The Option Investor Newsletter Wednesday 11-20-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: My Opinion? Who Cares! Futures Wrap: Called up to the Majors Index Trader Wrap: Today was about the future MUI CONTENT OF THE DAY: Russell Funds Options 101: Spreading Relative Strength Updated on the site tonight: Swing Trader Game Plan: Wing and a Prayer Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 11-20-2002 High Low Volume Advance/Decl DJIA 8623.01 + 148.23 8643.03 8439.06 1874 mln 1382/481 NASDAQ 1419.35 + 44.84 1419.64 1375.41 1200 mln 1524/194 S&P 100 466.91 + 9.30 467.40 456.61 totals 2906/675 S&P 500 914.15 + 17.41 915.01 894.93 RUS 2000 388.59 + 9.02 388.59 379.37 DJ TRANS 2281.37 + 11.55 2288.12 2263.91 VIX 28.66 - 2.70 31.46 28.66 VIXN 44.82 - 0.70 47.67 42.78 Put/Call Ratio 0.63 ******************************************************************* My Opinion? Who Cares! by Steven Price Talk about rangebound! The broader markets cannot seem to break out in either direction right now, leading to one headache after another for momentum traders. About the only market participants happy right now are those that started selling option premium when the Market Volatility Index (VIX) was still around 50 in the middle of October. Since then, we have seen a 44% drop in the VIX, and an awful lot of premium decay along with it. The current sideways movement is taking a toll on premiums and as we head into the holiday season and market action slows, market makers will be quicker to lower premium levels, rather than continue to purchase as the VIX falls. The current market movement is a study in how option premiums are affected in upward trending markets, even if that upward trend is only an intermediate one. Many investors believe the VIX represents movement in the OEX and the overall market. While this is partly true, there is a little more to it than that. With a Dow that has not seen a trading range of less than 100 points since September 20, and only two since June 18, common sense says that volatility should still be near all-time highs. I'm sure there are many long option holders right now wondering why a $3.00 call went to $2.50, even thought the stock went up a dollar. In reality, implied volatility almost always comes down as the market goes up. The one big exception to that rule was during the internet boom of the late 1990s, when stocks were liable to gap up as quickly as they went down. However, that was the exception to the rule. There are a couple of reasons for this phenomenon. Under normal market conditions, stocks go up much more slowly than they fall. Additionally, the most common option trade is the covered write. This is when purchasers of stock sell out of the money calls against their purchase to reduce the price. While they risk having the stock called away if the stock rallies through the strike before expiration, therefore limiting upside potential, it still provides a winner on the rally up to the strike. This activity also provides a tremendous amount of selling pressure on options during market rallies, therefore leading to a drop in implied volatility, or the price of the option, relative to stock price. So if you are wondering what happened to the price of your options, this is the most likely culprit. I mentioned in a couple of articles last week and this that the VIX does not drop from 36 to 30 in three days without some institutional selling. And institutions don't sell lots of options if they think the market is about to drop. It's a good bet that the same players that were selling premium, were also planning on buying some stock, or were writing calls on purchases at the very least. The fact that the VIX has now dropped under 30 looks bullish to me, since the big boys don't see immediate downside risk. Chart of the Dow and VIX Today's rally put at least a temporary halt to the head and shoulders pattern that had been developing in the Dow/SPX/OEX took a turn to the upside, rather than completing the right shoulder, as it appeared it would after yesterday's action. While we are not yet out of the woods on the downside, the Dow did take out the relative high, at 8636 on Monday, in intraday action, before falling back to close at 8623.01. The SPX hit the relative high of 915 and was turned back right at that level, finishing at 914. While these failures show that resistance is still in place, particularly in the SPX, bears need to be aware that we are still testing highs, as opposed to lows, which "feels" bullish for the moment. That doesn't mean I'm going full position long, as the bearish head and shoulders is still alive and well - as long as the Dow doesn't break 8800, or the SPX breaks 925. However, our new pivot point in the SPX for short term trades looks like 915. Chart of the SPX The Nasdaq also has yet to break the August high of 1426, which has served as resistance on several occasions now. However, the pattern beginning to emerge in the Nasdaq is a series of higher lows with the flat top. This is a bullish formation, and bears may want to switch teams if we get a breakout. While it is hard to imagine techs continuing this rally without a change in the IT spending environment, we are trying to capture moves for a profit, rather than funding our 401 (k) for the long haul. Chart of the Nasdaq One of the big reasons for the rise in the Nasdaq is chip stocks. The Semiconductor Sector Index (SOX) once again tested new relative highs today. This morning saw an upgrade from Soundview, which said evidence is growing that the first quarter could be a turnaround in the order picture for the semiconductor equipment industry. It raised price targets on several stocks in the sector, including KLAC, TER, NVLS and LRCX. This followed last night's earnings release from Analog Devices (ADI), which met expectations, but warned that it could miss consensus estimates for next quarter. The company did say, however, that a slow August order rate improved in September and grew significantly in October. The SOX not only ended the day on a new relative closing and intraday high, but closed near its high of the day, as well. The strength in the sector, in spite of more warnings than I can count on the entire OI staff's fingers and toes over the last couple of months, cannot be ignored. It has now set a series of higher highs and higher lows and bounced from a previous resistance level at 310, which could now be viewed as possible support. We still haven't seen a shift in capital spending, and even Alan Greenspan said yesterday that there are "very high hurdles" to capital spending that must be removed before investments in new technologies resume. However, investors are betting that it will come back and are scooping the sector to prove it. Chart of the SOX After the bell, Hewlett-Packard released earnings that beat estimates by $0.02, tripling its year ago number from 0.8 to 0.24 per share, prior to the Compaq merger. If we combined Compaq and HP results from last year, the company would have been over $500 million in the red in the year ago period, which makes the number even more impressive. The stock was trading $18.50, up $1.65 (9.7%) after hours. This may help boost the Nasdaq through that August resistance, but we won't count our chickens just yet. We have seen sentiment change overnight many times, so we'll wait for the actual breakthrough before declaring a rally. There was conflicting data today from the housing sector. The number that got the most attention was the 11.4% drop in housing starts in October. It was the largest drop since January 1994. In fact, the annualized pace dropped to 1.603 million, which matches the number of units started in 2001. This was a drop from last month's annualized rate of 1.81, which was a 16-year high. The decline was also worse than expected; economists were expecting a rate of 1.72 million. The number that got less attention, but helped lead to a rally in the Dow Jones Home Construction Index (DJUSHB), was the The Market Composite Index of mortgage loan applications, which measures mortgage loan applications for purchases and refinancings. The index showed an increase of 21% in the week ended November 15, and a 22% increase over the same week a year ago. There were also increases in the Purchase Index and Refinance Index. This also marked the seventeenth straight week the Refinance Index was above 4000. The data was accompanied by news from Hovanian Enterprises (HOV), currently on our call list, which raised its guidance for full year 2002 earnings and said new home orders in November remain strong. The bond market seems to be confirming the switch from bonds into stocks. In fact, for all the talk of a bearish head and shoulders formation in the Dow and S&P, a look at the ten-year bond shows a similar formation during the recent equity rally. Today's bond sell-off seemed to just about complete the right shoulder. If this H&S breaks through as the Dow rallies, then the bulls may be in business. Chart of the Ten-Year Note It seems that I switch sides on a daily basis, but in a rangebound, bouncing market, that is what tends to happen. If you were to pick one direction and simply stick with it, you'd see an awful lot of whipsaws. While that may not make much difference to long-term traders, short-termers better be willing to change sides as quickly as needed. Today the trend is up, but we are right at resistance in the broader markets, so we could be due for another rollover to the bottom of the range. If we see a fall in the morning, then I'm jumping on for what could be only a short drop. However, if we break through 915 in the SPX, then I'm jumping on long for the next 10 points. Then it will be time to reassess again at 925. If the Nasdaq breaks 1426, then I'm in until I see a rollover. Get the point? We need to be willing to get in and out quickly in this choppiness and leave our opinions out of the equation. ************ FUTURES WRAP ************ Called up to the Majors By John Seckinger jseckinger@OptionInvestor.com A lot of minor resistance areas were easily taken out during trading on Wednesday, forcing us to now turn towards more major areas of resistance for guidance going forward. Wednesday, November 20th at 4:15 P.M. Contract Net Change High Low Volume ES02Z 914.50 +16.50 915.50 894.00 620,867 YM02Z 8630.00 +154.00 8647.00 8435.00 17,870 NQ02Z 1076.00 +42.50 1077.00 1028.00 269,725 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. Fundamental News: October Housing Starts fell 11.4%; however, traders seemed to blame the weather and instead turned towards the building permits release for guidance. October building permits rose 1.7% to 1.763 million, and above the 1.70 consensus estimates. Technical News: Bond prices started out lower, and then dramatically reversed; sending the 30-year lower by 1’02 by session’s end. The 111’01 close is still within a well-defined range of 113 to 110, and traders should continue to look for a break out above/below one of these major levels. Elsewhere, the Utility Index (UTY) and Transportation Index (TRAN) under performed the major indices(higher by 0.40 and 0.50 percent, respectively); therefore, look for confirmation out of these indices for more longer term trades (example: Utility Index is currently at 239.82, and should rise above 243 to confirm the overall strength in the equity markets). Additionally, oil rose 1.3% and closed at its 440 pivotal level. A rise in the XOI Index should help stock prices. ================================================================= The Majors Being patient in the futures market sounds like an oxymoron; however, bearish traders playing Wednesday’s rally had to do just that. Looking at a 120-minute chart of the Mini-sized Dow contract (YM02Z), a lot of recent relative highs failed to provide resistance for a market seemingly on a mission towards higher valuations. With that said, it is now time to take a step back and look at possible major resistance and support areas going forward. The most obvious appears at 8700, which coincides with the mid-point of a daily regression channel. Between current levels and 8700, two other resistance areas exist: 8658 and 8684 (see below). If the YM contract does come under pressure, the two areas of major support is at the rising blue trend line (based off a series of relative lows), as well as the bottom of the daily regression channel. These upward trend lines currently come in at 8450 and 8400, respectively. A possible trade would be to Go LONG above 8700 and the mid-regression point (should be near 8730 during trading on Thursday), expecting a move to 8800 (target) with a stop at 8680. Chart of Mini-sized Dow (YM02Z), 120-minute Taking things to a more micro level, a 5-minute chart of the YM contract shows the breakout at 8541 and objective mapped out at 8684. As always, the market could hit 8684, come under some profit taking, and then power above and use that level as support. Nevertheless, it should be traders’ minds going into Thursday. Note: If the YM CLOSES back under the 8541 level, shorts will most likely try to wash out weak longs heading into Friday. Why? Solid breakouts should NOT come back and test the breakout level at any time. Chart of YM02Z, 5-minute The S&P 500 Index appears to have some catching up to do. With a series of relative highs (120-minute chart) taken out on Wednesday, the next major area of resistance is not found until the 924.02 to 925.66 range. Moreover, if the market doesn’t hit these levels in the near term, there is a chance that the bearish trend line from early March will reach the 925 area and strengthen that level. Nevertheless, longs should look for a move towards 924 UNLESS the market CLOSES back below 902. With MACD breaking the bearish trend, and prices seemingly controlled by an underpinning bid, the upward momentum has to be respected UNTIL a close back below support tells us otherwise. If a ‘failed close’ takes place, then we can look for a move back to the bottom of the contract’s range (894). Remember, a ‘failed close’ could be a move above 925 and then close at 920. Chart of S&P 500 Index, 120 minute A 30-minute chart of the Dec S&P 500 contract shows prices in after hours trading higher at 918.70 and above the relative high of 916.70. Furthermore, Wednesday’s session seems to have finally broken away from the converging path of two longer-term trend lines (Bearish from March 15th in black; Bullish from October 10th in blue). ‘Out of sight,’ but should not be ‘out of mind’. With that said, I will now be using the 900 area (corresponds with the 902.68 support above) as an influential pivotal area going forward. Looking upwards, resistance comes in at 927 and then 931. So, which levels hold more weight? The aforementioned 924.02 to 925.66 area, or the ones just mentioned? I would personally try to encompass all of them, via a stop above 931. Therefore, look to Go SHORT the ES02Z contract at 926.50 with a target of 914.50 (intermediate target of 900) and stop at 931.50 (above the 38.2% retracement line). Note: Until 924 is reached, expect underpinning bids unless 905.50 is taken out. The wildcard will be where the descending green trend line is when prices hit 924. Chart of Dec S&P 500, 30-minute A look at the Nasdaq-100 shows some tiered resistance above current levels; however, don’t be fooled by all the horizontal lines. If the market gets above 1079, expect prices to stay above UNTIL they close back underneath 1079 and gives a sell signal. The first objective for bulls above 1079 will be for a move to 1100, with a more intermediate range forecast of 1142 and 1172 (see last chart). Once above 1100 in the Nasdaq-100, NQ02Z traders long should look to raise stops. Chart of Nasdaq-100, Daily A 30-minute chart of the Dec Nasdaq 100 gives a more exact figure of 1172, based on a wedge breakout taking place just as the markets closed. Use that 1073 level as support until the market tells us otherwise (I love saying that). The only support seen below 1073 is at 1052 and 1020; therefore, execution is critical for trading on Thursday. If anything, I will remain cautiously bullish and expect at test of at least 1100 during trading on Thursday. Then it will be up to volume on whether the market settles above 1100. Chart of Dec Nasdaq 100, 30-minute Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Today was about the future Stocks reversed yesterday's losses and then some as bulls were back at the table betting on a robust future for a recovering economy. While "yesterday's" housing starts saw a weaker than expected picture of housing starts for October, the look to the future in a stronger than expected building permits, which portends further building of new homes, turned an early bullish frown into smiles as the Dow Jones Home Construction Index (DJUSBH) 298 +1.8% reversed an early session decline of -1.5% into a winning sector trade. Bulls bought the thought that the weaker October starts number was simply due to colder winter weather and not necessarily a sign of economic trouble. While Dow component Home Depot (NYSE:HD) $24.70 -0.84% traded weak again today after yesterday's drubbing and today's report on October housing starts, the improvement retailer managed to hold above a 52-week low of $23.18 and perhaps hints that even a battered HD bull looks to the future and not yet willing to cave in with little "good" news to hold onto. After a weak session yesterday in the retailing group, the S&P Retail Index (RLX.X) 283 +1.97% rebounded to close back above its intermediate-term 50-day SMA of 282.70, giving ever so marginal hope that there may still be some holiday cheer by year's end. Technology stocks rebounded strong today and here too it was some optimistic comments regarding the future for semiconductor equipment stocks that bolstered gains. In what has been a game of dueling analysts in recent weeks, today's call out of Soundview that it sees signs of good fortune for the semiconductor-equipment sector in the first quarter of next year found buyers in the chip stocks, sending the Semiconductor Index (SOX.X) 338 +8.25% to the top of the sector leader board. And if today's NASDAQ-100 Index (NDX.X) 1,070 +4.3% gain wasn't enough to have a bull still optimistic for higher prices, this evening's earnings report from Dow component Hewlett Packard (NYSE:HPQ) $16.85 +1.81% and after hours trading of $18.40 (+9% from its close) will lend further bullishness to tomorrows trading session. All totaled, today's sector action saw just two sectors trading in negative territory by session's end, with Airlines (XAL.X) 39.30 -2.89% and Gold/Silver (XAU.X) 65.20 -0.74% trading weak. Early morning bullishness in Treasuries faded by mid-session and turned into losses with the December 10-year Treasury bond (ty02z) 113'105 -0.71% falling, while the benchmark bond's yield ($TNX.X) rose to 4.075%, closing back above its shorter-term 21- day SMA. The longer-dated and "riskier" 30-year bond also fell in price, with its yield ($TYX.X) 4.941% jumping back above its rounding flat intermediate-term 50-day SMA of 4.872%. With cash freeing up from Treasuries, shorter-term bears turned to cover positions with the thought that a bullish stamped with cash freeing up puts the relative highs in the indexes back into play. With Wireless (YLS.X) 55.26 +5.85% and Internet (INX.X) 89.85 +6.92% indexes making new multi-month highs and extending a move above recent upside breaks of their 200-day SMA's and today's Broker/Dealer Index (XBD.X) 439 +3.37% closing above its longer- term 200-day SMA, the seemingly unbelievable and quick recovery in these groups have many looking for other sectors to perhaps test their longer-term 200-day SMA's in the not-so-distant future. In recent sessions, you've probably seen some "bearish" looking POTENTIAL head/shoulder tops in the equity indexes, most notably the Dow Industrials. However, equity bulls may also be monitoring the bond markets and what could pan out as bullish for equities, a POTENTIAL reverse head/shoulder pattern in the benchmark 10-year Treasury YIELD ($TNX.X) chart. With some "right shoulders" in the various head and shoulders patterns starting to grow into the "ear of the head" on the equity indexes, a break above 4.129% or thereabouts in the 10- year YIELD could have the major equity indexes making their move above recent highs. 10-year YIELD chart - Daily Interval The "cash register" for the stock market is the Treasury bond market and I see what could be a potential reverse head and shoulder pattern. Should the neckline near 41.50 or 4.15% be broken to the upside, this could target a YIELD in the 10-year Treasury at 4.5%. It should be encouraging to equity bulls that there is selling in Treasuries, but I still think an equity bull wants to see it continue as it tends to then generate cash that can flow toward equities. With the Gold/Silver Index (XAU.X) 65.20 -0.74% not acting all that bullish, the only reason a Treasury bond holder would sell his/her bonds is if the YIELD received looks less attractive when considering the risk/reward of other investment alternative. These "alternative" would progress to high-grade corporate bonds with a high yield than Treasuries, then junk bonds with a higher yield yet, and then stocks. The reason we monitor gold stocks along with the commodity itself is to make an observation of potential "inflation." Bonds find selling when inflation is a concern, while gold will find buyers. The slight divergence we're seeing between the two hints that further selling in bonds (higher YIELD a result) coupled with a lower gold price, will help rule out inflation and even deflation or stagflation. All "flation" words that equity bulls hate to hear. Dow Industrials Chart - Daily Interval It's going to take a terrible initial jobless claims number tomorrow morning to squash some of this evening's bullish after- hours tone. I think there has been some bears playing the POTENTIAL head/shoulders top that will rush to cover many of their DIA and DJX bearish trades on a break above Monday's high of 8,637 and have bulls targeting the round-number 9,000 level by week's end. With Internet, Wireless and Broker-dealer indexes up at their 200-day SMA's, bearish that have been shorting/putting the Dow near current levels most likely look to keep losses small. Today's action saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and status remains "bull confirmed" at 66.67%. Weekly jobless claims numbers are released before the opening bell and economists look for a number near 396,500. In my opinion, it would take a negative surprise above the 400-405K level to spoil this evening's bullish after-hours session. S&P 500 Index Chart - Daily Interval Evening trading has S&P futures (sp02z) higher at 919, which is upper end of that chart's Bollinger Band. That action if it holds into tomorrow morning would have the above SPX chart trading just shy of 921. If I were to remove the Bollinger Bands, then last near-term resistance before 950 would be November 6th high of 926. On a positive jobless report I would think it in the bears best interest to close out a bearish trade, while bulls will play upward trend that looks to be in play. The SPX has once again stuck its head above an the longer-term downward trend. So far, bulls have been hard pressed to keep it there. While jobless claims are released at 08:30 AM EST, that isn't all of tomorrow's economic data. Leading indicators at 10:00, Philadelphia Fed at 12:00 will also be closely monitored and could impact trading. Today's action saw the S&P 500 Bullish % ($BPSPX) rise 0.6% to 56.6%. This means the SPX saw a net gain of 3 stocks to point and figure buy signals. While rather "miniscule" we're still seeing some internal strengthening and makes it VERY TOUGH to try hold bearish trades when a technical breakdown doesn't take place. I tell you what, these tight Bollinger Bands make it tough trading period! S&P 100 Index Chart - Daily Interval Back above 465 and still alive says the bull as the relative high of 473 is back in play. Upper Bollinger Band trying to turn up and may tie in with an OEX at 480 next week. The narrower S&P 100 Bullish % ($BPOEX) saw a net loss of 1 stock to a point and figure sell signal today and has the bullish % slipping to 63%. Nothing major as it would take a bullish % reading of 58% to have the OEX slipping back into "bull correction" status. As it stands, still "bull confirmed" here. NASDAQ-100 Index Tracking stock (QQQ) - Daily Chart A bullish call regarding the semiconductor equipment stocks spoiled my best-laid plans when I profiled a short/put in the QQQ yesterday morning. I personally "had" to hold that position tonight as the Q's didn't quite manage to break the $26.75 level of horizontal resistance (11/04/02 relative high was actually $26.82 on the Q's). Tonight's earnings and post-market response has the QQQ trading $26.02 and NASDAQ futures (nd02z) at 1,082, compared to cash close of 1,076. If these late numbers hold, that would be enough to have both over the top of my horizontal resistance and has the 200-day SMA in play. A trader holding a QQQ put, may want to assess how holding that put, but offsetting it with a long position in the Q's might work in his/her account. For instance, if holding 5 December $26 puts that cost approximately $1.45 at yesterday's open and traded $0.90 close, instead of closing out for $0.65 loss (based on numbers here), trader could go long 500 QQQ, target 200-day SMA near $28. This would be a hedge type position that gives QQQ trade bullish exposure on what could portend to be a bullish session. Mane goal of such a trade is to make back the $1.45 expense of put, but doing so under a hedged position. One "benefit" of not OVERLEVERAGING in options and trading them as outlined in this weekend's "Ask the Analyst" column regarding a business plan and account management, is that it can allow for a trader to utilize excess cash to actually go long the underlying stock if the option trade works against you, as it appears the QQQ are going to work against me and my bullish profile. Since Leigh Stevens is giving me some Friday afternoon "relief" from the Index Trade Wraps, I've had multiple e-mails from subscribers still wanting to see the "bigger picture" and weekly tabulations of all the different Index and Sector gains/losses. As such, I will start, beginning tonight, monitoring the weekly action on a Wednesday to Wednesday close. When I first started using the point and figure bullish % charts, Tom Dorsey would only update them once a week and post them each Wednesday evening. His thoughts at the time were that it gave a good look at the markets/sectors, but by using Wednesday closes, tended to filter out some of the skewed Friday trading you can get with a weekend ahead, plus any skew from option expiration once a month. That said... I did go back and one week, changed the closes to reflect last Wednesday's close and compared to tonight's close. I just didn't have the time or "energy" to go back and change all the prior weekly closes. Weekly Index/Sector Changes Our last check of the weekly changes had the Indexes and Sectors relatively unchanged on a Friday-Friday basis (11/01-11/08). A slight change from a Wednesday-Wednesday basis shows a rather MARKED change doesn't it? I'm guessing that's part of the reason Tom Dorsey started updating his sector and index bullish % to reflect each day's changes (sectors much more active). The thing I want to touch on in the weekly data is this. The run in technology makes NO SENSE to me on a fundamental/economic basis, especially with the very economically sensitive Cyclical Index (CYC.X), which gained just 0.92% today and 1.8% on a weekly basis "dragging tail." This just doesn't jive in my book that the bullishness found is based on any true conviction of economic recovery. However, the rise in the 10-year YIELD this past week obviously finds cash rotating to equities. Why is this? I'm really starting to think this. Every BEAR that shorted the heck out of technology over the past 18 months, plowed that cash into higher YIELDING treasuries, driving YIELD lower. That type of trade made BIG money on both ends. Now technology, which is still down rather marked for this year alone, is seeing those shorts come off, and playing catch up to the relatively better performing Indexes/sectors of the past year. I try to highlight this in "blue squares" in the sense 12/31 column. See how the "so far Q4%" shows COMPX and NDX vastly outperforming? Several weeks ago, I highlighted the Russell-2000 Index (RUT.X) 388 +2.37% as the "best" risk/reward trade in the equity indexes, thinking that the RUT.X would also play "catch up" and be the out performer, even compared to the NDX and COMPX. That really hasn't happened to the extent I was looking for. The RUT.X trade has made a bull money to his/her account, but not as much as I had hoped. So why is that? I'm thinking, and have mentioned it before, the smaller caps probably weren't as heavily shorted as they're a little more "illiquid" when compared to the volumes you see traded in the different NASDAQ-100 stocks. One thing a bear hates is to be short an illiquid stock when it starts moving against him. I also want to touch on past commentary regarding the Wireless Index (YLS.X) and noted "leadership" there. Do you see how much gain that sector has had so far this quarter? Wow! But it is STILL down some 41.8% for the year. What's next? Don't tell me the Networkers (NWX.X) +5.3% and Fiber Optic (FOP.X) +8% are going to catch "bear fire" as they too look to close some ugly year-to-date losses. But I think that's the kind of trade that may well be taking place. Individual stock traders that saw a Monday bullish profile of Tellabs (TLAB) $8.73 +10.89%, then saw today's jump may understand what is taking place at the "stock" level and impacting the sector/index action. It seems that any type of pullback in a stock to an "old" buy signal on the point and figure chart, or some type of resistance broken serving as support, sees some impressive upside stock action on just the slightest bit of renewed bullishness. Almost like a bearish trader still holding TLAB short from $50 says.... "lock in some more gains." As such, I still think that the action in Treasury YIELDS, while maybe not "depicting" the economy, gives us the best measure of cash flows toward stocks. Even if it is continued short covering from "old bears" at much higher levels. Jeff Bailey ************************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 firm goes on to say that more than $214 billion is invested in funds modeling their U.S. indexes, with more than $1 trillion benchmarked today to their global family of indexes. For individual investors, Russell offers a variety of investment products including mutual funds, separately managed accounts and IRAs, which are sold and distributed through a worldwide network of financial professionals. Russell Funds are offered in Class C, E and S shares, which vary in fees and availability. Class C shares have a minimum initial investment of $1,000, with expense ratios as high as 3.08%, for Russell Emerging Markets C (REMCX). Class E and S shares have $2,500 initial investment minimums and expense ratios ranging from below 1.00% to as high as 2.33%, for Russell Emerging Markets E (REMEX). Morningstar lists 800-787-7354 as the 800 number for the Russell Funds. For complete fund information or a prospectus, log on to the Russell website at www.russell.com. Fund Overview Russell categories its mutual fund products into four families of funds based on their unique approach to diversification: Russell Funds, LifePoint Funds, Money Market Funds and Tax-Managed Funds. The Russell Funds seek long-term growth via investments all over the world, including the United States. These funds are managed by "strategically selected" investment managers (sub-advisers) hired and monitored by Russell. The firm uses a unique multi- manager, multi-style approach whereby fund assets are divided among various investment subadvisers, with distinct investment styles that compliment one another. The LifePoint Funds are designed to meet the needs of personal investors at different points in their lifecycle. These funds address a variety of time horizons, risk tolerances and return objectives. A key feature of the LifePoint funds, the website states, is professional rebalancing of funds to maintain their desired risk/return ratios. The funds also give investors the flexibility to migrate to more aggressive or conservative risk options as your life situation changes. The Money Market Funds provide current income consistent with preservation of capital and liquidity, and seek to maintain a stable $1 share price by investing assets in high-grade money market instruments with very short maturity dates (90 days or less). Lastly the Tax Managed Funds seek to provide capital growth or income on an "after-tax" or tax-exempt basis. These funds seek to achieve their growth, the websites states, by investing in a variety of equity securities, investment-grade "municipal" debt securities, and short-term municipal obligations. Russell's investment approach is founded on three principles. First, diversification among asset classes is one of the most prudent approaches to managing risk. Second, diversification among different investment styles is important since they can move in and out of favor with the market. Three, hiring and monitoring investment managers is needed since even the best money managers don't remain on top for extended time periods. Russell aims to combine all three foundations in its approach. Our Favorite Funds Starting first with the Russell Funds, our favorite equity fund is the $1.1 billion Russell Quantitative Equity Fund, available in C, E and S shares. The fund's a decent option for investors seeking "core equity" exposure since it blends growth and value styles and includes stocks with medium to large capitalizations. Assets are allocated to 11 investment sub-advisers. According to Morningstar, the Quantitative Equity Fund E (RQEEX) returned more than 31% in its first full year of operation, 1997, and then returned 24% and 21% the next two years. In years 2000 and 2001, the portfolio lost ground, but limited losses relative to the S&P 500 large-cap index. In each of its first five years, the fund's performance ranked in the second quartile of the large blend category, per Morningstar. Among fixed income products, we like the Russell Diversified Bond Fund (RDBEX), an intermediate-term investment-grade fund, and the Russell Multistrategy Bond Fund (RMSEX), a multi-sector bond fund that allocates assets among all bond market sectors including the high-yield and international bond markets. Russell's diversified bond fund seeks to provide diversification against equities and a stable level of cash flow by investing in fixed-income securities. It is a suitable option for investors seeking a "core fixed-income" holding emphasizing intermediate- term, investment-grade quality securities, and adding value via broad market sector rotation and issue selection. The firm's multistrategy bond product seeks to provide "maximum" total return by assuming a greater level of volatility than the average intermediate-term, investment-grade offering. It offers broad market exposure as well as exposure to high yielding areas of the bond market, including international and emerging markets. Russell utilizes a variety of total return strategies to enhance return without taking excessive portfolio risk. According to Morningstar, Russell Diversified Bond Fund E (RDBEX) has a 3-year annualized return of 8.5% through November 19, 2002, ranking in the top third of the intermediate-term bond category. The fund's 5-year average return of 6.6% was also good enough to land it in the category's top third. Russell Multistrategy Bond Fund E (RMSEX) produced a 3-year annualized total return of 7.3%, strong enough to rank in the top 5% of the multi-sector category, per Morningstar. Between the two funds, we like the diversified product better. Among Russell LifePoints Funds, we like the return-risk tradeoff provided by the Russell Conservative Strategy Fund E (RCLEX) and Russell Moderate Strategy Fund E (RMLEX) products. Conservative Strategy Fund seeks to achieve a "moderate" total rate of return through low capital appreciation and reinvestment of income, and maintains a diversified portfolio of around 20% equities and 80% fixed-income securities. It emphasizes capital preservation and stability through bond investments, with some exposure to equity investments. LifePoints Moderate Strategy Fund seeks high current income and growth of capital and income, consistent with a moderate level fluctuations in year-to-year market values. It typically will allocate around 40% of assets to equities for their long-term growth potential and 60% to fixed income securities for income and stability. Both Russell LifePoints funds are classified by Morningstar as domestic hybrid funds. According to Morningstar, the Conservative Strategy Fund has an average annualized total return of 5.1% as of November 19, 2002. That was 4.7% a year better than the broad U.S. stock market as measured by the S&P 500 index, and good enough to rank the fund in the top 12% of the Morningstar domestic hybrid fund category. The Moderate Strategy Fund's 4.0% average annual return was 3.7% better than the S&P 500 index and good enough to rank in the top 22% of the hybrid fund group. Conclusion Internet connection problems have prevented me for doing a more thorough job of analyzing the Russell family of funds this week. Considering their reputation in the investment consulting world and institutional marketplace, the Russell mutual funds present an interesting multi-level approach to diversification and risk that you may want to consider further for your investment goals. For more information, please go to the Russell Funds website at www.russell.com. There you can find further information on the Russell indexes and the firm's lineup of distinct mutual funds. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org *********** OPTIONS 101 *********** Spreading Relative Strength by Mark Phillips mphillips@OptionInvestor.com Over the past 2 weeks we've been looking at the Dow Jones US Home Construction index ($DJUSHB) and comparing it to the broader market in an attempt to learn about Relative Strength (RS). Once we identified the DJUSHB as a potential source of weakness, we dug into some of the components, looking for which stocks within that sector might be the weakest, and therefore make for an attractive bearish trade. After much discussion and charting, I came to the conclusion that of the four stocks we looked at, RYL was likely the weakest and either CTX or PHM looked to be the strongest (not good for a bearish trade). If you're just joining us and interested in the prior analysis, you can access the articles using the links below: And Now For Something Completely Different And The Verdict Is... In the week since the last article, price action is confirming that RYL is indeed the weakest of the bunch, and CTX seems to be moving into the lead in terms of being the strongest of the bunch. During our last discussion, I briefly mentioned how we can put on a spread to 'hedge our bets' with a bearish bias on the Housing sector. We want exposure to the downside, but don't want to get clobbered by a rebound in the entire sector. Things like that can happen in a market that tends to be so news driven, especially when the news (Housing Starts, Building Permits, etc.) can be so volatile. The DJUSHB seems to be building an nice downtrend now, and I like the fact that resistance is building in the 300 area, a former level of support. The way we can put on a hedged position is by initiating a bullish position on the strong stock in the sector, and a bearish trade on the weak stock in the sector. That way, if the sector sees a strong rebound, we have exposure through a bullish position in the strongest stock in the group, which we can expect will outperform to the upside. But if our bearish thesis is correct, we have that bearish position on the weakling, which should outperform to the downside. While it certainly isn't a foolproof strategy, it definitely has merit. While we've already determined our bullish and bearish candidates, there is one final RS comparison I like to do before actually making the decision to put on the trade, and that is a direct comparison between the two stocks in question. Relative Strength Chart of RYL vs. CTX Looking at this direct comparison of the two stocks in question confirms the relative weakness of RYL, and today's breakdown below support tells us that the basis for our bias still makes sense. So let's go straight to the option chains and put together a Relative Strength spread. For the sake of simplicity, we want to put the trade on using options as close as possible to ATM (At the Money). CTX is currently trading at $46.26, so we want to use the $45 Call. Since we're already well into the December expiration cycle, my preference would be to use options with a January expiration, giving the trade some time to work without time decay becoming a significant factor over the near term. The JAN-03 $45 Call (CTX-AI) is currently trading for $4.80, making the cost of this side of the spread $480 per contract. RYL is still tooling around the $36 level, with Wednesday's close at $36.55. Fortunately, RYL has $2.50 strikes available, allowing us to use the $37.50 put. That JAN-03 $37 Put (RYL-MU) is trading for $3.60 for a cost of $360 per contract. So putting on this spread as of Wednesday's closing prices would cost $840 and give us exposure to movement in the Housing sector over the next 8 weeks. The thing to keep in mind with this trade is that it is entirely possible that both sides of the spread could be profitable. That would happen if RYL broke down further, and CTX found its legs and headed back up the chart. It's certainly not a guarantee, but the research we've done up to this point shows that it is a definite possibility. Of course, we have the potential that the trade goes against us as well, and we have to take protective action (read: stop losses) to keep that risk under control. We could implement a stop loss (although it would have to be a mental one) on the entire position, where we would exit the entire position if its value dropped by more than 25-30%. Alternatively, we could place an individual stop on each leg of the spread, where we could end up exiting only one side of the spread or the other, depending on the price action of each of the two stocks. This is a highly individual issue, but if implementing this trade myself, I would place a resting stop individually on each leg of the spread. The other risk that we need to consider when putting on this type of trade is the possibility of a large change in volatility. If volatility declines substantially, then we could see both sides of this trade move against us, even without adverse price moves in the underlying securities. With the VIX finally breaking back into its historical range, and the initial cost of entering this trade, I would definitely consider this a significant risk. So how do we mitigate this risk? Spreads. One of the great advantages of simple bull and bear spreads is that in addition to reducing the cost of entry, they help to insulate us from the effects of changing volatility. So how would this RS spread strategy change if we were to utilize a standard spread strategy? Spread traders are probably way ahead of me already, but I'm going to provide a bit more detail for those that are less familiar with spreads. Rather than just buy the call on CTX, we want to put on a Bull Call spread by simultaneously buying the $45 call and sell a call at a higher strike. In this case, I'd select the $50 strike, currently trading for $2.25. So doing the math, the bullish side of our RS spread would only cost $2.55 ($4.80-2.25). By putting on the spread, we are cutting our risk on the bullish side of the trade by almost 50%, but the price we pay for that reduction of risk is that our upside is also limited. The maximum return at expiration would be $2.45 ($5.00-$2.55), while we are still risking $2.55. Normally that isn't great on a risk/reward basis. Looking at the bearish side of the RS spread, we would supplement our purchase of the $37 RYL put by selling a lower strike put with the same expiration. My preference would be for the $32 put (RYL-MZ), currently trading for $1.60. That reduces the cost of the bearish side of the RS spread from $3.60 to $2.00. Maximum return on this side of the spread is limited to $3.00 ($5.00-2.00), while the risk has been lowered to $2.00. I'm not wild about the risk/return about using the Bull Call and Bear Put spreads in place of just buying a call and buying a put. But there are lots of possible permutations we could employ to improve our odds. Since we're doing a spread on RYL and a spread on CTX, we've insulated ourselves from the effect of both changes in volatility and time decay. That means we could consider using December contracts rather than January. That would reduce our cost of entering the spreads, while keeping the potential reward unchanged. That improves the risk to reward ratio. Sophisticated spread traders could really have fun with this RS Spread strategy, putting on a Bear Call spread (Buy the high strike and sell the low strike) on RYL and a Bull Put spread (Buy the low strike and sell the high strike) on CTX. This strategy allows us to take in a credit on each side of the RS Spread, and we get to keep those credits, so long as both of the sold options expire out of the money. My intent here isn't to provide what I think is a money-making trade. What I wanted to accomplish is show a creative way in which trades can be crafted to take advantage of relative strength where we find it. The details of the RS example we've gone through in the housing sector are unimportant. If you understand the process, then you know you can do this with any sector in the market or any group of stocks you choose. Finding the disparity in Relative Strength is the technical analysis part of the process. Then that knowledge can be put to use, using the strategy of your choice, whether that involves a sophisticated spread strategy or simply going long the strong and shorting the weak. Knowledge is power. Hopefully this little exercise has you feeling invincible. Have a great week! Mark ************************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 ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Wing and a Prayer This is what traders were calling the rally today. They said stocks were being bought on the hope that a recovery would appear in 2003 despite constant news to the contrary. Traders managed to close the indexes right below strong resistance once again but this time the result could be different. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************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 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Wednesday 11-20-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: GNSS Dropped Calls: None Dropped Puts: GE Play of the Day: Call - GNSS Big Cap Covered Calls & Naked Puts: Another Surprise Rally! Updated on the site tonight: Market Watch Market Posture ************************Advertisement************************* Quit paying fees for limit orders or minimum equity _ No hidden fees for limit orders or balances _ $1.50 /contract (10+ contracts) or $14.95 minimum. _ Zero minimum deposit required to open an account _ Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ************************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 ************************************************************** *********************************************************** Stop-Loss Adjustments *********************************************************** GNSS - call Adjust from $13 up to $14 *********************************************************** DROPS *********************************************************** calls ^^^^^ none puts ^^^^ GE $24.80 +0.90 (+0.94 for the week) We've been talking about the possible reorganization announcement from GE, which is widely expected on Thursday. The company will webcast its analyst meeting, at which it is expected to announce an earnings shortfall of 15-20 cents, stemming from a charge of around $2 billion for the restructuring. At this point we feel the bad news could be priced into the stock, since we didn't get the breakdown we were looking for and we are closing the play ahead of the meeting. If the news is worse than expected, we could see another lower low, in which case traders may want to hang on for the ride, ************************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 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** GNSS - Genesis Microchip - $18.00 +1.66 (+0.83 for the week) Company summary: Genesis Microchip Inc. is a leading provider of image processing systems enabling superior picture quality for a variety of consumer and PC-display products. Featuring Genesis Display Perfection(TM) technologies and Emmy-award winning Faroudja video technology, Genesis system-on-a-chip solutions are used worldwide by display manufacturers to produce visibly better images across a broad set of devices including flat-panel displays, digital TVs, digital CRTs, projectors and DVD players. Genesis boasts a technology portfolio that features 135 patents, including analog and mixed signal System-on-a-chip design, DCDi(TM) deinterlacing, TrueLife(TM) video enhancement and IntelliComb(TM) video decoding. Founded in 1987, Genesis supports its leading-brand name customers with offices in the U.S., Canada, India, Taiwan, Korea, China and Japan. (source: company release) Most Recent Write-Up: Genesis' recent breakout was a bullish catapult on the point and figure chart, which is a triple top followed by a double top. It's a very bullish formation and is supported by the company's presence in a market that is growing by leaps and bounds. The flat panel monitor business is expected to ship 6.3 million units in 2002, but as many as 97 million in 2005. The projector market, used by consumers and businesses, is projected to grow from just under 700,000 in 2001 to at least 12 million by 2005. Today the company announced that its FLI2310 digital video format converter was chosen by Sharp for its new series of LCD televisions, another growing market. The most recent buy signal came at $16.00. Today's pullback, following an RBC downgrade that said it had reached its price target, found support just above that breakout level. The stock broke through its 200-dma on Monday, trading as high as $18.95, which indicates $19 will be the next hurdle for Genesis. After setting its third higher high, today's retracement and bounce above $16 is the stock's third higher low. New entries can look for a move back over the 200-dma of $17.00, and also today's high of $17.10, as an entry point. We will leave our stop at $13 for the time being, allowing for any continued pullback to still maintain the pattern of higher lows. If we do get a continued pullback, then we will watch for signs of intraday support before recommending new entries. Why This Is our Play of The Day: It didn't take GNSS long to rebound from the downgrade, and it did so in impressive fashion. The stock not only broke back above the 200-dma (now $16.82), but cruised right through $17 and finished the day at the next round number, $18.00. After breaking above $18, it found support throughout the end of the day. The Semiconductor Index (SOX) also broke out to a new relative high, and the sector continues to look bullish, setting higher highs and higher lows. While many of the sub sections of the group are still seeing slow demand, we'll keep our money on one with a growing business. Look to enter on intraday support over $18, or a pullback above the 200-dma, preferably above $17.00. If the stock breaks down below that average, then step to the sidelines until we get a picture of where the buyers will step in and provide support. BUY CALL DEC-15.00* QFE-LC OI= 3316 at $3.80 SL=1.90 BUY CALL DEC-17.50 QFE-LW OI= 2123 at $2.00 SL=1.00 BUY CALL JAN-15.00 QFE-AC OI= 70 at $4.30 SL=2.20 BUY CALL JAN-17.50 QFE-AW OI= 38 at $2.85 SL=1.50 Average Daily Volume = 1.96 mil ************************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 ************************************************************** ************** MARKET POSTURE ************** One More Hurdle To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_112002.asp ************ MARKET WATCH ************ Playing the News To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_112002.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS *************** Another Surprise Rally! By Ray Cummins NASDAQ stocks led the market higher Wednesday with semiconductor and networking shares ascending amid optimism over a recovery in the technology segment. The NASDAQ Composite Index rose 45 points to 1,419 with computer hardware and software shares also contributing to the rally. The Dow Jones Industrial Average added 148 points to close at 8,623 on strength in J.P. Morgan Chase (NYSE:JPM), which said it had no credit liability in the National Century Financial Enterprises bankruptcy. Despite news of slowing growth in the housing market, broader market sectors were also higher with biotechnology stocks among the best performers. Losing groups included pharmaceutical and airline issues. The Standard & Poor's 500 Index closed up 17 points at 914. Winners outpaced losers more than 2 to 1 on both the NYSE and the NASDAQ. Trading volume was average with over 1.5 billion shares exchanged on the Big Board while 1.7 billion shares changed hands on the technology exchange. Treasury notes enjoyed small gains after the announcement of weaker-than-expected housing data but bonds eventually moved lower. The 10-year Treasury note lost 21/32 to yield 4.06, down from 3.98% in the previous session. The 30-year bond was 1 12/32 lower while its yield stood at 4.94%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 11/19/02 *************** 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. Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield CCMP DEC 40 38.80 51.73 $1.20 7.04% CDWC DEC 40 39.15 52.68 $0.85 5.10% FRX DEC 85 83.05 103.82 $1.95 5.14% GILD DEC 32 31.85 35.55 $0.65 4.41% KLAC DEC 30 29.25 36.79 $0.75 6.06% NBIX DEC 35 34.30 45.84 $0.70 4.64% AZO DEC 75 73.05 83.38 $1.95 6.05% COCO DEC 30 29.40 38.61 $0.60 5.89% GILD DEC 30 29.40 35.55 $0.60 5.36% IGEN DEC 30 29.15 38.23 $0.85 8.01% MSFT DEC 50 49.00 54.83 $1.00 4.62% NBIX DEC 35 33.85 45.84 $1.15 9.08% SNPS DEC 35 34.50 47.98 $0.50 4.31% Naked Calls Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ABK DEC 65 65.90 57.38 $0.90 4.88% ATK DEC 65 66.05 58.50 $1.05 5.24% EXPE DEC 80 81.05 70.14 $1.05 5.16% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status FCN 41.18 39.26 DEC 30 35 0.55 34.45 $0.55 Open MSFT 57.03 54.83 DEC 48 50 0.30 49.70 $0.30 Open SNPS 47.35 47.98 DEC 35 40 0.60 39.40 $0.60 Open COLM 40.85 41.33 DEC 30 35 0.60 34.40 $0.60 Open Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status CAH 70.01 64.70 DEC 85 80 0.55 80.55 $0.55 Open FNM 68.21 62.65 DEC 80 75 0.75 75.75 $0.75 Open APA 50.00 50.76 DEC 60 55 0.60 55.60 $0.60 Open LLL 44.49 43.30 DEC 55 50 0.50 50.50 $0.50 Open TOT 67.37 70.10 DEC 80 75 0.45 75.45 $0.45 Open Credit Strangles Stock Strike Strike Cost Current Gain Potential Symbol Month &Price Basis Price (Loss) Mon. Yield KBH DEC 50C 52.00 42.89 $2.00 7.68% KBH DEC 40P 38.75 42.89 $1.25 6.67% THO DEC 40C 40.50 35.48 $0.50 4.34% THO DEC 30P 29.50 35.48 $0.50 4.46% KB Homes (NYSE:KBH) will continue to be on the watch-list as it tests support slightly above the sold put at $41-$42. Synthetic Positions: No Open Positions Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. The positions with *** will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. *************** BULLISH PLAYS - Premium Selling All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. *************** CYMI - Cymer $33.59 *** On The Rebound! *** Cymer (NASDAQ:CYMI is a supplier of excimer laser illumination sources, the essential light source for deep ultraviolet (DUV) photolithography systems used in the building of semiconductors. DUV lithography is a key enabling technology, which has allowed the semiconductor industry to meet the exacting specifications and manufacturing requirements for volume production of today's most advanced semiconductor chips. Cymer's lasers are used in step-and-repeat and step-and-scan photolithography systems for the manufacture of semiconductors with critical feature sizes below 0.35 microns. Cymer believes its excimer lasers constitute a substantial majority of all excimer lasers incorporated in DUV photolithography tools. Cymer's various products consist of photolithography light sources, replacement parts and service. CYMI - Cymer $33.59 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 25 CQG XE 446 0.40 24.60 5.7% *** SELL PUT DEC 30 CQG XF 982 1.25 28.75 11.4% *************** IR - Ingersoll-Rand $42.19 *** Bullish Sector *** Ingersoll-Rand (NYSE:IR) is a provider of security and safety, climate control, industrial solutions and infrastructure products. Climate Control focuses on markets requiring refrigerant-gas compression technology, and services to provide gas pressure for distribution to end users or to maintain a refrigeration cycle for protecting food and other perishables. Industrial Solutions is composed of a diverse group of businesses focused on providing solutions to enhance customers' industrial efficiency. Industrial Solutions consists of three primary segments: Air and Productivity Solutions, Dresser-Rand and Engineered Solutions. Infrastructure supplies products and services for various types of construction projects, industrial and commercial development and also golf and utility vehicles. Security and Safety manufactures and markets architectural hardware and access-control products and service to customers seeking to enhance productivity and security for their residential, commercial and institutional buildings. IR - Ingersoll-Rand $42.19 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 35 IR XG 6,374 0.50 34.50 5.0% *** SELL PUT DEC 37.5 IR XU 932 0.80 36.70 6.2% SELL PUT DEC 40 IR XH 119 1.20 38.80 7.7% *************** LLTC - Linear Technology $31.73 *** Hot Sector! *** Linear Technology (NASDAQ:LLTC) designs, manufactures and sells a broad line of standard high-performance linear integrated circuits (ICs). Applications for the company's products include telecommunications, cellular telephones, networking products, optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products, digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control and military and space systems. LLTC - Linear Technology $31.73 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 25 LLQ XE 927 0.30 24.70 4.6% *** SELL PUT DEC 27.5 LLQ XY 476 0.65 26.85 7.2% SELL PUT DEC 30 LLQ XF 654 1.35 28.65 11.1% *************** MERQ - Mercury Interactive $31.54 *** 6-Month High! *** Mercury Interactive (NASDAQ:MERQ) is a provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Its software products and hosted services help companies worldwide enhance the user experience by improving the performance, availability, reliability and scalability of their Web-based applications. Its many hosted services provide its customers with a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. Its integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. The company also provides outsourced load testing and Web performance monitoring services that complement its software products. MERQ - Mercury Interactive $31.54 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 25 RQB XE 528 0.35 24.65 5.3% *** SELL PUT DEC 30 RQB XF 389 1.60 28.40 12.8% *************** QCOM - Qualcomm $39.15 *** On The Move! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. The company offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology, enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $39.15 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 32.5 AAW XZ 6,097 0.45 32.05 4.8% *** SELL PUT DEC 35 AAW XG 5,617 0.85 34.15 7.0% SELL PUT DEC 37.5 AAW XU 5,390 1.50 36.00 9.8% *************** QLGC - QLogic $41.43 *** Up-trend Intact! *** QLogic Corporation (NASDAQ:QLGC) designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers. The company's products are based on SCSI, iSCSI, Fibre Channel and Infiniband standards. The company is the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Their products include its SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool Kit management software. QLogic is the only HBA vendor that supports SCSI, Internet Protocol, Virtual Interface and FICON protocols with the same Fibre Channel HBA. In addition, the company designs and supplies controller chips used in a variety of hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure. QLGC - QLogic $41.43 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 30 QLC XF 1,661 0.45 29.55 5.2% *** SELL PUT DEC 32.5 QLC XZ 1,287 0.75 31.75 8.4% SELL PUT DEC 35 QLC XG 3,257 1.15 3 3.85 10.3% *************** SYK - Stryker $66.81 *** Rally Mode! *** Stryker Corporation (NYSE:SYK) and its many subsidiaries develop, manufacture and market specialty surgical and medical products, including orthopaedic reconstructive implants. The firm operates in two reportable segments: Orthopaedic Implants, which sells orthopaedic reconstructive, trauma and spinal implants, bone cement and the bone growth factor osteogenic protein-1, and the MedSurg Equipment segment, which sells powered surgical instruments, endoscopic systems, medical imaging equipment, craniomaxillofacial implants, image-guided surgical systems and hospital beds and also stretchers. The company's Other segment includes Physical Therapy Services and corporate administration. SYK - Stryker $66.81 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 60 SYK XL 844 0.70 59.30 3.4% "TS" SELL PUT DEC 65 SYK XM 1,289 1.65 63.35 6.3% *************** TTWO - Take-Two Interactive $29.50 *** Xmas Shopping Season! *** Take-Two Interactive Software (NASDAQ:TTWO) is an integrated developer, marketer, distributor and publisher of interactive entertainment software games and accessories for the personal computer, PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The company publishes and develops products through various wholly owned subsidiaries including Rockstar Games, Rockstar Studios, Gathering of Developers, TalonSoft, Joytech, PopTop, Global Star and under the Take-Two brand name. The company maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland. TTWO - Take-Two Interactive $29.50 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT DEC 22.5 TUO XX 2,538 0.30 22.20 4.9% *** SELL PUT DEC 25 TUO XE 2,896 0.60 24.40 7.7% *************** BULLISH PLAYS - Credit Spreads These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** CCMP - Cabot Microelectronics $53.80 *** New Trading Range! *** Cabot Microelectronics is a supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit devices, within a process called chemical mechanical planarization. CMP is a polishing process used by integrated circuit (IC) device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is the polishing process that levels and smooths, and removes the excess material from the surfaces of these layers. CMP slurries are unique liquid formulations that facilitate and enhance this polishing process and usually contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $53.80 PLAY (conservative - bullish/credit spread): BUY PUT DEC-40.00 UKR-XH OI=551 A=$0.55 SELL PUT DEC-45.00 UKR-XI OI=740 B=$1.00 INITIAL NET-CREDIT TARGET=$0.50-$0.65 POTENTIAL PROFIT(max)=11% B/E=$44.50 *************** ROOM - Hotel.com $68.94 *** New High! *** Hotel.com (NASDAQ:ROOM), formerly known as Hotel Reservations Network, is a consolidator of hotel and lodging accommodations. The company contracts with lodging properties in advance for volume purchases and guaranteed availability of rooms at lower prices, and sells these rooms to consumers often at significant discounts to published rates. The company's supply relationships also often allow it to offer customers accommodation alternatives for otherwise unavailable dates. In addition, through its wholly owned subsidiary, TravelNow.com, the company offers customers the ability to book hotel rooms, airline travel and car rentals. The company has room supply agreements with over 2,600 hotels in 97 major markets in North America, the Caribbean, Western Europe and Asia, as well as 113 vacation rental properties in 17 markets in North America and the Caribbean. ROOM - Hotel.com $68.94 PLAY (conservative - bullish/credit spread): BUY PUT DEC-55.00 URD-XK OI=187 A=$0.40 SELL PUT DEC-60.00 URD-XL OI=819 B=$0.90 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$59.45 *************** WFMI - Whole Foods Market $50.55 *** A Big Day! *** Whole Foods Market (NYSE:WFMI) owns and operates a chain of natural and organic foods supermarkets. The categories of products that the company offers include: produce, grocery, meat and poultry, seafood, bakery, prepared foods, specialty (beer/wine/cheese), nutritional supplements, body care, pet products, floral, household products and educational products such as books. On average, the company's stores carry approximately 20,000 SKUs (stock-keeping units) of food and non-food products. Whole Foods has a broad product selection with a heavy emphasis on perishable foods that appeal to both natural foods and gourmet shoppers. WFMI - Whole Foods Market $50.55 PLAY (very conservative - bullish/credit spread): BUY PUT DEC-40.00 FMQ-XH OI=108 A=$0.25 SELL PUT DEC-45.00 FMQ-XI OI=266 B=$0.60 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$44.60 *************** XL - XL Capital $80.15 *** Recovery In Progress *** XL Capital (NYSE:XL), formerly EXEL Merger Company, is a provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. The company provides property and casualty insurance on a global basis and generally writes specialty coverages for commercial customers. Specific lines of business written are third-party general liability insurance, environmental liability insurance, directors/officers liability insurance, professional liability insurance, aviation and satellite insurance, employment practices liability insurance, surety, marine insurance, property insurance and other insurance covers, including program business as well as political risk insurance. Premiums written vary by jurisdiction principally due to local market conditions and legal requirements. XL - XL Capital $80.15 PLAY (conservative - bullish/credit spread): BUY PUT DEC-70.00 XL-XN OI=56 A=$0.75 SELL PUT DEC-75.00 XL-XO OI=224 B=$1.30 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=12% B/E=$74.40 *************** BEARISH PLAYS - Credit Spreads All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** BRL - Barr Laboratories $58.13 *** Generic Drug Slump *** Barr Laboratories (NYSE:BRL) is a pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. The firm was formed in October 2001 as the result of a merger between a subsidiary of Barr Laboratories and Duramed, in which Duramed became a wholly owned subsidiary of Barr. Barr sells approximately 85 pharmaceutical products, representing various dosage strengths and product forms of approximately 35 chemical entities. Barr's product line focuses principally on the development and marketing of generic and proprietary products in the oncology and female healthcare categories, including hormone replacement and oral contraceptives. Duramed develops, manufactures and markets a line of prescription drug products in tablet, capsule and liquid forms. Duramed's products include those of its own manufacture and those it markets under arrangements with other manufacturers. BRL - Barr Laboratories $58.13 PLAY (less conservative - bearish/credit spread): BUY CALL DEC-70.00 BRL-LN OI=47 A=$0.25 SELL CALL DEC-65.00 BRL-LM OI=512 B=$0.80 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$65.65 *************** CAH - Cardinal Health $65.00 *** Second Chance - Replay! *** Cardinal Health (NYSE:CAH) is a provider of products and services to healthcare providers and manufacturers, helping them improve the efficiency and quality of healthcare. The company has four main segments: Pharmaceutical Distribution and Provider Services, which offers pharmaceutical and other healthcare products, as well as a wide range of pharmacy management services; Medical-Surgical Products and Services, which includes medical products and services; Pharmaceutical Technologies and Services, which provides a range of technologies and services, and Automation and Information Services, which focuses on meeting various customer needs through proprietary automation and information products and services. CAH - Cardinal Health $65.00 PLAY (moderately aggressive - bearish/credit spread): BUY CALL DEC-75.00 CAH-LO OI=3394 A=$0.20 SELL CALL DEC-70.00 CAH-LN OI=4407 B=$1.05 INITIAL NET-CREDIT TARGET=$0.85-$1.00 POTENTIAL PROFIT(max)=20% B/E=$70.85 *************** NVS - Novartis $38.40 *** Sector Slump! *** Novartis AG (NYSE:NVS) is engaged in sales and innovation in its continuing core business of pharmaceuticals, generics, consumer health, eyecare products and animal health. The company's product portfolio includes a wide range of products in eight major disease areas: cardiovascular/metabolism/endocrinology, oncology/hematology, central nervous system, transplantation/immunology, dermatology, respiratory, rheumatology/bone/hormone replacement therapy and ophthalmics. With its many products and services, Novartis is a world leader in pharmaceuticals and consumer health. Headquartered in Basel, Switzerland, Novartis Group companies employ about 74,000 people and operates in over 140 countries around the world. NVS - Novartis $38.40 PLAY (conservative - bearish/credit spread): BUY CALL DEC-45.00 NVS-LI OI=24 A=$0.25 SELL CALL DEC-40.00 NVS-LH OI=2097 B=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$50.55 *************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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