On The Rebound! *** Fairchild Semiconductor International (NYSE:FCS) is a global company that designs, manufactures and markets high-performance building block semiconductors critical for multiple end markets, with a focus on developing power and interface solutions. The company's products are used in consumer, communications, computer, industrial and automotive applications. Fairchild's products are organized into three principal product groups: Analog and Mixed Signal Products, Discrete Products and Interface & Logic Products. Other products include non-volatile memory and opto-electronics. PLAY (speculative - bullish/synthetic position): BUY CALL FEB-17.50 FCS-BW OI=2163 A=$0.85 SELL PUT FEB-10.00 FCS-NB OI=160 B=$0.75 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$0.90 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $350 per contract. ***** LTXX - LTX Corporation $6.83 *** Hot Sector! *** LTX Corporation (NASDAQ:LTXX) designs, manufactures, markets and services semiconductor test equipment. The company sells its test systems to semiconductor designers and manufacturers worldwide, including Texas Instruments, Philips Semiconductor, NEC, National Semiconductor, Motorola, Vitesse Semiconductor, Agere Systems, Infineon Technologies and Hitachi. These customers utilize this semiconductor test equipment to test every semiconductor device at two different stages during the manufacturing process. These devices are incorporated in a wide range of products, including data communications equipment such as switches, routers, servers, broadband products such as cable modems and Ethernet accessories, personal communication devices such as cell phones and personal digital assistants, retail consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and personal computer accessory products such as disk drives and 3-D graphics accelerators. PLAY (speculative - bullish/synthetic position): BUY CALL FEB-10.00 UXT-BB OI=83 A=$0.65 SELL PUT FEB-5.00 UXT-NA OI=25 B=$0.50 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.45-$0.70 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $200 per contract. ***** MENT - Mentor Graphics $10.35 *** Favorable Earnings! *** Mentor Graphics (NASDAQ:MENT) is engaged in electronic design automation (EDA), providing software and hardware design tools that enable companies to send better electronic products to market faster and more cost-effectively. Mentor manufactures, markets and supports EDA products and provides related services, which together are used by engineers to design, analyze, simulate, model, implement and verify the components of electronic systems. Customers use the firm's products in the design of such diverse products as automotive electronics, video games systems, computer network hubs and routers, telephone-switching systems, cellular handsets, signal processors, video conferencing equipment, 3-D graphics boards, digital audio broadcast radios, smart cards and products enabled with the Bluetooth short-range wireless radio technology. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-12.50 MGQ-AV OI=180 A=$0.90 SELL PUT JAN-7.50 MGQ-MU OI=41 B=$0.50 INITIAL NET DEBIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.55-$0.80 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $275 per contract. ***** XMSR - XM Satellite Radio $3.43 *** Bottom Fishing! *** XM Satellite Radio Holdings (NASDAQ:XMSR) is transforming radio, an industry that has seen little technological change since FM, almost 40 years ago. XM's programming lineup features over 100 coast-to-coast digital channels: 70 music channels, many of them commercial- free, from hip-hop to opera, classical to country, bluegrass to blues; and 31 channels of sports, talk, children's and entertainment. The company will build a subscriber base for XM Radio through multiple distribution channels, including an exclusive distribution arrangement with General Motors, other automotive manufacturers, car audio dealers and consumer retail electronics stores. XM was named 2001 "Product of the Year" by Fortune, "Invention of the Year" by Time and won Popular Science's 2001 "Best of What's New" Grand Award in the electronics category. XM also won several awards at the 2001 Consumer Electronics Show, including "Best of CES" in the automotive category, and received a coveted "A" rating from Entertainment Weekly. XM's strategic investors include America's leading car, radio and satellite TV companies; General Motors, American Honda Motors, Clear Channel Communications and DIRECTV. PLAY (very speculative - bullish/synthetic position): BUY CALL APR-5.00 QSY-DA OI=411 A=$0.80 SELL PUT APR-2.50 QSY-PZ OI=205 B=$0.60 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.60-$0.90 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $140 per contract. ************** 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. ***** BR - Burlington Resources $42.01 *** Oil Sector Hedge! *** Burlington Resources (NYSE:BR) is a holding company that is engaged, through its principal subsidiaries, Burlington Resources Oil & Gas Company LP, The Louisiana Land and Exploration Company, Burlington Resources Canada, Canadian Hunter Exploration and their affiliated companies, in the exploration for and the development, production and marketing of crude oil, NGLs (natural gas liquids) and natural gas. The company's asset base is dominated by North American natural gas properties and its extensive North American lease holdings extend from the Gulf of Mexico to the Mackenzie Delta region in the Northwest Territories of the Canadian Arctic and Alaska's north slope. The company also has operations in the Northwest European Shelf, North Africa, Latin America, the Far East and West Africa. BUY PUT DEC-35.00 BR-XG OI=69 A=$0.45 SELL PUT DEC-37.50 BR-XU OI=77 B=$0.70 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$37.20 ***** EBAY - eBay Inc. $64.79 *** New Trading Range? *** eBay (NASDAQ:EBAY) is a web-based community in which buyers and sellers are brought together to browse, buy and sell items such as collectibles, automobiles, high-end or premium art items, jewelry, consumer electronics and a host of practical and other miscellaneous items. The eBay trading platform is an automated, topically arranged service that supports an auction format in which sellers list items for sale and buyers bid on items of interest, and a fixed-price format in which sellers and buyers trade items at a fixed price established by sellers. Through its wholly owned and partially owned subsidiaries and affiliates, the Company operated online trading platforms directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and also the United Kingdom. PLAY (conservative - bullish/credit spread): BUY PUT DEC-50 QXB-XJ OI=1734 A=$0.65 SELL PUT DEC-55 QXB-XK OI=950 B=$1.10 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$54.45 ***** IGEN - IGEN International $36.49 *** Rally Mode! *** IGEN International (NASDAQ:IGEN) develops and markets products that utilize its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. ORIGEN is incorporated into instrument systems and related consumable reagents, and the company also offers assay development as well as other services used to perform analytical testing. Products based on IGEN's ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. PLAY (less conservative - bullish/credit spread): BUY PUT DEC-25.00 GQ-XE OI=1376 A=$0.35 SELL PUT DEC-30.00 GQ-XF OI=894 B=$1.00 INITIAL NET-CREDIT TARGET=$0.70-$0.80 POTENTIAL PROFIT(max)=16% B/E=$54.45 ***** SLM - SLM Corporation $102.94 *** Recession Proof? *** SLM Corporation (NYSE:SLM), formerly USA Education, is a private source of funding, delivery and servicing support for higher education loans for students and their parents in the United States. SLM provides a range of financial services, processing capabilities and information technology to meet the needs of educational institutions, lenders, students and guarantee agencies. The company's managed portfolio of student loans, including loans owned and loans securitized, totals over $70 billion, of which the majority is federally insured. The firm also has commitments to buy billions of dollars of additional student loans. Primarily a provider of education credit, the company serves a diverse range of clients, including over 6,000 educational and financial institutions and guarantee agencies. The company serves in excess of seven million borrowers through its ownership or management of student loans. PLAY (conservative - bullish/credit spread): BUY PUT DEC-85.00 SLM-XQ OI=39 A=$1.15 SELL PUT DEC-90.00 SLM-XR OI=569 B=$1.70 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$89.35 ***** ABC - AmerisourceBergen $72.45 *** Premium Selling! *** AmerisourceBergen (NYSE:ABC) is a pharmaceutical services firm dedicated solely to the pharmaceutical supply chain. The company markets its pharmaceutical products and services to hospital systems (hospitals and acute care facilities), alternate care customers (mail order facilities, physicians' offices, long-term care institutions and clinics), independent community pharmacies, and regional drugstore and food merchandising chains. The firm also provides outsourced pharmacies to long-term care and workers' compensation programs. AmerisourceBergen operates in two segments: Pharmaceutical Distribution and PharMerica. The Pharmaceutical Distribution is primarily the Company's wholesale and specialty drug distribution business, and PharMerica is their institutional pharmacy business. AmerisourceBergen was formed in connection with the merger of AmeriSource Health Corporation and Bergen Brunswig Corporation, which was consummated in August 2001. PLAY (conservative - bearish/credit spread): BUY CALL DEC-85 ABC-LQ OI=172 A=$0.50 SELL CALL DEC-80 ABC-LP OI=145 B=$1.05 INITIAL NET CREDIT TARGET=$0.60-$0.75 POTENTIAL PROFIT(max)=14% B/E=$80.60 ***** OEX - S&P 100 Index $458.16 *** Sell The Rally! *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. Traders who participate in OTM credit-spreads often utilize S&P 100 (OEX) options because they generally contain more premium than options on individual stocks and also provide an underlying instrument less prone to huge, gapping moves. Please review the OIN's Market Sentiment section for more specific information on the current trends in equities. PLAY (conservative - bearish/credit spread): BUY CALL NOV-495 OXB-KS OI=2147 A=$0.70 SELL CALL NOV-490 OXB-KR OI=5635 B=$1.00 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT (monthly)=14% ***** SBGI - Sinclair Broadcast Group $10.60 *** Disparity Play! *** Sinclair Broadcast Group (SBGI) is one of the largest and most diversified television broadcasting companies, owns and operates, programs, or provides sales services to 62 television stations in 39 markets. Sinclair's television group includes FOX, ABC, WB, CBS, NBC, and UPN affiliates and reaches approximately 24% of all U.S. television households. PLAY (very speculative - bearish/credit spread): BUY CALL DEC-15.00 JQO-LC OI=91 A=$0.45 SELL CALL DEC-12.50 JQO-LV OI=193 B=$1.05 INITIAL NET CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=35% B/E=$13.15 ***** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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