The Option Investor Newsletter Sunday 11-10-2002 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: Cracks in the Foundation Futures Market: Methodology Index Trader Wrap: "General-ley" speaking, stocks were lower Editor’s Plays: Expiration Week Market Sentiment: Put Away Those Horns Ask the Analyst: When Signals Conflict Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Big Money Wins Again Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 11-08 WE 11-01 WE 10-25 WE 10-18 DOW 8537.13 + 19.49 8517.64 + 73.65 8443.99 +121.59 +472.11 Nasdaq 1359.29 - 1.41 1360.70 + 29.57 1331.13 + 43.27 + 77.39 S&P-100 457.39 - 0.77 458.16 + 2.51 455.65 + 6.63 + 26.34 S&P-500 894.74 - 6.22 900.96 + 3.31 897.65 + 13.26 + 49.07 W5000 8438.80 - 63.40 8502.20 + 51.56 8450.64 +126.86 +450.75 RUT 378.99 - 4.46 383.45 + 10.81 372.64 + 9.27 + 18.44 TRAN 2346.88 + 31.20 2315.68 + 2.37 2313.31 + 34.22 +124.42 VIX 33.56 - 0.42 33.98 - 2.29 36.27 - 3.55 - 3.62 VXN 52.01 + 2.15 49.86 - 0.53 50.39 - 4.94 - 3.54 TRIN 1.80 0.95 0.89 0.80 Put/Call 1.05 0.71 0.77 0.68 ****************************************************************** Cracks in the Foundation by Jim Brown Thanks to a closing spike the Dow managed to close the day in negative territory but finish the week in the green. This makes the fifth positive week in a row for the Dow. The other indexes were not so lucky and all broke four week winning streaks and appear to be leading indicators that the recent rally may be developing cracks in the foundation. Dow Chart - 90 min Nasdaq Chart - 120 min Friday began strong despite another round of warnings but the gains proved impossible to hold. Leading the list was McDonalds who warned for the seventh time in eight quarters that earnings were going to miss estimates. They are going to close 175 stores and layoff 600 full time employees. Blaming slowing sales, cheaper prices and competition they said October revenue would be below estimates. Dow Jones reported that customer traffic was actually up in October but the average check was lower due to the new $1 menu options. The fast food war is heating up and Wendy's just announced less than expected results on Thursday. The Burger King buyout is also suffering from the war. Safeway warned that sales for the quarter and full year would be less than expected because previous growth estimates were too high. This is a continuing trend in the food sector and other retailers got hit for losses as well. WIN, KR, GAP, ABS, SVU and even distributor FLM traded lower. Because some of the week chain store sales comes from increased competition from Wal-Mart that stock closed up slightly. WMT has not been saying bullish things lately and it appears that gaining share is the only thing keeping them out of trouble. The heat in the kitchen is rising in many companies and the chefs in charge of cooking the books are bailing out in droves. Beleaguered Tenet Healthcare has been under the gun all week for accounting questions and THC announced that the COO and CFO had resigned. Not a good sign and the stock, which had been trading at $50 two weeks ago closed at $14.84 on Friday. Other healthcare companies were also hit by friendly fire and guilt by association. Video game maker THQI, which has been under fire for lowering revenue estimates announced their COO had left the company and they were going to dissolve the position. THQI dropped nearly -10% on the news. After the bell on Friday Duke Energy announced that it had received a subpoena as part of a grand jury investigation into energy trading in California. Expect more on this topic as investigations progress. Xcel Energy denied an article in the Wall Street Journal that it had filed for Chapter 11 bankruptcy. Seems like that would be really easy to check before putting it in print. Xcel claimed they had not filed and had no intentions to file. They claimed they were working with creditors to plan a restructuring proposal and it would take weeks before any decision was known. Other than the stock news above the markets were quiet on Friday and the major news was the unanimous vote on the Iraq resolution by the UN Security Council. This should be more correctly labeled the "Gotcha" resolution since it puts Saddam in a box from which there is no escape. Iraq has seven days to "accept" the resolution. Once accepted they have 30 days to declare all their weapons of mass destruction and set them up for future destruction. Once they are declared the inspectors will inspect them and destroy them. The key here is the default provision. If Iraq accepts the resolution and fails to declare ALL their weapons and the inspectors find out they lied then all bets are off. The next communication Saddam will receive will be in the form of a cruise missile in his office window. Not really but you get the idea. For somebody that has spent billions rebuilding his weapons supply and hiding them from outside sources he is not going to simply say "sure, here is the keys to 33 of my palaces and these are the weapons you will find there." We will probably get the bluff, reluctant acceptance and then incomplete disclosure of the stuff he deems replaceable. He will hope to run the same shell game he did before where trucks were driving out the back gate while inspectors were being questioned at the front gate. The inspectors are going to play by different rules this time. The resolution gives them no knock, any one, any time, any place authority to search and this is something Saddam has violently rejected for obvious reasons. It appears that by Dec-23rd the inspectors will walk up to several "undeclared" weapons sites using information from undercover operatives, defectors and the Iraq opposition and "discover" undeclared weapons. The U.S. will say I told you so and with prior approval from the U.N. will proceed to war. The inspectors must report back to the U.N. by mid February on what they found but nothing prevents them from declaring violations at any time. This eventuality has been priced into the market for quite some time and the movement in oil prices today confirmed it. Oil rose a meager +44 cents after the announcement. The U.S. has been moving troops and equipment for months and the fact that we may go to war is now taken for granted. Most analysts think it will be short and harsh and will be over by April 1st. The resolution was credited with causing the Friday sell off but I personally doubt it was related. If anything it put off any attack until February or later and improved the chances of a possible coalition to accomplish the task. If anything it was another win by the Bush administration in a week already full of successes. More troubling to the markets was extended analysis of the 50 point rate cut. The wording of the announcement along with the minutes of the September meeting make it clear that the Fed did not come to this decision over time. Analysts feel it was something specific that suddenly turned a split decision over a 25 point cut at the last meeting into an unanimous decision for a 50 point cut this week. The overriding question is what? Yes, economic reports have been turning down but the majority are still pointing to growth. Jobs are not that weak and productivity is high. Is there a banking problem? Is there another Long Term Capital about to implode somewhere? Is Brazil going to renounce the IMF and go it alone without strong economic changes? Analysts fear that the Fed knows something they are not telling. The Fed commissioned an analysis of Japan's death spiral recently and it is possible they learned enough from that analysis that it scared them into action. One of the lessons from Japan was that a long succession of minor rate cuts only when absolutely necessary left them with a flat economy and no cuts left. The lesson many are suggesting is that when faced with a sluggish economy and dwindling ammo you make the maximum use of that ammo in the shortest period of time. The 50 point cut was totally out of character for the current Fed and Greenspan. Something changed and if the maximum use theory is to be believed then the Fed thinks there is something to worry about. Whether it is just the failure of the economy to bounce or something else in our future we don't know. The uncertainty is weighing on the markets. What was the Fed afraid of and should we be worried. Friday could have been worse. There was a concentrated effort to keep the Dow over 8517 so that the winning streak could be kept alive. Big money wanted investors to read "five week winning streak" in the paper this weekend instead of "markets fall on Fed concerns." Actually the closing levels on all the major indexes should be a warning message to investors. The current pivot points for the major indexes were Dow 8600, Nasdaq 1380, S&P 905 and OEX 465 as of Friday morning. Moving below these numbers signifies a break in the short term trend and the possibility of weakness ahead. All the indexes closed well below those levels on Friday. The selling on Friday was far from convincing and could have been just post Fed profit taking. The lackluster market action drew numerous commentators and analysts in front of the TV cameras to expound on why we are going to Dow 5000 or 10000. We are a country with 44 million investors and days like Friday bring out nearly that many analysts and all with differing opinions. Trying to apply too much importance to Friday's action will have you chasing ghosts and dreaming in candlesticks. The only thing we can infer from Thursday and Friday is that investor's enthusiasm cooled from the October rally intensity and with the Fed meeting and election over they took the day off to spend some of their gains. If you want to really drive yourself crazy just ponder why the bears were unable to cause a stronger drop with no real opposition. Next week is going to be a yawner. Monday is Veteran's Day and the bond markets will be closed. The stock market will be open but volume should be light. The economic calendar is blank for the Mon/Tue/Wed but will make up for it on Thursday and Friday. Thursday we get Jobless Claims, Import/Export prices, Retail Sales and the Philly Fed Survey. Friday we have Business Inventories, PPI, Industrial Production, Capacity Utilization and Michigan Sentiment. These reports should not be earth shaking since we already know the recovery is limping along and almost nothing they can say will make the Fed rush to cut rates again. The only surprise in my opinion would be for them to be positive and the markets might celebrate that. Earnings are likely to be the real focus with AMAT on Wednesday after the bell. They already announced this week that they were cutting -1750 jobs due to a continued slump in chip sales. Dell announces on Thursday after the close but is expected to announce inline after numerous affirmative comments. A couple of other notables are NTAP on Tuesday and INTU at Wednesday. Earnings are far from over with over 100 companies reporting this week. We have seen in the past that the later in the cycle companies report the better the chance of weaker results. The forecast for the markets is mixed. It is an options expiration week and there are likely to be many positions which need to be squared away. The bullish sentiment still exists but the reasons for buying now are much less compelling and mostly seasonal. The end-of-year rally crowd is expecting a rally and they will likely buy from habit to reap the seasonal rewards regardless of the outlook. This may give us a bullish undercurrent. Funds saw inflows of $3 billion this week, which is a dramatic change in direction after many weeks of outflows. This could have been related to the pre-Fed expectations. In the post Fed week ahead there may be some inflows from investors expecting the 50 point cut to be a magic wand for the markets. If investor confidence has been increased by the rate cut then the urge to get in quick should be seen this week. If we don't see buying begin by Wednesday then the outlook could be grim. This is a show me week and everyone sitting on cash with an itchy trigger finger will be looking for confirmation that the year end rally has begun. If it does not appear then the excitement will fade and investors will go back to the couch instead of the computer. Enter Very Passively, Exit Very Aggressively! Jim Brown "The market is a voting machine, where countless individuals register choices, which are the product partly of reason and partly of emotion." - Graham & Dodd ************** FUTURES MARKET ************** Methodology By John Seckinger jseckinger@OptionInvestor.com As a member of the CBOT, I was on the trading floor when the exchange first introduced the Dow Jones futures contract. It was like having the best of both worlds. Liquidity and leverage. I had the membership to step into the trading pit; however, I first wondered if I needed a different mentality when approaching an equity index futures contract versus that of a fixed income instrument. I didn’t. As I learned throughout the years, nothing beats hard work and discipline, as well as a solid understanding of technical analysis. After meticulously studying the Dow Jones contract, it only made sense to explore what the Chicago Mercantile Exchange (CME) had to offer. The e-mini S&P 500 (ES) and e-mini Nasdaq-100 (NQ) once again afforded a trader an incredible use of leverage, as well as usually adhering to the same technical trends that was found at the CBOT. The nice thing about the CME was the increase in liquidity, which certainly helps at times when execution is critical. Hmmm. . . when isn’t execution critical? Before we review the three contracts, I would like to share with you a small part of my trading methodology. Top-Down Approach: This is defined as trading with the ‘big picture’ in mind. Since the index futures contract attempts to be one step ahead of the cash market, I like to always be aware of what part of the business cycle the U.S. economy is in via studying the bond market, currency trends, action by the Fed, etc. This can help a trader on a micro level, because it will either strengthen support (if economy is experiencing strength) or resistance (if expectations are for a weaker economic environment ahead). Trading Psychology: I am a big believer that the market will go out of its way to “trap” trader into believing one thing or another. These ‘traps’ are normally accomplished by stops that take the market outside important support or resistance levels, action by the media, or rumors that viscously circulate on the trading floor. It has always been my methodology to not initially chase such price action. Confirmation is key. If solid support is at 898.50 in the ES02Z contract and the market falls underneath this level, 9/10 times the market will come back and test this pivotal level. This has certainly helped my confidence as a trader. From b to P: This Traders Corner article I wrote back in August really gives a clear insight into how I deal with market dynamics via horizontal and vertical patterns. The article can be found here at http://www.OptionInvestor.com/traderscorner/081302_1.asp Learning Curve: My intention is to help all futures traders; from brand new futures traders looking to get a feel for the contract(s), to highly skilled traders looking for one more trading tool that will give him/her an edge. I have always been a believer that, because the markets are so dynamic, constant education and ‘open-mindedness’ is critical to succeed in such a competitive environment. If a certain form of RSI, Stochastics, ADX, or MACD works better on a 30-minute chart than 60-minute, why not learn to adapt? Staying with this theme, I will constantly try to update subscribers on confirmation of daily market sentiment, or a break in sentiment that occurs during a trading period. This will be done via Market Monitor (as well as in this article) and will include an illustrative attachment. Traders Corner Articles: Going forward, all of my Traders Corner Articles will be focused on the equity index futures market. For a list of my other articles, please visit this page: http://www.OptionInvestor.com/indexes/traderscorner.asp Friday, November 8th at 4:00 P.M. Contract Net Change High Low Volume ES02Z 893.50 –9.00 910.75 890.50 587,172 YM02Z 8506.00 -68.00 8658.0 8480.0 16,820 NQ02Z 1009.00 -20.50 1043.50 1005.00 226,204 ES02Z = E-mini SP500 futures YM02Z = E-mini Dow $5 futures NQ02Z = E-mini NDX 100 futures Note: The 02Z suffix stands for 2002, December, and will change as the exchanges shift the contract month. The contract months are March, June, September, and December. The volume stats are from Q-charts. Let us start with a weekly chart of the S&P 500 Index and get a longer-term feel first. As the chart shows, the Dec contract tested strong intermediate: A bearish trend line dating back to mid March, the 22 Weekly Moving Average, and a highly watched 38.2% retracement level. If the weekly low of 890.50 is breached, support on an intermediate level is not felt until 869 (first blue horizontal line). The other two support lines are at 854.50 and 841. Even though sentiment is currently bearish, we will still need confirmation and follow-through activity underneath 890.50. Once under 890.50, the market will be telling me to be prepared for another wave lower. Chart of the December S&P 500 Index (SP02Z), Weekly Now that we have a bearish weekly viewpoint in mind, let us turn to a daily chart of the E-mini S&P 500 contract. There should be support at both the 22 and 50 DMA’s (886 and 881, respectively), and a trader going short at 890 should expect a slight bounce near 886. If the first target it hit (886), make sure to trail the stop down to near breakeven just in case there is a better- than-expected rebound. If the contract falls to the second objective of 881, lower the stop once again to the 22 DMA. Chart of ES02Z, Daily Taking things to a more micro level, the consolidation seen during trading on Friday afternoon has the appearance of long liquidation (a “b” pattern). The mid-point of the range appears to be at 894 and near the 50 PMA; therefore, if the index falls below 8909.50, I expect this mid-point not to be tested in the near term (hence stop at 895). Chart of ES02Z, 5-minute The mini-sized Dow contract seems to have support near 8480, and a break underneath this level should send the contract to the bottom of the regression line at 8400. The intermediate range target is for a test of 8169. With the 8169 target in place, I would use a stop at 8560. If 8400 is hit, move trailing stops down to 8465 and lock in profits. Chart of YM02Z, Daily For short-term traders looking to capture a quick move to 8400, a stop closer to 8550 can be used. Since the YM02Z contract has not closed underneath 8480, there is still the possibility that sentiment could turn bullish. How is this possible? It is possible if the contract rises above both 8550 and 8650 and closes above the ascending black regression line. Chart of YM02Z, 5-minute A look at a daily chart of the E-Mini Nasdaq (NQ02Z) contract shows the contract on Friday closing the gap left at the beginning of the week (Monday) and closing near the 1000 level. There is a chance that the contract could test this gap once more before falling underneath both the 1000 level and reaching the target of 984; therefore, a potential trade would be to short the NQ02Z at 1025. Chart of NQ02Z, Daily Looking at a five-minute chart of the NQ02Z contract, regression analysis is used for Friday’s consolidation range and we will have to watch for either a bid back to the top of the range or a break underneath 1005 and then a quick test of 1000. With that said, if the contract does not initially bounce upward, a potential trade could be to sell the NA02Z at 998 and use a 1010 stop. The objective would still be for a test of 984. Once 990 is hit, lower the trailing stop to near breakeven. Chart of NQ02Z, 5-minute Good luck Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** "General-ley" speaking, stocks were lower The major indexes traded lower for a second straight session, as healthcare sectors were battered lower as nightmares of what happened in the energy trading sector with Enron spooked sectors bulls into thinking...."here we go again." Its not that two of the more battered stocks in the group, Tenet Healthcare (NYSE:THC) $14.90 -46.69% and Syncor International (NASDAQ:SYNC) $18.38 -18.9% have been "swapping" needles, but the appearance of potentially mischievous wrongdoings and sudden management changes found the Morgan Stanley Health Providers Index (RXH.X) 274 -9.75% and HMO Index (HMO.X) 512 -6.84% seeing some group think selling. Today's sector losses had both sectors earning top spot in our weekly sector loser list. For a second week in a row, the NYSE Composite ($NYA.X) 476.66 -0.77%, Dow Industrials (INDU) 8,537 -0.57%, S&P 500 Index (SPX.X) 894 -0.87% and S&P 100 Index (OEX.X) showed little change in price action on a week-to-week basis and begins to hint that the renewed bullishness in bonds, which saw the 10-year YIELD ($TNX.X) fall from last Friday's 3.97% yield to 3.852% begin to offset last the $2.3 billion cash inflows into U.S. equity funds for the week ended November 6. The "defensive" move toward Treasuries saw the NASDAQ Composite Index 1,369 trade down 1.26% on Friday, but finish down just fractionally on the week. The "perceived risk" in technology stocks had the NASDAQ-100 Index (NDX.X) 1,008 -1.69% along with the smaller-cap Russell-2000 Index (RUT.X) 379 -1% finding some selling on Friday, with both posting -1.1% losses for the week. This weeks big winners? The Airline Index (XAL.X) fell 3.7% on Friday, but posted an 8.5% gain on the week. Bullishness in Drug stocks saw the Drug Index (DRG.X) find a 1% gain on Friday, which built to a 5% gain on the week. Internet stocks as depicted by the CBOE Internet Index (INX.X) edged down 0.89% on Friday, but bucked was our only "tech-related" sector to post a gain greater than 1%, with an impressive 4.7% weekly gain. Weakness in the U.S. Dollar, combined with a rush back toward bonds found bulls looking to play a little defense as they bid the Gold/Silver Index (XAU.X) 4% higher on the week, despite a -1.13% decline on Friday. While sector gains were somewhat limited to the aforementioned, losses were heavier not only in the healthcare group, but housing as the Dow Jones Home Construction Index (DJUSHB) 290.49, which fell -2.7% on Friday, was pummeled -7.5% lower this week. This action made no sense to an economic bull as lower YIELDS in the longer-dated 10-year and 30-year Treasuries should bode well for lower mortgage rates. Banks, which have historically benefited from an easing Fed policy also traded against "economic sensibility" as both the S&P Banks Index (BIX.X) and KBW Bank Index (BKX.X) fell -5.9% and -4.7% on the week. However, as noted in Wednesday's 01:00 PM EST update, the aggressive cutting of rates by the Fed may be putting some near-term pressure on margins in the group. The Semiconductor Index (SOX.X) 299 -0.89%, which battled with the psychological 300 level all day on Friday, was this weeks tech- sector loser with a -4.8% decline. Weekly Sector/Index Changes Hmmmm.... there's got to be a better way of doing this, but what I've tried to do this week is perhaps connect the dots with our weekly Index/Sector tabulations. It was the weekend update just after completion of the 10/25/02 week that I was "still bullish, but looking for a pullback in stocks," when for the first time in several weeks we saw marginal buying come back into the 10-year YIELD. Well.... the NYSE thru S&P 100 has been "black" or unchanged by more/less that 1% on a week-to-week basis since then. What I'm trying to visualize is that indeed we're seeing some "stalling out" in the major indexes. It would make sense perhaps that the more volatile NASDAQ-100 Index (NDX) is more likely to turn from blue to red and red to blue as 1% weekly swings isn't uncommon. Same may be said for the more illiquid smaller caps in the Russell-2000 Index. Then as we "move south" into the sectors, we can perhaps see the larger "island of blue" begin to get broken up a bit and start seeing sprinklings of black and red. If there's is ONE, make it TWO things or trends in the above spreadsheet that is concerning to the bullish half of me, it would be what is taking place between lower YIELDS and Gold/Silver stocks. In past history, when Gold stocks bid and YIELDS are headed lower, it has been under "defensive" market conditions. The SECOND thing that bothers me is the weakness the U.S. Dollar has seen in recent weeks. This weeks action by the FOMC to cut rates to 1.25% has interest rates here in the U.S. roughly 2-3% LOWER than our friends over in the UK and Europe. The cut in rates also had savings/money market account YIELDING roughly 1.1% and if taxes are paid as ordinary income, with inflation running at a 1.5% annual rate (based on September CPI of 1.5%) all of a sudden, money in the bank at 1.1% has become a losing man's game. It is perhaps that "realization" which had money heading toward the longer-dated maturities and relatively higher YIELDS among U.S. investors. It may also have had money headed back out of the U.S. to overseas markets, while some of the money in saving accounts simply rotated into stocks that had posted strong gains in the prior weeks (excluding the last two weeks). I guess what bothers me too much is that when we look at the "so far Q4" percentage gains for the major indexes, why has cash been so "eager" to snap up 10-year YIELD of 4.134%, 4.095%, 3.977% and 3.852% in recent weeks? A bear will answer that question with.... "Just watch why cash has been so eager to snap up those YIELDS when you see what happens to stocks in the coming weeks. You see, the Fed shot itself in the foot with that 50-basis point rate cut, when it tried to turn savers into spenders by making saving's accounts a losing man's game." Hmmmm.... maybe this "saving" thing is right. Note the "underperformance" of the more regional S&P Banks Index (BIX.X) versus the more multi-national KBW Banks Index (BKX.X). Not only on a weekly basis, but "so far Q4" basis too. Now comes a bull's answer.... "You're right Jeff. The FOMC move this week will inject more liquidity into the economy and equity markets than you can begin to imagine. Look at the brokerage sector, up 11.6% for the quarter. You see? Investors are taking their money out of savings and pumping it into stocks. You always said the MARKET was never wrong and the MARKET looks to be making some bullish bets on the brokers and that trading revenues are going to be picking up. When stocks break to new relative highs, just watch what those bond bulls do in the 10-year as they sit and wait for their 3.85% interest payments to show up as stocks surge higher! And when our fine friends from overseas watches what's going on, then watch the dollar rise as they start bringing their cash back over here and exchange their euro and yen for U.S. assets!" Ugh! Both sides have good arguments don't they? Confused? Don't be. Simply treat each one as a "bearish scenario" and "bearish scenario" and test each of them over time. For me, right now, I've got to side fractionally with the bearish camp. For WHATEVER reason, the dollar is weak, gold bids, and YIELDS are falling. If nothing else, after a very nice run-up in stocks, a bull should at least be looking to protect some gains. Dow Industrials Chart - Daily Interval It can be informative to "look back" a week at past commentary and see if things panned out per observations, scenarios made. Last weekend we thought the favorable court ruling would have the Dow breaking above 8,550 (ok, I wasn't going out on a limb) and have the 8,717 level achievable. By golly, the Dow closed above 8,717 for one session and fell right back where we started from. Probably could have made it to 9,000 if not for so much cash going into Treasuries. Hmmmm.... what happened to all the money coming out of savings accounts to buy stocks? Maybe its waiting at 8,379 or 8,170. I think we'll find out this week. One reason I "really like" a Dow bullish trade at 8,200 is that I think there's probably some shorts between 8,170 and 8,379 that are questioning things. I feel that's a "low risk" entry point. Even if things are "terrible" from the Feds point of view that warranted a 50-basis point cut this week, then a decline to 8,000 would get a bounce back into the 8,170-8,379 zone and give a skittish bull a chance to exit. My title "General-ly" speaking was a lame attempt at drawing attention to weakness in General Electric (NYSE:GE) $25.10 -3.86%. We've talked in past months (since $40) that this company has its proverbial finger in just about every piece of pie in the U.S. and GLOBAL economy. Today, GE fell below its October relative low of $24.90 with an intra-day trade of $25.63. Just as the markets "gapped higher" on October 15th at the open, GE did too and today it filled that gap. If GE continues to weaken, be alert for broader market weakness. GE has been one of the weaker Dow stocks with deep ties to the economy. Speaking of "Generals," General Motors (NYSE:GM) $34.42 -0.46% traded in a very tight range ($35.00-$34.42) on Friday, but closed for the second consecutive session below its 21-day SMA after closing above this short-term moving average on Tuesday and Wednesday. For years, there's been a market saying that goes... "As GM goes, so goes the market." Unlike many NASDAQ stocks, GM does have what I consider to be a "reasonable" upward trend associated with its daily chart at $32.81. I can "eyeball" support in GM at $32.81 on a Dow test of 8,200. Unfortunately for GE, any upward trend would now have to be anchored at the lows and attached to today's low of $24.63. If it's true that weakness leads, the MCD, GE did their part on Friday. If GM gets in the act then that would be a negative. Conversely, if strength leads, then 3M (NYSE:MMM) $128.29 -0.24%, which continues to find resistance at its 52-week highs near $130 seems to need some type of "cash infusion" to get a break-out going and lead the Dow higher. My other Dow stock that we've looked for leadership in is Johnson & Johnson (NYSE:JNJ) 60.27 +0.63%. Just like MMM, JNJ is testing relative highs. The "only difference" between MMM and JNJ is their sector associations. JNJ is more of a drug stock and MMM a cyclical. I do hold a bullish position in JNJ from $55, but currently have no bullish position in MMM. Friday's action saw no net change in the Dow Industrials Bullish % ($BPINDU) and remains "bull confirmed" at 63.33%. For the week, the Dow's bullish % rose 6.66%, so it was a net gain of 2 stocks to point and figure buy signals. Remember, once a stock's point and figure chart generates its first p/f buy signal, it can still generate more buy signals, but will not contribute further to the bullish % until after it generates a "sell signal." For example, since JNJ first generated a "buy signal" at $57 on October 2, which had it contributing 3.33% to the bullish %, the next buy signal at $60 did not contribute further to the Dow's bullish % reading. I'm going to go in the same "chart order" as we did last Friday. This way, those that want to compare week-to-week action can perhaps get a feel for how things went rather easily. I think you could open up another browser window, click on last weekends update, then come back to your other browser and make some comparisons. NASDAQ-100 Index Chart - Daily Interval The NDX did close below a very aggressive upward trend. A trend that even the most bullish of bulls "knew" couldn't last forever. This hints that some pressure that was released from the lows when the bullish percent fell to October's low reading of 14% has been released and may be time for a rest. Bears are still very cautious and most likely provide support between 953 and 1,000. I've tried to envision what the lower stochastics oscillator might do as it relates to NDX price levels. I've done the same with the MACD. I can envision the MACD crossing below its red Signal on a break and close below the 21-day SMA, then trending into the 953 level as MACD approaches zero. It's at that point that any market makers short near 1,050 as they were giving liquidity to buyers after MSFT news would then look to firm up their bids and provide support. At the same time, think of what market makers were doing that may have been doing some shorting the week prior at the 1,000 level. If you guessed "sitting some bids and covering short inventory for break-even," then you and I are on the same page. Remember, NASDAQ-100 stocks are all listed on the NASDAQ exchange. Therefore, the bulk of orders not matched through an ECN pass through a market maker. Market makers don't try and "predict" anything. All they do is measure ORDER FLOW and trade levels. To perhaps better grasp this concept, it might be fun and educational to read an article I wrote in the "Bailey's Basics" section titled "Retracement Levels." A quick refresher on past bullish % levels shows August's relative high bullish % reaching 60%, while current levels are higher and have reached 69%. This tells us that risk levels in the NDX are very similar to that found in late August. However, the matching new relative highs in both the chart of the NDX as well as the internals as depicted by the bullish %, give hint that the recent rise has been fueled by more than just "hot air." Bears will begin monitoring for resistance at 1,050, but will want to see some type of 3-box reversal to 62% before getting overly bearish. Friday's action saw the NASDAQ-100 Bullish % slip by 2% to 67% from Wednesday and Thursday's readings of 69%. Still "bull confirmed" and would need a reading of 62% to slip back into a "bull correction" status. Best bullish entry points come on pullback near 61.8% retracement of 61.8%, but only if Treasuries firm up here. I'm not thinking that investors will be as eager to pull money out of their low yielding savings accounts if tech stocks start generating 2% declines each day, so either need stability in Treasuries or selling to provide fuel for aggressive tech stocks. QQQ/NDX Note: Microsoft (MSFT) $55.10 -1.62% .... biggest weighted stock in NDX and QQQ broke 4-session support and may look to fill its gap from $54-$55.25. If MSFT does fill its gap, look for firm support in MSFT near $54 and tie in with QQQ/NDX at their 21-day SMA's ($24.37 / 980). If you've got a retracement tool, I've had my retracement brackets set as I think a market maker would have. Top at $73.65 and bottom at $41.50. This was a "fitted" retracement with 19.1% at $47.64, 38.2% at $53.78, which resulted in 50% at $57.57 (hmmmm.... that's right were stock ran after last Friday's announcement), 61.8% at $61.36 (market makers upper risk level) and 80.9% at $67.50. S&P 500 Index Chart - Daily Interval Both the weekly % change and "so far Q4" percentage changes are really starting to diverge and we can perhaps see the "lagging" of the broader SPX to the narrower OEX. EVERY index trader (Dow, OEX, NDX, QQQ or RUT) will have their eye on the SPX as it approaches its 21-day SMA. If this widely watched index that has been finding some technical resistance on the bar chart begins slicing below levels of support, then most likely the other indexes begin to catch up if bulls begin pulling the plug with the thinking that their holding will follow suit. I just caught a "labeling" mistake from last Friday. Horizontal resistance at the dashed red line should have been labeled 925, not 909 (which was the 9/11/02 close instead of high). A bull's target of 950 may still be achievable as their is still some upside room in the bullish %, but to get there, a bull sure as heck needs to see some selling in treasuries to generate some cash and flow toward equities. If we know anything about Treasuries, the selling needs to come from the riskier end and the 30-year. If the selling just comes from the shorter-dated maturities, but simply rotates to the higher YIELDing 30-year, like it may have done today, then that does stocks little good if the money coming out of the short-end just winds up in the higher YIELDing long-end. S&P 100 Index Chart - Daily Interval I appologize to those index traders that have sent me e-mail regarding OEX bearish entry points, but I personally am NOT looking at OEX as a put, when the SPX has been the lagging "like" index on the way up, and now seems to lead the way down. As such, it would be the OEX a trader uses to look for "first" bullishness should a decline continue to take hold. The OEX "stretched" its wings above its 09/11/02 relative highs this week and plants the seed of doubt in an OEX bear's mind on further bullishness to 480. Should SPX cracks below its 21-day and a SPX trader puts there, then turn your attention to the stronger OEX and monitor its progress in following sessions. The OEX should show first sign of strength. If not, then most likely more "junkier" stocks in the broader S&P 500 lead lower and further decline in OEX acts like a sledge hammer, driving SPX lower. Again... if Treasuries stay where the are, or YIELDS continue lower, then the 21-day SMA's are suspect to being broken. The RISKIEST 30-year YIELD closed BELOW its 50-day SMA today. However, we remember that on 10/15/02, we wanted to see the INDEX breaks ABOVE their 50-day SMA's be CONFIRMED with a YIELD break above its 50-day SMA. That happened and stock benefited markedly. Now we see YIELD leading lower and its my best guess that unless something changes soon, equities will follow. If we think for a moment that the "mutual funders" that dumped $2.3 billion into U.S. equity funds in the latest week are going to be happy if the SPX starts breaking below 856 and not thinking "here we go again," then we may have to re-think things. Mutual fund managers HAVE to invest the money they receive from fund holders into the stocks they deem most worthy. Remember from Thursday's wrap that Trim Tabs estimated that the week prior, roughly $800 million outflows were seen. That was probably during SPX range-bound 878-900. Then when SPX held tough and media started banking on 25-basis point cut and good for stocks, $2.3 billion came in, only somebody (the MARKET) started buying bonds and perhaps shifting out of stocks to the mutual funders. At least this is how I perceive what has been happening. Mutual funders along with the equity indexes need some cash from the bond markets. Mutual fund investors are more apt to send their fund managers some cash, see how things go, before they cough up more cash. Note: My parent, which I deeply respect and love own some equity mutual funds. The term "mutual funders" is not meant as derogatory. 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 ************** Expiration Week You would think that expiration week after a Fed meeting there would be tons of cheap plays. I spent over two hours just researching stocks/options for something I liked. There were lots of plays but they were either pinned at a strike price already or right at support/resistance and no real chance for a decent lottery play. Out of the hundreds of stocks I looked at the options were either too expensive or too far away to make sense. If I am not willing to put my money on the line I can't recommend it to you. There were several chip stock plays that were possible with the SOX dropping but we already have a SMH put play in progress. Don't put all your eggs in one basket. I looked at stocks, holders, I-shares, indexes, etc and only found two plays that made sense to me in the expiration week context. MLNM Call The first is MLNM. Something happened to them in the last two weeks and they have taken off like a rocket. They have strong resistance at 10.50 but that is about $2 away. The option I would recommend is the NOV-$7.50 Call for $1.40. It is already $1.26 in the money leaving only 14 cents of time premium. You should get almost 100% of every penny gain in the stock between now and Friday. The highest open interest is the $10 strike so that is probably where the stock will end up to expire the most options worthless. Ending at $10 would make the $7.50 option $2.50 and nicely profitable. If you wanted to bet on the extreme outside chance that MLNM would break $10 by as little as 50 cents you could throw a $10 bill on the $10 option at 10 cents and consider it a real lottery play. This is not a wise move but when you consider the risk/reward it might appeal to some of the gunslingers out there. The play on MLNM would require a positive market and unless the trend from the last two days changes that is not going to happen. This sets up an opportunity to profit by buying any dip. The $7.50 option will get cheaper on any MLNM dip with the market and the rebound possibilities are still there. ************************ DJX Put Where the MLNM play was for a positive market this play needs a sell off to prosper. This is a simple strategy that anyone can follow. With the Dow clinging to 8550 and the closest real support in the 8250-8350 range that gives us the chance for a $2 DJX move. There are two ways to play. In the money and out of the money. With only FOUR days until expiration, DJX options expire on Thursday night, we have to be right about direction and quick on the trigger. Using either option I would only trigger the play on a Dow drop below 8500. I would strongly advise against playing the out of the money option. Assuming we get a drop to 8300 the 83.00 option, currently 80 cents would jump to $1.50 in a normal week. In expiration week it would jump a lot less. Remember, remaining time value will decrease -33% per day this week. (That is a round number and not precise.) That 80-cent option will only have 1/3 of its value on Wednesday if it is not in the money. Still a rapid drop on Monday could hit $1.25 or more before the market paused for air and the market makers caught up with accurate pricing. Consider the 83/84 options pure lottery plays. Using the in the money option I would choose either the $87 or $88 strike. The estimated ask on Monday would be $2.40 and $3.25 respectively. That is 40 cents of time premium on the $87 and 25 cents on the $88 strike. A Dow drop to 8300 would raise the $87 strike to at least $4.10 and the $88 strike to $5.10. That would be better than a 50% gain in each. The problem with in the money options is that they lose premium when the market goes against you just as fast as they gain premium when it goes in your direction. This means you need to keep a tight stop loss once you are in the trade. With the short fuse you need to set a profit target and get out quick or set a trailing stop to take you out on any bounce. Using either option I would set a buy stop at 84.90. That means if the DJX touches 84.90 you want to "buy open" the option of your choice. Once in the trade you need to set a stop loss for "sell close" at not more than 85.50 to protect your position. I would also immediately set a sell stop at 83.00 to 83.50 to take you out of the trade. Any dip to near the 83.00 level could be sharp and the rebound quick. Don't miss your chance. ************************** SMH Ladder Recap (see 10/27 Editors Plays for setup) The QQQ Nov-$26 call traded as high a $1.20 several times on Monday and if sold would have recovered $4,800 of your $5,250 investment in the entire trade. This would have left you with a cost basis in the SMH puts of $450. The SMH Nov-$22.50 put traded as high as 55 cents on Friday ($2750 value). With the AMAT earnings report on Wednesday and techs under pressure we still have a very good chance of doing well on this trade. The SMH closed on Friday at $24.42, down from $27.18 on Monday. $24.00 is the last support before $22.50 and our exit target. If we get a further downdraft on Monday/Tuesday I would not wait for the AMAT earnings and would exit the play with your profit Wednesday afternoon or before to avoid a positive surprise. Premium on an out of the money put will decay very fast this week. If we do get an accelerated drop you could follow it down with a trailing stop but it would be a high risk strategy. Instead, take a profit when offered and get ready for the next play. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Put Away Those Horns by Steven Price Anyone confused? Has the rally run out of steam? Did rates go back up when we weren't looking? Or have there simply been no changes in the business spending environment in the last month? Bingo. While the recent rate cut should eventually have an effect on spending, as the cost of financing drops even further, it will take at least 6-9 months to work its way through the economy. And if low rates haven't helped to this point, how much difference will another 50 basis points make? With Wednesday's FOMC meeting behind us, we were left to ponder recent economic data, most of which was not very good. Last Thursday and Friday we got a slew of bad news, but the markets rallied, as it was taken as a sign that the FOMC would lower rates. The anticipatory rally continued through the first part of the week. However, after the FOMC news was out, the rally ended quickly. There were certainly other forces at work this week. Cisco essentially warned that the next quarter could see a revenue decline. While no one wants to hear that from one of the biggest techs in the market, it certainly was not a major surprise. In fact, we had been hearing similar things throughout earnings season from a majority of chipmakers and software companies. Even Microsoft had said that this quarter's earnings were an anomaly, and not to expect a repeat. So the Cisco news shouldn't have been a shock to the system and yet it sent the market rolling downhill for two days. What is more likely is that it simply came at a time when there was no straw to grasp in front of us. Today's further drop was also blamed on the prospect of war. The U.N. approved the U.S. resolution on Iraq, which the Iraqi ambassador said was crafted in such a way as to prevent inspectors from entering the country. But did anyone really believe Saddam Hussein would fully comply with U.S. inspection demands? While going to war may have a negative effect on our economy, it has most likely already been priced into the market to some extent. Certainly the oil markets don't seem overly concerned about the effect. Now that OPEC has been cheating on its quotas the last couple of months and the president of the organization all but gave support to the practice for at least the next couple of quarters, even the prospect of an invasion saw oil futures remain under $26 per barrel. At the height of speculation over what the U.S. would do toward the end of September, the futures were trading over $30. The fact that oil supplies appear safe should help the markets, as it will keep the cost of transportation and production lower. So the U.N. resolution simply shouldn't have that great of an effect. McDonald's said this morning that it would not achieve its 2002 earnings goals and that it was closing 175 restaurants. The closures will lead to 400-600 layoffs and reduce 4Q income by $350-425 million. It is also pulling out of three countries and giving up ownership in four. For the year, U.S. sales are down 1.5%. More layoffs lead to fewer workers, which leads to a smaller lunchtime crowd. The chip stocks appear to be rolling over after an incredible run that saw the Semiconductor Index gain more than 50% in a month. After topping out at 329, it has fallen out of its ascending channel and broke down through support at 300 today. It finished the session just under that level, closing at 299.91, after dropping to an intraday low of 292. 44. Apparently investors lent more credibility to the bad news from NVidia last night, than to the good news from Qualcomm. If the index remains under 300, and we get some intraday resistance, the sector looks like a short again, with plenty of downside room. Keep in mind the last PnF breakdown led to a quick upside reversal, so let's be sure we see resistance before piling on. I keep going back to last week's data. GDP came in lower than estimates. Personal spending decreased more than expected and personal income grew less. This week's data showed that while initial jobless claims dropped by 20,000, the four week moving average remained above the 400,000 level, which is generally the barometer for whether the employment picture is improving. Productivity showed improvement, but still came in below expectations. Why all the negativity? I think the better question is why all the bullishness over the last month. And as long as were on the topic of negativity, it appears that we could be in the process of forming a second head and shoulders pattern in the Dow and SPX. Only this time the head at 8800 in the Dow would be lower than the one in August at 9077. The good news is that the Dow held support at 8500, and the COMPX held on around 1360 (closing at 1359), after filling its gap from Monday. The bad news is that the SPX did not hold support at 900. We are definitely looking at some crucial levels and the coming week should give us a feel for whether the rally is simply pulling back for another run at Dow 9000, or if it is out of steam and heading back to 8000. A close below Dow 8500, along with the SPX under 900 would indicate the latter. The fact that the COMPX and SOX are a point below support seems pivotal, as well. Look for support or resistance at these levels. Unfortunately (for bulls), I expect to see resistance. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7286 Current : 8537 Moving Averages: (Simple) 10-dma: 8522 50-dma: 8172 200-dma: 9264 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 894 Moving Averages: (Simple) 10-dma: 899 50-dma: 867 200-dma: 996 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1008 Moving Averages: (Simple) 10-dma: 1013 50-dma: 920 200-dma: 1150 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): So much for Qualcomm riding to the rescue. The chip stocks attempted a rebound on Friday, trading up to 308 in the SOX, but previous resistance at 310 came back into play and the sector instead chose to follow NVDA down into the 200s again. On Thursday we commented in this space that the SOX had broken down out of its ascending channel from the beginning of October. Just as it looked like the rally would reverse itself, QCOM came out with earnings news that rallied the stock over a dollar after hours and it appeared as though the scare was only that. We also said that if it failed to rally the troops and the SOX fell below 300, to watch out below. NVidia also released its earnings, which were less than stellar, leading to a Prudential downgrade. Guess what? The index finished the day at 299. If we see evidence of resistance under 300, it looks as though it will be time to short the sector once again, with a target back in the low 200s. 52-week High: 657 52-week Low : 214 Current : 299 Moving Averages: (Simple) 10-dma: 305 50-dma: 269 200-dma: 422 Market Volatility In a somewhat puzzling move, the VIX sank today, even though war fears picked up steam and the Dow and SPX fell below recent support levels. Apparently the lure of a steep weekend time decay (theta) curve ahead of expiration week was enough to bring in the sellers. That certainly appeared to be the case as the index stayed high until the afternoon, when it sold off, in spite of a market drop, with a big jolt just before the close, as market makers dropped the at the money straddles ahead of next week. Of course on Monday, the VIX calculation will leave the November options out of the mix, so we may see a big move as January comes into play. CBOE Market Volatility Index (VIX) = 33.56 –1.72 Nasdaq-100 Volatility Index (VXN) = 52.01 –1.89 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.05 514,316 238,482 Equity Only 0.88 403,070 355,869 OEX 1.23 27,051 33,373 QQQ 1.39 44,183 61,514 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 41 + 0 Bull Confirmed NASDAQ-100 67 - 2 Bull Confirmed Dow Indust. 63 + 0 Bull Confirmed S&P 500 55 - 2 Bull Alert S&P 100 62 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.31 10-Day Arms Index 1.26 21-Day Arms Index 1.05 55-Day Arms Index 1.31 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 977 1709 NASDAQ 1356 1791 New Highs New Lows NYSE 20 42 NASDAQ 44 42 Volume (in millions) NYSE 1,711 NASDAQ 1,588 ----------------------------------------------------------------- Commitments Of Traders Report: 11/05/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added 4,000 contracts to the short side, while increasing longs by 1,000. Small trader added 1,000 to the long side, while increasing short positions by only 500 contracts. Commercials Long Short Net % Of OI 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%) 11/05/02 438,546 472,384 (33,838) (3.7%) 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 10/15/02 134,507 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% 11/05/02 138,604 76,032 65,572 30.5% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials added 2,000 long contracts while adding 1,000 to the short side. Small traders added 30%, or 3,000 contracts to the long side, while increasing shorts by a similar amount. Commercials Long Short Net % of OI 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%) 11/05/02 49,128 56,121 (6,993) ( 6.6%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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% 11/05/02 13,355 12,903 452 1.7% 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 added to both sides, increasing longs by 700 and shorts by 2,300. Small traders reduced long positions slightly, but dropped 2,300 from their short side, for a significant reduction in the overall short position. Commercials Long Short Net % of OI 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% 11/05/02 22,533 15,687 6,846 17.9% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 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%) 11/05/02 5,089 8,735 (3,646) (26.4%) 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 *************** When Signals Conflict by Steve Price Question: Re: Neurocrine Biosciences, Inc. (NBIX) Anyone short this? I am since 48. Opinion? Thanks, Alexandra Answer: Biotechs are often hard to judge on their financials, as many lose money, since they are in the process of developing drugs and funding R&D. A company like NBIX has a decent cash position, with about $275 million with which to fund R&D and a development partnership with GlaxoSmithKline. It is working on drugs that address cancer, depression, insomnia, diabetes and MS. When it comes to companies like this one, I often rely heavily on the charts to determine how the market currently values the quality and progress of the company's research and financial position. From a short standpoint, you are basically picking a top in a stock that has been setting a series of higher highs and higher lows. The stock has been in an ascending channel since it consolidated between $25 and $30 at the beginning of July, and has been resilient to market pullbacks as it has climbed steadily. The short position from $48 has been profitable so far, and may continue to be so as the stock heads back toward the ascending bottom trend line in the current channel. It has tested this trend line six times since June and bounced each time. However, the stock has yet to register a point and figure reversal, and has a bullish vertical count of $59. I would expect a reversal at some point between the buy signal at $44 and the achievement of this target, so we may be seeing that reversal now. Still, this is definitely a short that is swimming against a rising tide. A look at the PnF also shows that the stock rolled over right at the top of a channel on that chart and if we get a reversal at $45, the bullish support is down at $40. We are seeing a divergence between the different charting techniques. My strategy if I were holding this short position would be to keep a tight stop, in case we are just seeing a dip and not a real pullback. If the stock trades $45, registering a three-box reversal on the PnF chart, then I would look for a break in support on the daily chart, as well. If it breaks down out of the channel, then my target becomes $40. At that point, I either close the position, or do a 180 and play the bounce. We usually see similarities between the two charts, however, this time it gets a little trickier. My advice when we don't get confirmation between the two is to identify the point at which they diverge (in this case the support levels) and go with the one that more closely represents the movement of the stock at that level. Right now, we have room to fall on the daily chart to around $43- $44. As we move forward in time and that trend line ascends, the level is higher. However, if we test those levels, then we will get a good look at a crucial level, as the PnF should reverse at the bounce point on the daily. Daily Chart of NBIX Point and Figure Chart of NBIX Commentary on the Semiconductor Sector Te Semiconductor Index (SOX.X), which many readers have been watching for signs of weakness, appears to have rolled over and may be presenting us with some new short opportunities. The index has dropped out of the descending channel which has contained it for the last month. It had tested the bottom trend line of that channel repeatedly, bouncing each time. This time, however, it is clearly below that mark and looks to have found resistance there to the upside. The MACD has begun to turn and stochastics have given a sell signal after finding support at the 80 overbought level for the last month. In addition, the SOX has given a point and figure sell signal, with this breakdown appearing more convincing than the last. Daily Chart of the SOX Point and Figure Chart of the SOX 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 November 11th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- BCH Banco de Chile Mon, Nov 11 During the Market 0.22 FUN Cedar Fair LP Mon, Nov 11 After the Bell 1.99 LZB La-Z-Boy Inc. Mon, Nov 11 After the Bell 0.47 LEE Lee Enterprises Mon, Nov 11 -----N/A----- 0.42 NZT Tlcom Corp Nw Zelnd Mon, Nov 11 During the Market N/A MAY May Depart Strs Co Mon, Nov 11 -----N/A----- 0.10 TSN Tyson Foods Mon, Nov 11 Before the Bell 0.26 ------------------------- TUESDAY ------------------------------ ANF Abercrombie & Fitch Tue, Nov 12 After the Bell 0.43 AXA AXA Tue, Nov 12 -----N/A----- N/A BAY Bayer Tue, Nov 12 Before the Bell N/A BOX BOC Group PLC Tue, Nov 12 -----N/A----- N/A CPG Chelsea Prop Grp, Tue, Nov 12 After the Bell 0.70 CM Coles Myer Tue, Nov 12 After the Bell N/A DHI D.R. Horton Tue, Nov 12 Before the Bell 0.87 EN Enel S.p.A. Tue, Nov 12 -----N/A----- N/A FOSL Fossil, Inc. Tue, Nov 12 Before the Bell 0.29 JCP JC Penney Tue, Nov 12 Before the Bell 0.23 LAMR LAMAR ADVERTISING CO Tue, Nov 12 After the Bell -0.05 MAS Masco Tue, Nov 12 -----N/A----- 0.44 NBG National Bank Greece Tue, Nov 12 During the Market N/A NTAP Network Appliance Tue, Nov 12 After the Bell 0.05 NXL New Excl Realty Trust Tue, Nov 12 Before the Bell 0.47 NEM Newmont Mining Corp Tue, Nov 12 Before the Bell 0.16 PBR Petrobras Tue, Nov 12 -----N/A----- 0.63 REP Repsol YPF Tue, Nov 12 -----N/A----- 0.34 TRK Speedway Motorsports Tue, Nov 12 Before the Bell 0.02 TJX The TJX Companies Tue, Nov 12 Before the Bell 0.29 UBS UBS AG Tue, Nov 12 Before the Bell N/A UBB Unibanco Tue, Nov 12 -----N/A----- 0.61 UAXS Universal Access Tue, Nov 12 Before the Bell N/A VOD Vodafone Grp Public Tue, Nov 12 -----N/A----- N/A WTW Weight Watchers Intl Tue, Nov 12 Before the Bell 0.32 WGR Western Gas Resources Tue, Nov 12 Before the Bell 0.27 ----------------------- WEDNESDAY ----------------------------- AAA Altana AG Wed, Nov 13 -----N/A----- N/A ANN AnnTaylor Stores Wed, Nov 13 After the Bell 0.50 AMAT Applied Materials Wed, Nov 13 After the Bell 0.08 RMK ARAMARK Corporation Wed, Nov 13 Before the Bell 0.40 ASN Archstone-Smith Trust Wed, Nov 13 Before the Bell 0.53 CWP Cable & Wireless Plc Wed, Nov 13 -----N/A----- N/A CPB Campbell Soup Wed, Nov 13 Before the Bell 0.44 RIO Companhia Val Rio DoceWed, Nov 13 -----N/A----- -0.68 E ENI SpA Wed, Nov 13 During the Market N/A FD Federated Depart Strs Wed, Nov 13 Before the Bell 0.32 FST Forest Oil Corp Wed, Nov 13 After the Bell 0.10 GALN Galen Holdings PLC Wed, Nov 13 -----N/A----- 0.30 HP Helmerich & Payne Wed, Nov 13 -----N/A----- 0.23 INTU Intuit Wed, Nov 13 After the Bell -0.23 JHX James Hardie Ind Wed, Nov 13 -----N/A----- N/A KUB Kubota Limited Wed, Nov 13 -----N/A----- N/A MAC Macerich Co Wed, Nov 13 Before the Bell 0.78 PCG Pacific Gas Electric Wed, Nov 13 -----N/A----- 0.60 PSS PAYLESS SHOESOURCE Wed, Nov 13 Before the Bell 1.03 PUB PUBLICIS Groupe SA Wed, Nov 13 -----N/A----- N/A RANKY Rank Group Plc. Wed, Nov 13 -----N/A----- N/A IMI SanPaolo IMI SpA Wed, Nov 13 -----N/A----- N/A SI Siemens AG Wed, Nov 13 -----N/A----- N/A IPG The Inter Group Co Wed, Nov 13 After the Bell 0.08 TIF Tiffany & Co. Wed, Nov 13 Before the Bell 0.18 WMT Wal-Mart Stores Inc. Wed, Nov 13 Before the Bell 0.40 ------------------------- THURSDAY ----------------------------- AZ ALLIANZ AG Thu, Nov 14 Before the Bell N/A AEOS Am Eagle Outfit Inc Thu, Nov 14 Before the Bell 0.31 AOT Apogent Technologies Thu, Nov 14 After the Bell 0.35 IRE Bank of Ireland Thu, Nov 14 -----N/A----- N/A BF BASF Thu, Nov 14 -----N/A----- N/A BEAS BEA Systems Thu, Nov 14 -----N/A----- 0.06 BNG Benetton Group Thu, Nov 14 -----N/A----- N/A CMS CMS Energy Corp. Thu, Nov 14 Before the Bell 0.30 CSR Credit Suisse Group Thu, Nov 14 Before the Bell N/A DELL Dell Computer Cor Thu, Nov 14 After the Bell 0.21 EON E.ON AG Thu, Nov 14 -----N/A----- N/A DISH EchoStar Comm Corp. Thu, Nov 14 Before the Bell 0.07 GPS Gap Inc. Thu, Nov 14 After the Bell 0.06 KNBWY Kirin Brewery Company Thu, Nov 14 Before the Bell N/A KSS Kohl`s Thu, Nov 14 After the Bell 0.34 KEP Korea Electric Power Thu, Nov 14 -----N/A----- N/A L Liberty Media Group Thu, Nov 14 -----N/A----- -0.02 MTA MATÁV Thu, Nov 14 -----N/A----- N/A SBUX Starbucks Thu, Nov 14 After the Bell 0.15 TGT Target Corporation Thu, Nov 14 Before the Bell 0.28 TEF Tele España S.A. Thu, Nov 14 Before the Bell N/A WMB Williams Companies Thu, Nov 14 Before the Bell 0.02 ------------------------- FRIDAY ------------------------------- SJM J. M. Smucker Company Fri, Nov 15 Before the Bell 0.49 KPN Royal KPN N.V. Fri, Nov 15 Before the Bell N/A SDX Sodexho Alliance S.A. Fri, Nov 15 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CPBI CPB Inc. 2:1 Nov. 8th Nov. 12th SBGA Summit Bank Corporation 2:1 Nov. 18th Nov. 19th COO Cooper Cos 2:1 Nov. 22nd Nov. 25th -------------------------- Economic Reports This Week -------------------------- The market will continue to react to late third quarter earnings reports. This week we'll see sector heavy weights AMAT report on Wednesday and DELL report on Thursday. Late in the week look for retail sales reports and the PPI. ============================================================== -For- Monday, 11/11/02 ---------------- None Tuesday, 11/12/02 ----------------- None Wednesday, 11/13/02 ------------------- None Thursday, 11/14/02 ------------------ Initial Claims (BB) 11/09 Forecast: 400K Previous: 390K Export Prices ex-ag.(BB)Oct Forecast: N/A Previous: 0.0% Import Prices ex-oil(BB)Oct Forecast: N/A Previous: 0.2% Retail Sales (BB) Oct Forecast: -0.2% Previous: -1.2% Retail Sales ex-auto(BB)Oct Forecast: 0.2% Previous: 0.1% Friday, 11/15/02 ---------------- Business Inventories(BB)Sep Forecast: 0.0% Previous: -0.1% PPI (BB) Oct Forecast: 0.3% Previous: 0.1% Core PPI (BB) Oct Forecast: 0.1% Previous: 0.1% Industrial Prduction(DM)Oct Forecast: -0.4% Previous: -0.1% Capacity Utilization(DM)Oct Forecast: 75.7% Previous: 75.9% Mich Sentiment-Prel.(DM)Nov Forecast: 82.0 Previous: 80.6 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 ********************* Big Money Wins Again Somebody, big money, plunge protection team, mutual funds or Jeff Bailey fought a hard battle to close the Dow over 8517 on Friday and won. That enabled them to say the Dow had a five-week winning streak on all the financial pages this weekend. I wonder how many people look to see that the Nasdaq, OEX, SPX, RUT and Wilshire 5000, all broader market indexes, posted losses for the week? 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The Option Investor Newsletter Sunday 11-10-2002 Sunday 2 of 5 In Section Two: Stock Pick: BLUD - Immucor, Inc. Daily Results Call Play of the Day: SYK Put Play of the Day: IBM Dropped Calls: FCS Dropped Puts: None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** Stock Pick ********** BLUD - Immucor, Inc. - $23.65 Strategy: Long stock with put insurance Dominance makes for a profitable opportunity. At least that is how things seem to be shaping up in the blood-testing industry. While there are many labs that still prefer man over machine when it comes to screening blood used in transfusions, that bias is changing. And that's where our new play comes in. BLUD makes automated instrument and reagent systems for blood transfusions and is taking advantage of the wide-open market opportunity through new products and pure muscle. While only about 15% of the blood transfusion testing market uses automated systems, BLUD estimates it has about a 54% market share. The rest is held by Johnson & Johnson's Ortho Clinical Diagnostics division. Until fairly recently, there was a lot of competition, keeping prices low. But with most of the smaller firms having been acquired or merged, those still in the game now have the ability to start raising testing prices. From a low a few years ago of $0.25 per test, the average cost is now around $1.25. And last year, BLUD started signing 3-year contracts with buying groups that had built-in price hikes of as much as 200%. While the company does make a pretty penny from selling the testing equipment, the real cash-flow comes from reagents it sells to work in conjunction with the testing instruments. Since those chemical agents which are used to test blood for reactions, can only be used one, BLUD has set itself up with a recurring revenue stream. So not only does BLUD hold a dominant position in an industry that is just starting to grow, but it is building in healthy price increases to keep that revenue stream growing. Which it should continue to do, as customers that purchase the equipment need to keep coming back to the source for those raw materials needed to perform the tests. The final benefit of this play is that the company's income stream is independent of the economy. It's pretty easy to see that blood tests don't get cut back just because the economy slows down. Let's see, the leader in a growth industry that is recession resistant -- how does it get any better than that? Well, entering the play last September, when the stock was trading around $2 would have been much better. Since then, the bulls have been very serious about accumulating the stock, driving it north of $23 on Friday. Despite the fact that we missed out on the early surge up the charts, this looks like a trend that is still in its very early stages, as the fundamental picture should continue to drive increasing profits to the bottom line. Consensus estimates call for 2003 earnings to grow 32% in 2003 and an additional 22% in 2004. BLUD is sitting right at new all-time highs, but with the positive growth trend, both for the company and the industry, this looks like a stock that could be much higher a year or two from now. Unlike many of our recent plays, we aren't necessarily inclined to wait for a pullback before entering this play. The price action is volatile on a day-by-day basis, but clearly the trend is up. While it would be nice to nab an entry when the stock pulls back to the $22 level, we really don't want to take the risk that another surge of buying causes the stock to run away from us. Buying a protective put allows us to enter near current levels and not be concerned about a short-term selloff after we enter the play. So here's the plan. If the stock continues upward on Monday, buy shares at the prevailing price and then purchase a December-2002 $22.50 insurance put for $1.75 for each 100 shares you are long. That caps your downside risk at $22.50 for the next five weeks, and judging by BLUD's recent price action, the stock ought to be substantially above that level by year end. Investors that would prefer to nab a bargain, can look for a pullback to the $22 or even $20 level before buying shares. If you're lucky enough to get the stock on a pullback, then look to insure your position by purchasing the December-2002 $20 put Option 1: If BLUD is not above $22.00 by Dec. 2nd, close both positions and exit the play. Option 2: If BLUD is below $20.00 on Dec. 2nd then you have the option of closing the put for a slight profit and lowering your basis in the long stock play by the amount of the put premium received or closing both positions and exiting the play. Option 3: If BLUD is above $25.00 by Dec. 2nd, then close the put position for any remaining premium and set a stop loss on the stock at your entry point plus any short fall on the put premium. Immucor (BLUD) Weekly Chart *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week EXPE 72.60 0.77 0.40 1.50 0.78 2.99 entry pullback FCS 13.30 -0.16 -0.99 0.41 –0.71 –1.20 Drop, SOX 299 FRX 100.15 0.11 0.08 -0.54 0.11 –0.71 support at $100 SYK 65.74 0.44 -1.39 0.84 1.00 0.09 entry level PUTS ABK 57.53 -0.45 -0.80 -0.21 –1.79 –4.47 New, gap fill IBM 77.59 2.10 -0.07 0.74 –1.05 –2.81 New, risk/reward LEH 54.50 2.29 0.49 0.71 –1.56 0.49 back under $55 LOW 39.47 -1.00 0.70 -0.46 –1.67 –2.73 new resistance OHP 33.00 0.07 -0.88 0.90 –0.45 –4.25 sector weakness PHM 43.51 0.06 -0.70 1.15 –2.14 –3.49 New, mortgages RTH 72.50 -2.20 1.20 -0.15 –0.81 –3.05 sales weak ************************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: ********************* SYK - Stryker - $65.74 -1.49 (+0.29 for the week) See details in play list Put Play of the Day: ******************** IBM - International Business Machines $77.59 (-2.81 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ FCS $13.30 (+0.00) Turn out the lights, the party's over. While FCS managed to once again hold over the $13 support level on Friday, the Semiconductor index (SOX.X) suffered more collateral damage, falling back under the critical $300 level. FCS is still exhibiting good relative strength, but the overall sector weakness will more than likely drag this stock lower next week. We got a nice little move out of the stock since picking it just below $12, but it is clearly time to leave this party, so that we don't get stuck cleaning up. Take advantage of any bounce on Monday morning to gain a better exit point from the play. PUTS ^^^^ IBM *********** 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 11-10-2002 Sunday 3 of 5 In Section Three: New Calls: None Current Calls: SYK, EXPE, FRX New Puts: PHM, ABK, IBM ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** None ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** SYK - Stryker - $65.74 -1.49 (+0.29 for the week) Company Summary: Stryker Corporation develops, manufactures and markets specialty surgical and medical products, including orthopaedic reconstructive, trauma, spinal and craniomaxillofacial implants, the bone growth factor osteogenic protein-1, powered surgical instruments, endoscopic systems, patient care and handling equipment for the global market, and provides outpatient physical therapy services in the United States. (source: company release) Why We Like It: Stryker pulled back today, after its recent run to all-time highs, and found support at the $65 entry level we identified in the original write-up. Most health care related stocks took a hit today, as did the broader markets. However, SYK held up above the point and figure breakout level and the ascending trend line, beginning in the middle of September. The joint replacement business remains strong, and Goldman Sachs even highlighted the strength of Stryker's fundamentals when it shifted the stock from its recommended list to "market outperformer" status. Goldman said," Importantly, investors should not interpret our rating change as a sign that fundamentals are weakening. To the contrary, fundamentals remain robust with an orthopedic implant environment marked by solid unit gains and price increases." The company posted a 26% increase in its earnings for the first nine months of the year and raised fourth quarter guidance recently, outstripping analysts predictions by $0.02 per share. The series of higher highs and higher lows remains in tact and today's pullback constituted yet another higher low. The point and figure bullish vertical count is $93, underscoring our bullish sentiment on the stock. Our initial target remains the $75 range, but with an encouraging eventual PnF target, we may simply chase it with a tight stop if we achieve our initial goal. New entries can initiate the play on a hold over $65. We will leave our stop at $64, which would be a PnF reversal and a break in the trend of higher lows. ***** November contracts expire in one week ******* BUY CALL NOV-65 SYK-KM OI= 558 at $2.00 SL=1.00 BUY CALL NOV-70 SYK-KN OI= 25 at $0.25 SL=0.40 BUY CALL DEC-65*SYK-LM OI= 977 at $4.00 SL=2.00 BUY CALL DEC-70 SYK-LN OI= 298 at $1.35 SL=0.75 Average Daily Volume = 749 k --- EXPE – Expedia, Inc. $72.60 (+3.45 last week) Company Summary: Expedia is a provider of online travel services for leisure and small business travelers, offering one-stop shopping and reservation services with real-time access to schedules, pricing and availability. The company's global travel marketplace includes direct-to-consumer Websites offering travel-planning services at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.nl and Expedia.it. In addition, the company provides travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is a division of Travelscape, Inc., one of EXPE's wholly owned subsidiaries. Why We Like It: When we initiated coverage of EXPE on Thursday night, we were hoping for a pullback to the $73 level to allow us to jump on board this momentum run up the charts. Well, Friday delivered just what we were asking for, and perhaps a bit more. Broad market weakness dragged on the stock right from the opening bell, driving it slightly below our $72 stop before a slight lift into the afternoon. The bounce off the lows wasn't so much that there was significant buying interest. The selling pressure just abated. This can be seen on the intraday chart, where the early drop came on heavy volume, while the ensuing afternoon lift took place on drastically reduced volume. Clearly the bulls decided to take some profits ahead of the weekend, and we're going to have to wait for next week to see if we still have an actionable play. If the broad markets break under the critical support that they just barely held onto Friday afternoon, then it is a pretty safe bet that EXPE will follow suit and drop below our $72 stop. But putting those pessimistic thoughts aside, Friday's weakness could turn out to be providing us with a decent entry into the play if the bulls come back from the long weekend reinvigorated. We don't want to just enter near the $72 level though. Wait for renewed buying interest to appear and enter on a rally back above the $73.50 level (the site of Friday's afternoon high). Then look for the rally to continue above $74.50 on robust volume, confirming that bullish interest in the stock is still strong. *** November contracts expire next week *** BUY CALL NOV-70 UED-KN OI=2041 at $4.30 SL=2.75 BUY CALL NOV-75 UED-KO OI=1589 at $1.50 SL=0.75 BUY CALL DEC-70 UED-LN OI= 869 at $7.20 SL=5.25 BUY CALL DEC-75*UED-LO OI= 153 at $4.40 SL=2.75 BUY CALL DEC-80 UED-LP OI= 317 at $2.55 SL=1.25 Average Daily Volume = 2.22 mln --- FRX – Forest Laboratories $100.15 (-0.03 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: True to form, FRX spent Friday behaving just like it had all week long, attempting, but failing to hold above the $102 level. Weakness in the broad market was likely to blame, as there was really no conviction as evidenced by volume that barely topped 50% of the ADV. FRX has been burning up the charts since early September, and this week's consolidation above the $100 level actually looks healthy. It is allowing some bulls to harvest their recent gains, but it is impressive that there has not been a rush for the exits. There is intraday support near $100, followed by more support near $99. And this is backed up by the rising 20-dma, which is currently at $98.85. A continuation of the distribution from last week should drop FRX into this area, where there should be willing buyers, looking to enter for another assault on the highs just above $103. A rebound from above the 20-dma should provide an opportunity to open new positions, but make sure the rebound is accompanied by solid buying volume. Keep stops set at $97.50. *** November contracts expire next week *** BUY CALL NOV-100 FHA-KT OI=3957 at $2.15 SL=1.00 BUY CALL DEC-100*FRX-LT OI= 164 at $5.30 SL=3.25 BUY CALL DEC-105 FRX-LA OI= 863 at $2.80 SL=1.50 Average Daily Volume = 1.92 mln ************* NEW PUT PLAYS ************* PHM - Pulte Homes - $43.51 -0.85 (-2.41 for the week) Company Summary: Pulte Homes, Inc., based in Bloomfield Hills, Michigan, has operations in 43 markets across the United States. Through its Del Webb brand, the Company is also the nation's leading builder of active adult communities for people age 55 and older. Over its history, the Company has constructed more than 300,000 homes and has been named 2002 Builder of the Year. Pulte Mortgage Corporation is a nationwide lender committed to meeting the financing needs of Pulte Homes' customers by offering a wide variety of loan products and superior customer service.(source: company release) Why We Like It: The homebuilders have had a rough couple of weeks, with the Dow Jones U.S. Home Construction Index (DJUSHB) rolling over from its fourth consecutive lower rounding top. It broke through its 50- dma on Thursday's CSFB downgrade, as well as its 300 support level. The slide continued Friday, and the group has now lost almost 10% in two days. The builders were downgraded as a result of data suggesting a slowing construction market, and saw analyst Ivy Zelman drop her recommendation from "overweight" to "market weight." The firm said it believed issues facing the group will limit prospects for outperformance over the next 12 months and that the bull case for the sector is getting harder to defend. Numerous stocks in the sector saw their ratings slashed to either neutral or underperform. While Pulte was not one of them, we believe the factors affecting the industry will affect PHM, as well, and the current weakness in the stock provides plenty of downside room for a short play. The Mortgage Bankers Association of America released its annual economic forecast for 2003 on October 23. The MBA's chief economist said “Mortgage rates are poised to increase gradually as economic activity picks up next year. This will slow mortgage funding activity over the course of next year... MBA expects this to gradually slow home purchase activity in the second half of the year. " While home purchasing remains strong, weekly mortgage applications fell 20% in the week ending October 25. Signs that the housing market is beginning to cool are apparent, and seasonal forces should contribute to that trend as we head into winter. PHM has followed the DJUSHB closely, also rolling over from successively lower rounding tops and has broken through support at its 50-dma, which coincided with support on the daily chart at $44. The stock gave a new point and figure sell signal with the trade of $44 and should quickly test the bullish support line at $40. The MACD oscillator recently rolled over and gave a sell signal to confirm what we are seeing on the PnF and daily charts, as well. We like entry at the current level, or on a rebound below $45. We will target the October lows between $36 and $37 on the play. There is likely to be support at the aforementioned bullish support line at $40, but if mortgage applications continue to slow, PHM should be able to work its way through that level, along with the rest of the sector. Place stops at $47. BUY PUT NOV-42.50*LOW-WV OI= 998 at $3.30 SL=1.60 BUY PUT DEC-42.50 LOW-XV OI= 139 at $4.40 SL=2.20 Average Daily Volume = 5.59 MIL --- ABK – Ambac Financial Group, Inc. $57.53 (-3.44 last week) Company Summary: Ambac Financial Group is a holding company that, through its subsidiaries provides financial guarantee products and other financial services to clients in both the public and private sectors around the world. The company provides financial guarantees for municipal and structured finance obligations through its principal operating subsidiary, Ambac Assurance Corporation. Through its financial services subsidiaries, the company provides financial and investment products, including investment agreements, interest rate swaps, funding conduits, investment advisory and cash management services to its financial guarantee clients, which include municipalities and their authorities, school districts, healthcare organizations and asset-backed issuers. Why We Like It: It's a well-known market reality that any meaningful advance for equities requires the participation of the Financial stocks. Well, in the wake of the Fed's surprise 50-basis point interest rate cut, Financial stocks have not been behaving very well, with both the Banking index (BKX.X) and the Brokerage index (XBD.X) closing in the red the past 2 days. After rocketing off the early October lows near $50, shares of ABK have been running into stiff resistance near the $65 level. The first bout of selling after failing to penetrate resistance knocked the stock back to its 200-dma near the $61 level. It looked like ABK might actually consolidate before moving higher, but it wasn't to be, as the bears pressured the stock below first the 20-dma ($61.56) and then the 200-dma ($60.93). And then it got ugly. On Wednesday, CSFB downgraded the stock to Neutral on a valuation basis, motivating sellers to shave another 4% off the stock's price by week's end. This week's decline put the PnF chart on a fresh Sell signal, with a current vertical count of $50. If achieved, that would be a retracement of all the stock's gains since the October low. ABK came to rest right on the 50-dma on Friday, and that might generate a bit of an oversold bounce next week. If so, then we can look for the rebound to fail near the $60 level, which is just below the 200-dma. Momentum traders will want to wait for the stock to fall under $57 (just below Friday's intraday low) before entering the play. Initial stops are set at $61. *** November contracts expire next week *** BUY PUT NOV-60 ABK-WL OI=1770 at $3.40 SL=1.75 BUY PUT NOV-55 ABK-WK OI=1418 at $1.10 SL=0.50 BUY PUT DEC-55*ABK-XK OI= 1 at $3.40 SL=1.075 Average Daily Volume = 848 K --- IBM - International Business Machines $77.59 (-2.81 last week) Company Summary: International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. Why We Like It: With the scent of recovery in the air, the bulls propelled the stock market sharply off its lows of early October, but ran into formidable resistance in the past week. The breakout over resistance on Tuesday was certainly encouraging, but it is beginning to look like it took every last buyer to get the job done. In the past 2 days, the DOW has fallen right back to major support near 8500, and could be telling us to prepare for a sharp trip down the charts. As one of the key DOW stocks, IBM is telegraphing some troubling signs after last week's failure to hold above its 200-dma. Closing just a penny above its August high on Monday, IBM proceeded to drop gradually and has been picking up steam over the past 2 days due to a variety of negative factors. First up was the "Sell the news" reaction to the 50 basis point interest rate cut, which arrived full force on Tuesday. But IBM contributed to the problem, when it announced plans to issue 19 million shares of its own stock to help fund the deficit in its pension plan. That revived talk that IBM has been meeting its earnings guidance through creative use of share buybacks and tweaking of its 'anticipated' pension fund returns. The net result is that the bulls that were clamoring for the stock a few short days ago are now spitting it back out. To be sure, the bullish trend of the past several weeks is still intact, but it is definitely starting to fray around the edges. IBM managed to find support near the $77 level on Friday, and should find strong arms waiting near $75. But the $80 level now looks like formidable resistance and should put a cap on any future rally attempts unless the DOW is actually able to break out to new recovery highs. That means that a failed rally near the $79.50-80.00 level should make for an ideal entry point into the play. A breakdown under $77 can also be used for new entries, but be aware that the first test of the $75 support level is likely to produce a bounce. For that reason, we want to consider harvesting partial gains the first time that level is tested, looking to re-enter once that rebound runs out of steam. Once below $75, IBM will have gap support near $72, and that's where the bears will likely really get serious. Once they break below the $72 level, they'll be eyeing several open gaps down below that are begging to be filled, the first of which is waiting down at $65. Initial stops are set at $80, as IBM should not be able to close above that level if our bearish thesis is correct. *** November contracts expire next week *** BUY PUT NOV-80 IBM-WP OI=15113 at $3.40 SL=1.75 BUY PUT NOV-75 IBM-WO OI=18712 at $1.05 SL=0.50 BUY PUT DEC-75*IBM-XO OI= 6837 at $3.40 SL=1.75 Average Daily Volume = 10.0 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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The Option Investor Newsletter Sunday 11-10-2002 Sunday 4 of 5 In Section Four: Current Put Plays: RTH, LOW LEH, OHP Leaps: Title Here Traders Corner: Trading As a Business. Are You Up To It? Traders Corner: Title Here Traders Corner: Title Here ************************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 ***************** 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 RTH is a measure of overall sentiment in the sector and it sent us a clear message after this week's same store sales reports. While there were some diamonds in the rough, the overall sentiment out of the sector was very cautious heading toward the holiday shopping season. Many analysts and several of the retailers themselves cited declining Consumer Confidence and a weak economy, when pressed to predict how the fourth quarter would shape up. Not to be overlooked is this year's shortened official holiday shopping season, with Thanksgiving falling later than usual. With only 2 official shopping days in November, this month's sales numbers are bound to be weak when compared to previous Novembers. It will be hard to draw comparisons to last year, since it was shortly after 9/11, but some retailers are predicting a possible decline from 2001, which would be a sad commentary on the state of the economy. With numerous retail earnings coming out in the next two weeks, we could see some volatility in the RTH, so conservative traders may want to sit this one out. However, the RTH refused to participate in the recent Dow rally and the risk to the upside seems limited. It found support at $73 over the last week, until today, when the broad market pullback helped tag another "O" to the current down column on the point and figure chart. The bullish support line is down at $66 and we can see the RTH testing that level by the end of earnings season. The MACD oscillator has also recently rolled over, confirming the downtrend. The recent downdraft has convinced us to tighten our stop, and we are setting it at $76, just above recent resistance. ***** November contracts expire in one week ******* BUY PUT NOV-75 RTH-WO OI= 2169 at $3.30 SL=1.70 BUY PUT DEC-75*RTH-XO OI= 231 at $4.90 SL=2.50 Average Daily Volume = N/A --- 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 continues its slow grind downward, now below $40 and finding resistance there to the upside. This is a welcome change for shorts, who saw the stock bouncing above that level earlier in the week. With the new resistance level, the risk reward in the play has been reduced from this level and we are comfortable lowering the stop loss from $44.00 to $42.00, just above Thursday's top. We are now testing new support a dollar lower, with today's low at $39.00. This places the stock just above its PnF bullish support line, which sits at $38. The intraday chart shows that the stock attempted a rebound after hitting $39, but found resistance at $39.75. While the stock is moving slowly, it has continued its series of lower lows and lower highs on each rebound attempt. It appears the next test below bullish support will be $36.50 from early October. There is a slew of retail earnings reports coming out in the next couple of weeks. This past week's sales reports saw mixed results, with even those companies beating expectations warning that the next quarter could be a challenge. With declining Consumer Confidence, increasing layoffs, the four-week average of initial jobless claims remaining over 400,000 and a drop in personal spending, we expect more cautious statements to accompany upcoming earnings releases in the sector. That should keep us in the current downtrend as we head toward LOW's own earnings date of November 18. New entries from this level need to be conscious of the aforementioned bullish support at $38, but can enter on a failed rebound under $40. ***** November contracts expire in one week ******* BUY PUT NOV-42.50*LOW-WV OI= 998 at $3.30 SL=1.60 BUY PUT DEC-42.50 LOW-XV OI= 139 at $4.40 SL=2.20 Average Daily Volume = 5.59 MIL --- LEH – Lehman Brothers Holdings $54.50 (-0.07 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: Despite getting the interest rate cut they wanted and a more market-friendly mix in Congress earlier in the week, the bulls stumbled once again on Friday, with virtually every sector of the market ending in the red. The Brokerage sector (XBD.X) slid a bit closer to the critical $400 support level, ending the week just above the 20-dma ($404.93). With daily Stochastics already in full bearish roll, and MACD now tipping over as well, it looks like the bears are getting set to flex their muscles again next week. After rallying up to its descending trendline near $57.50 on two separate occasions last week, LEH finally rolled over as well. Giving up more than 3% on Friday, the stock filled its gap from Monday, and closed below the 20-dma ($55.21). While there is some mild support near $54.50, with both Stochastics and MACD rolling over, it looks like the stock is destined to retest the $52.50 support level, which is also the site of the 50-dma. Should that support level fail to hold, then it will likely be a quick trip down to the $50 level, as the stock endeavors to fill its October 15th gap. It's not all clear for the bears yet, but the $56 level is now shaping up as intraday resistance with more resistance up at $57. Another failed rally attempt below $57 would provide a solid entry point, although more cautious traders may want to wait for the stock to fall below $54 in conjunction with the XBD index puncturing the $400 level. For now, keep stops set at $58. *** November contracts expire next week *** BUY PUT NOV-55 LEH-WK OI=3035 at $1.70 SL=0.75 BUY PUT DEC-55*LEH-XK OI= 457 at $3.80 SL=2.25 BUY PUT DEC-50 LEH-XJ OI=1708 at $1.90 SL=1.00 Average Daily Volume = 2.80 mln --- OHP – Oxford Health Plans, Inc. $33.00 (-3.50 last week) Company Summary: Oxford Health Plans is a healthcare company providing health benefit plans primarily in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and the Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice and third-party administration of employer-funded benefit plans. Why We Like It: It may seem strange to keep focusing on the story surrounding THC, when our play is actually on OHP. But the THC story has been the driving force behind weakness in the Health Care stocks over the past week. The situation got a bit uglier Thursday night, when THC announced some changes to its senior management structure and the stock was summarily cut in half -- again -- on Friday. This time, the carnage spilled over into the entire sector, with the HMO index plunging nearly 7%, knocking the stuffing out of the $520 support level. That negative sector pressure was good enough to drive our OHP play solidly below the $34 level and after putting a quick stop to the midday rebound, the bears closed the stock at it's lowest point since January 9th. Judging by the heavy selling volume (nearly triple the ADV), the selling isn't anywhere near being over. The vertical count on the PnF chart grew to project a downside target now at $18. There is some mild support at $32, which then starts to really firm up in the $29-30 area. But the $35 level (prior support) is now shaping up as formidable resistance. Use an oversold bounce to the $35 area as a solid entry point into the play, ahead of the next leg down. We'll likely need to see the HMO index lose its next level of support (near $505) before OHP will break below $32. So momentum traders that are looking to enter on a breakdown below that level, will want to confirm that the HMO index is losing support as well. Lower stops to $37. *** November contracts expire next week *** BUY PUT NOV-35 OHP-WG OI=1253 at $2.60 SL=1.25 BUY PUT DEC-35*OHP-XG OI=1008 at $4.00 SL=2.50 BUY PUT DEC-32 OHP-XG OI= 0 at $2.70 SL=1.25 Average Daily Volume = 1.05 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 ***** Stability and Balance By Mark Phillips mphillips@OptionInvestor.com Last week's market action reminded me of the analogy of trying to balance a group of people in a rowboat. Just ahead of the FOMC meeting, the boat seemed to have found an acceptable balance. The surprise 50 basis point rate cut however, goaded those few remaining occupants on the bearish side of the boat to rush to the other side. Then everyone was sitting on the bulls' side of the boat (making it very unstable), when CSCO's CEO, John Chambers disappointed the market with his very cautious outlook for the near and intermediate future, citing very difficult industry trends for the NEXT SEVERAL QUARTERS. That created a mad rush to get the boat balanced again, and resultant rocking back and forth caused the boat to take on some water and now all the occupants are reconsidering just how seaworthy their small craft is. By the way, are those storm clouds on the horizon? Can we get the boat back to shore before we hit rough water, or are we just going to have to swim for it? Does that mean I'm ready to abandon ship and swim for it? No, not yet. Afterall, the Bullish Percent readings are still in just about their strongest possible condition. With the exception of the S&P 500 (SPX), which is still in Bull Alert, all of the major indices are currently Bull Confirmed. We haven't yet seen any appreciable weakening of the market internals. But what is causing me to be much more cautious to the long side is that the DOW and SPX have essentially gone nowhere in terms of price over the past 3 weeks, while the Bullish Percent has risen from 50 to 63 and from 44 to 55 respectively. That internal strengthening has not resulted in further price gains, which indicates to me that the recent rally has been little more than short-covering. The institutions are not participating, and without institutional sponsorship, this recent rally is likely to go the way of the past half-dozen or so. Back to new lows. In perusing my charts of the major indices this weekend, I noted something interesting on my SPX chart. Rather than try to describe what I see, I thought I'd take advantage of the "picture is worth 1000 words" maxim, and just show it to you. S&P 500 (SPX) Daily Chart Whoever said technical analysis doesn't work, never saw a chart like this. The descending trendline (red) from last spring, capped the rally midweek, and with daily Stochastics showing very clear bearish divergence, I'm expecting further weakness dead ahead. While we can look for significant support near the $875-880 level, I think the more important test will be the center line (grey) of the broad descending channel. That line provided support throughout the latter half of October, and I expect more than a couple technicians are looking to see how the SPX behaves next time this support line is encountered. If it fails as support, then look out below, as it will bring up the very real possibility of a retest of the October lows. For the record, that center line is currently at $865, but will fall to $850 by the end of November. That pretty much sums up my broad market view, and with the Semiconductors and Biotechs apparently rolling over, there is little in the way of leadership for the broad markets. Financials aren't looking any better with the Banking and Brokerage indices, BKX and XBD respectively topping out at or below their August highs. If we're looking at a nascent recovery, I sure can't see from what area of the market it is likely to come. The only other pertinent observation I'd like to make is the action of the VIX. Isn't it amazing that once again this indicator is finding a bottom in the low 30s? What's it going to take to drop it back into the 20-30 range? I don't know, but I am currently leaning towards the possibility that the "normal" range for the VIX just might be shifting upwards. We need a lot more data before we'll know whether that is in fact the case, but right now I'm expecting to see 50 again (perhaps more than once) before we see 20. With the topsy-turvy markets of late, I have to say I'm downright pleased with the way our Portfolio is performing. We may not have a lot of plays there, but everything appears to be shaping up in our favor. Care to take a look with me? Portfolio: LEN - It may have looked like we were early to the party, calling a top in the Home Construction sector, but it looks like the market is coming around to our way of thinking. The past 2 days saw the $DJUSHB index put in its third consecutive lower high, and then plunge through both the 50-dma and then 20-dma, coming to rest on Friday below the $300 level. LEN was already looking weak, but the past 2 days confirmed that, as the stock plunged under its 200-dma and then broke the ascending trendline connecting the July and October lows. We aren't out of the woods quite yet, as the stock is finding support near $51, the site of its PnF Bullish support line. Look for a break of this level to confirm the stock's weakness, and then a trade below $49 to put the PnF chart on a Sell signal. Late-comers to the play can use a near term rebound and subsequent failure in the $54-55 area. We are lowering our stop this weekend to $56.50, just above the last swing high. JNJ - While JNJ hasn't been able to break out just yet, it certainly has been behaving rather well. We're starting to see renewed signs of life in the Pharmaceutical sector (DRG.X) and last week's break above the $315 level has the DRG in its strongest position since mid-June. Higher lows are still the theme, both for the DRG and JNJ, and the next hurdle for JNJ will be to post another higher high. That higher high will come from a print above $61.50, and a trade at $62 will generate yet another Buy signal on the PnF chart. Until we get that breakout, we're keeping our stop rather wide at $56. This is the site of the late-October lows and is just below the still-rising 50-dma that has provided support on the last two pullbacks. NEM - This is just about the kind of (in)action I would expect from this play, and to be honest, I like what I see. This one isn't going to take off in the near-term, but as more and more investors come to the realization that Gold is in a new bull market, gold shares are going to be in favor. NEM is clawing its way back above the $25 level, and with Gold Futures pushing back over the $320 level, it looks like we are on track. Subsequent rebounds from the $25 support level can still be used to enter the play ahead of the expected breakout over the 200-dma. Watch List: MO - Call me the eternal optimist, but I still like our prospects in the MO play, provided we ever get the entry I'm asking for. For the time being, the $44 level looks like a firm top, so we don't need to be in any hurry to establish a position up here. But my premise about investors shifting their focus towards stocks that pay a fat dividend is likely to start playing out in the months to come. With weekly Stochastics nearing overbought and the hint of bearish Stochastics divergence on the daily, down is the most probably near-term direction. I'm more than happy to lie in wait until the stock comes back down to the $38 level where we'd like to take an entry. GM - That was so close! I almost decided to step into the GM play last week when the stock rallied almost to the $37 level. But looking at the weekly Stochastics I decided to wait for a better opportunity. Sure that entry would be profitable right now, but I'm looking for a slightly bigger bounce to give us a better risk/reward. GM may be trying to put in a near-term bottom here, and we don't want to get caught in the crossfire with a poor entry point. I'd still prefer to see a bounce up near the $40 level, which is very strong resistance, before taking an entry. But the $37-38 level is certainly viable if we get a solid rollover in that range. I'm having a hard time seeing anything bullish in the current market. With the exception of possible tax code changes that are more business-friendly, like the elimination of double taxation of dividends (wouldn't that be a nice boost for our MO play, after we enter it?), there are few things the GOP controlled government can do to stimulate the economy, and the Fed has already given us all the stimulus we are likely to see. Economic growth is anemic, at best and the shorts are essentially done covering. In fact, they could very well get active again over the next couple weeks. Taking note of the fact that I axed the Watch List plays on both the DJX and QQQ (not to mention MSFT) this week, should tell you all you need to know about my market bias. While it may not yet be time to get heavily short, it certainly isn't the time to be getting aggressively long either. Hold on tight, because volatility doesn't seem to have any intentions of letting up! 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 $ 7.90 +21.54% $56 '05 $ 60 ZJN-AL $ 9.10 $11.10 +21.98% $56 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 $11.00 +27.91% $56.50 '05 $ 50 XFF-MJ $11.20 $14.60 +30.36% $56.50 SMH 11/04/02 '04 $ 25 KBS-ME $ 5.00 $ 6.00 +20.00% $29.25 '05 $ 25 ZTO-ME $ 6.20 $ 7.30 +15.18% $29.25 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 $ 40 ZMO-AH CC JAN-2005 $ 30 ZMO-AF PUTS: GM 10/27/02 $40-41 JAN-2004 $ 35 LGM-MG $37-38 JAN-2005 $ 30 ZGM-MF BBH 11/10/02 $88-90 JAN-2004 $ 85 KBB-MQ JAN-2005 $ 80 XBB-MP New Portfolio Plays SMH - Semiconductor HOLDR $26.21 **Put Play** Who says target shooting doesn't work. The short-covering that has been propelling the Semiconductor index (SOX.X) sharply higher over the past 5 weeks seems to have come to an end. After shooting up to just above $27 on Monday, the SMH appears to have topped out, and is back in distribution mode, as the reality of the industry's fundamentals seems to be taking hold again. There has been little of good news in the Chip sector as the SMH has been rising, and the very cautious comments from CSCO in their earnings report on Wednesday seemed to confirm that nobody can really see when things are going to improve. Recall the recent news that billings had actually increased in the last reporting period? Well, just before that, the Book-to-Bill had fallen off a cliff, once again. Connect the dots, and you can see that billings may have risen, but new bookings (the source of future billings) is still in decline. Now that the short covering has seemingly come to an end, earnings season is over and the Fed has dropped interest rates (with negligible prospects for another cut), there appears to be no catalyst to drive this group higher. Technically, the sector seems to have topped out as will, with the weekly Stochastics just beginning to roll over and the SOX closing on Friday back under the critical $300 level. Another push up into the $26-27 area can still be used for initiating positions in the play, so long as we don't get a breakout over last week's highs. In order to give the play some room to move until the downside momentum picks up, we're starting out with a wide stop at $29.25, just above the August closing highs. BUY LEAP JAN-2004 $25 KBS-ME $5.00 BUY LEAP JAN-2005 $25 ZTO-ME $6.20 New Watchlist Plays BBH - Biotechnology HOLDR $85.28 **Put Play** While the rest of the market has been rising sharply over the past month, the Biotechnology sector (BTK.X) has been notably absent on the leader board. Churning along in a narrow range between $340-355, the BTK finally broke out last week, pushing briefly above the $360 level, only to fall back into the trading range, once again. That has the looks of an exhaustion top, and can be seen more clearly on the chart of the BBH. Briefly clearing the $90 resistance level, the BBH has now fallen right back to the $85 support level and with both daily and weekly Stochastics now tipped over in bearish decline, the prospects for the bulls do not look good. Adding to the problems in the sector is the long-term descending trendline going back to the March 2000 highs. This trendline turned back the bulls this past March and looks like it is setting up for a repeat performance, as it sits right at $90.50, the site of last week's highs. If the BBH fails to take out this resistance level, it will mark the fourth rejection at the $90 level since June. Another measure of the weakness that seems to be appearing in the group is the fact that Friday's decline had the BBH breaking the ascending trendline that had been supporting a pattern of higher lows since late September. Look for the $84-85 area to provide one last bounce, which we can use to grab an attractive entry into the play. That bounce will likely fail near the $88 level (currently the site of the broken trendline off the September lows), and a rollover there will be the "kiss of death" to the recent rally. Due to the volatile nature of the recent market, we want to give the play a bit of flexibility, so we are looking to enter the play on the next rally failure in the $88-90 area. Note that the ascending trendline that is currently at $88 will rise to $90 by next Friday, which explains the $88-90 range specified for new entries. We'll initially place our stop at $92.50 (just above the August highs), as a rally above that level would give a clear indication that our bearish bias is incorrect. BUY LEAP JAN-2004 $85 KBB-MQ BUY LEAP JAN-2005 $80 XBB-MP Drops DJX - $85.37 Its' time to pull the plug on our DJX Watch List play. While the DOW's Bullish percent has been marching up towards overbought territory, the actual price of the DJX has made very little upward progress. While it still might be able to challenge the August highs, the risk is now weighted much more heavily to the downside. There just isn't enough potential reward in the play to consider taking new entries, even if we do get a solid drop and bounce from the $82-83 area. Depending on how the action of the next couple weeks plays out, it is entirely possible that the DJX will be back on the Watch List very soon, but next time it will be on the Put side. MSFT - $55.10 Last week's legal ruling looks to have been the last piece of good news for Mr. Softee. With the broad market running out of steam, and the stock unable to hold above the $57 level, it is hard to see much upside left in the play. Recall from the most recent earnings announcement, that the boost in revenue came from a one-time change in the company's accounting practices. Investors seem to have figured out that much like the rest of the market, the upside reward in MSFT is fairly low when compared to the potential downside. We have to agree, and will move to the sidelines on this play. QQQ - $25.07 Propelled by consistent short-covering in the past month, the NASDAQ has risen considerably from the October lows, without giving us the benefit of an acceptable entry point. With the NASDAQ-100 Bullish percent rising right to the edge of overbought territory, there is just too much downside risk to consider new bullish entries at this time. Short-covering appears to have pretty much run its course, but we haven't seen the necessary institutional buying that is necessary to keep the index on the rise. Much like our DJX play, I view the next likely long-term trade in the QQQ to be to the downside. ************** TRADERS CORNER ************** Trading As a Business. Are You Up To It? By Mike Parnos, Investing With Attitude Buy Low – Sell High. Sell High – Buy Low. Couch Potato Trading Institute words to live by. Sounds easy, doesn’t it? Well, there’s a little more to it than that. Buy what? Sell when? Who’s high? What’s low? A few years ago, thousands of people left high paying jobs in the hopes of making a living by trading in the stock market. Little did they know . . . And that “little” is why they’re now working their way back up the corporate ladder one cheeseburger at a time. Can you make a living in the stock market? Of course you can, but you have to treat it like a business. Before you can properly invest – whether you’re trading options, stocks, baseball cards or Barbie Dolls – you need to invest in yourself. You need to prepare yourself mentally, physically, and financially. It takes commitment! What Do You Need To Succeed? 1. EDUCATION: Jethro Bodine’s dream was to be a brain surgeon or a fry cook. We’ll never know if he succeeded, because the show was cancelled. Well, each endeavor takes its own form of expertise. Trading is no different. Your subscription to OptionInvestor is a giant step towards that end. OI provides a plethora (apologies to Howard Cosell) of timely information. Every time the market fluctuates or flatulates, it will be reported. There’s something for everyone. Everything is discussed, from aggressive trading strategies to conservative trading strategies to technical analysis to fundamental analysis. But, it takes more than just reading the information. You have to lean how to implement it. 2. INFORMATION: You need to have access to the Internet for a variety of reasons. You need a computer with sufficient speed (600 MHz.) and 128 RAM (random access memory). You can get by with a dialup modem, but a cable or ADSL connection is preferred. Everything will happen faster – including your “companion shopping.” The Internet is your primary source of information. Without this crucial information, you’re flying blind. It’s not healthy. Just ask Ricky Nelson and John Denver. a) In addition to OI, ideally you should have streaming stock and index quotes available. Many Internet sites offer 15-minute delayed quotes, but that’s not good enough. The markets move much too fast. Some brokerage firms now offer streaming quotes at no charge if you open an account. b) Often, the streaming real time quotes also include daily and real time intraday charting. If not, there are a number of free Internet sites that will give you 15-minute delayed daily and intraday charts. They are interactive charts that can, upon request, show you different time frames, chart sizes, various indicators, moving averages, volumes, etc. For a small monthly fee, you can upgrade to their real-time charts. There are many quote and charting services available – some for under $100 per month. For the most sophisticated traders, NASDAQ Level II quotes and tick-by-tick charting can help with entering and exiting trades. Some brokerages even offer free Level II quotes and charting services to very active traders 3. BROKERAGE ACCOUNT: You will need to have an online margin brokerage account. Accounts where you have to talk to a human (?) to place your order will invariably cost you money. Why? Because by the time you dial the phone, get connected to a broker (or customer service representative), explain what you want to do, get a quote, have him repeat it back to you, and place the order, the underlying could have moved a point in either direction. In that extra minute or two, the information you just received on the phone may now be obsolete and useless. Ideally, an on-line account will have software that will show you the bid and ask prices of an option on ALL exchanges on which the option trades. As you know, the prices for an option can vary from one exchange to another. By seeing the different exchange, it enables you, with a simple mouse-click, to send your order directly to the exchange offering the best price – instantly. If you send your limit order at the bid or the ask, it will likely be filled in a matter of seconds. No phones, no fouls. When you open your account, you’ll need to get approval to trade options. The levels of approval go from novice to professional. The more experience you have, the higher approval level you’ll get. The brokerages do this to cover themselves. If you lose the family jewels trading options, you won’t be able to sue the brokerage firm to get them back. If you’re relatively new to options, you’ll probably get approval to sell covered calls and the straight purchase of puts and calls. If you have more experience, you’ll be able to trade spreads. The highest approval level will allow you to sell uncovered options. 4. MONEY: If you’re planning to treat trading, whether it’s stocks or options, as a business, your money and your positions represent your inventory. They say, “It takes money to make money.” It wouldn’t be a cliché if it weren’t true. How much money is necessary to start your business? It depends on what strategies you want to use. Do your strategies involve stock purchases? If so, then you’ll need enough to subsidize the purchase (or half the purchase on margin) of the stocks. If you’re going to simply buy calls and puts, you need enough to cover the purchases of the puts and calls. For spread trades or trading naked (uncovered) options, the brokerage will likely require an account minimum. When spread and uncovered option trading, if you’re going to do it properly, you’ll need to have cash or other marginable securities (stocks, mutual funds, bonds, CDs, etc.) in your account to enable you to make the trades and adjustments in your positions. Brokerages have different policies in determining what securities they accept as marginable. 5. TIME: You’ve got it or you have to make it. Now, you just have to prioritize it. If trading is your business, you’ll have to do research on what to buy, when to buy it and what’s the right price. That takes time. 6. EMOTION: You can’t afford it. It has no place in the business of trading. Cry at sad movie, not over spilled milk or lost money. If you properly followed your trading rules, a loss is just a cost of doing business. Nothing more. Keep emotion, along with your ego, on a short leash. You’ll have good streaks and bad, but, if you use common sense, and know every aspect of your business, you can do just fine. 7. DESIRE: You have to want it badly enough. It’s amazing, if you want something bad enough, the number of sacrifices you’re willing to make in order to achieve it. You’ll be surprised how far desire will take you. Knowledge is Power If you want to trade for a living, you’ll spend the time to learn the strategies. You’ll find the strategies that are most comfortable and learn them inside and out. You’ll know what to do when the strategy works or if it goes against you. You’ll know the adjustments you can make and when to make them. You’ll know how to research and recognize opportunities and what strategies to use to take advantage of them. Those are the things we try to teach at OI and the CPTI. It’s here for the learning. The Secret of Survival It comes down to survival. If you want to continue to trade and stay in business, you must concentrate on making good trades. You have to protect your inventory. How? Self-discipline. It’s a rare commodity, indeed. You can’t buy it at Office Depot or Victoria’s Secret. Either you have it, or you don’t. It’s like your money. Either you’ll have it, or you won’t. __________________________________________________________ CPTI Portfolio Update (as of Friday’s close) BBH Iron Condor – Trading at $85.05. Just dandy! We want it to finish between $80 and $95 at November expiration. MMM Iron Condor – Trading at $128.20. Also dandy! We want it to finish between $120 and $130 at November expiration. We made a few adjustments earlier this week, twice buying shares and then reselling them when MMM violated $130 resistance and came back down. TTWO Short Strangle – Trading at $27.02. Couldn’t be better! We want it to finish between $25 and $30 at November expiration. QQQ ITM Strangle – Trading at $25.07. This week has been interesting. For those who bought the Dec. $23 calls, the QQQs made it up to about $26.75 and a few alert traders I know took some quick profits. It’s still early in the trade and the market is trying to move up. The resistance at $26 seems to be substantial and holding, but who knows? Stay tuned . . . ____________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. mparnos@OptionInvestor.com ************** TRADERS CORNER ************** Reversal patterns: Rectangle Tops and Bottoms By Leigh Stevens lstevens@OptionInvestor.com If someone calls you a square, you may feel offended, especially if you think you are more “with” the fashions and trends of the times. If someone describes what a stock or index is doing as forming a square, that may be useful information and not offensive. I wrote previously about markets that turn on a time and either rebound sharply or fall sharply, often after “spiking” up or down – these are “V” type bottoms or tops (the tops are also called “V” tops although they are more like “inverted” V patterns: http://www.OptionInvestor.com/traderscorner/110702_2.asp Traders are always looking to get in early into new trends, which is why we want to quickly be able to size up a recently formed top or bottom pattern. Look for “spike” up or down moves, then sharp moves in the opposite direction (to the prior trend), to signal the V-type reversal. However, there is also a top or bottom that forms after prices go sideways for some time and the intraday (or hourly, or weekly, etc.) highs or lows start occurring repeatedly in the same price area – such that you can draw a straight (horizontal) line through the tops or bottoms that are the stopping points for up or down swings. Charles Dow used the term “lines” or line formation to identify these type moves. While the line pattern or sideways move is often or most often a “continuation” type pattern – meaning, that prices are marking time or “consolidating” prior gains or losses before continuing on in the same direction. A big move in the same direction is called a “leg”. My article about where sideways type price moves precede another move in the same direction is at – http://www.OptionInvestor.com/traderscorner/082202_1.asp RECTANGLE TOPS AND BOTTOMS - A rectangle, what Dow called a “line” formation, is outlined by two horizontal lines that connect a series of highs and lows that occur at around the same price areas over time, creating a sideways trading range that interrupts an advancing or declining trend. The rectangle most often proves to be continuation pattern or sideways consolidation prior to the resumption of the dominant trend – in some instances, a rectangle acts in lieu of a secondary downtrend in a primary up trend (or a secondary uptrend in a primary downtrend) – on still fewer occasions, the rectangle can also form a top or bottom and becomes the prelude to a trend reversal. The rebound in GE from the fall period of last year was followed by a lengthily apparent “consolidation” into a trading range or rectangle pattern. Normally, we would assume that this was a continuation pattern and that the breakout would be to the upside, above the highs – WRONG! – it turned out that this was the more uncommon rectangle top. Of course, this pattern can also be seen as a triple top in terms of the main clusters of the rally peaks. The key to a rectangle is to trade in the direction of the price swing that breaks out above or below the top and bottom of the rectangle. Dr. Andrew Lo an MIT professor and researcher in the area of financial markets, studied whether technical price “patterns” had future predictive value and found that rectangle tops and rectangle bottoms were 2 (of 5) chart patterns they found significantly correlated to the expected outcome – if a rectangle forms after an advance, but the breakout is downward and the following price trend continues lower, it is considered to be a rectangle top; conversely, if a rectangle formed after a decline, was preceded by a downtrend and the direction of the breakout is up, it is a rectangle bottom. Now, while these patterns may be reliable in terms of predicting a trend reversal, the pattern is also not that common. So, you don’t see a rectangle reversal type formation all that often – when it does occur, it is a reliable pattern in terms of the suggestion that there will be follow through after the breakout. When there is one or two consecutive closes above the upper or lower horizontal line, or the “line” is exceeded by more than 5- 7%, any trade made should be in the direction of the breakout, with a stop point just below/above the breakout point. Some examples reaching back into my chart archive follow - In the next chart, a rectangle top is preceded by an uptrend. As with trendlines, it can be appropriate to take out one (or more) spike high or low in terms of “defining” a rectangle – the key is to use the most number of points – 3 in this example of the major top formed by Apple (AAPL) Computer, as shown in the chart – As always with technical chart patterns, the ones that have “measuring” implications for a potential next price objective (e.g., Head & Shoulder’s, “flag” patterns, etc.) are very useful to traders. If you have some idea of a price target then you have a trade objective. If you have a trader objective, then it helps set a risk or stop-out (exit) point – reward potential should always be 2-3 times the amount risked, which keeps you on a solid winning trend even if you lose on 1/2 of your trades. If the rectangle pattern – after a breakout – suggests that the potential move is 15 points, then you can risk 5 points. A “tighter” stop is more feasible after a breakout move anyway, as there should not be a return to much under/over the support/resistance line if the breakout is genuine or the real deal. MEASURING IMPLICATIONS – RECTANGLE TOPS and BOTTOMS After a breakout to the downside from a rectangle top, the minimum objective for a low in the further expected decline is equal to the height of the formation – that is, the distance between the line of the highs and the line of the lows added to the bottom of the rectangle at the downside breakout point (see chart above). Sometimes, an upper or lower boundary “line” is not precisely defined, so an approximation must be used. Generally the longer the sideways trend, the bigger will be the resulting move. A rectangle bottom is preceded by a downtrend as can be seen in chart of Philip Morris (MO) below – The minimum objective for a high in the expected uptrend is equal to the height of the formation – that is, the distance between the line of the lows and the line of the highs added to the top of the rectangle at the upside breakout point. As it always true for any minimum price objective rule of thumb, they are useful for an initial objective at the time of the breakout – after the trend develops, you need to follow the trend developments and also use other technical analysis analytical tools (e.g., trendlines), in order to see just how the price trend will extend in terms of duration and price. ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 11-10-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: More Q&A On Covered-Calls Naked Puts: Options 101: If You Fail To Plan... Spreads/Straddles/Combos: Entry Point...Or Time To Sell? 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: More Q&A On Covered-Calls By Mark Wnetrzak One of our readers asked for an explanation of the methods used in closing or adjusting a covered-call position. Attn: Covered-calls editor Subject: Covered-call exits and adjustments Dear Mark, As a novice covered-call option investor, I appreciated your explanation of how to figure the profit/loss on covered-calls in your section of Sunday, 11/3/02. In your "Summary of Previous Candidates" introduction you mentioned that plays can be opened, closed, or adjusted in a variety of ways. I am particularly interested in knowing how a current play can be closed or adjusted, other than waiting until expiration or you are "called" out. Thanks, KD Hello KD, Although the "in-the-money" covered-call strategy offers a conservative method to profit from stock ownership, it still requires a disciplined approach and sound money management techniques, as there is risk of loss in all trading. Obviously, writing a covered-call does hedge against downside movement in the underlying issue, but the technique is not a remedy for protracted bearish activity. ITM covered-calls simply offer a higher probability of making a consistent (low) return on your investment. As for exiting covered-call positions, there are a variety of stop-loss signals an investor can employ: a strict percentage of one's overall portfolio; a fixed dollar amount; a technical violation; etc. Once you decide to close a covered-call play, you simply buy back the calls (at the "ask") and then sell the stock (at the "bid"). A "net-credit" order can also be used in closing a covered-write to ensure an efficient exit. In that case, you would place an order with your broker to "sell" the stock and "buy to close" the calls for a net credit at a price reasonably close to parity. For example, if you purchased XYZ stock at $13.88 and sold the NOV-$12.50 calls for $2.00, your cost basis or break-even point would be $11.88 (not including commissions). A few days later the stock breaks down technically, and when it hits $11.50 on a closing basis, you decide to exit the position to preserve capital. The next day you repurchase the calls for about $0.45 and sell the stock at $11.45, incurring a loss of $0.88. The math looks like this: 11.88 - 11.45 = 0.43 + 0.45 = 0.88 (not including the cost of commissions). There are several methods to adjust a covered-write: You might roll up (a bullish adjustment), roll forward, roll down, or even use the combination 'ratio-call' method. Generally, if you are defensive and trying to lower your cost basis in your covered- call position, you would roll down and/or forward. If this is done before expiration, you would need to buy back your current (sold) calls. To roll down, you sell a lower-strike call and to roll forward you transition to a future expiration period. An investor who remains bullish in the long-term will do this to protect against short-term weakness, but ultimately, he expects the stock to recover. Generally, you will have to move forward several months (or use LEAPS) in order to obtain a credit in the new position. Sometimes, the best that can be accomplished is to "lock-in a loss," which will still be less than the current loss, providing the stock doesn't move significantly lower. Referring to the above example: After buying back the NOV-12.50 calls, your new cost basis (11.88 + 0.45) is $12.33. You check the news and realize the stock declined because of a short-term production problem. You think the stock may drop to around $10, but ultimately will recover. You decide to roll down and forward to the MAR-$10 strike, which is selling for $3.15. The adjusted position offers a new cost basis of $9.18 ($12.33 - $3.15), which provides additional downside protection and offers a reasonable return on investment at the expense of tying up your capital for a longer period. The link below leads to a previous narrative on a the "ratio-call" method used to adjust a covered call position: http://members.OptionInvestor.com/coveredcalls/050502_1.asp Again, the ability to manage losses is paramount to a successful portfolio. Technical analysis is used my many professionals to identify areas of support or resistance, which can then assist in applying exit or adjustment points. "Secrets for Profiting in Bull and Bear Markets" by Stan Weinstein, will help you learn how to evaluate the technical condition of stocks. The OIN bookstore also offers several other technical analysis books to choose from. Larry McMillan's book, "Options as a Strategic Investment" has some excellent information on Covered-Calls. The book is also a great resource for option traders and explains all aspects of the "covered write" strategy including the strategy of selling calls on long-term portfolio holdings. One last comment: It is very important to completely understand any strategy you intend to use as you are the only person who can decide what is right for you. Hope that helps, Mark W. mark@OptionInvestor.com 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 3.28 NOV 2.50 0.35 *$ 0.26 16.8% IMCL 8.16 8.97 NOV 7.50 1.25 *$ 0.59 12.4% MANU 3.17 3.71 NOV 2.50 0.85 *$ 0.18 11.2% REGN 15.21 16.61 NOV 15.00 1.25 *$ 1.04 10.8% WWCA 2.71 5.34 NOV 2.50 0.50 *$ 0.29 9.5% PCS 2.82 3.66 NOV 2.50 0.50 *$ 0.18 8.4% CKFR 16.39 15.81 NOV 15.00 1.95 *$ 0.56 8.4% SNDK 14.30 20.36 NOV 12.50 2.75 *$ 0.95 7.1% VOXX 7.40 8.13 NOV 7.50 0.45 *$ 0.55 6.9% SEPR 8.72 8.72 NOV 7.50 1.55 *$ 0.33 6.7% VSAT 8.47 9.81 NOV 7.50 1.40 *$ 0.43 6.6% BCGI 10.30 14.13 NOV 10.00 1.10 *$ 0.80 6.3% TMCS 18.14 23.77 NOV 17.50 1.80 *$ 1.16 6.2% MU 17.30 15.57 NOV 15.00 2.85 *$ 0.55 5.5% MACR 9.15 10.49 NOV 7.50 2.00 *$ 0.35 5.3% GNSS 12.29 14.24 NOV 10.00 2.75 *$ 0.46 5.2% HAL 17.10 16.58 NOV 15.00 2.45 *$ 0.35 5.2% FDRY 6.02 7.00 NOV 5.00 1.35 *$ 0.33 5.1% MEDI 24.95 24.36 NOV 22.50 3.70 *$ 1.25 5.1% MCHP 23.18 26.52 NOV 20.00 4.20 *$ 1.02 4.7% HPQ 16.31 16.68 NOV 15.00 1.60 *$ 0.29 4.3% IVX 12.95 12.50 NOV 12.50 0.80 $ 0.35 4.2% VRST 16.63 17.90 NOV 15.00 1.90 *$ 0.27 4.0% ISSX 19.19 20.00 NOV 17.50 2.00 *$ 0.31 3.9% MDCO 14.63 14.33 NOV 12.50 2.35 *$ 0.22 3.9% BCGI 11.26 14.13 NOV 10.00 1.60 *$ 0.34 3.8% CREE 14.98 18.71 NOV 12.50 2.90 *$ 0.42 3.8% MENT 7.50 11.25 NOV 5.00 2.70 *$ 0.20 3.6% TTN 13.02 12.30 NOV 12.50 0.85 $ 0.13 2.3% CPB 22.59 21.06 NOV 22.50 1.05 $ -0.48 0.0% NVDA 14.10 11.36 NOV 12.50 2.05 $ -0.69 0.0% *$ = Stock price is above the sold striking price. Comments: The major averages floundered this week after a bit of "sell the news" washed through the recent bullish euphoria. Many of the positions in the covered-call portfolio above are now entering a consolidation phase and should be monitored closely if they show excessive signs of weakness. The gap-up open on Monday offered little chance to enter the Hewlett-Packard (NYSE:HPQ) or Internet Security Sys. (NASDAQ:ISSX) positions but by Tuesday, a favorable entry point was available. NVIDIA's (NASDAQ:NVDA) shares dropped sharply on Friday, a day after the company reported weak quarterly results and warned of a tough competitive environment that may hurt future earnings. Definitely an early exit candidate though investors with a longer-term outlook may consider rolling down and forward. We will simply show the position closed. Campbell Soup (NYSE:CPB) is another position we will show closed as it continues to weaken and is threatening to move lower. Positions Closed: Coventry Health Care (NYSE:CVH) 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 IDCC 14.74 DEC 12.50 DAQ LV 2.90 2294 11.84 42 4.0% IMCL 8.97 DEC 7.50 QCI LU 2.15 264 6.82 42 7.2% MDCO 14.33 DEC 10.00 MQL LB 4.90 0 9.43 42 4.4% OSUR 7.97 DEC 7.50 QTP LU 1.45 102 6.52 42 10.9% SIMG 5.44 DEC 5.00 QSI LA 1.10 101 4.34 42 11.0% USG 6.25 DEC 5.00 USG LA 1.60 109 4.65 42 5.5% V 13.96 DEC 12.50 V LV 2.35 4825 11.61 42 5.6% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield SIMG 5.44 DEC 5.00 QSI LA 1.10 101 4.34 42 11.0% OSUR 7.97 DEC 7.50 QTP LU 1.45 102 6.52 42 10.9% IMCL 8.97 DEC 7.50 QCI LU 2.15 264 6.82 42 7.2% V 13.96 DEC 12.50 V LV 2.35 4825 11.61 42 5.6% USG 6.25 DEC 5.00 USG LA 1.60 109 4.65 42 5.5% MDCO 14.33 DEC 10.00 MQL LB 4.90 0 9.43 42 4.4% IDCC 14.74 DEC 12.50 DAQ LV 2.90 2294 11.84 42 4.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** IDCC - InterDigital $14.74 *** On The Move! *** InterDigital Communications (NASDAQ:IDCC) specializes in the architecture, design and delivery of wireless technology and product platforms. Over the course of its corporate history, the company has amassed a substantial and significant library of digital wireless systems experience and know-how, and holds an extensive worldwide portfolio of patents in the wireless systems field. IDCC markets its technologies and solutions primarily to wireless communications equipment producers and related suppliers. In addition, the company licenses its Time Division Multiple Access and Code Division Multiple Access patents to equipment manufacturers worldwide. InterDigital will release its 3rd-quarter financial results before the open on Tuesday, November 12. The stock has rallied sharply over the last 2 months and is threatening to break-out of a 2-year Stage I base. Our outlook is bullish due to the technical strength in the issue and this position offers a relatively low risk cost basis in the issue. DEC 12.50 DAQ LV LB=2.90 OI=2294 CB=11.84 DE=42 TY=4.0% ***** IMCL - ImClone $8.97 *** Still In A Trading Range *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product candidate, Erbitux (cetuximab), is a therapeutic monoclonal antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. ImClone's next most advanced product candidate, BEC2, is a cancer vaccine. In addition to the development of its lead product candidates, the company conducts research, both independently and in collaboration with academic and corporate partners, in a number of areas related to its core focus of growth factor blockers, cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. Recently, ImClone announced that they and Bristol-Myers Squibb (NYSE:BMY) are beginning a new round of clinical tests of Erbitux. With all the "bad" news surrounding ImClone, traders have been speculating on an eventual recovery in the stock. This position takes advantage of the overpriced options and the short-term trading range of an issue that shows support at our cost basis. The company is due to report earnings on Monday according to CBS MarketWatch. DEC 7.50 QCI LU LB=2.15 OI=264 CB=6.82 DE=42 TY=7.2% ***** MDCO - The Medicines Company $14.33 *** Own This One *** 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 speculation with a cost basis near technical support. DEC 10.00 MQL LB LB=4.90 OI=0 CB=9.43 DE=42 TY=4.4% ***** OSUR - OraSure $7.97 *** OraQuick HIV Test Approval *** OraSure Technologies (NASDAQ:OSUR) develops, manufactures and markets oral fluid specimen collection devices using proprietary oral fluid technologies and diagnostic products, including immunoassays and other in-vitro diagnostic tests and other medical devices. These products are sold in the United States and certain foreign countries to government agencies, clinical laboratories, physicians' offices, hospitals, commercial and industrial entities and various distributors. OSUR’s products include an oral fluid collection device, the OraQuick Rapid Test, the UPT and UPlink detection platforms, the Histofreezer portable cryosurgical system and Auto-Lyte liquid reagents. Shares of OraSure surged this week after a new 20-minute HIV test kit received FDA approval. The OraQuick Rapid HIV-1 antibody test requires no special equipment, can be stored at room temperature and may later be approved for use outside the doctor's office. Yes, we expect the stock to pullback next week, which should offer a better cost basis that shown here. Investors who are looking for a long-term portfolio holding can use this position to obtain an entry point with cost basis closer to support. DEC 7.50 QTP LU LB=1.45 OI=102 CB=6.52 DE=42 TY=10.9% ***** SIMG - Silicon Image $5.44 *** Change Of Character? *** Silicon Image (NASDAQ:SIMG) develops and markets products that move all forms of digital data in a serial manner at high speeds. The company offers products in three markets: personal computing, consumer electronics (CE), and storage. The PC market consists of two host platforms, PCs and notebook, and four display devices, CRTs, flat panel monitors, flat panels and projectors. The CE market consists of three host platforms and a video peripheral. Host platform devices are set-top boxes and DVD and D-VHS players and the video peripheral is a television. The storage market includes Fibre Channel (Host Bus Adapters (HBA), Switches and RAID controllers) and Serial ATA (PCs and RAID controllers) products along with legacy products for the Parallel ATA and SCSI RAID markets. In October, Silicon Image reported 11% sequential growth with record revenues of $21.4 million. The recent rally in SIMG with heavy volume has negated a 5-month downtrend which suggests a bullish change-of-character. Investors who agree can use this position to obtain a low risk cost basis in the issue. DEC 5.00 QSI LA LB=1.10 OI=101 CB=4.34 DE=42 TY=11.0% ***** USG - USG Corporation $6.25 *** What’s Up? *** USG (NYSE:USG) is a manufacturer and distributor of building materials producing a wide range of products for use in new residential, new nonresidential, and repair and remodel construction, as well as products used in certain industrial processes. The company's operations are organized into three operating segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution. On June 25, 2001, the parent company of the USG and 10 of its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 in the United States Bankruptcy Court for the District of Delaware. These cases do not include any of the company's non-United States subsidiaries. No comment from USG after the New York Stock Exchange had asked the company to comment on the recent rise in share price. Has the company finally reached a settlement? The only thing that is for sure is that the stock has rallied sharply on heavy volume which bodes well for further upside potential. This position offers traders a method to speculate on the near-term performance of the issue with a cost basis closer to technical support. DEC 5.00 USG LA LB=1.60 OI=109 CB=4.65 DE=42 TY=5.5% ***** V - Vivendi $13.96 *** Restructuring Continues *** Vivendi Universal (NYSE:V) is a global media and communications company engaged in businesses that focus primarily on two core areas: Media and Communications; and Environmental Services. The Media and Communications business operates a number of integrated businesses in the music, multimedia and publishing, film and pay television, telecommunications and Internet industries. The Environmental Services business includes world-class water, waste management, transportation and energy services operations. The company under new chairman, Jean-Rene Fourtou, is working to chip away at the $16.9 billion debt racked by former chairman Jean-Marie Messier, who transformed the former French utilities company into a vast media and entertainment giant. Shares of Vivendi dropped on Monday when news of an investigation by U.S. authorities into whether the company deliberately misled investors was announced. Analysts believe the complaints don’t have anything to do with current leadership and probably will not have a major effect on the company. The shares recovered as investors focused on the future and the ability of Vivendi to complete its restructuring and reduce its debt. We simply favor the 4-month trading range and this conservative position allows bottom-fishing speculators to profit from the current lateral trend. DEC 12.50 V LV LB=2.35 OI=4825 CB=11.61 DE=42 TY=5.6% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield SWKS 8.14 DEC 7.50 GAK LU 1.40 473 6.74 42 8.2% BELM 8.20 DEC 7.50 QBL LU 1.45 59 6.75 42 8.0% RFMD 7.95 DEC 7.50 RFZ LU 1.20 2262 6.75 42 8.0% SCUR 5.76 DEC 5.00 UQU LA 1.25 155 4.51 42 7.9% PAX 2.75 DEC 2.50 PAX LZ 0.45 127 2.30 42 6.3% SHRP 22.90 DEC 22.50 SAU LX 2.10 218 20.80 42 5.9% SRNA 16.50 DEC 15.00 NHU LC 2.60 22 13.90 42 5.7% DOX 8.55 DEC 7.50 DOX LU 1.60 185 6.95 42 5.7% ICN 10.78 DEC 10.00 ICN LB 1.50 1609 9.28 42 5.6% MROI 11.85 DEC 10.00 UPJ LB 2.50 5 9.35 42 5.0% SONE 5.68 DEC 5.00 FBZ LA 1.00 172 4.68 42 5.0% SNDK 20.36 DEC 17.50 SWQ LW 3.80 534 16.56 42 4.1% ***************** NAKED PUT SECTION ***************** Options 101: If You Fail To Plan... By Ray Cummins The options market offers a variety of ways to make money but if you don't have a trading plan, there is little chance you will be successful in the long run. New readers are always asking about guidelines for developing a trading plan, so I have compiled some basic steps to assist with this process. 1) Identify portfolio capital and positions limits: Determining the maximum capital outlay for the options portion of your portfolio is the first step in developing a trading plan as this value directly affects many of the components of your approach to the derivatives market. With professional traders, no positions are initiated without a complete assessment of the capitalization necessary to carry out the entire strategy, even in the worst case scenario. In addition, the potential risk in a position should always be established prior to beginning the trade, with a fixed limit on losses and a formula for taking profits. 2) Assess market conditions and future expectations: Before any trade is initiated, it is important to carefully evaluate the current trend and character of the equity markets, including sentiment indicators and factors that affect option prices such as the recent volatility in share price. In addition, you must be aware of the market fundamentals and any potential events or announcements that may affect the overall trends in stocks. After you have become more experienced, you will learn that the market is cyclical and as conditions change, you must determine how the current environment and economic climate impacts your strategic outlook and trading style. 3) Research candidates: The first step in this process is to narrow the list of potential issues through the use of technical scans and presorted lists, based on recent trends or price activity, as well as option premiums and other important characteristics such as implied volatility. After you have reduced the group to a small collection of outstanding candidates, it is necessary to identify the target prices you believe each issue will achieve, based on trend-lines, moving averages, and support or resistance areas, and make an assessment of the position's potential. A thorough study of the underlying issue's historical data is used to provide objective goals for future movement, based on expected volatility and technical analysis. With all of these elements properly evaluated and arranged, you can decide which strategy offers the best risk-reward outlook based on criteria that are compatible with your personal trading style. 4) Review strategies: The wonderful thing about option trading is its diversity. There are an incredible number of strategies available, one for every type of market trend, character and outlook. Positions involving combinations of calls and puts, with different strike prices and expiration months, along with index and futures options offer the astute trader a variety of ways to participate in the market. This assortment provides even the most conservative investor the ability to construct positions with an acceptable level of risk and reward in almost any situation. Remember, however, the risk in option trading can be substantial and as a trader, your primary goal should always be to maximize returns and preserve capital. The easiest way to achieve this objective is to become familiar with proven strategies and acquire the knowledge to implement and manage them correctly. In all cases, the strategies you use must be appropriate to your experience level and trading style. 5) Identify entry and exit points: After you have evaluated the characteristics of the market and selected the correct method to profit from future trends, the next task is to determine specific entry and exit points for the underlying instrument. In most cases, technical analysis should be used to ascertain this information, and they should be based on the appropriate parameters for risk and reward. However, entry timing can be improved by utilizing a number of different indicators and the criteria used to identify a trading opportunity is a personal choice. Whatever system you use, it is important that a simple mechanism for money management be built into the initial trade, in order to eliminate reaction-based decisions during volatile situations. 6) Initiate position: After the initial entry points and criteria have been identified, it is crucial to execute these trades with discipline and consistency. One of the most difficult tasks for a new trader is "pulling the trigger" in a timely manner. This chore becomes easier once you have developed a systematic plan for entering and exiting positions. At the same time, you must develop the patience to avoid initiating a trade when conditions are less than optimal. Always remember that you do not have to open any position until you are satisfied with the probability of a profitable outcome. You can search through charts for the perfect pattern, perform extensive due-diligence, and wait for the best combination of technical indicators and favorable market conditions. In short, you can forego any trade until the number of reasons to participate becomes overwhelming. 7) Monitor the underlying for changes: One of the most important steps in the trading process is to observe the ongoing changes in the instrument or issue as well as its sector/industry group and the market as a whole. When something unexpected occurs, it is critical to take decisive action and in all cases, strive to make sound judgments and be disciplined in your trading routine. Use all possible methods, such as trading stops and pre-planned profit targets, to avoid emotional decisions and make changes to the original plan only after careful consideration and review of the new or unique circumstances that warrant a different approach. 8) Implement exit/adjustment trades: The most important requirement in this category is discipline. Discipline in option trading is the ability to maintain self-control and execute a preset plan. Often, the most difficult skill that new traders must learn is the ability to overcome human (emotional) impulses. When money is at stake, the influences of greed and fear will attempt to sway your judgment, hindering a rational thought process. If you can not overcome these effects, the chances of success are slim. In fact, that is the primary reason it is so important to use strategies which promote a mechanical approach to trading. These types of techniques offer little opportunity for indecision and generally provide more consistent returns as they are exposed to less risk than those with a high level of maintenance. 9) Review actions/inactions, evaluate the outcome and record lessons learned: Most professional traders keep a log of all aspects of each individual trade in order to conduct a review of the entire decision-making process and compare the outcomes to the initial forecasts and expectations. Some even rank their positions based on the quality of the initial technical or fundamental indications and the timeliness or efficiency in executing the entry and exit trades. The objective of any study of past performance is to use the results to improve one's skills and help develop an expertise in a specific technique and indeed, the ability to learn from past mistakes is one of the most important attributes of a successful trader. 10) Final thoughts: Be thorough and precise in all your trading activities, just like the professional trader who manages a large portfolio for wealthy investors. These experienced participants are successful because they understand the necessity of using a proven system to limit losses and maximize profits. In addition, they have learned to avoid the emotional, reaction-based trading that occurs when there are no predetermined entry and exit points in a position. This knowledge, along with a thorough grasp of the strategies being utilized, leads to the development of a number of beneficial attributes, all of which combine to produce consistent profits for the prudent, methodical market player. 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 14.96 NOV 7.50 0.35 *$ 0.35 15.6% AMZN 19.04 19.51 NOV 15.00 0.50 *$ 0.50 12.6% AFCO 13.19 15.00 NOV 10.00 0.25 *$ 0.25 12.5% KOSP 15.25 19.13 NOV 12.50 0.30 *$ 0.30 11.9% AMLN 16.95 18.20 NOV 15.00 0.75 *$ 0.75 11.7% WPI 28.34 28.91 NOV 25.00 0.45 *$ 0.45 11.6% NVLS 33.06 32.04 NOV 27.50 0.40 *$ 0.40 10.8% AMZN 18.46 19.51 NOV 15.00 0.55 *$ 0.55 10.7% CIMA 27.17 25.41 NOV 25.00 0.45 *$ 0.45 10.7% HOLX 11.74 12.41 NOV 10.00 0.50 *$ 0.50 10.5% TMCS 20.33 23.77 NOV 17.50 0.55 *$ 0.55 10.2% JWN 20.98 22.00 NOV 17.50 0.35 *$ 0.35 9.6% BSTE 30.74 31.02 NOV 25.00 0.30 *$ 0.30 9.5% KLAC 37.39 37.05 NOV 30.00 0.30 *$ 0.30 8.3% HLYW 17.20 16.42 NOV 15.00 0.60 *$ 0.60 8.2% GETY 26.41 29.06 NOV 22.50 0.40 *$ 0.40 8.2% NOK 14.44 16.83 NOV 12.50 0.40 *$ 0.40 8.2% QCOM 31.37 34.76 NOV 25.00 0.65 *$ 0.65 8.2% AMLN 15.80 18.20 NOV 12.50 0.40 *$ 0.40 8.1% QCOM 36.20 34.76 NOV 30.00 0.65 *$ 0.65 7.9% KDE 23.77 28.71 NOV 20.00 0.70 *$ 0.70 7.9% COCO 37.75 38.50 NOV 30.00 0.75 *$ 0.75 7.9% TARO 35.39 36.97 NOV 32.50 0.40 *$ 0.40 7.4% DRD 19.70 18.30 NOV 17.50 0.30 *$ 0.30 7.3% PPDI 26.99 29.15 NOV 22.50 0.45 *$ 0.45 7.2% QCOM 36.52 34.76 NOV 30.00 0.40 *$ 0.40 6.8% CAI 41.29 40.66 NOV 37.50 0.40 *$ 0.40 6.6% AFFX 23.99 25.28 NOV 17.50 0.30 *$ 0.30 6.4% VZ 35.19 38.68 NOV 30.00 0.70 *$ 0.70 6.3% BSX 38.40 38.89 NOV 35.00 0.35 *$ 0.35 6.2% GENZ 23.57 28.60 NOV 17.50 0.35 *$ 0.35 6.0% SYMC 39.00 39.61 NOV 30.00 0.45 *$ 0.45 5.9% INVN 35.05 33.07 NOV 25.00 0.40 *$ 0.40 5.9% QLGC 33.15 40.65 NOV 22.50 0.25 *$ 0.25 5.3% TMPW 17.68 12.20 NOV 15.00 0.30 $ -2.50 0.0% *$ = Stock price is above the sold striking price. Comments: The bullish activity came to an end this week and despite the recent optimism over a potential recovery in the economy, the outlook for the stock market is even more clouded after the Fed's decision to lower interest rates by 50 basis points. A combination of overbought conditions and worries about the impending conflict with Iraq caused traders to "sell the news" and the question now is whether key support levels (near 920 on the SPX and 1345 on the COMPQX) will hold in the coming sessions. In our portfolio, TMP Worldwide (NASDAQ:TMPW) was the big loser this week, falling to the $12 range after the company reported weak third-quarter earnings and slashed its fourth-quarter view, due to the sluggish economy. There was little opportunity to limit losses in the position but it has been closed. Another issue that endured unfavorable news was Hollywood Entertainment (NASDAQ:HLYW) and although the price of the stock is above the sold strike at $15, it seems likely to test support in that range in the coming week. Issues on the "early exit" watch-list include: Qualcomm (NASDAQ:QCOM), Cima Labs (NASDAQ:CIMA) and Duane Read (NYSE:DRD). Positions Closed: Overture (NASDAQ:OVER) 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 31.02 DEC 22.50 BQS XX 0.75 79 21.75 42 7.8% ESIO 21.15 DEC 15.00 EQO XC 0.35 60 14.65 42 5.5% KOSP 19.13 DEC 15.00 KQW XC 0.35 30 14.65 42 6.1% NPSP 28.24 DEC 20.00 QKK XD 0.50 20 19.50 42 5.9% NWRE 17.68 DEC 12.50 QQA XV 0.55 388 11.95 42 9.7% PLMD 30.31 DEC 22.50 PM XX 0.60 365 21.90 42 6.5% POSS 14.20 DEC 12.50 UPQ XV 0.35 0 12.15 42 5.9% RIMM 16.58 DEC 12.50 RUL XV 0.30 1442 12.20 42 6.0% 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 NWRE 17.68 DEC 12.50 QQA XV 0.55 388 11.95 42 9.7% BSTE 31.02 DEC 22.50 BQS XX 0.75 79 21.75 42 7.8% PLMD 30.31 DEC 22.50 PM XX 0.60 365 21.90 42 6.5% KOSP 19.13 DEC 15.00 KQW XC 0.35 30 14.65 42 6.1% RIMM 16.58 DEC 12.50 RUL XV 0.30 1442 12.20 42 6.0% NPSP 28.24 DEC 20.00 QKK XD 0.50 20 19.50 42 5.9% POSS 14.20 DEC 12.50 UPQ XV 0.35 0 12.15 42 5.9% ESIO 21.15 DEC 15.00 EQO XC 0.35 60 14.65 42 5.5% 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 $31.02 *** Premium Selling! *** 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. In October, 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 lateral activity in the issue with this position. DEC 22.50 BQS XX LB=0.75 OI=79 CB=21.75 DE=42 TY=7.8% ***** ESIO - Electro Scientific Industries $21.15 *** New Orders! *** Electro Scientific Industries (NASDAQ:ESIO) makes high-technology manufacturing equipment for the global electronics market. The company is a supplier of advanced laser systems used to improve the production yield of semiconductor devices; high-speed test and termination equipment used in the high-volume production of multi-layer ceramic capacitors as well as other passive electronic components, and advanced laser systems used to fine tune various components and circuitry. In addition, Electro produces a family of drilling systems for production of high-density interconnect circuit boards and advanced electronic packaging, as well as inspection systems and original equipment manufacturer machine vision products. Its customers are primarily manufacturers of semiconductors, passive electronic components and electronic interconnect devices. Last week, Electro Scientific Industries received an order for seven Model 2300 Chip Resistor trimming systems to be shipped to Beihai Yinhe Hi-Tech Industrial during ESI's second fiscal quarter. This announcement followed a $1.25 million order in October for Electronic Component Systems from Amotech, a manufacturer of varistors used in home appliances, computers, automobiles, telecommunications and other industrial equipment. Traders who like the outlook for the company can establish a low risk cost basis in the issue with this position. DEC 15.00 EQO XC LB=0.35 OI=60 CB=14.65 DE=42 TY=5.5% ***** KOSP - KOS Pharmaceuticals $19.13 *** Rally Mode! *** KOS Pharmaceuticals (NASDAQ:KOS) is a fully integrated specialty pharmaceutical company engaged in the development of proprietary prescription products for the treatment of chronic cardiovascular and respiratory diseases. The company manufactures its marketed products, Niaspan and Advicor, and markets such products directly through its own specialty sales force and through a sales force provided by a contract sales organization. Their cardiovascular products are based on controlled-release, once-a-day, oral dosage formulations. The company's respiratory products in development consist of aerosolized inhalation formulations to be used mainly with its proprietary inhalation devices. Shares of KOS rocketed recently after the firm agreed to license two of its cholesterol treatments to Germany's Merck KGaA (G.MRK) in a deal worth up to $61 million, including upfront and milestone payments. Merck will pay KOS $15 million up front for exclusive international rights to Niaspan and Advicor outside North America and Japan, and KOS will also receive 25% of net sales of the products, which the company will manufacture and supply to Merck. KOS Pharmaceuticals also reported favorable quarterly profits and the technical indications suggest higher share values in the near future. DEC 15.00 KQW XC LB=0.35 OI=30 CB=14.65 DE=42 TY=6.1% ***** NPSP - NPS Pharmaceuticals $28.24 *** More Premium Selling! *** NPS Pharmaceuticals (NASDAQ:NPSP) is a biopharmaceutical company engaged in discovering, developing and commercializing small molecule drugs and recombinant proteins. The company's product candidates are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders. NPS Pharmaceuticals has three product candidates in active clinical development and several pre-clinical product candidates. Two of these product candidates, Preos and AMG 073, are in Phase III clinical trials. The company's third product candidate, ALX-0600, is in a pilot Phase II clinical trial. NPSP rallied in early July after a favorable Salomon Smith Barney report noted that the company has been making solid progress in resolving the manufacturing issues with its lead drug candidate Preos. Recently, NPS reported that it has successfully produced additional supplies of the drug and it now can supply patients in all of its current clinical trials into the first quarter of 2003. Traders can speculate on the near-term performance of the issue with this conservative position. DEC 20.00 QKK XD LB=0.50 OI=20 CB=19.50 DE=42 TY=5.9% ***** NWRE - Neoware Systems $17.68 *** Rally Resumes! *** Neoware Systems (NASDAQ:NWRE) provides software and solutions to enable appliance computing, a web-based computing architecture targeted at business customers that is designed to be simpler and easier than traditional personal computer-based computing. The company's software and management tools power and manage a new generation of smart computing appliances that utilize the benefits of open, industry-standard technologies to create new alternatives to PCs used in business and a variety of proprietary business devices. Neoware Systems provides its software on top of a number of embedded operating systems, including Microsoft's Windows CE and NT Embedded, as well as an embedded version of the Linux operating system. The firm reported sharply higher revenue and earnings for its fiscal 2003 first quarter and the CEO said, "We see strong demand for our products, and believe that we are very well positioned to continue to gain market share and deliver revenue and profit growth as we capitalize upon the benefits of our software-powered business model." That's an optimistic view for sure but investors appear to agree with that assessment as the stock has jumped 50% in just two weeks. Investors looking for a long-term portfolio holding in the technology segment can use this position to obtain a low risk entry point in the issue. DEC 12.50 QQA XV LB=0.55 OI=388 CB=11.95 DE=42 TY=9.7% ***** PLMD - PolyMedica $30.31 *** Speculation Only! *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer medical products and services, conducting business through its Chronic Care, Professional Products and Consumer Healthcare segments. The company sells diabetes supplies and products, and provides services to Medicare-eligible seniors suffering from diabetes and related chronic diseases through its Chronic Care segment. Through its Professional Products segment, it provides direct-to-consumer prescription respiratory supplies and services to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease. It also markets, manufactures and distributes a broad line of prescription urological and suppository products. PolyMedica markets prescription oral medications not covered by Medicare to its existing customers through its Professional Products segment. In October, the company reported that quarterly net income rose, although legal costs tied to a federal health care fraud investigation weighed on results. PolyMedica has recently been under investigation by federal agencies for health care fraud, improper revenue recognition and obstruction of justice however, the Securities and Exchange Commission recommended no action against the firm in April after it examined the company's accounts, financial reports, public disclosures and sales of securities. This position offers speculators a favorable risk-reward outlook. DEC 22.50 PM XX LB=0.60 OI=365 CB=21.90 DE=42 TY=6.5% ***** POSS - Possis Medical $14.20 *** On The Move! *** Possis Medical (NASDAQ:POSS) manufactures and markets medical products. The company was initially engaged in the designing, manufacturing and sales of industrial equipment, and had a small division that provided temporary technical personnel. The firm's involvement with medical products began in 1976 but in 1990, Possis made the decision to focus solely on medical products and subsequently divested all non-medical operations. Shares of Possis posted a healthy gain last week after the firm said first-quarter earnings would come in "significantly above" previous projections. Citing the combined positive impact of higher-than-projected sales of its blood-clot removal product and lower spending on research and development, Possis forecast a pretax profit of 12 to 14 cents a share, well above its prior prediction of 6 to 8 cents a share. The company's earnings are due on 10/12/02 and traders can speculate conservatively on the report with this position. DEC 12.50 UPQ XV LB=0.35 OI=0 CB=12.15 DE=42 TY=5.9% ***** RIMM - Research In Motion $16.58 *** New Wireless Deals! *** Research In Motion Limited (NASDAQ:RIMM) is a designer, builder, and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, RIM provides solutions for seamless access to time sensitive information and communications, including e-mail, phone, messaging, Internet- and intranet-based applications. The firm's technology also enables a broad array of third-party developers and manufacturers around the world to enhance their products and services with wireless connectivity. RIM's portfolio of products includes RIM Wireless Handhelds, the BlackBerry wireless e-mail solution, embedded radio-modems and a unique suite of software development tools. Shares of Research In Motion last week after the company announced a software-license agreement with Finnish cell-phone giant Nokia. The agreement gives Nokia the right to use and distribute certain BlackBerry software in conjunction with Nokia products on a worldwide basis and the announcement was the second license agreement announced by Research In Motion in two days. On Thursday, the company said Palm , the personal digital assistant maker, had agreed to license certain Research In Motion keyboard patents. Traders can attempt to profit from the rally with less risk using this position. DEC 12.50 RUL XV LB=0.30 OI=1442 CB=12.20 DE=42 TY=6.0% ***** ***************** 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 CREE 18.71 DEC 15.00 CVO XC 0.60 443 14.40 42 9.9% VRST 17.90 DEC 15.00 UVQ XC 0.65 55 14.35 42 9.6% CAL 8.43 DEC 5.00 CAL XA 0.25 2857 4.75 42 9.4% ICST 22.04 DEC 17.50 IUY XW 0.65 27 16.85 42 9.3% PCLE 13.93 DEC 12.50 PUC XV 0.55 20 11.95 42 8.5% UNTD 14.25 DEC 12.50 QAB XV 0.50 21 12.00 42 8.1% SHRP 22.90 DEC 20.00 SAU XD 0.75 9 19.25 42 7.7% NSCN 14.90 DEC 12.50 QKN XV 0.40 16 12.10 42 7.3% CIMA 25.41 DEC 22.50 UVK XX 0.80 95 21.70 42 7.2% BCGI 14.13 DEC 12.50 QGB XV 0.35 0 12.15 42 5.8% FOX 27.00 DEC 25.00 FOX XE 0.75 66 24.25 42 5.7% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Entry Point...Or Time To Sell? By Ray Cummins Stocks retreated for a second consecutive session Friday as new concerns over the potential war with Iraq and a dour outlook for corporate earnings weighed on investors. The Dow Jones industrial average closed 49 points lower at 8,537 on weakness in McDonalds (NYSE:MCD), General Electric (NYSE:GE), and Walt Disney (NYSE:DIS). The tech-heavy NASDAQ index slipped 17 points to 1,359 as the recent grim forecast from Cisco Systems continued to negatively affect shares in the technology segment. The S&P 500-stock index slumped 7 points to 894 as health care, wholesale drug and grocery shares led the broader market lower. Losers outpaced winners by roughly 3 to 2 on both the NYSE and the technology exchange. Over 1.4 billion shares traded on the Big Board while 1.6 billion shares were exchanged on the NASDAQ. Treasury issues extended their recent gains amid the weakness in equities. The 10-year note rallied 10/32 to yield 3.84% and the 30-year government bond surged 1 18/32 to yield 4.79%. ***************** 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 96.58 103.35 NOV 80 85 0.50 84.50 $0.50 Open UNH 93.49 86.83 NOV 80 85 0.60 84.40 $0.60 Open WTW 45.40 49.15 NOV 35 40 0.50 39.50 $0.50 Open ABK 63.21 57.53 NOV 55 55 0.60 54.40 $0.60 Open CHIR 42.51 39.55 NOV 35 37 0.30 37.20 $0.30 Open CDWC 50.61 51.95 NOV 40 45 0.60 44.40 $0.60 Open CEPH 50.58 54.55 NOV 40 45 0.50 44.50 $0.50 Open CTSH 69.54 70.00 NOV 55 60 0.55 59.45 $0.55 Open BR 42.01 40.72 DEC 35 37 0.30 37.20 $0.30 Open EBAY 64.79 63.88 DEC 50 55 0.55 54.45 $0.55 Open IGEN 36.49 38.39 DEC 25 30 0.65 29.35 $0.65 Open SLM 102.94 103.35 DEC 85 90 0.65 89.35 $0.65 Open Stocks in the health care segment "took it on the chin" Friday and the bearish trend in United Health (NYSE:UNH) suggests an early exit in the position. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status FITB 57.47 60.60 NOV 70 65 0.65 65.65 $0.65 Open LEN 53.67 51.55 NOV 65 60 0.80 60.80 $0.80 Open LMT 62.45 56.43 NOV 75 70 0.55 70.55 $0.55 Open MMM 120.60 128.29 NOV 140 135 0.50 135.50 $0.50 Open AIG 63.71 64.47 NOV 75 70 0.60 70.60 $0.60 Open GD 76.58 81.60 NOV 90 85 0.55 85.55 $0.55 Open AGN 55.57 55.25 NOV 65 60 0.50 60.50 $0.50 Open NE 31.45 33.34 NOV 37 35 0.30 35.30 $0.30 Open ABC 72.45 67.00 DEC 85 80 0.65 80.65 $0.65 Open OEX 458.16 457.39 NOV 495 490 0.40 490.40 $0.40 Open SBGI 10.60 11.15 DEC 15 12 0.70 13.20 $0.70 Open Fifth Third Bancorp (NYSE:FITB) finally retreated amid the broad selling pressure and the position should now expire at maximum profit. SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V G/L Status ERTS 67.73 64.13 NOV 75 60 0.40 0.50 0.90 Closed SCHL 47.43 43.90 NOV 55 40 0.25 0.60 0.85 Closed DLTR 25.12 25.54 NOV 30 20 0.00 0.55 0.55 Open? NXTL 9.69 12.00 JAN 12 7 0.10 2.20 2.30 Open CAI 39.21 40.66 DEC 45 35 0.10 0.80 0.90 Open FCS 13.30 13.30 FEB 17 10 0.10 0.00 0.00 Open LTXX 6.83 7.01 FEB 10 5 0.00 0.00 0.00 Open MENT 10.35 11.25 JAN 12 7 (0.50) 0.00 0.00 No Play XMSR 3.43 3.43 APR 5 2 0.00 0.20 0.20 Open Nextel (NASDAQ:NXTL) has been one of the best plays this month, offering up to $2.30 profit in the speculative position. Caci International (NYSE:CAI) has also provided excellent gains and the bullish play in Dollar Tree Stores (NASDAQ:DLTR) achieved a small profit. The recent rallies in Electronic Arts (NYSE:ERTS) and Scholastic (NASDAQ:SCHL) have ended, thus the positions will be closed. Among the new "speculative" issues, Mentor Graphics (NASDAQ:MENT) did not offer an entry near the target price. 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 41.80 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 30.67 FEB-35C NOV-35C 1.25 2.30 Open? CREE 14.98 18.71 JAN-17C NOV-17C 1.00 1.30 Open HNT 25.75 24.12 JAN-30C NOV-30C 0.75 0.60 Open Lifepoint (NASDAQ:LPNT) continued to be very active this week and since the position has already offered a favorable gain (and remains profitable) it may be time to close the bullish spread. Cree (NASDAQ:CREE) has also remained volatile over the past week but the issue is due for a consolidation. Traders who have yet to make an adjustment in the position should get an opportunity to transition to a diagonal spread (if they are bullish), using the DEC-$20 options in the short position. A neutral adjustment would involve rolling to the DEC-$17.50 options (short) for a sizable credit. The speculative spread 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) spread has been closed to preserve capital. SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit G/L Status AES 2.92 1.99 J04-7.5P J03-2.5P 4.50 0.25 Open IMCL 7.77 8.97 J04-15P JO3-5P 8.00 0.75 Open NVDA 11.10 11.36 J04-20P J03-7P 10.00 2.00 Closed Nvidia (NASDAQ:NVDA) was another big winner this month, offering up to a $2.00 profit after only two weeks in play. The position achieved a favorable "early-exit" gain with a closing debit near $8.00 that nearly yielded our target profit for the play. CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V G/L Status PPD 21.58 22.89 NOV 25 17 1.25 0.60 0.65 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. **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. ***** SHRP - Sharper Image $22.90 *** Earnings Speculation *** Sharper Image Corporation (NASDAQ:SHRP) is a specialty retailer of entertaining products that are designed to make life easier and more enjoyable. The company offers an assortment of products in the consumer electronics, recreation, fitness, personal care, housewares, travel, toy, gift and other categories. The company's products are marketed and sold through three major sales channels: The Sharper Image stores, The Sharper Image catalog and the World Wide Web, primarily through its sharperimage.com Internet site. The company also has business-to-business operations consisting of Sharper Image Corporate Rewards and Incentives and wholesale operations. The company's earnings are due 11/21/02. Strategy Explanation: A less neutral and more bullish type of calendar or time spread is initiated when the current value of the underlying issue is below the strike price of the options. This type of position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the underlying stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option's strike price. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the trader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are "in-the-money" at expiration, he will have to buy them back to preserve the long-term position. PLAY (speculative - bullish/calendar spread): BUY CALL FEB-25 SAU-BE OI=130 A=$2.15 SELL CALL DEC-25 SAU-LE OI=420 B=$1.15 INITIAL NET DEBIT TARGET=$0.85-$0.90 TARGET PROFIT=0.50-$0.75 ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. Editor's Note: Starting next week, the "probability of profit" based on the 100-day historical volatility will again be listed for each credit spread candidate. ***** DE - Deere & Co. $49.00 *** New Trading Range? *** Deere & Company (NYSE:DE) and its subsidiaries operate in four major business segments: the agricultural equipment segment, the commercial and consumer equipment segment, the construction and forestry segment and the credit segment. The agricultural segment manufactures and distributes a full line of farm equipment. The commercial and consumer equipment segment makes and distributes equipment for commercial and residential uses. The construction and forestry segment manufactures and distributes a broad range of machines used in construction, earthmoving, material handling and timber harvesting. The credit segment primarily finances sales and leases by John Deere dealers of new and used agricultural, commercial and consumer, and construction and forestry equipment. PLAY (conservative - bullish/credit spread): BUY PUT DEC-40 DE-XH OI=2159 A=$0.45 SELL PUT DEC-45 DE-XI OI=2478 B=$1.10 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=16% B/E=$44.35 ***** INTU - Intuit $52.91 *** Up-trend Intact! *** Intuit (NYSE:INTU) is a provider of business tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. PLAY (conservative - bullish/credit spread): BUY PUT DEC-40 IQU-XH OI=346 A=$0.40 SELL PUT DEC-45 IQU-XI OI=349 B=$0.85 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$44.50 ***** LLY – Eli Lilly $62.24 *** Optimistic Outlook! *** Eli Lilly & Company (NYSE:LLY) discovers, develops, manufactures and sells pharmaceutical products. The company offers neuroscience products, endocrine products, anti-infectives, oncology products, animal health products and cardiovascular agents. LLY manufactures and distributes its products through owned or leased facilities in the U.S., Puerto Rico and 26 other countries. Eli Lilly directs its research efforts primarily toward the search for products to diagnose, prevent and treat human diseases. LLY also conducts research to find products to treat diseases in animals, and to increase the efficiency of animal food production. PLAY (conservative - bullish/credit spread): BUY PUT DEC-50 LLY-XJ OI=7422 A=$0.50 SELL PUT DEC-55 LLY-XK OI=12939 B=$1.00 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$54.45 ***** MCO - Moody's Corporation $45.12 *** Rolling Over? *** Moody's Corporation (NYSE:MCO) is a global credit rating, research and risk analysis firm that publishes credit opinions, research and ratings on fixed-income securities, other credit obligations and issuers of securities. Moody's credit ratings and research help investors analyze the credit risks associated with fixed- income securities. The company publishes rating opinions on a broad range of credit obligations, including: various corporate and governmental obligations; structured finance securities; and commercial paper programs issued in domestic and international markets. PLAY (conservative - bearish/credit spread): BUY CALL DEC-55 MCO-LK OI=0 A=$0.25 SELL CALL DEC-50 MCO-LJ OI=54 B=$0.75 INITIAL NET CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=11% B/E=$50.55 ***** WLP - WellPoint Health $74.04 *** Sector Slump! *** WellPoint Health Networks (NYSE:WLP) is a managed healthcare firm. As a result of the January 2002 completion of its merger with RightCHOICE Managed Care, the company has over 12 million members. The company offers a broad spectrum of network-based managed care plans, including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), as well as point-of-service (POS) and other hybrid plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The firm also provides an array of specialty and other products, including pharmacy, dental, workers' compensation managed care services, utilization management, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. PLAY (conservative - bearish/credit spread): BUY CALL DEC-90 WLP-LR OI=576 A=$0.50 SELL CALL DEC-85 WLP-LQ OI=679 B=$1.05 INITIAL NET CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=12% B/E=$85.60 ***** UNH - UnitedHealth Group $86.83 *** Bearish Sector! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and well being services. Through its family of businesses, the company helps people achieve optimal health and well being through all stages of life. The firm's revenues are derived from premium revenues on insured (risk-based) products, fees from management, administrative and consulting services and investment and other income. It conducts its business primarily through operating divisions in the following business segments: Uniprise; Healthcare Services, which includes the UnitedHealthcare and Ovations businesses; Specialized Care Services, and Ingenix. PLAY (conservative - bearish/credit spread): BUY CALL DEC-105 UNH-LA OI=680 A=$0.35 SELL CALL DEC-100 UNH-LT OI=1879 B=$0.85 INITIAL NET CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$100.55 ******************* SYNTHETIC POSITIONS ******************* These stocks have established trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these momentum plays attractive. ***** ABT - Abbott Laboratories $45.89 *** Drug Sector Rebound! *** Abbott Laboratories (NYSE:ABT) is principally involved in the discovery, development, manufacture and sale of healthcare products and services. The company's Pharmaceutical Products segment produces adult and pediatric pharmaceuticals sold primarily on the prescription or recommendation of physicians, while the Diagnostic Products segment produces diagnostic systems and tests for blood banks, hospitals, commercial laboratories, alternate care testing sites, and consumers. The Hospital Products segment offers drugs and drug delivery systems, perioperative and intensive care products, among others. Ross Products include adult nutritionals, and the International Segment includes hospital, pharmaceutical, and adult and pediatric nutritional products sold and manufactured outside the United States. PLAY (speculative - bullish/synthetic position): BUY CALL DEC-50 ABT-LJ OI=412 A=$0.40 SELL PUT DEC-40 ABT-XH OI=1956 B=$0.40 INITIAL NET CREDIT TARGET=$0.10-$0.15 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $1,275 per contract. ***** BZH - Beazer Homes $60.60 *** Retreat In Progress! *** Beazer Homes (NYSE:BZH) designs, builds and sells single family homes in various locations within the United States: Florida, Georgia, North Carolina, South Carolina, Tennessee, Arizona, California, Colorado, Nevada, Texas, Maryland, Pennsylvania, New Jersey and Virginia. The company designs its homes to appeal primarily to entry-level and first time move-up homebuyers. The company's objective is to provide its customers with homes that incorporate quality and value while seeking to maximize its gain on invested capital. The company's homebuilding and marketing activities are conducted under the name of Beazer Homes in each of its markets except in Colorado (Sanford Homes) and Tennessee (Phillips Builders). PLAY (speculative - bearish/synthetic position): BUY PUT DEC-50 BZH-XJ OI=64 A=$1.65 SELL CALL DEC-70 BZH-LN OI=203 B=$1.45 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.90-$1.25 Note: Using options, the position is similar to being short the stock. The initial collateral requirement for the sold call is approximately $1,650 per contract. *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** ERTS - Electronic Arts $64.13 *** Premium Selling *** Electronic Arts (NYSE:ERTS) operates in two principal business segments globally: EA's Core business segment comprises the creation, marketing and distribution of entertainment software, while the EA.com business segment is composed of the creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and Website advertising. PLAY (aggressive - neutral/credit strangle): SELL CALL DEC-70 EZQ-LN OI=9325 B=$1.35 SELL PUT DEC-55 EZQ-XK OI=1214 B=$1.10 INITIAL NET-CREDIT TARGET=$2.45-$2.60 PROFIT(max)=16% PROBABILITY OF PROFIT (100-day HV)=70% UPSIDE B/E=$72.45 DOWNSIDE B/E=$52.55 ***** ************************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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