The Option Investor Newsletter Sunday 11-24-2002 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: Is It Real? Futures Market: It’s History Index Trader Wrap: Thank you, thank you and thank you! Editor’s Plays: Cheap Stocks Market Sentiment: Reading Between the Lines Ask the Analyst: Plan the trade and trade the plan Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Movin' On Up Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 11-22 WE 11-15 WE 11-08 WE 11-01 DOW 8804.84 +226.75 8579.09 + 41.96 8537.13 + 19.49 + 73.65 Nasdaq 1468.74 + 57.60 1411.14 + 51.86 1359.29 - 1.41 + 29.57 S&P-100 475.03 + 11.31 463.72 + 6.33 457.39 - 0.77 + 2.51 S&P-500 930.55 + 20.72 909.83 + 15.09 894.74 - 6.22 + 3.31 W5000 8783.13 +199.08 8584.05 +145.25 8438.80 - 63.40 + 51.56 RUT 400.00 + 14.08 385.92 + 6.93 378.99 - 4.46 + 10.81 TRAN 2313.98 - 19.12 2333.20 - 13.68 2346.88 + 31.20 + 2.37 VIX 26.73 - 4.10 30.83 - 2.73 33.56 - 0.42 - 2.29 VXN 46.49 - 3.19 49.68 - 2.33 52.01 + 2.15 - 0.53 TRIN 1.05 0.67 1.80 0.95 Put/Call 0.70 0.57 1.05 0.71 ****************************************************************** Is It Real? by Jim Brown The markets pulled back slightly on Friday but the Dow still managed to post a +226 point gain for the week and stretch its winning streak to seven weeks. Considering the gains over the last seven weeks this was an impressive feat. The Nasdaq also managed to close at levels not seen since June. Overall it was a great week and the streak of consecutive years this week was positive has now stretched to ten. Dow Chart – Daily Nasdaq Chart – Daily Friday was a sleeper day. We traded very close to the flat line all day and only a late afternoon drop kept the averages from closing positive. Comments out of Russia contained a warning from Putin to Bush to not attack Iraq without full UN consent. This caused traders who were starting to feel bullish again to decide being safe meant being flat over the weekend. That -65 point Dow drop just before the close managed to push the index to the low of the day. Friday started off bad but quickly recovered after Cisco was cut to a "sell" by Fulcrum after they said revenue growth for 2003- and 2004 will not be sufficient to offset the impact of declining grow margins. They set a 12-month price target of $11 and said the cost of expensing options could cut earnings by as much as 60%. Cisco was only down marginally by -.35 cents on the news but the tone was set for the day. Salomon Smith Barney cut PSFT and SEBL on valuation concerns from a lack of any corporate IT recovery. Brocade warned that earnings would fall and the COO was leaving. BRCD lost -27% on the news with a drop to $5.27. All these events cast a spell over the tech sector and the Nasdaq lost -20 points in early trading. On better note Taiwan Semiconductor, the biggest foundry in the world said an anticipated -7% drop in demand had not materialized and they were adding capacity to accommodate a brisk increase in orders for PC products. Did anybody pickup on that? The expected drop in demand did not appear and capacity utilization was increasing due to orders for computer products. This is not a small side sector manufacturer. This is the largest chip foundry in the world. This good news offset the negative semiconductor book-to-bill report from Thursday night. That ratio dropped to .73 from .84 the prior month. This was the fourth month of significant decline and indicated there was no recovery in the chip sector in October. This is the STEEPEST three-month decline on record and orders are approaching the lows from last year. It is not expected to get better soon. AMAT said they expected orders in Q4 to drop another -20%. This is directly contrary to the comments from Taiwan Semi today. However, the B-t-B ratio is backward looking and is for October. The TSM data is for the current month and to some extent is forward looking since they are having to add capacity for current order flow. This brings up the distinct possibility that the October period was the bottom and as the largest foundry in the world and the most likely to see the first swell of orders, the TSM data could be the leading indicator of a coming rebound. According to the latest CIO Magazine Tech poll in October, more CIOs expected to decrease spending in the current quarter than increase spending. This was the first time in eight months the sentiment was negative. If something has suddenly appeared to turn the economy around then it is a stealth attack and it appeared in the last four weeks. Maybe the Fed has decided cutting rates is not working and just decided to replace all the government computers instead. There are mixed messages coming out of the box makers. Dell gave a glowing outlook for its own business but was criticized for not being even more aggressive. HPQ beat estimates and affirmed guidance for the 4Q and were criticized for "possible" channel stuffing and number manipulation. It appears the bears have taken over the analyst community but then bad news always sells more newspapers than good. Dan Niles has gone on record several times recently as saying a rebound was underway and even called the HPQ surprise in advance. Both Dell and HPQ showed gains in Europe of +15% so obviously there was plenty of market share for both. Other areas strong for both companies and for IBM was the server market. All showed gains and Dell was knocking the cover off the ball. If companies are quietly using their IT budget dollars to beef up their server farms then the next wave will be desktop computers. You don't upgrade the desktops and then try to feed them with servers that are multiple generations old. You do the infrastructure first and then the individual computers. Another problem in the computer sector is price deflation. In 1999 the average 400MHZ desktop replacement for the Y2K upgrade was $2,500. The average 2.4 MHZ desktop replacement today costs less than $1,000 without a monitor. Today I installed a 2.4GHZ, 1GB ram, 360GB of disk, CD burner, DVD player plus all the bells and whistles and it cost me less than $900 using an existing monitor. PC box makers are faced with trying to produce revenue growth while computer prices are falling 10%-15% per month. In order to get +15% growth they have to sell +30% more boxes than they did the prior period. Just selling the same number of units would cut their revenue by -15% every quarter. It is a cutthroat market and it is not expected to see any sudden price surges. The fact that HPQ and Dell are showing revenue growth at all in the current economy is amazing. Obviously investors have not picked up on this fact of life as Dell stock has dropped -10% since they announced earnings one week ago. Now, back to the TSM news. I don't want to apply too much to the event just in case it is a blip and not the start of a new trend. If you remember a month ago I reported that they also said they were seeing a flurry of last minute rush orders to fill holiday shipments. So consider this. In October they say they have a flurry of unexpected orders. In November the expected drop did not appear and they are having to add capacity for December. This is normally a slow period for chipmakers with forced plant closings and mandatory holiday vacations. Do you see the possible conclusions here? Rising demand during a normally slow period. It could be a blip, just an inventory replenishment phase, but it could also be the real thing. The Fed has cut rates 12 times in two years and cheap money may finally be doing its job. I know the preceding paragraphs may be bordering on heresy to some readers but after three years of gloom and doom it may be time to start considering the bullish alternative. Another leading indicator of impending economic rebound is copper. Copper has risen nearly 15% since mid October and there is only one reason for buying copper. You are going to make wire, pipe, circuit boards and things like industrial equipment. Copper has historically led manufacturing rebounds by 6-9 months. Another measure of a real rally is the small caps. The Russell 2000 stocks. The Russell has risen +23% since the October lows. This is less than the Nasdaq's gain of +32% but still very respectable. When rebound rallies are bear market rallies the big cap indexes tend to outperform the small caps. They are liquid and easy to move in and out with large sums of cash. They are a favorite of funds when there is no conviction. When funds think the rally is for real they spread out into small caps to capture the maximum price appreciation of any future rally cycle. The Russell is up +8% in the last two weeks. There is definitely money flowing into this group. Personally I think the Nasdaq has out performed because the majority of Nasdaq stocks are no longer mid or big caps with many high flyers now priced in the single digits. They are not specifically "small caps" due to the number of shares outstanding but were definitely "small prices" and that attracted larger dollars. Going forward we are just not going to explode to Dow 12,000 over the Thanksgiving holidays. There are far too few signs of a pending recovery and there are still sectors under attack. Airlines, health care, oil, financial, etc. Fourth quarter warning season starts after Thanksgiving. There is also strong resistance just above us. The Dow has resistance at 9050 and 9205. The Nasdaq at 1485 and 1504. These are significant resistance levels and are not likely to be broken on the first attempt. Many analysts think Dow 9200 will be the high for the rest of the year. That remains to be seen but we could hit that area just as the first wave of warnings hits us. That resistance coupled with a little reinforcement of negative sentiment could slow the momentum. Many think that a recovery will appear by Q3-2003 but that the recent market gains have already priced in that conclusion. It is almost a sure thing that there will be another "spectacular" terrorist event between now and Q3 and with the increased news coverage of what a soft target our malls are the holiday retail season could be a disaster. The bottom line for me is still optimism. I see bullishness breaking out all over and glimmers of hope on the horizon. Chip orders picking up, auto sales not as bad as expected, home sales are still strong and we have a rising market to help rebuild consumer confidence. This type of good news tends to feed on itself and we have seen many times recently that bad news is being ignored. While I would not go out and borrow against my home equity to invest in the market now I would not bet against it either. We may be headed higher. Maybe not straight up but if the last seven weeks are any indication the trend has definitely changed. Is it real? It is for everybody that bought the dip on October 10th. Don't you wish you had that time machine now. Enter Very Passively, Exit Very Aggressively! Jim Brown "The stock market is that creation of man which humbles him the most". - Anonymous ************** FUTURES MARKET ************** It’s History By John Seckinger jseckinger@OptionInvestor.com Looking at monthly and weekly charts dating back to 1999 seems to shed light on long-term psychology and expectations of traders with an extended time horizon. Friday, November 23rd at 4:15 P.M. Contract Net Change High Low Volume ES02Z 928.75 -6.75 937.50 927.25 464,042 YM02Z 8796.00 -63.00 8875.00 8805.00 14,874 NQ02Z 1116.50 -1.00 1124.50 1100.50 243,851 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: The equity markets had to digest a weak 0.73 book-to-bill ratio, as well as a warning from Brocade (BRCD, - 27.5% to 5.28) about disappointing quarterly revenue and the announcement that 150 jobs, or 12% of its work force, will be cut. Other negative news included a downgrade of PeopleSoft (PSFT, -5% to 19.99), Siebel (SEBL, +0.91% at 8.74), Cisco (CSCO, -2.3% at 14.89), and Adobe (ADBE, -1.29% at 29.81). Other notes included the announcement from Wal-Mart that Sam's Club will enter the Canadian market; possibly having a negative impact on Costco (COST). Costco derives 18% of operating earnings from Canada. Additionally, it is reported that the US will launch an investigation into Micron's (MU) complaint that the S. Korean government subsidized DRAM makers Hynix and Samsung Technical News: The Dow Jones finished the week higher by 260, and has now posted seven straight weekly gains. Since 1987, the Dow has gained every year except three over the Thanksgiving week including the following Monday. Note: There are no major earnings reports all week; however, a few noteworthy economic reports are scheduled to be released. Existing Home Sales on Monday; GDP, New Home Sales, and Consumer Confidence on Tuesday; and Durable Goods Orders on Wednesday. A few sectors making headlines on Friday were Biotech (BTK, 379), Networking (NWX, 152), and Utilities (UTY, 248). The Biotech Index tested solid resistance between 380-385 (intra-day high of 385), the NWX index rose 3.62% and above 150, while the UTY index cleared 343 and looks poised to trade towards 257. ================================================================= The December Mini-sized Dow Contract (YM02Z) As always, it makes sense to start with a longer-term chart and try to get a reading on sentiment and expectations of traders with an extended time horizon. With that said, I decided to pull up a monthly chart of the Dow and look for potential long-term pivot areas. It was only a few years ago when all eyes were on the “diamond” formation in the Dow and the possibility of an extended move either way. After a relative high (11750) and low (9731) were established, traders had their 2,019-point objective. The question was: Which way will the Dow go, and where is the apex? I calculated 10,841 as the apex (based on volume), and once 9731 was taken out, the 8822 objective became set in stone (which was eventually reached after a tremendous amount of volatility, and a number of bull traps). In conclusion, long- term traders most likely remember the 8800 to 8900 area; moreover, the psychological importance of 8800 has just become even more magnified. Chart of Dow Jones Industrial Average, Monthly The real question now is, where is the Dow headed? Looking at a weekly chart between April 1999 to July 2000, there appears a pattern that somewhat resembles current events (Note: impossible to match psychology). The Dow broke out higher, appeared to show a relative high (recently seen with the Bearish Shooting Star formation), and then went on to close above all previous weekly highs. As the chart shows, prices went on to rise an additional 300 points higher (would put Dow at 9100); however, more importantly, the Dow really began to fall once prices CLOSED underneath these psychologically important levels. Will history repeat itself? I do believe that least resistance is HIGHER at current levels; however, in the back of my mind, I worry about the next wave higher being carried by retailers thinking that a great rally is about to begin. I wish they are right; however, a weekly close back under the previous relative weekly highs could be very troublesome for longs. Chart of Dow, Weekly (April 1999 to July 2000) Getting to a chart of the YM02Z contract, the objective of 8996 remains untested; however, there is some nice support underneath at 8725 and below at 8638. Short-term pivot is at 8800, while resistance before 8996 is seen at 8951 (Dow DMA). Above 8996, resistance is felt at 9018 (YM 200 DMA) and 9077. Chart of Mini-sized Dow (YM02Z), 120-minute YM02Z Support Resistance Pivot 8800 8900 8800 8725 8935 8638 8685 8951 8540 9000 9018 9077 Bold signifies levels within the Dow Jones. The December E-mini Nasdaq 100 Contract (NQ02Z) The Nasdaq 100 appears to be more rational and less volatile than the other two futures contracts. However, that could all change very soon. With the contract pulling back towards the highly watched 1100 area (Friday’s intra-day low at 1100), the strength of this pivot becomes greater. Additionally, there is a bearish divergence in the RSI oscillator that could do one of two things. One, squeeze shorts towards 1172 if the 1124.50 level is taken out, or, secondly, have shorts get aggressive once under the 1100 pivot and look to test the wedge support at 1073. Note: Conservative bears might be looking for a break of the rising blue support line, currently matching the 50 DMA at 1053. Chart of E-Mini Nasdaq 100, 120-minute NQ02Z Support Resistance Pivot 1124 1110 1131 1100 1000 1154 1088 1072 1163 1073 1020 1172 1053 1000 Bold signifies levels within the NDX. The December E-mini S&P 500 Contract (ES02Z) Close, but no cigar. The ES02Z contract briefly rose above the 936 pivotal level (corresponding with a bearish trend line from March); however, late-day profit taking easily closed the index underneath at 930.55. If the index can close above this trend line, there some solid resistance levels to be concerned about. One is at 945, and, more importantly, at 965. Downside intermediate support is felt at 930 and then much lower just under 900 (22 WMA at 894). Another worry for longs could be the ADX oscillator, falling from above 40 to under 40 and signaling that the recent momentum may be running out of steam. Note: If the Dow does rise an additional 300 points (based on top paragraph), this could place the S&P 500 near the 965-971 level. Chart of S&P 500 Index, Weekly A 90-minute chart of the ES02Z contract continues to show the bearish divergence, but prices remain above the 926-927 pivotal level. A move under this pivot could pressure the index back towards 912 and the middle of the regression channel. New buyers might not get involved until the 937 level is taken out, and a rise above 937 might have to be confirmed with better RSI numbers. Chart of E-Mini S&P 500, 90-minute ES02Z Support Resistance Pivot 926-27 936 926.50 910 956 927 902 965 971 Bold signifies levels within the S&P 500. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Thank you, thank you and thank you! By Leigh Stevens lstevens@OptionInvestor.com The bulls had something to be thankful for again last week with another strong run up – the 7th. week in row for the S&P, Dow and the Nasdaq, at least for the Nas 100 (NDX). The S&P 500 was up 30 points, for a 3.3% gain and the Nasdaq Composite (COMPX) was higher by 58 points and a 4% increase. Weeks like this makes stock owners feel like more such stuffing and with some prospect for yet another week of the same ahead – for at least the last 9 years in a row, the market has been higher in the holiday shortened week ahead. TRADING ACTIVITY AND OUTLOOK – Round up the usual suspects at least from market of yesteryear – the financials and technology led the way last week. Just the leadership we would expect if in fact the economy is reviving. However, a week’s end, a reduction in earnings estimates from Brocade Communications reminded the flock that there were still going to be some rough spots. Hard to believe but Nasdaq is leading the way as the fallen tech angels rise again. And, in terms of the Nasdaq market, the technical mavens – as in “technical” analysis – can give “official” word of an emerging UP-trend in the technology heavy Nasdaq, with its penetration of its August price peak. An uptrend being defined as a series of higher rally peaks makes the August (up) swing highs the defining points. It looks to me that the big cap “old” economy stock averages will follow suit in a move to new highs ahead. As I’ve said before, the market often “climbs a wall of worry” when emerging from a bear market. Of course, fundamentally Iraq is the wild card with a major oil price spike as a danger. Big worries indeed, but there is usually something that keeps too many people from getting too bullish too quickly - funny how that works. I notice that a lot of technicians are now being quoted for their two cents worth on what is going on – trotting out this group defines the times when the market is telling us something that we don’t see or trust yet. I know because this is when I would get called to go on CNBC occasionally. When the market is a mystery, call in the technical analysts as they have these kind of weird crystal balls. Understandable I guess, when the market is acting as a somewhat mysterious “discounting” mechanism as equity prices adjust for better prospective earnings a half or full year out. Because the “market” is usually right on what lies ahead, we have things like the rule of thumb about higher highs and higher reaction lows. Last week’s improvement in jobless claims and a factory activity pickup in the Philly Fed report were a couple of factors seized on by the market. The other thing I find significant as a student of market psychology and market history is that there is not much bullishness out there and, in fact, not a lot of market interest. (Charles) Dow defined this as the 3rd. and final phase of bear markets – lack of interest in stocks especially in terms of new buying. Professional money managers are another story, as they continue to nibble away at select stocks. The week ahead will have some things to watch for – October existing and new home sales, October durable goods orders, personal income and spending figures – can we all just please continue to SPEND! – also, comes any revision to Q3 GDP and a last say by the University of Michigan on their consumer sentiment index – oh, and I shouldn’t fail to mention the Fed Beige book or musings by the federal reserve on what is going on out there in the economic hinterlands. If you want to watch bellwether tech stocks – IBM, Cisco and Microsoft continue to rally advance above their 200-day moving averages. GE is my S&P bellwether and it has at least broken out above its 50-day average. Jack Welch where are you when we need you! MY INDEX OUTLOOKS - I generally let my pictures do the talking and I have a number of notations on the 4 key charts that follow that form my market outlook, which is basically bullish but with expectations that it’s not going to be just “up, up and away”. S&P 100 Index (OEX) – Daily and Hourly charts: My bullish outlook case for the S&P 100 index (OEX) stems from the rebound off the double bottom low of late July/early-October and the subsequent move in the Index above the March-October down trendline. However, this is not to say that there will not still be two-sided trading swings. In terms of the OEX, “pivotal” near support is 470, at the prior recent highs that were exceeded last week. Above 470, OEX is in a position to test key overhead resistance at the August peak at 486. (By “test” is meant OEX gets up this level to determine if the Index can/will get through resistance implied by this prior high or not.) A move below 470 implies that price action has become bearish. I peg the most significant resistance as from 486 (the August top), then on up to the 200-day moving average at 495 – therefore, the down arrows on the daily chart, left, below. Given the increasingly near-term overbought condition highlighted by the hourly and daily stochastic indicators, the 486-495 price zone could cap the present rally for a time. I suggest selling around 495 on up to the psychological important 500 level, either to take profits on stock or Index calls held from lower levels and/or for a bearish trade: long puts or shorting representative S&P stocks. Near technical support implied by the hourly chart is at 462, which is the approximate low end of the current hourly uptrend channel. If OEX falls from recent highs in the 475-478 area per the downside momentum showing on the hourly stochastics, the most bullish technical action is where OEX finds support at its lower hourly channel boundary – see the right hand chart above. I suggest buying in the 460-462 area unless it knifes through. Assuming a buy, an exit point is on a 5-point further drop, especially a close under 455 or chart support implied by the prior hourly low. A decisive downside penetration of 455 would be a cautionary “signal” to exit long stock/long OEX calls. On the daily chart 445 is the significant must-hold prior low. A downside penetration of 445 calls into question the S&P 100 remaining in an uptrend. Better for the bullish case is for OEX to hold at or above 455. DJ Industrial Index (1/100 of Dow Avg.- $DJX) Daily/Hourly: In terms of the Dow, 8800 is the pivotal near support – what was resistance “becomes” support. Next lower DJX support is 85 and is a suggested buy area in the DJX, at the low end of the hourly uptrend channel. Better to call support as between 86 to 85. Support levels below 85 are at the prior lows – 84, then 83. 91 is pivotal resistance based on the top end of the hourly channel. 92-93 is the zone where I would turn seller and look at put plays – 93 puts DJX up against the March-May down trendline. The most bullish possibility comes in with a move through resistance at 92-93, followed by an eventual move to 98-99, without more than minor corrections along the way. This outcome is mentioned because there is a “bull flag” pattern on the daily chart that could suggest it – I rate this possibility as least likely but it is a “measuring” implications of the pattern per the daily chart notations above (left). Stay tuned! NASDAQ COMPOSITE (COMPX) Daily chart – As I mentioned before, the move in the Nasdaq Composite to above its prior August high suggested that this sector of the market is now in a “confirmed” uptrend. 1500 next looms as very key resistance and a possible area to trade on the short side - but not if it sails much above this level, such as by more than 10 points - especially on a closing basis. 1400-1425 is near support – a close under 1400 breaks the bullish Nasdaq pattern and suggests bearish trading strategies would pay off again. However, only a downside penetration of the last low around 1320 “confirms” the bear is back. QQQ Daily/Hourly charts: The resistance area I suggested last week in QQQ as being at 27- 28 still looks basically like the main resistance, as considered on a closing basis. At most I currently see potential for QQQ to again get back to 29-30, before a deeper correction sets – however, I should also note that a close above 30 is evidence that the trend is stronger than what I am laying out in this view of the Nasdaq 100. The chart and indicator picture is somewhat mixed – price and volume trends remain bullish overall, but there are some cautionary signals that I see – namely, the “extended” nature of the near-term trend (length of time without a correction and the “overbought” reading in RSI) and the bearish Price/RSI divergence on the daily chart Relative Strength Indicator as RSI fails to “confirm” the latest high. My suggestion is to trade out of QQQ longs and get short or buy puts on further rallies - specifically, I would do so in the 28.5-29.5 area, looking for a pullback back to the low end of the steep hourly uptrend channel at a minimum. 24-25 is an area where I would have buying interest again if QQQ corrects back to this zone. ************************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 ************** Cheap Stocks The Nasdaq rebound has brought new life back into many previously dead stocks. Many of these stocks were well under $10 and are now starting to make a comeback. This level is critical as many funds will not buy stocks under $10. Once that level is broken to the upside there can be a swift ramp to $20 if the market is favorable. These stocks normally have cheap options because the range of movement under $10 limits risk to the market makers and the premium shrinks. A couple pure momentum plays this weekend include TLAB and RATL. Both are nearing $10 and both are showing good momentum. These plays are not based on fundamentals so there is not a long explanation. You can buy them now while they are cheap and hope for the breakout or set a buy stop just above $10 and only buy the breakout. TLAB - March $10 call $1.25 Rational Software - April $10 call $2.15 RATL is showing signs of increased fund interest with sharp buying spurts every 3-4 days. The 200 DMA is 10.60 and possible resistance. Once over 10.60 there is only gradual resistance until around $20. The inverted head and shoulders could add some strength to a break over $10. ***************** Play Recap: ***************** AEOS Breakout call The AEOS call play from last week was never triggered as the stock never touched $19.30 before rolling over on profit taking. Cancel that suggestion. ***************** Microsoft Breakout call Microsoft broke the $57.30 trigger point on Thursday and the Jan-$60 target call was trading at $1.95 at the time. Any continued Nasdaq rally will involve MSFT and a strong rally could be led by MSFT if funds decide to jump in strong. The profit target is currently $65. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Reading Between the Lines by Steven Price Not much happened you say? I beg to differ. After a week that saw the broader markets take out significant resistance levels, today's movement (or lack of it) was significant in and of itself. The Dow avoiding the bearish head and shoulders pattern, by trading above 8800, took some serious buying. The fact that today's 40-point pull back stopped at 8804 is not merely a coincidence. It appears we have a new support level in the blue chips. Our next focus will be on the August high of 9077. The August high was not a challenge for the Nasdaq Composite, which had rallied 93 points in the previous two days. Some pull back could have been expected today after blasting through that level of resistance, which had served as a ceiling on four previous rally attempts. But the bulls wouldn't allow that to happen, and the COMP finished up slightly on the day. One of the big reasons there was no pull back, in spite of the fourth straight monthly decline in the semiconductor book-to-bill ratio, was news from Taiwan Semiconductor. The world's largest chip foundry raised capacity utilization and shipment forecast, duo to an upturn in demand for PCs and communications products. An increase in PC demand! Had to repeat that sentence, since it was the first time we've heard it in an awfully long time. Certainly some of that demand is seasonal, due to the holiday season, however, it is still significant. The Semiconductor Sector Index (SOX), which had posted a 70% gain from its low of 214 on October 9, looked as though it would pull back after its 53-point gain from the last two days, following the book to bill number Thursday evening. However, following the TSM news, the pullback was a non-event, giving back only 2.66 on the day. The Market Volatility Index (VIX) continues to sink, as the market consolidates at successively higher levels. After venturing over 50 on October 10, it finished the day at 26.73, giving up almost 50% from its highs. The VIX can be used to measure fear in the marketplace and right now it's showing a great deal of complacency. It has dropped more than 10 points in less than a week and a half. One thing to be cautious of after this recent rally is the fact that the bullish percentages are reaching levels that could indicate a slowing of the rally, or a pullback. The SPX bullish percent is now at 64, right below its bearish resistance line at 66. The last two rebounds fell short of that mark and a breakthrough above it could be considered bullish. However, when combined with the bullish percent in the NDX, COMPX and Dow, red flags are starting to pop up. The NDX bullish percent has reached 76, which is 6 points into overbought territory. The COMP bullish percent is still down at 44, but only two boxes below its bearish resistance line at 48 (bullish percent is measured in 2% boxes). The Dow bullish percent broke through its bearish resistance line down at 60, but has now entered overbought territory, like the NDX, with a reading of 70. After so much activity this week, we should see a severe drop off in volume as we head into the holiday week. Ahead of Thanksgiving, many traders head home early, or go on vacation. It is certainly a good sign that we got the breakout to the upside this week, when the volume was still strong and traders were getting their activity out of the way before the lull. The one thing we need to be cautious of is the retail sales environment. As we get closer to the end of the month, year over year sales comparisons will suffer from the fact that Thanksgiving falls later and creates six fewer official shopping days before Christmas. The buying may simply shift to December and that will probably be the spin most retailers put on November's numbers. However, most mall traffic is down for the year and if it doesn't come back in December, then we may see investors and analysts concerned about a lack of consumer spending. Consumer spending makes up 2/3 of GDP, so you can do the math. Right now the trend is up and should be played that way. However, don't expect much guidance from this week's action (or lack thereof). As long as the Dow holds 8800 and the Nasdaq remains above 1426, then we have indeed reached higher ground. I'm certainly not ready to declare the bear market behind us, and Dow 9077 will give us a better indication as to just where we stand; so as we approach 9000, be cautious protect long positions with a few extra puts. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8804 Moving Averages: (Simple) 10-dma: 8549 50-dma: 8192 200-dma: 9205 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 930 Moving Averages: (Simple) 10-dma: 903 50-dma: 868 200-dma: 986 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1116 Moving Averages: (Simple) 10-dma: 1048 50-dma: 945 200-dma: 1128 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): Last night's book-to-bill ratio was the fourth straight monthly decline, and looked as though it would weigh on the sector after a tremendous run up through the August highs. However, Taiwan Semiconductor came to the rescue by raising guidance for fourth quarter capacity utilization and shipments. The company cited increased PC demand, and suddenly the correction in the SOX was a mere 2.66. The sector continues to look bullish for the short term and the bullish vertical count of 412 (which coincides with the 200-dma) is the next target to the upside. 52-week High: 657 52-week Low : 214 Current : 362 Moving Averages: (Simple) 10-dma: 321 50-dma: 276 200-dma: 411 Market Volatility The VIX has given up almost 50% of its value in the last 6 weeks, and is now approaching 25 for the first time since June. That was prior to the July crash and the drop in premiums shows the lack of fear currently in the market, with the Dow holding up over 8800. If we manage to break out above the August high in the Dow of 9077, we could actually see the VIX back in the low 20s. Some of today's VIX drop may be attributed to traders avoiding premium buying before a holiday week, when many will be on vacation. Traders who are long options manage those positions by trading stock against the position, which is harder to do when they are not in the pits. However, if the market had broken down below 8800, we likely would have seen an increase, rather than a drop. CBOE Market Volatility Index (VIX) = 26.73 –0.64 Nasdaq-100 Volatility Index (VXN) = 46.49 +1.79 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.70 555,217 390,571 Equity Only 0.60 425,700 256,483 OEX 0.97 13,984 13,504 QQQ 1.28 21,692 27,786 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 46 + 1 Bull Confirmed NASDAQ-100 77 + 2 Bull Confirmed Dow Indust. 70 + 0 Bull Confirmed S&P 500 65 + 2 Bull Confirmed S&P 100 70 + 3 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 0.94 10-Day Arms Index 1.00 21-Day Arms Index 1.12 55-Day Arms Index 1.19 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 1460 1281 NASDAQ 1718 1463 New Highs New Lows NYSE 37 26 NASDAQ 89 3739 Volume (in millions) NYSE 1,979 NASDAQ 1,902 ----------------------------------------------------------------- Commitments Of Traders Report: 11/19/02 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 9,000 long contracts, while adding only 3,700 shorts. Small traders added 2,000 longs to their positions, while adding 7,000 short contracts. Commercials Long Short Net % Of OI 10/29/02 437,565 468,557 (30,992) (3.4%) 11/05/02 438,546 472,384 (33,838) (3.7%) 11/12/02 437,683 476,540 (38,857) (4.3%) 11/19/02 446,668 480,270 (33,602) (3.6%) 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 10/29/02 137,740 75,587 62,153 29.1% 11/05/02 138,604 76,032 65,572 30.5% 11/12/02 141,389 70,624 70,765 33.4% 11/19/02 143,070 77,332 65,738 29.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials reduced both long and short positions by approximately 3,000 contracts. Small traders added 4,000 to the long side and 2,000 to the short side. Commercials Long Short Net % of OI 10/29/02 47,837 55,261 (7,324) ( 7.1%) 11/05/02 49,128 56,121 (6,993) ( 6.6%) 11/12/02 45,647 55,892 (10,245) (10.1%) 11/19/02 42,074 52,302 (10,228) (10.7%) 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 10/29/02 10,584 9,419 1,165 5.8% 11/05/02 13,355 12,903 452 1.7% 11/12/02 12,698 8,801 3,897 18.1% 11/19/02 16,292 10,540 5,752 21.4% 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 1,000 contracts to both the long and short side, while small traders reduced the long side by 1,300 contracts and shorts by only 300. Commercials Long Short Net % of OI 10/29/02 21,800 13,337 8,463 24.1% 11/05/02 22,533 15,687 6,846 17.9% 11/12/02 22,283 14,953 7,330 19.6% 11/19/02 23,535 15,741 7,794 19.8% 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 10/29/02 5,602 11,090 (5,488) (32.9%) 11/05/02 5,089 8,735 (3,646) (26.4%) 11/12/02 5,736 8,513 (2,777) (19.5%) 11/19/02 4,428 8,203 (3,775) (29.9%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Plan the trade and trade the plan Question: What would you like to see addressed in this weekends "Ask the Analyst" column? Responses: I like the plan the trade, trade the plan idea. Maybe show some of the good business plans that people sent too. You're a stud, thanks. Trading like a market maker and trading levels. How to hedge a trade. (long/short stock, credit/debit spread) There was a great deal of response to my question regarding what this weekend's "Ask the Analyst" topic would be about. I'd love to try and attempt an answer at all of them, but the overriding response was in regards to planning a trade and then trading a plan. However, if a trader will absorb this topic on planning a trade and trading a plan, then with time, and other topics discussed in the future (like those above) a trader/investor, not unlike a weight lifter that starts out with a 5 lb. dumbbell (I weigh more than 5 lbs. and I'm a "stud"... as proof, see first response to my poll question) should begin seeing some type of "bulk" added to their knowledge of the markets, tools of the trade, and the bottom line of their accounts. One reason I think the "plan the trade and trade the plan" found a more overwhelming response is that some traders took time out of some busy schedules this week and actually sat down with a pen and paper and developed a business/trading plan. The business plan is the foundation that a successful/investor begins with. It's also the first step toward DISCIPLINE. Think about it. If you live in Denver, CO and are taking the family on a road trip/Thanksgiving vacation miles from home and have never been there before, the first thing you reach for to plan that trip is a roadmap. Something that gives you a sense of direction or course that should be followed to eventually reach your destination. Without it, you end up like National Lampoon's Clarke Griswold in the movie "Vacation" and find yourself stranded in the middle of nowhere with flat tires and a dead loved one strapped to the top of the family's station wagon. The "dead loved one" is analogous to that stock we bought at $50 that now trades $20, or the 40 put contracts we over leveraged on that went "no bid" two days after we bought them. Upon review, it's often found that we "knew" we should not have really initiated some of those terrible trades to begin with, as nowhere on our road map did the road we just traveled down lead to where we wanted to go or had PLANNED on going. Believe it or not, one of the greatest challenges a trader faces is sticking with a plan they had laid out based on a scenario they had built (stock fundamentals, economic developments, geopolitical event, industry/sector trends, etc.) and for a technical analyst like myself and perhaps you, an observation from the MARKET that looks to either AGREE with you scenario, or DISAGREE with that you or I think should be taking place. How many times do we buy a call/put or go long/short a stock and 1, 2, or 3 day's later, find we're not as rich as our scenario was supposed to have us? A good plan has some type of time plan associated with it. To build a trading plan, one of the best ways I've found to undertake this process is to first lay out a scenario. It can be anything that makes SENSE to you. Once the scenario is in place, I like to think like a computer and develop a plan that fits the scenario, which will simply be controlled with three simple commands. If, then, else. If you're a computer programmer, these terms are familiar to you. I'm not a computer programmer, but I took some Fortran and Pascal in college. Are these languages even around anymore? Let's take an e-mail that a subscriber sent me yesterday. We can perhaps tackle the "plan" and "damage control," which other subscribers have requested commentary. Here is the subscriber's e-mail. Hi Jeff, Help! Need your opinion, I'm lost. I've got a QQQ short straddle in the Jan. 25 '05 call and a Jan. 25 '05 put a while ago, I received total $10.40. At that time, QQQ was $24.75. Call and put were both $5.20 even. Now, QQQ trading at $27.75. The call ask $7.80 and the put still at $3.90. Total is $11.70. I don't understand why???? Supposedly, I can earn some time from the premium, isn't it? What do you think the proper way to lower the losses or don't worry, it's 2005? Now... I'm going to take this subscriber's trade and paraphrase what the subscriber was thinking (scenario) at the time the trade was placed. I also received a follow up e-mail from the subscriber stating that he/she felt the current economic data was weak and that the economy would stay flat over the next couple of years. I'm then going to develop the plan with a specific set of rules (If, then, else) that would then be derived from the trader/investor's trader's business plan. You know, the LIMITS OF RISK. Scenario: For the most part, technology stocks as depicted by the NASDAQ-100 Tracking Stock (QQQ) will stay range bound or close between $19.80 and $30.20 between now and January expiration of 2005 as I expect economic activity to be stagnate during this time period. Should this come true, I will profit by selling QQQ call and put option premiums and walk away with a minimum 50% profit. (Note: The ranges of $19.80 and $30.20 are simply calculated by taking the $25.00 strike and then subtracting the $5.20 premium received by selling each put and call). Now. The above trade really doesn't have a trigger point on it. But for example purposes, lets pretend we started thinking about this back in early October when the QQQ was trading $20 and began thinking that I'd sure like to initiate a 2-year short straddle on the Q's if they ever rallied back near $24.73. So I'd start out with an "if" "then" statement for the plan. 1) IF the QQQ trades $24.75, THEN sell 1 Jan. 05 $25 call and 1 Jan. 05 $25 put. OK.... the QQQ traded $24.75 and the trade has been run. That's it right? We've loaded up the family in the station wagon and pulled out of the driveway. Guess what? We're about 2 day's into a two-year world tour and we might have a tire starting to deflate. "Oh goodness, I hope the spare tire has air in it. Honey, can you reach into the glove box and see if there is some type of service area at the next exit where we can pull off and get the tire changed?" The significant other responds.... "Map? What map? I thought YOU knew where we were going and made sure the car was prepared for this trip! What kind of spouse are you that we'd be so unprepared!" You see where I'm going here don't you? It was great to run the trade (get in the car and go on vacation) as we knew we'd have a great time (keep option premiums for our account). But wouldn't it have been nice to have a detailed plan, really think things through before we set off on this journey (run the trade)? Should we really have decided to take the station wagon on this trip (the QQQ) or was there a better mode of transportation to have taken over this extended journey of two years. Now this is a 2-year trade. At any point, we can turn back home as long as the motor is running (haven't blown the account up) and have four good tires (don't let one trade get away from us). You and I know this. The first thing we need to do is assess the DOWNSIDE risk this trade presents if things don't go exactly as the SCENARIO depicts (economy grows or economy goes into recession). We also know that the MAXIMUM gain we could achieve from this trade is $1,040.00 (based on 1 contract sold in each put and call). We also know that to keep the ENTIRE $1,040.00, the QQQ needs to close at $25.00 on January 2005. Hmmm... Can I possibly get in my station wagon, drive non-stop from Denver to New York City and approximate within 1 second my arrival time? In essence, that's kind of what needs to be done with the trade above if we're to keep 100% of the premiums. Statement of Risk: (Check you business plan and answer this). For a gain potential MAXIMUM gain of $1,040.00 what am I allowed to risk? (10% = $104.00, 20% = $208.00, etc.) Let's look at a chart of the QQQ. Since this trade/investment is longer-term we need to run some numbers and define some ranges that give us a feel for risk levels. Once those risk levels are defined, then we can put together some type of "damage" control plan. As mentioned in last week's column, option premiums are VARIABLES as will fluctuate with market volatility as depicted by the NASDAQ-100 Market Volatility Index (VXN.X) 46.49 at today's close. NASDAQ-100 Trust (QQQ) - Daily Interval The first thing we could do is draw a "waterline" where the short straddle was initiated at $24.75 (near $25). At that level, it is helpful to understand what we were paid (reward) in return for the OBLIGATION (risk) this trade takes on. Next, identify a RANGE or levels away from the "waterline" where upon expiration, the trade would have us running a net loss for the TOTAL trade (put and call positions combined). Since option premium is a VARIABLE, which can not be accurately forecast based on a two- year time horizon, it is left out of the equation. Once the outer limits are calculated, the trader begins to make observations as it relates to a two-year time frame as mandated by the January 2005 expiration. (straddle/strangle/spread traders use same plan outline, but in scope of expiration they're playing). It is notable however from the subscriber's e-mail that despite our defined range; the trade is running at a net loss right now. Now, QQQ trading at $27.75. The call ask $7.80 and the put still at $3.90. Total is $11.70. I don't understand why???? Supposedly, I can earn some time from the premium, isn't it? Aha! Again... option premiums are VARIABLES and difficult to assess/measure, especially over a two-year time frame. With a VOLATILE security like the QQQ, one can make the analogy that the trader has crammed the 4-member family into the 2-seat sports car and embarked on a two-year tour. While the QQQ is still within our range of profitability, it's the VOLATILITY of this investment vehicle (car) that's going to create a bumpy ride between now and January 2005. Quick review: I don't know about you and I'm not criticizing the subscriber. From his/her own admission in a follow up e-mail, he/she is in a learning process. But as we begin "planning" (always plan before you trade) this trade and laying things out with a two-year time frame, I sense a rather large amount of RISK relative to the MAXIMUM $1,040.00 potential gain (per 1 contract). Add to that the more volatile instrument and one may question the true comfort level one can have with a trade such as this. However, sometimes in the planning stage, a trader may uncover some type of RISK that he/she isn't really all that comfortable with. If so, the trade is usually avoided. Plan Stated: 1) IF the QQQ trades $24.75, THEN Sell 1 QQQ Jan. 05 $25 call for $5.20 and sell 1 QQQ Jan. 05 $25 put. 2) Once the trade is taken, do nothing until stock trades outside of defined range. 3) IF the QQQ trades outside the defined range (or begins to generate a loss, which threatens business plan goals) THEN close the trade for loss at predetermined % allowable and move on, ELSE hedge the trade (buy insurance) with a trade that helps protect against greater loss. IF hedge (insurance) is too costly THEN close the trade. There is NO else after that. If the trader does not follow the outline plan, which accounts for preservation of capital, then all that is left is HOPE. When it comes to trading, HOPE has no place in a trade. If you don't believe me, then let Hanger Orthopedic (NASDAQ: Once the plan is reviewed (before the trade in initiated) the trader/investor has a clear understanding of risk and potential return (even if its a trade in a stock or option with a defined target). If after reviewing the plan and the trader/investor finds anything he/she is uncomfortable with, then most likely the trade needs to be rethought or avoided all together. Similar to the "Fresh Seafood" roadside stand in the middle of Kansas. Once your trade is underway, then trade your plan. Do NOT deviate from your plan UNLESS.... 1) Some KNOWN event or new information is discovered that has your original scenario flawed. 2) Adverse price action has the trade creating GREATER LOSS that now threatens your business plan goals. 3) You're profitable in a trade, have not yet achieved your object, but current events unfolding play AGAINST your scenario and warrant profits being locked in. Anticipating a question: Jeff: Why would a trader be willing expose their account to 1) Potentially unlimited risk should the QQQ trade $30 or higher (to infinity)? Or... 2) Potential risk of $2,500 - 1,040 (premiums received) = $1,460 Note: If we think or don't plan for potential risk of "infinity" or "$1,460" as it relates to the above trade, then how good is our trading plan? Our trade plan should ALWAYS define MAXIMUM risk. It's scary, but it also provides the smelling salts for each fight (trade) we're about to initiate. Selling short spreads like the trade asked about is a trade designed to produce income for an account. As you can see from the trade plan, to make money in such a trade, MAXIMUM gain must have the security closing EXACTLY on the stated strike. While I know of no way to assess "odds" or probabilities of a security pegging a strike, my observations over the years is that more volatile trading securities are probably not the best instrument to try and even attempt to have peg a certain level, especially when considering a 2-year time period. Where am I going to be in 2-years? Will I have all my hair in two years? How much will I weigh two years from now? Where will I be 4 months from now? I think I have a higher probability of predicting where I'll be 4-months from now. I think I've got a better than 95% chance I'll have all my hair 4- months from now. I'll bet $5,000 that I'll weigh 3 lbs. either side of 180 lbs. 4-months from now. If I'm a little heavier or lighter than 180 lbs, then I can easily make adjustments to my eating habits to make darned sure I meet my 180 lb. goal. Final review: I do feel that at some time, all of us have perhaps gotten into a trade that really didn't "match" what we were originally thinking. Sometimes, trades that are laid out with the best of plans are impacted by some "unforeseen" or "unpredictable" developments. As negative as it seems a trader MUST have a predetermined action plan it place should a trade move against them, especially a trade with unlimited risk potential. It is the great trading plan that defines entry, profitable target exit point and addresses a finite point where adverse price action threatens your business/trading account or begins to DISSPROVE your original trading scenario. One thing I learned to appreciate from point and figure charts and trading plans that use the IF, THEN and ELSE type of systematic and methodical "rules" is how well they mesh together. Bar chartists will use moving averages, Bollinger Bands and retracement brackets to define various levels where they assign their IF, THEN, ELSE trading plan statements. Did anyone notice or make the tie in the chart of the QQQ with the horizontal lines drawn, the similarity perhaps between those three levels and retracement? While those levels are equidistant from the "waterline" of $25, is that any different than the 50% retracement level with 61.8% and 38.2% on either side? Now put yourself in the shoes of a market maker or specialist and controlling millions of dollars RISK (equity exposed long or short) in shares of CSCO or the QQQ. Their "scenarios" are a bit different than yours and mine, but their trading plans are very similar to that outline above. For an educational piece on retracement and market making, you might like to read "Retracement Levels" in the Bailey's Basics section. The CBOE market maker. His/her job for the most part is to SELL options and BUY options to meet the MARKETS liquidity needs. Think about the trader that SELLS options NAKED and when doing so ALWAYS exposes himself to potentially greater risk than the premiums received. When we buy puts and calls, we KNOW what our MAXIMUM loss is before we run the trade. If not OVER LEVERAGED and were to use a business plan like that addressed last weekend, then we don't really need a hedge strategy as risk was addressed and losses conceded before the trade was ever run. Well.... this was another long column and I may have rambled a bit, but hopefully you will see that by actually planning a trade before you click that mouse button you will have mapped out a route that you expect a trade to follow. It's when that trade develops a "flat tire," or "blown radiator" hose that your plan needs to address a point where you either pull off the road (stop out) or find a service station close by to help you make repairs. In many states, it's illegal to drive a car without insurance. If you're going to trade options that carry potentially unlimited risk, then you'd better have some type of plan in place to deal with that risk at some finite point. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of November 24th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ITY Imperial Tobacco Grp Mon, Nov 25 Before the Bell 1.08 SMTC Semtech Mon, Nov 25 After the Bell 0.14 TECD Tech Data Corporation Mon, Nov 25 -----N/A----- 0.57 ------------------------- TUESDAY ------------------------------ BMO Bank Of Montreal Tue, Nov 26 -----N/A----- N/A CMVT Comverse Technology Tue, Nov 26 After the Bell -0.15 DG Dollar General Corp. Tue, Nov 26 After the Bell 0.18 EV Eaton Vance Corp. Tue, Nov 26 Before the Bell 0.38 HRB H&R Block, Inc. Tue, Nov 26 After the Bell -0.05 MIK Michaels Stores Tue, Nov 26 After the Bell 0.40 NGG National Grid Transco Tue, Nov 26 -----N/A----- N/A ULCM Ulticom Tue, Nov 26 After the Bell -0.01 V Vivendi Universal Tue, Nov 26 -----N/A----- 0.33 ----------------------- WEDNESDAY ----------------------------- BCM Canadian Impl Bnk Com Wed, Nov 27 -----N/A----- N/A DT Deutsche Telekom Wed, Nov 27 -----N/A----- N/A OTE Hellenic Telecomm Wed, Nov 27 -----N/A----- N/A HRL Hormel Foods Corp Wed, Nov 27 Before the Bell 0.49 TD Toronto Dominion Bank Wed, Nov 27 Before the Bell N/A ------------------------- THURSDAY ----------------------------- No major earnings ------------------------- FRIDAY ------------------------------- No major earnings ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable COO Cooper Cos 2:1 Nov. 22nd Nov. 25th CHTT Chattem Inc. 2:1 Nov. 29th Dec. 2nd BYFC Broadway Financial 2:1 Nov. 30th Dec. 2nd GSOF Group 1 Software 2:1 Dec. 2nd Dec. 3rd ACDO Accredo Health 3:2 Dec. 2nd Dec. 3rd CLBK Commercial Bank 5:4 Dec. 3rd Dec. 4th -------------------------- Economic Reports This Week -------------------------- Thanksgiving week is traditionally a bullish time for the stock market. However, given that the Industrials have been up this many weeks in a row it could prove tough to add one more week to the rally. Keep an eye on Wednesday as there are several economic reports that could influence the market sentiment. ============================================================== -For- Monday, 11/25/02 ---------------- Existing Home Sales (DM)Oct Forecast: 5.35M Previous: 5.40M Tuesday, 11/26/02 ----------------- GDP-Prel. (BB) Q3 Forecast: 3.2% Previous: 3.1% Chain Deflator-Prel.(BB) Q3 Forecast: 1.1% Previous: 1.1% Consumer Confidence(DM) Nov Forecast: 83.0 Previous: 79.4 New Home Sales (DM) Oct Forecast: 980K Previous: 1.021M Wednesday, 11/27/02 ------------------- Initial Claims (BB) 11/23 Forecast: N/A Previous: 376K Personal Income (BB) Oct Forecast: 0.0% Previous: 0.4% Personal Spending (BB) Oct Forecast: 0.2% Previous: -0.4% Mich Sentiment-Rev.(DM) Nov Forecast: 85.0 Previous: 85.0 Durable Orders (DM) Oct Forecast: 3.0% Previous: -4.9% Chicago PMI (DM) Nov Forecast: 47.5 Previous: 45.9 Help-Wanted Index (DM) Oct Forecast: N/A Previous: 43 Fed’s Beige Book (DM) Thursday, 11/28/02 ------------------ None Friday, 11/29/02 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* SWING TRADE GAME PLAN ********************* Movin' On Up I will be taking over the swing trade model this week from Jim. For those readers following the model the last few months, you are bound to see some differences in trading styles. Each trader is different and assesses risk in his or her own manner. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. 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The Option Investor Newsletter Sunday 11-24-2002 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: MSFT Put Play of the Day: HSIC Dropped Calls: CEPH, HOV Dropped Puts: PG ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week ADBE 29.81 -0.77 -0.79 -0.71 1.84 1.21 minor pullback CEPH 57.74 0.71 -1.39 -1.80 2.08 1.99 Drop, $60 tough ETN 75.42 -1.24 -0.03 1.48 2.77 1.42 regrouping GNSS 18.99 0.01 -1.26 1.67 0.90 1.40 still strong HOV 33.25 -1.35 -0.95 0.55 1.35 –0.75 Drop, sideways ICOS 30.66 -0.42 -1.16 0.72 1.82 2.55 New, breakout IMCL 15.04 -0.77 1.15 0.82 1.43 2.83 support at $15 MSFT 58.20 -1.10 -0.72 1.61 0.86 1.25 New, above $57 PUTS HSIC 43.60 -0.79 -1.13 0.86 –2.79 –6.84 New, failing JBLU 33.02 -0.77 -0.79 -0.71 –1.01 –5.30 PnF breakdown PG 86.58 -1.15 0.95 1.44 –1.26 –0.72 Drop, sideways SLM 98.60 -2.85 1.00 0.71 –2.40 –7.15 New,1st yr free TRMS 50.96 -1.97 -0.62 1.06 2.33 0.66 no entry ************************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: ********************* MSFT - Microsoft - $58.20 +0.36 (+1.50 for the week) See details in play list Put Play of the Day: ******************** HSIC – Henry Schein, Inc. $43.60 (-6.62 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 ^^^^^ CEPH $57.74 -1.31 (+2.03 for the week) Cephalon experienced another pull back today and the stock has stayed true to its current volatility. While it rebounded from a higher low today, over the top of its previous consolidation, the resistance around $60 from earlier this year seems to be staying true to form. Rather than fight that resistance while our premium decays, we'll close the play for a gain and invest elsewhere. Traders who wish to stay in the play can raise stops to $57 and look for a breakthrough over $60 as the next bullish signal. The stock got a fresh buy signal on the PnF chart, but today's pullback, came at previous resistance on that chart, as well. A $60 breakthrough could see the stock at $63-64. --- HOV $33.25 -0.45 (-0.75 for the week) Hovanian has rebounded for the fifth straight time from the rising 200-dma, currently at $30.81. The problem we see with the play is that the rebounds are failing at successively lowere levels and don't seem to have the same "pop" as previous bounces. Rather than let our premium decay while the stock consolidates, we'll close the play and wait for a more decisive breakout. This week's conflicting data on housing starts (down) and mortgage applications (up) seems to have investors confused and the home construction stocks are moving sideways. PUTS ^^^^ PG $86.58 (-0.70) While Consumer-oriented stocks continued to show weakness relative to the rest of the market, PG has really been a disappointing play. The stock has been mired between $85-88 for more than 2 weeks now, and we've grown tired of waiting for the breakdown. With the improving internals in the overall market, it appears unlikely that the stock will see a significant breakdown. The potential reward just doesn't justify the risk of keeping the play open, so we're dropping coverage of PG this weekend. There are better trading candidates available, and that's where we want to focus our attention. *********** 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 11-24-2002 Sunday 3 of 5 In Section Three: New Calls: MSFT, ICOS Current Calls: GNSS, ADBE, ETN, IMCL New Puts: SLM, HSIC ************************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 ************** MSFT - Microsoft - $58.20 +0.36 (+1.50 for the week) Company Summary: Founded in 1975, Microsoft is the worldwide leader in software, services and Internet technologies for personal and business computing. The company offers a wide range of products and services designed to empower people through great software - any time, any place and on any device. (source: company release) Why We Like It: Microsoft has benefited from the recent market rally, which has led both blue chips and techs alike. It is one of the few tech companies to actually plan a hiring expansion in the last year and has expanded it R&D budget by 20%. The company announced that its new Xbox live gaming consoles, which is part of company's $2 billion strategy to make its video game console the center of a networked home entertainment system, sold out in about a week on retail shelves. Not a bad sign heading into the holiday shopping season. While retailers are concerned about how much consumers will be spending this year, there is obviously one product with no lack of demand. Today's news from Taiwan Semiconductor, which said it was raising its fourth quarter utilization and shipment rate goals, could be huge for MSFT stock. The new guidance from TSM was due to a recent increase in demand for PCs and communications products. More PCs equals more demand for MSFT's windows products. The stock jumped back on November 4, following a judge's acceptance of the company's antitrust settlement with the government. Ever since then it has been consolidating around $55, with a top of $57, until the recent breakout. The stock not only broke above resistance on the daily chart, but established a new point and figure buy signal, as well. The trade of $58 was a double top buy signal on the PnF, and has a current bullish vertical count of $84.the fact that it consolidated after a long run, and has now broken out once again underscores the bullish patterns on both charts. As a member of both the Dow and Nasdaq, MSFT is bound to benefit from the Dow breakout over 8800, and Friday's support at that level, and also the Nasdaq's breakthrough of its August highs. The next significant level of resistance appears to be the March high of $65, with some minor resistance just over $60. We like the current level for entry, after breaking clear of consolidation, however, traders can also enter on a pullback to support at $57, if we get some broad market profit taking after the recent run. Place stops at $55, below the recent consolidation floor. BUY CALL DEC-55.00* MSQ-LK OI= 31150 at $4.30 SL=2.15 BUY CALL DEC-60.00* MSQ-LL OI= 56311 at $1.30 SL=0.00 BUY CALL JAN-55.00 MSQ-AK OI= 74045 at $5.30 SL=2.70 BUY CALL JAN-60.00 MSQ-AK OI= 106181 at $2.50 SL=1.25 Average Daily Volume = 45.4 mil --- ICOS – ICOS Corporation $30.66 (+2.51 last week) Company Summary: ICOS Corporation develops pharmaceutical products with significant commercial potential by combining its capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and gene expression profiling. The company applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis, pulmonary arterial hypertension and other cardiovascular diseases, as well as inflammatory diseases. ICOS has established collaborations with pharmaceutical and biotechnology companies to enhance its internal development capabilities and to offset a substantial portion of the financial risks of developing its product candidates. Why We Like It: Breakouts in the Biotechnology sector (BTK.X) are becoming as commonplace as those in the Semiconductor sector lately. And it shouldn't come as any surprise either, with the BTK itself breaking out above major resistance. More important than clearing the $370 level is the fact that the BTK has now broken above the descending trendline that has kept the index under pressure over the past year. Much like the BTK, shares of ICOS have been muddling their way sideways, finding consistent resistance near the $25 level for over a month. Even beating earnings estimates on November 5th wasn't enough to get the buyers interested. But then a week ago, the stock shot higher by $4 in one day on very heavy volume. That surge found resistance near $28.50 (near the 200-dma) before pulling back once again. This time, the stock found support near $27 and then vaulted higher with the rest of the BTK index over the past 3 days, once again on strong and increasing buying volume. Helping to make the case for a sustained move, ICOS has now closed above the 200-dma for 2 consecutive days and is now solidly into the gap left behind in late April. Last week's surge higher generated a new PnF Buy signal, and the vertical count is giving a bullish price target of $50. That level isn't likely to be seen any time soon, but ICOS now has a solid shot at extending its rally towards the top of that gap, which rests at $39. The consolidation before last week's breakout has left solid support in the $27-28 area, and a dip and rebound from that area would make for a solid entry into the play. Given the fact that the stock is up so strongly in the past 7 days (26% to be exact), momentum traders need to be careful about buying into strength. But the increasing buying volume (70% above the ADV on Friday) indicate that there is some power behind this move. If trading the breakout, wait for a push through $31.25 (just above Friday's intraday high) on continued strong volume before entering and then place a stop at $28.50. Our coverage stop for the play will be lower at $26.50, as a violation of that level would break the string of higher lows. BUY CALL DEC-30*IIQ-LF OI=1098 at $2.60 SL=1.25 BUY CALL DEC-35 IIQ-LG OI= 204 at $0.70 SL=0.25 BUY CALL JAN-30 IIQ-AF OI=1699 at $3.60 SL=1.75 BUY CALL JAN-35 IIQ-AG OI= 971 at $1.50 SL=0.75 Average Daily Volume = 1.09 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** GNSS - Genesis Microchip - $18.99 +0.09 (+1.82 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) Why We Like It: Genesis took a breather today, along with the Semiconductor Index (SOX). Both the stock and the sector have been on an incredible run the last few days, and reached their August highs on Thursday. Thursday night's news that the book to bill ratio for the sector had fallen for the fourth straight month was shaken off, and the sector strength continues to amaze. There was some good news for the group, as well, from Taiwan Semiconductor (TSM), the world's largest chip foundry. TSM said it no longer expects the fourth quarter decline in capacity utilization and shipments that it predicted in late October. The company raised its fourth quarter shipment forecast based on rising demand for computers and communications products. It has been an awfully long time since we have seen a company predicting an increase in computer demand and this should further support the continuing growth in flat panel monitors, one of GNSS's specialties. The stock continues to pullback to support and establish new buy signals on the PnF chart, the most recent coming at $19.00. After trading up to $19.87 on Thursday, traders can use one of two strategies for entry. A move over $20 would constitute an upside breakout and provide an entry point for momentum traders. An alternative would be a pullback to support above $18.00. This would establish a PnF reversal down, but would be in keeping with the recent pattern, if it finds support and climbs higher from there. BUY CALL DEC-15.00* QFE-LC OI= 3013 at $4.40 SL=2.20 BUY CALL DEC-17.50 QFE-LW OI= 2224 at $2.60 SL=1.30 BUY CALL MAR-15.00 QFE-CC OI= 834 at $5.90 SL=3.00 BUY CALL MAR-17.50 QFE-LW OI= 321 at $4.50 SL=2.25 Average Daily Volume = 1.96 mil --- ADBE – Adobe Systems $29.81 (+0.86 this week) Company Summary: A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies to major hardware manufacturers, software developers, and service providers, as well as offering integrated software solutions to businesses of all sizes. Why We Like It: Seeing a bit of profit taking on Friday was about what was expected, except the fact that it was so mild. After its breakout through both the $29 level and the 200-dma on Thursday, ADBE gapped lower on Friday, beginning the day just below $29. The initial volatility sent the stock back to $30 and then the stock spent the day drifting between those two levels. However, it was encouraging to see the bulls prevail at the end of the day, closing the session out above the 200-dma. As a measure of the strength in the Software sector, note that the GSO index ended the day with a fractional loss, but up nearly 7% for the week. Adding to the bullish picture was MSFT, as that huge Software stock solidified its breakout by holding above the $58 level. Against this backdrop, ADBE's pattern of higher highs and higher lows off of the October bottom looks particularly encouraging. Clearing the 200-dma and then holding that level on Friday just adds to our conviction. Another potential bullish catalyst is that ADBE reports earnings in mid-December and that expectations of improved results should keep the stock in its steady ascending pattern. Solid support near $28.50 (also the site of the 2-week ascending trendline) should provide a solid level to initiate new positions. Traders looking to enter on further strength will want to wait for ADBE to push through the $30.50 level (just above Thursday's intraday high), along with renewed buying in the Software sector. Our stop remains at $27. BUY CALL DEC-25 AEQ-LE OI= 949 at $5.60 SL=3.50 BUY CALL DEC-30*AEQ-LF OI=1857 at $2.15 SL=1.00 BUY CALL JAN-30 AEQ-AF OI=2536 at $3.10 SL=1.50 BUY CALL JAN-35 AEQ-AG OI=1664 at $1.35 SL=0.75 Average Daily Volume = 3.65 mln --- ETN – Eaton Corporation $75.42 (+2.24 last week) Company Summary: Eaton Corporation is a global diversified industrial manufacturer with businesses in fluid power systems, electrical power quality, distribution and control, automotive engine air management and fuel economy and intelligent truck systems for fuel economy and safety. The principal markets for the company's Fluid Power, Automotive and Truck segments are original equipment manufacturers and after market customers of heavy-, medium- and light-duty trucks, passenger cars, off-highway vehicles, industrial equipment, and aerospace products and systems. The principal markets for the company's Industrial and Commercial Controls segment are industrial, construction, commercial, automotive and government customers. Why We Like It: Didn't we say that some profit taking was likely after the solid run of the prior two days? Cyclical stocks have been on a steady climb lately and ETN has been one of the leaders. Thursday's breakout over both the $74 resistance level and the 200-dma at $74.58 was an important technical development, but it seemed a pretty safe bet that price would soften going into the weekend. Sure enough, after pushing slightly above the prior day's highs, shares of ETN drifted lower throughout the day on Friday, giving back only about 1.5% on the day. This is still solidly above the $74.00-74.50 area where we'd like to initiate new positions on a rebound from support. Note that the Cyclical index (CYC.X) only suffered a fractional loss and looks like it could easily extend its gains next week. Momentum traders now have a solid entry trigger they can use to initiate new positions -- look for ETN to push through Friday's intraday highs (above $77), while the CYC index advances through the $465 resistance level. Stops remain at $72. BUY CALL DEC-75*ETN-LO OI=218 at $4.00 SL=2.75 BUY CALL DEC-80 ETN-LP OI= 0 at $1.50 SL=2.75 BUY CALL JAN-75 ETN-AO OI=363 at $5.40 SL=3.50 BUY CALL JAN-80 ETN-AP OI=131 at $3.00 SL=1.50 Average Daily Volume = 464 K --- IMCL – Imclone Systems $15.04 (+3.27 last week) Company Summary: Engaged in the research and development of novel cancer treatments, IMCL focuses on growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain tumors depend. Phase I/II clinical trials have been promising. The lead candidate for angiogenesis inhibition, IMC-1C11 is an antibody that binds selectively and with high affinity to KDR, a principal Vascular Endothelial Growth Factor (VEGF) receptor, thus inhibiting angiogenesis. Why We Like It: While Friday's session may not have looked very exciting, IMCL actually made some important progress in its trek up the chart. After coming to rest just below $15 on Thursday, the Biotech stock pushed through that level early on Friday and managed to consistently find support there all the way to the closing bell. The trading range got incredibly tight towards the end of the day, as it became clear that traders had squared their positions ahead of the weekend. But it was really impressive that the stock didn't sell off with the rest of the market in the final 30 minutes of trade. While we'd like to think that the $15 level is now a new, higher base from which the stock can take off running again next week, it appears the more likely outcome is a mild pullback to support, ideally in the $13.50-14.00 range, but possibly as low as strong support at $12. Such a pullback would provide a solid entry into the play, but only after the rebound from support gets underway. The trading pattern in the Biotechnology index (BTK.X) was similar to that in IMCL again on Friday, so it appears that the stock is moving more in sync with the sector, and less on the rumors of a possible BMY buyout. That's good for our play, as it likely means the price moves will be a bit more predictable going forward. The BTK index is solidifying its advance over the $365 level and as long as that level isn't violated on any profit taking, the bullish run should continue. Momentum traders will want to look for IMCL to push through the $15.50 level along with the BTK index advancing through $385 resistance before adding new positions. Keep stops set at $11.50. BUY CALL DEC-12 QCI-LV OI=1597 at $3.50 SL=1.75 BUY CALL DEC-15*QCI-LC OI=2460 at $1.90 SL=1.00 BUY CALL DEC-17 QCI-LW OI= 803 at $1.05 SL=0.50 BUY CALL JAN-15 QCI-AC OI=2672 at $2.90 SL=1.50 BUY CALL JAN-20 QCI-AD OI=3548 at $1.15 SL=0.50 Average Daily Volume = 2.00 mln ************* NEW PUT PLAYS ************* SLM - Sallie Mae - $98.60 -5.35 (-6.40 for the week) Company Summary: Sallie Mae is the nation's leading provider of education funding, managing more than $77 billion in student loans for more than seven million borrowers. The company primarily provides federally guaranteed student loans originated under the Federal Family Education Loan Program (FFELP), and offers comprehensive information and resources to guide students, parents and guidance professionals through the financial aid process. The company was founded in 1972 as a government-sponsored enterprise (GSE) called the Student Loan Marketing Association, and began the privatization process in 1997. Since then, Sallie Mae's parent company name has changed, most recently to SLM Corporation (effective May 17, 2002). Through its specialized subsidiaries and divisions, the company also provides an array of consumer credit loans, including those for lifelong learning and K-12 education, and business and technical outsourcing services for colleges and universities. (source: company release) Why We Like it: This short play could be classified as a high risk play, given today's big drop and the chance for a bounce. The stock has been on a tear lately, setting a series of higher highs and higher lows. As rates have dropped, the theory is that more student loan holders will consolidate student loans from other lenders, bringing in more business for Sallie Mae. That may be true, but the pattern of higher highs ended over the past month. After reaching a high of just under $107 in late October, the stock fell to support over $100, before making another jump. The second set of highs over the last week found resistance at $105. Today, the stock fell off a cliff, following a report on Thursday that Senator John Edwards made a speech in which he proposed creating a program that would make the first year of college free. While that may sound good top parents, it could cut deep into Sallie Mae's profits, as they are the country's largest provider of education funding. that would amount to an immediate 25% drop in profits from undergraduate loans, and while it is still just an idea, it is an idea from someone who has the power to sponsor a bill. The idea of those lost profits sent the stock tumbling through support levels, most notably the $100 mark. The next level of support on the daily chart is $90, and given the selling into the close, a bounce looks unlikely on Monday. That being said, traders still must be aware of the possibility after such a big drop. There is bullish support on the point and figure chart at $95, which coincides with the 200-dma of $95.24 and that will certainly be a challenge for the short play on the way down. However, it is $3.60 away and even if it gives the stock a bounce, we could see a nice gain on the play at that level. The tricky part of this play is entry. We would like to see a bounce to resistance under $101, which acted as intraday resistance today on two separate rebound attempts, for an ideal entry. Momentum traders can look for a break under today's low of $98.47. If the stock continues the end of day sell-off below that level, then it is a sign investors want nothing to do with the possibility of a 25% drop in earnings and grabbing puts on the way down could be very profitable. If we get another gap down anywhere below $96, then we'll step aside and let the stock test the 200-dma before entering the play. Place stops above today's high at $103.00. BUY PUT DEC-100 SLM-XT OI= 649 at $4.00 SL=2.00 BUY PUT DEC- 95 SLM-XS OI= 219 at $1.95 SL=1.00 Average Daily Volume = 948 k --- HSIC – Henry Schein, Inc. $43.60 (-6.62 last week) Company Summary: HSIC is a distributor of healthcare products and services to office-based healthcare practitioners in the combined North American and European markets. The company's healthcare distribution segment consists of the company's dental, medical, veterinary and international groups. The technology segment consists of the company's practice management software business and certain other value-added products and services. Why We Like It: Despite the very encouraging breakout in the broad markets last week, there were some notable areas of weakness that clearly got the bears' attention. On Thursday, it was the HMO stocks that got hit with the bulk of the selling, and that focus shifted slightly on Friday to shares of the medical supply companies. The selling didn't appear to be company specific, but there was clearly something that motivated a mass exodus out of the group. Some of the names hit by the selling were HSIC, ZMH and PDCO. Both HSIC and PDCO announced earnings on Thursday, so that could be part of the catalyst. The downdraft in ZMH seemed to be unrelated, as rumors about a potential acquisition, which the company later refuted. While this weakness in the sector is what initially got our attention, it was HSIC's chart that got us to stick around for a second look. The stock appeared to top out in early October, and since then has been heading down in a volatile and high-volume decline. Confirming the stock's weakness was the rollover from the 20-dma (then at $50.50) early last week. Then the company released earnings and something set off the sellers, as the stock fell more than $3 on Thursday and then an additional $2 on Friday. That loss came on very heavy volume and with the substantial break of the $46 support level, HSIC looks like it is just getting started on this downward move. Not only did the stock break its bullish ascending trendline on the PnF chart, but generated another Sell signal with the trade at $45. The vertical count now projects down to the $34 level. This play may be right up the alley of aggressive momentum traders, who will want to target entries on a drop under $42. If taking that entry, keep an eye out for a potential bounce in the $40 area, the site of the July lows. Traders looking for a failed rally before entering the play will want to look for a rollover near $46 to allow entry into the play. Place stops initially at $46.50. BUY PUT DEC-45*HQE-XI OI=375 at $3.10 SL=1.50 BUY PUT DEC-40 HQE-XH OI= 13 at $1.00 SL=0.50 Average Daily Volume = 520 K ************************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 11-24-2002 Sunday 4 of 5 In Section Four: Current Put Plays: JBLU Leaps: Home, Home IN The Range Traders Corner: Here It Is On A Silver Platter ************************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 ***************** JBLU - Jet Blue - $33.02 -1.98 (-5.73 for the week) Company Summary: It was a good day for some of the airlines, following the announcement from United that it had reached an agreement with its machinists for $1.5 billion in wage cuts. While the Airline Index (XAL.X) was rebounding, Jet Blue continued its recent drop. The stock began its recent descent when J.P. Morgan dumped almost its entire stake in the airline as soon as its IPO restriction came off. JPM was one of JBLU's biggest initial investors and the dumping of stock scared investors off for more than just the day it sold the stock. Ever since, JBLU has been setting lower daily highs and lower lows and looks to have now completed a bearish head and shoulders pattern. Today's drop came in spite of the 222-point gain in the Dow and followed more bad news on the competition front. Delta Airlines announced on Wednesday that they are creating a new lost cost airline within an airline to compete with airlines such as JBLU. The number 3 U.S. carrier has the power to cut into the low-cost market and steal market share from airlines such as Jet Blue, Southwest and AirTran. Why We Like It: Jet Blue continued its slide today, begun on November 15. News that JPM had dumped almost its entire share in the company when IPO restrictions were lifted October 9 has given investors a scare. The news that Delta Airlines was expanding to the lost cost airline arena, intending to compete with airlines such as Jet Blue, Southwest and Air Tran, only convinced more stockholders to get out before market share began heading south. Other full-cost carriers have attempted the strategy, with limited success, but the affect on Delta's books won't help JBLU in the short term. JBLU continues to set lower relative lows and lower highs, with support at $35 now appearing as strong intraday resistance on the intraday charts. The trade of $34 not only established a new PnF sell signal, but also a breakdown in the bullish support line. We like the show of resistance under $35 for entry here, and the sell-off into the close. The best entry point will be on a rebound under $35, which should act as resistance and still avoid a PnF reversal up. Momentum traders can look for a trade below $33, but keep in mind our initial target is $30. BUY PUT DEC-35*JGQ-XG OI= 505 at $3.70 SL=1.90 BUY PUT DEC-30 JGQ-XF OI= 315 at $1.40 SL=0.00 Average Daily Volume = 756 k ************************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 ***** Home, Home IN The Range By Mark Phillips mphillips@OptionInvestor.com In my opinion, last week was all about the VIX. We talked about the Volatility index last week, and I wondered aloud whether it was about to break down into its normal 20-30 range or if 30 would provide a floor once again. We got hints of that answer on Monday as the VIX dipped its toe under the 30 level, hitting an intraday low of 29.96. It took until Wednesday afternoon to really break below 30 and then it was all over when HPQ said wonderful things in its earnings conference call. That unleashed the bulls on Thursday, leading the DOW and SPX to break their November highs, voiding the potential Head & Shoulders patterns that had been setting up for the past few weeks. With the VIX ending the week below 27, it is clear that the pattern of fear that had kept the markets rangebound has now been broken. But does this mean it is full bull ahead? Not quite. While the strong buying on Thursday propelled the Bullish Percent measures closer to overbought (the DOW, NDX and OEX are already there), that good news carries with it some not-so-good news, that there is a lot more risk to the downside now then there is to the upside. Jeff Bailey covers this in plenty of detail on a regular basis, so I won't elaborate here. Make no mistake, the breakout on Thursday was impressive, both in terms of price action and volume, making it look like there was finally some institutional participation in the rally. That means strong hands buying stocks and that's encouraging into the end of the year. What makes me nervous (in addition to the elevated Bullish Percent readings) is the fact that the weekly Stochastics on all the major indices (and numerous sectors) are all topped out in overbought territory. That tells me that without a pullback to consolidate the upside is likely limited. Of the two S&P indices that we follow here, the OEX has been the strongest in recent months, failing to penetrate its July lows in October. The pattern of higher lows is impressive and I expect there is still a bit more upside in this index before the next correction arrives. But looking at a long-term chart of the index, shows there is some major resistance just above. Care to take a look with me? My apologies for the very messy chart, but there is just a lot of important information there. Look at the confluence of resistance measures that are just about to come into play. The descending trendline from the September 2000 highs at $485, the 50% retracement of the March-July decline at $489, major resistance at $490 (late June/early July, as well as the closing lows from September 2001), and then the 200-dma at $495. Given the right conditions, I'd say this market would continue to churn through resistance. But this isn't a normal situation. The market has used up a tremendous amount of strength just getting to this point, and that is reflected in the Bullish Percent readings and the overbought oscillators. Bringing the VIX back into this equation, it has significant support in place now at the 25-26 area, and that area will make sense for a near term reversal that corresponds with the OEX reversing from that $485-495 resistance level. That sums up my market view for the week. The intermediate term has certainly improved, but we ought to be looking for a near-term pullback to consolidate these gains and build up a head of steam so that we can add to them. Enough about the broad market, let's take some time to look at the plays on our list, because there have certainly been some interesting developments in the past week. Portfolio: LEN - The breakdown we were hoping for last week never quite materialized and the lift in the broad markets last week was enough to keep the Housing sector in the green in the latter half of last week. The $DJUSHB index crawled back over $300 and LEN clawed its way to near $53. Here's what's interesting though. Did you notice that LEN couldn't hold above the 20-dma? Not only that, but it never got close to the converged 50-dma and 200-dma, which represent solid resistance just below our $55 stop. Keep a sharp eye on the stock (and sector) performance following the Existing Home Sales number due out Monday morning. If it confirms the weak Housing Starts number from last week, then we ought to be heading back down to test that $50 support again. JNJ - Without a doubt, our JNJ play has been a big disappointment to me. While it looked good at first, while gradually marching to higher highs, that pattern looks about to end. The stock was unable to push through the $61 level and appears to be in the early stage of a rollover. Normally, I'd drop the play this weekend, but I'm swayed to keep it alive with the strength in the broader market. The play will only survive if the rally broadens out to the Drug stocks, and I don't like the bearish ascending wedge in the DRG index that has been building since late July. The apex of that wedge is right around the $320 level, and the 200-dma is lying in wait just above at $323. The DRG index needs to break out with conviction in order for JNJ to clear the $61 resistance level. Conservative players may want to exit the play on any strength on Monday. We'll stick with the play for now, keeping our stop set at $58. NEM - Gold continues to trade sideways in that neutral wedge, and I continue to believe that the direction of the break will determine the future of our NEM play. After disappointing earnings a couple weeks ago, the stock seems to have settled into a trading range between $23-25. Likely, Gold will need to break solidly above the top of its wedge (currently $324.50) before NEM will be able to make significant upside progress. Like we said at the outset, this is going to be a slow-mover and requires patience. Keep stops set at $22. SMH - Whoa! Who hit the up button? Our SMH play was looking nice and sedate last weekend, with the SOX comfortably under significant resistance. Last week was a different story altogether, with a strong updraft on Wednesday ahead of HPQ's earnings. The positive earnings report sent the SOX skyrocketing again on Thursday, and we came to rest at the end of the week right at the $363 resistance level. This is a critical time for our play. Either we are very near where this rally will fail, or we are about to break out and the play will die a quick death. Next week is likely to be hard to read, with trading volume light ahead of the long weekend. The bearish Book to Bill report was blunted by the positive comments from TSM on Friday about increasing demand. Right now I'm leaning to the upside, and I almost pulled the plug on this play this weekend. Aggressive traders could consider initiating new positions on a rally failure near current levels, but I would prefer to wait for a break back under the $330 level ($26.50 on the SMH) before considering new positions. Our stop remains at $29.25, just above the August highs. MO - The Consumer stocks have been completely left out of the breakout move in the broad market, and MO spent last week consistently losing ground. By the end of the week, MO was hanging out just above the $37 level and not looking at all bullish. I'm rapidly losing conviction on this play, but I'm willing to give it a bit more time on the theory that if this rally broadens out a bit more, these Consumer stocks will go along for the ride. I'm really not wild about adding new positions unless old MO can get a taste of the 'Big Mo' and break back above $40. For now, we'll sit tight with our stops set at $35 Watch List: BBH - While the tight range continues to hold in the BBH, I'm starting to see some disturbing signs in the BTK index, as it managed a solid breakout last week. Rather than looking like a put opportunity, the series of higher lows and now higher highs has me thinking that I am once again on the wrong side of this trade. Sure we have the beginnings of a rollover on the weekly Stochastics chart, but price action is starting to look pretty bullish. But I'm not yet convinced, as on the BBH chart, price is just barely above the descending trendline, we have horizontal resistance at $92.50-93.00 (depending on how you draw the line) and the 200-dma at $93.38. Aggressive traders could try gaming a new entry on a rollover from this level, but I would prefer to see a drop back under $89 to give me some bearish confidence. A close over the 200-dma will have us dropping the play without question. GM - Either I'm picking the wrong plays, or picking the wrong direction. GM finally got moving and last week actually pushed above the $38 level. You'd think that would have me initiating a new position, but you'd be wrong. That rise generated a fresh PnF Buy signal and that raises a caution flag. With auto manufacturers saying sales aren't as bad as expected now, perhaps we've seen the bottom for this cycle. That's entirely possible, but I'm not quite ready to concede defeat. With the stock closing between $37-38 on Friday, let's ignore entries on a drop back out of that range, and instead focus on the $40-41 area. That is now very strong resistance and a rally to that level ought to provide a solid entry opportunity when it fails. In that event, stops will be very tight at $42. I mentioned last weekend that the next two weeks would likely give us a clearer picture as to near-term market direction, and last week certainly didn't disappoint, with the VIX breaking back into its historically normal range. That decrease in volatility is a welcome sight, as hopefully it is indicating that we are heading towards more predictable market conditions. The downside of course, is that the drop in volatility is causing option premiums to deflate as well. That can be seen in most of our open plays, as some of them are underwater, even though the price of the respective stocks have moved in our favor, albeit marginally. My view has changed over the past week to cautiously bullish into the end of the year, but with the caveat that there is a lot more potential downside risk then upside reward over the near term. Lots of significant resistance looms just overhead in all the major indices. If things are really getting better, then we'll have plenty of time to pile onto the bullish train. But if this is just another rally that is doomed to failure, I certainly don't want to be the last one onto the train just before it reverses course. Patience is the key right now, as we wait for the market to reveal its intentions. Have a great week and then long holiday weekend with friends and family! You can bet that's what I'll be doing! 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 $ 6.70 + 3.08% $58 '05 $ 60 ZJN-AL $ 9.10 $10.10 +10.99% $58 NEM 10/30/02 '04 $ 30 LIE-AF $ 3.90 $ 3.00 -23.08% $22 '05 $ 30 ZIE-AF $ 6.10 $ 5.30 -13.11% $22 MO 11/13/02 '04 $ 40 LMO-AH $ 3.90 $ 3.50 -10.25% $35 '05 $ 40 ZMO-AH $ 4.80 $ 4.50 - 6.25% $35 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $10.10 +17.44% $55 '05 $ 50 XFF-MJ $11.20 $12.10 + 8.11% $55 SMH 11/04/02 '04 $ 25 KBS-ME $ 5.00 $ 4.50 -10.00% $29.25 '05 $ 25 ZTO-ME $ 6.20 $ 6.00 - 3.23% $29.25 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: DELL 11/24/02 $26-27 JAN-2004 $ 30 LDE-AF CC JAN-2004 $ 25 LDE-AE JAN-2005 $ 30 ZDE-AF CC JAN-2005 $ 25 ZDE-AE GD 11/24/02 $78-80 JAN-2004 $ 80 KJD-AP CC JAN-2004 $ 70 KJD-AN JAN-2005 $ 80 ZZJ-AP CC JAN-2005 $ 75 ZZJ-AO PUTS: GM 10/27/02 $40-41 JAN-2004 $ 35 LGM-MG JAN-2005 $ 35 ZGM-MG BBH 11/10/02 $88-90 JAN-2004 $ 85 KBB-MQ JAN-2005 $ 80 XBB-MP New Portfolio Plays None New Watchlist Plays DELL - Dell Computer $28.98 **Call Play** Has anyone else noticed the consistent improving tone that we're hearing from the box-makers? The big surprise last week was the strong earnings and bullish forecast from Hewlett Packard. That was good for a strong run in the techs on Thursday, and the market held onto those gains heading into the weekend. DELL is the de facto 800 lb gorilla in the PC market, and anybody in that market knows that DELL is about to eat their lunch. In the DELL conference call on November 14th, the CEO had good things to say about their business growth and it looks like the company is firing on all cylinders. This good news was already factored into the stock ahead of the report and as a result the stock has been rather weak since then. But there are a couple of interesting observations that caught my attention. First is the fact that the $9.1 billion revenue number was the company's highest-revenue quarter ever. Added to that fact is revenues that have been steadily climbing for the past four quarters. So is that translating to earnings? You Betcha! While not growing at a huge rate, they have been increasing each of the past several quarters. DELL has been essentially range-bound for the past 2 years, but if I'm reading the charts right, and the hints of increasing PC demand are true, that range is getting ready to break to the upside. We don't want to work ourselves into a lather and try to chase the stock higher. I don't think there is any risk of the stock running away from us anytime soon, but with the PnF Buy signal generated with the recent rally and a bullish price target of $41, I definitely think we have something we can work with. An argument could be made for the stock now finding support near $28 (previous resistance), but I think the more prudent site to look for new entries is down in the $26-27 area. The 50-dma is currently at $27.40 and above the 200-dma, which is at $26.37. Use an intraday dip in this area to initiate new positions and we'll then look to set our stop at $23. The reason for such a wide stop is that it is just below the late September lows and it would take a print of $23 to invalidate the current Buy signal on the PnF chart. For those of you that favor the strategy, I think DELL will make a great candidate for writing covered calls against the long-term LEAP. BUY LEAP JAN-2004 $30 LDE-AF BUY LEAP JAN-2004 $25 LDE-AE **Covered Call** BUY LEAP JAN-2005 $30 LDE-AF BUY LEAP JAN-2005 $25 LDE-AE **Covered Call** GD - General Dynamics $82.80 **Call Play** Remember back in June when we captured a nice downhill slide in shares of GD? A large part of that weakness centered around the company's Gulfstream division, as with all the corporate cutbacks, it seemed a foregone conclusion that there was going to be a dearth of orders for new executive jets. Well, that crisis played itself out (and to our benefit, I might add), and the stock has been consolidating in an ever-tightening range for the past four months. In fact, the price has traced out a nice neutral wedge, with the top of the wedge at $85 right now, and the bottom of the wedge at 77.50. Take note of the continuing series of higher lows. That's a good sign as this consolidation is building up energy to go one way or the other, and with war with Iraq looming as a near-certainty, I'm betting the break will be to the upside. In fact, we got a hint of that eventual break last week, when the stock popped up above $84, creating a new PnF Buy signal. While it has only broken out by one box so far, the bullish price target is currently $99. It would take a trade of $76 to invalidate that Buy signal. Call me crazy, but that looks like a pretty favorable risk to reward ratio! Another pullback seems the likely next course of action for the stock, and we want to look at new entries on a rebound from anywhere in the $78-80 range. Note that the 10-, 20- and 50-dmas are all clustered between $79.50-80.50. My expectation is that any drop below these moving averages will result in a quick rebound. Another bullish indication is that the Stochastics and MACD on the weekly chart are just starting to turn bullish again, indicating that the long-term picture is turning in favor of the bulls. After entry, we'll set our stop at $76, as a trade below that level would have the PnF chart back in Sell mode. BUY LEAP JAN-2004 $80 KJD-AP BUY LEAP JAN-2004 $70 KJD-AN **Covered Call** BUY LEAP JAN-2005 $80 ZZJ-AP BUY LEAP JAN-2005 $75 ZZJ-AO **Covered Call** Drops None ************** TRADERS CORNER ************** Here It Is On A Silver Platter By Mike Parnos, Investing With Attitude OK. You want easy? I’ll give you easy. At the Couch Potato Trading Institute (CPTI) we hand it to you on a silver platter. No, it’s not a pizza or a six-pack. It’s not a TV Guide or new pajamas. It’s not a real silver platter either, but, if you never get your butt off the couch, you can’t be too picky. With each strategy there are several things to consider before entering the trade. Each strategy requires its own specific research and, to increase the probability of success, as many as possible of the criteria should line up. Some instructors suggest a trading journal for you to record notes and reasons why you enter and exit a trade. Reviewing these journals helps to point out trading strengths and weaknesses. I figured that a way to simplify the decision making process would be to have a separate checklist for each strategy. That way, as you fill it out, you’ll be able to better determine the viability of the trade. Choices, good and bad, will become very obvious when you can see the facts in black and white. It takes away the memory variable and reduces some of the emotion. Each week I’ll include a checklist for a specific strategy along with a description of the strategy itself. Some of these strategies we will have discussed in previous columns, but statistics tell us that most concepts aren’t grasped until at least five or six exposures. As I write this, it’s uncertain how this checklist will print out. If you have a problem getting it on one sheet, email me (mparnos@OptionInvestor.com) and I’ll be glad to send you a Microsoft Word file with everything already laid out and ready to print. Once you print out a good copy, take it to your friendly Office Depot or Office Max and copy it onto 3-hole punch paper. Keep these sheets in a trading loose-leaf for easy reference. ___________________________________________________________ The Straddle – CPTI Style In its simplest terms, a normal straddle is the simultaneous purchase of a put and a call with the same strike price and the same expiration. For example, as the underlying makes a large move up, the call option will increase in value more rapidly than the put option will decline in value. Since we at the CPTI are far from normal (thank God), we wouldn’t dare buy the straddle only one month out. If you believe there will be a substantial movement in the next month, buy the straddle at least 3-4 months out. Why? Because, in the first month of a four-month option, time premium erodes very slowly. Only about 10%-15% of the time value will disappear during that first month. So, you may have to pay for some additional time premium when you buy puts and calls three months out, but this additional money is not really at risk. Let’s take a hypothetical look at the DOW (DIA) – trading at $88.19. Scenario A: Buy the DIA Dec. $88 calls @ $2.45 Buy the DIA Dec. $88 puts @ $2.30 You are exposed for $4.75 Scenario B: Buy the DIA Mar. 03 $88 calls @ $5.00 Buy the DIA Mar. 03 $88 puts @ $5.00 You are exposed for $10.00 – or are you? You are only exposed for the full $10.00 if you plan to hold the position to expiration in March. However, we’re going to exit this position in ONE MONTH or less. During this time, the options may lose 15% of their value because this is the first month of a five-month option. Fifteen percent of $10.00 is only $1.50. That’s a hell-of-a-lot LESS than the $4.75 in Scenario A. You may be tying up the $10.00 for that first month, but the bulk of that money is NOT at risk. Why risk $4.75 when you can risk $1.50? Stock Selection This is where the checklist will come in very handy. Ideally, you’d like to be buying undervalued options. So, check and see if the implied volatility is greater than or less than the historical volatility. Hopefully, it will be less. Then, when the stock begins to move, the implied volatility will increase, adding value to both the put and the call. Support and Resistance Support and resistance levels are also a key factor. If the DIA is trading at $88.19 and there is strong support at $85 and then below that at $83, the stock will have a very tough time breaking through those two support levels to make a large enough move to make the straddle worthwhile in the down direction. The same holds true for the other direction. Is there resistance? How much and where? The support may be in the form of a trend line, a moving average, and (if you believe in all that Franco American chart spaghetti) a variety of other indicators. Possibly the Best Time Probably the best scenario is to put on a trade right as the underlying is at a support or resistance level. It may stay there a few days, but the odds are pretty good that it’s either going to bounce back down with a thump or breakout through the resistance toward the next level. That’s why, at the end of the checklist, I put a choice of either trading or placing this particular security on your watch list. It’s much more advisable to wait for the most opportune time to put on a trade. The sun will come up tomorrow, and so might your stock, to the best place to trade. Make use of the “Notes” section on the checklist. Using this support and resistance information you so diligently dug up, you can get an idea of a target price for the stock. Will that target price be enough for you to make a respectable return on your risk? If the Dow moves 500 points in a few weeks, there’s a good chance you’d be able to liquidate your straddle for $10.75 or more. You just made $.75. Sounds like peanuts, doesn’t it? But, in reality, you made $.75 on a risk of only $1.50. That’s a 50% return in a relatively short period of time. I’ll take that any day! Another reason why straddles are so popular at the CPTI, is that any option trader can do it. It doesn’t require any high trading approval level. The position consists of just buying options. Brokerages don’t get paranoid until you start to sell options. The CPTI Straddle Checklist Stock / Symbol: ____________________________________________ Last Trade: ______________ Current Bid: _____________ Current Ask: ________________ At-The-Money Put: (Month, Strike): ___________ Ask: ____________ At-The-Money Call: (Month, Strike): ___________ Ask: ____________ Total Cost of Put & Call: ___________________ Potential Risk: (10% x Total): _____________ Date To Exit Trade: _________________________ Implied Volatility: _________________________ Historical Volatility: ______________________ Primary Support Level: ______________________ Secondary Support Level: ____________________ Primary Resistance Level 1: _________________ Secondary Resistance Level 2: _______________ Trend Line Support: _________________________ Trend Line Resistance: ______________________ Target Price: (Bullish) ___________ (Bearish) _______________ Average Monthly Move: ____________________ Notes: _______________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ Date Entered Trade: ________________________ Keep It On The Watch List: _____ (Yes) _____ (No) So, are you ready to get organized? Are you ready to turn your trading into a methodical, business-like money making proposition instead of it being a quick-draw contest? If you have the quickest trading finger in the west, find something else for that finger to do (do I need to give you suggestions?) while you’re doing your due diligence. I keep a “To Do” list of all the things I need to accomplish, both big and small. It’s a great organizational tool. Now, if I can just remember where I put the damn thing! ______________________________________________________________ CPTI Portfolio Update – As of Friday’s Close. BBH Iron Condor – Currently trading at $90.95 We want BBH to finish the December option cycle anywhere between $80 and $95. The biotechs were strong this week, but we’re still looking good! TTWO Short Strangle – Currently trading at $29.60. We want TTWO to finish the December option cycle anywhere between $22.50 and $35.00. Looking good! We’re about halfway between the strikes. IMCL Covered Call – Currently trading at $15.05. We want IMCL to finish the December option cycle over $10 so it will be called away. Looking strong! Now we have a 5-point cushion. QQQ ITM Strangle – Currently trading at $27.76. Went as high as $27.94 on Friday. The QQQs finally made its predicted 3-point move – and then some. CPTI students, who were bullish and put on the $23/$25 strangle, could have sold the $23 call for $5.00. That’s a profit of $.65 and you now own the $25 put free and clear with a month to go. CPTI students, who were slightly bearish and put on the $24/$26 strangle could have sold the $24 call for $4.10 and own the $26 put at only $.25 with a month to go. Now we can hope for a typical Fibonacci retracement. Prepare for a potential cash infusion! ____________________________________________________________ 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 ************************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 11-24-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: More Q&A With The Editor Naked Puts: Options 101: Understanding Market Cycles Spreads/Straddles/Combos: A Consolidation Is Definitely In Order! 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 With The Editor By Mark Wnetrzak Based on the recent influx of questions, the strategy of writing covered-calls is becoming popular again. Attn: Covered-Calls Editor Subject: Buy-Write Orders Mark, After following your "Covered Call" column for a while, I have begun to do live trading today using your recommendations. I have a question about placing a "Buy-Write" order. Should you mark the order "All or None" to ensure that the shares of stock bought is equivalent to the number of Calls sold or is that imply by this type of order? I seem to be having a very hard time getting anything filled even though it appears that the "net debit" to fill is available. Thanks in advance for your help. A Humble Subscriber, RD Hello RD, When you place a "buy-write" order, you are issuing a combination order to buy the stock and sell the call at a specific "net" debit. The "all or none" condition pertains to whether your whole order must be filled. Without the conditional, you could get a partial fill, say 200 shares of stock and 2 calls sold as opposed to a 1000 shares and 10 calls. Usually the conditional isn't required except in very thinly traded stocks. Also, an "all or none" order generally has the least precedence (it is filled last) in the order flow. In any case, you should check with your brokerage to verify how they fill combination orders and what restrictions apply. If your orders are being executed electronically (not through a human broker), both the stock and option will have to trade exactly at the specified net debit before the order is filled. With most traditional (personal) brokers, the specialist has the flexibility to make the individual trades at different times or to combine the positions with larger orders. He may even try to "leg" into the order to meet your specified net-debit; buying the stock in the morning and selling the calls later in the trading session. The "buy-write" order is an excellent method to enter trades only at the price you want, especially when you can't monitor the market throughout the day. However, if you don't get filled, there is always another day and another stock. Hope this helps, Mark W. mark@OptionInvestor.com Editor's note: The "buy-write" order is a popular method of initiating a covered-call. A buy-write involves buying a stock and selling its option simultaneously. When placing a buy-write order, you are requesting to purchase the shares and sell the call options for a specific "net" price, with both transactions occurring at the same time. Since the cost basis is established prior to the trade, a buy-write order can be a useful method to guarantee the cost basis in new stock. The exact phraseology is not important but a specific "net-debit" must be given when the trade instructions are delivered to the agent. The floor broker or clearing-house will fill the order if the specified net-debit can be achieved through any combination of stock and call-option prices. One of the advantages of this technique is that it prevents the possibility of "slippage" during the position entry process when the premium in the call option declines. This problem happens frequently in the plays we list as many are opened in the first hour of trading on the Monday after the newsletter is published. If too many calls are sold without any buying pressure, the bid premium drops quickly towards intrinsic value and the (ITM) play becomes unfavorable. Traders who attempt to "leg-in" to these positions (buying the stock with plans to sell the call later) are often surprised to see the previously overvalued premiums disappear before they can write the options that complete the play. Using this technique, the stock and options prices do not have to be monitored during the day's activity, as the order will be executed only when the appropriate net-debit is achieved. In addition, this type of trading works very well with low volume issues and provides the market-maker with an opportunity to fill the request based on other orders in the pits. The buy-write can also be used with unusually volatile stocks that novice investors might otherwise avoid when choosing candidates for a conservative covered-write position. 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 RSTO 5.48 7.30 DEC 5.00 1.05 *$ 0.57 11.2% SIMG 5.44 7.07 DEC 5.00 1.10 *$ 0.66 11.0% INHL 7.96 8.95 DEC 7.50 1.05 *$ 0.59 7.4% IMCL 8.97 15.04 DEC 7.50 2.15 *$ 0.68 7.2% V 13.96 14.34 DEC 12.50 2.35 *$ 0.89 5.6% USG 6.25 7.14 DEC 5.00 1.60 *$ 0.35 5.5% CTIC 8.60 8.80 DEC 7.50 1.50 *$ 0.40 4.9% IDCC 15.20 16.09 DEC 12.50 3.30 *$ 0.60 4.4% MDCO 14.33 16.49 DEC 10.00 4.90 *$ 0.57 4.4% DCTM 18.13 19.90 DEC 15.00 3.80 *$ 0.67 4.1% IDCC 14.74 16.09 DEC 12.50 2.90 *$ 0.66 4.0% BRCM 15.45 20.64 DEC 12.50 3.50 *$ 0.55 4.0% SEE 18.26 21.33 DEC 15.00 3.90 *$ 0.64 3.9% OSUR 7.97 6.26 DEC 7.50 1.45 $ -0.26 0.0% *$ = Stock price is above the sold striking price. Comments: No rest for the weary as the major averages continue to party like it's 1999! Suffering a little "call-selling" regret? (Sigh...) A time-merchant's bane: an extremely bullish market phase. The key question is, "Will support hold during the inevitable consolidation phase?" For obvious reasons, the covered-call portfolio is doing quite well except for OraSure Technologies (NASDAQ:OSUR), which continues to work off its recent rally. Even Vivendi Universal (NYSE:V) has moved out of danger after receiving a bid for its media assets. We remain cautiously optimistic, for without a base to build from, the higher we go, the farther we can fall. 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 BLDP 13.80 DEC 12.50 DUJ LV 1.80 3019 12.00 28 4.5% CIEN 5.58 DEC 5.00 EUQ LA 1.00 7870 4.58 28 10.0% CMOS 11.11 DEC 10.00 CQS LB 1.65 179 9.46 28 6.2% DCTM 19.90 DEC 17.50 QDC LW 3.10 258 16.80 28 4.5% ISSX 24.48 DEC 22.50 ISU LX 3.50 564 20.98 28 7.9% MATK 22.07 DEC 20.00 KQT LD 3.30 454 18.77 28 7.1% TXN 19.22 DEC 17.50 TXN LS 2.40 15677 16.82 28 4.4% 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 CIEN 5.58 DEC 5.00 EUQ LA 1.00 7870 4.58 28 10.0% ISSX 24.48 DEC 22.50 ISU LX 3.50 564 20.98 28 7.9% MATK 22.07 DEC 20.00 KQT LD 3.30 454 18.77 28 7.1% CMOS 11.11 DEC 10.00 CQS LB 1.65 179 9.46 28 6.2% BLDP 13.80 DEC 12.50 DUJ LV 1.80 3019 12.00 28 4.5% DCTM 19.90 DEC 17.50 QDC LW 3.10 258 16.80 28 4.5% TXN 19.22 DEC 17.50 TXN LS 2.40 15677 16.82 28 4.4% 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). ***** BLDP - Ballard Power Systems $13.80 *** Re-Energized! *** Ballard Power Systems (NASDAQ:BLDP) develops, manufactures and markets zero-emission proton exchange membrane (PEM) fuel cells. BLDP is commercializing fuel cell engines for the transportation market, electric drives for both fuel cell and battery-powered electric vehicles, power conversion products for fuel cell generators, microturbines and other distributed generation technologies, and fuel cell systems for markets ranging from portable power products to larger stationary generation products. Ballard is a Tier 1 automotive supplier of friction materials for power train components. Ballard has supplied fuel cells to Honda, Nissan, Volkswagen, Yamaha, Cinergy, Coleman Powermate, and etc. Ballard moved up sharply on Friday, taking out the October high and the technical signals suggest further upside potential. Regardless of the recent slump in share value, Ballard is one of the top companies in the Fuel Cell sector and among many institutional investors, it is also one of the core holdings. The current technical outlook is recovering and our position offers an excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. DEC 12.50 DUJ LV LB=1.80 OI=3019 CB=12.00 DE=28 TY=4.5% ***** CIEN - Ciena $5.58 *** Ride The "Telecom Recovery" Train *** Ciena Corporation (NASDAQ:CIEN) is engaged in the intelligent optical networking equipment market. Ciena offers a portfolio of products for communications service providers worldwide. The company's customers include long-distance carriers, competitive and incumbent CLECs, ISPs, and wireless/wholesale carriers. CIEN offers optical transport and intelligent optical switching systems that enable service providers to provision, manage and deliver high-bandwidth services to their customers. Ciena's intelligent optical networking products are designed to enable carriers to deliver any time, any size, any priority bandwidth to their customers. The Telecom sector is on the mend and this week's move in Ciena suggests a bullish change of character. The stock rallied on very heavy volume, closing above its 150-dma and above a strong resistance area near $4 - $4.50. Traders can speculate on the near-term performance of the issue with this conservative position. DEC 5.00 EUQ LA LB=1.00 OI=7870 CB=4.58 DE=28 TY=10.0% ***** CMOS - Credence $11.11 *** On The Rebound! *** Credence Systems (NASDAQ:CMOS) designs, manufactures, sells and services engineering validation test and automatic test equipment used for testing semiconductor integrated circuits. The company also develops, licenses and distributes software products that provide automation solutions in the design and test flow fields. It serves a broad spectrum of the semiconductor industry's testing needs through products that test digital logic, mixed-signal, system-on-a-chip, radio frequency, volatile, static and non- volatile memory semiconductors. Their customers include major semiconductor manufacturers, fabless design houses, foundries and assembly and test services companies. With earnings due the day before Thanksgiving, investors are grabbing shares of Credence, which suggests any "bad" news has already been priced in. Our outlook is also bullish due to the recent rally on heavy volume and this position offers a cost basis below technical support. DEC 10.00 CQS LB LB=1.65 OI=179 CB=9.46 DE=28 TY=6.2% ***** DCTM - Documentum $19.90 *** Bracing For A Break-Out *** Documentum (NASDAQ:DCTM) provides enterprise content management software solutions that bring intelligence and automation to the creation, management, personalization and distribution of vast quantities and types of content, including documents, Web pages, XML files and rich media, in one common content platform and repository. DCTM's platform makes it possible for companies to distribute content globally across all internal and external systems, applications and user communities. Documentum's products include site delivery services, content personalization services and document control managers, among others. Documentum has been trading in a lateral base for almost 2 years and has completed a short-term "double-bottom" formation. The stock is on the move to take out the March high and this position offers a favorable way to speculate on the near-term performance of the issue. DEC 17.50 QDC LW LB=3.10 OI=258 CB=16.80 DE=28 TY=4.5% ***** ISSX - Internet Security Systems $24.48 *** Hot Sector! *** Internet Security Systems (NASDAQ:ISSX) is a security software company engaged in information protection solutions dedicated to protecting online assets. The company's security management solutions include software products, managed security services and professional services that are made up of both consulting and training services. The company offers a comprehensive line of products and services for enterprise, smaller enterprise, consumer and service provider customers. The company provides its security management solutions in three primary geographic areas: the Americas (United States, Canada and Latin America), which accounted for 71% of total revenues in 2001, EMEA (Europe, Middle East and Africa), which accounted for 15% of revenues in 2001 and Asia/Pacific Rim, which accounted of 14% of revenues in 2001. Internet stocks remain among the leaders in the current technology rally and a noticeable recovery is underway in ISSX shares. Investors who want to establish a conservative basis in a leading Internet security stock should consider this position. DEC 22.50 ISU LX LB=3.50 OI=564 CB=20.98 DE=28 TY=7.9% ***** MATK - Martek Biosciences $22.07 *** Healthy Stuff! *** Martek Biosciences )NASDAQ:MATK) develops and sells products from microalgae. Microalgae are microplants. The company is engaged in the commercial development of microalgae into a portfolio of high value products and new product candidates consisting of Nutritional Products, Advanced Detection Systems and Other Products, primarily Algal Genomics. Their nutritional products include nutritional oils for infant formula, dietary supplementation and other products. Advanced Detection Systems products include fluorescent dyes from various algae for use in scientific applications for detection of certain biological processes. Martek announced Friday that its popular supplement DHA improves overweight children's cardiovascular health, thus reducing the risk factor for early coronary heart disease. A recent American Heart Association (AHA) Scientific Statement also outlined the health benefit of omega-3 fatty acids from plant and fish sources, specifically docosahexaenoic acid (DHA), which Martek offers to the public as an adult nutritional aid under the trade name "Neuromins. Investors who are interested in a unique Biotechnology company should consider this position. DEC 20.00 KQT LD LB=3.30 OI=454 CB=18.77 DE=28 TY=7.1% ***** TXN - Texas Instruments $19.22 *** Blue Chip Bottom-Fishing *** Texas Instruments (NYSE:TXN) is a global semiconductor company and a designer and supplier of digital signal processors and analog integrated circuits. TXN also designs and manufactures other semiconductor products. Those products include standard logic devices, application-specific integrated circuits, reduced instruction-set computing microprocessors, microcontrollers and digital imaging devices. In addition to semiconductors, TXN has two other principal segments. Sensors & Controls sells electrical and electronic controls, sensors and RF ID systems into commercial and industrial markets. Educational & Productivity Solutions is a supplier of graphing and educational calculators. On Tuesday, at the Lehman Brothers semiconductor and computer systems conference, Texas Instruments' COO Rich Templeton reiterated the company's 4th- quarter financial targets. We simply favor the technical support area at our cost basis and the current bullish momentum in the sector. Investors can use this position to obtain a conservative entry point in the issue. DEC 17.50 TXN LS LB=2.40 OI=15677 CB=16.82 DE=28 TY=4.4% ***** ***************** 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 SRNA 18.86 DEC 17.50 NHU LW 2.30 128 16.56 28 6.2% ZRAN 18.80 DEC 17.50 ZUO LW 2.20 436 16.60 28 5.9% LGTO 6.00 DEC 5.00 EQN LR 1.25 1327 4.75 28 5.7% PKTR 8.14 DEC 7.50 XOU LU 1.00 5 7.14 28 5.5% UNTD 16.40 DEC 15.00 QAB LC 2.10 3228 14.30 28 5.3% MEDI 28.07 DEC 25.00 MEQ LE 4.20 21744 23.87 28 5.1% RMBS 8.79 DEC 7.50 BNQ LU 1.60 3549 7.19 28 4.7% RFMD 10.94 DEC 10.00 RFZ LB 1.35 6894 9.59 28 4.6% PATH 16.54 DEC 15.00 AQE LC 2.15 328 14.39 28 4.6% NTAP 14.35 DEC 12.50 NUL LV 2.30 6272 12.05 28 4.1% CELG 25.00 DEC 22.50 LQH LX 3.30 339 21.70 28 4.0% INHL 8.95 DEC 7.50 QNX LU 1.70 349 7.25 28 3.7% ***************** NAKED PUT SECTION ***************** Options 101: Understanding Market Cycles By Ray Cummins Once again, it is time to start thinking about the historical, year-end relationship between small-cap and large-cap stocks. January has become known as a month when stocks, especially small company stocks, provide solid gains. Investors have noticed the pattern and adjusted their buying and selling habits accordingly, creating what many experts refer to as the "January Effect." A less noticeable phenomena that often precedes the January Effect occurs from mid-November to mid-December, when large-cap stocks outperform smaller-cap issues. Some traders say this is due to profit taking in the lower-priced stocks and some believe it is caused by annual tax-loss selling, where investors create losses in some holdings to offset gains in others, thus reducing their tax liability. In this scenario, investors sell stocks that have fallen in value during the year, and then purchase new (small-cap) shares in January to complete the cycle. Other explanations are centered on the large asset inflows from institutional investors or the year-end repositioning of fund portfolios by professional money managers. However, many of these investors are not likely to transition into small company stocks (in January) because they are often restricted by portfolio guidelines to focus on large-cap and mid-cap companies. With these facts in mind, a case could be made that the phenomenon is just a self-fulfilling prophecy, much like many of the current trends that occur in the stock market. The historically strong performance of small stocks in the first few months of the year is well known and easily proven. The less obvious cycle in November and December is often more profitable as the majority of traders don't use the trend to their advantage, thus leaving the effect intact for those that are aware of it's existence. Some experts believe the flagging economy may affect the historical trend, but it appears that much of that condition has already been factored into the current pricing of equities. Indeed, the impressive performance of technology stocks over the last few weeks supports a bullish outlook in the near-term and if the phenomenon becomes more well known, it will also transition to a self-fulfilling prophecy. Once the notion of a "Pre-January Effect" becomes widespread, investors who do not want to miss the opportunity for above-average returns will put available cash into large-cap stocks towards the end of the year, thus confirming the hypothesis that this group rises near Thanksgiving and into the holiday season. Regardless of whether the pre-January effect provides a profitable trading opportunity, it is important to remember that throughout the history of the stock market, there have been many lesser known trends that have perpetuated into well-defined cycles. If you hope to make money in the stock market, it is absolutely essential that you understand the importance of these historical tendencies. You must also learn to discern the broader, more technical movements in the market, in contrast to those produced by short-term "emotional" factors. As you have probably observed, the economy also moves in identifiable cycles that precede bullish and bearish trends and you can not expect to be a successful investor until you can correctly judge whether the current trend is a part of a primary wave (which is a bull or bear market cycle of several years duration) or rather a short-term component of a secondary wave, which lasts from a few weeks to a few months. While no one has demonstrated the ability to spot the top of a bull market or the bottom of a bearish phase on a consistent basis, it is important to be conscious of these repetitive tendencies and use that knowledge to your advantage. The key to success is to maintain a general awareness of the overall condition of the market, and the economy, and adjust your portfolio and trading style accordingly. 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 NWRE 17.68 17.75 DEC 12.50 0.55 *$ 0.55 9.7% ESIO 22.99 24.50 DEC 17.50 0.55 *$ 0.55 9.3% IMCL 11.77 15.04 DEC 7.50 0.25 *$ 0.25 8.4% ISSX 22.19 24.48 DEC 17.50 0.45 *$ 0.45 8.0% BSTE 31.02 30.40 DEC 22.50 0.75 *$ 0.75 7.8% HAL 17.85 18.85 DEC 12.50 0.35 *$ 0.35 7.8% CYMI 33.43 37.40 DEC 25.00 0.60 *$ 0.60 7.2% PHTN 28.50 31.26 DEC 22.50 0.50 *$ 0.50 7.0% GNSS 17.17 18.98 DEC 12.50 0.30 *$ 0.30 7.0% PLMD 30.31 29.71 DEC 22.50 0.60 *$ 0.60 6.5% KOSP 19.13 20.92 DEC 15.00 0.35 *$ 0.35 6.1% RIMM 16.58 14.05 DEC 12.50 0.30 *$ 0.30 6.0% NPSP 28.24 29.01 DEC 20.00 0.50 *$ 0.50 5.9% POSS 14.20 15.90 DEC 12.50 0.35 *$ 0.35 5.9% IGEN 38.65 38.89 DEC 30.00 0.55 *$ 0.55 5.8% ESIO 21.15 24.50 DEC 15.00 0.35 *$ 0.35 5.5% AMZN 22.21 23.99 DEC 17.50 0.30 *$ 0.30 5.5% PPD 27.08 24.84 DEC 20.00 0.35 *$ 0.35 5.3% *$ = Stock price is above the sold striking price. Comments: The market soared to recent highs this week, thus Friday's minor consolidation was expected as stocks took a breather to absorb the bullish activity. It is encouraging that the market held its gains but next week will include some pre-holiday (low volume) sessions, so it will be interesting to see how stock prices react. Some technical traders are looking for spike to the 950-960 range (S&P 500 Index - SPX) while others believe we have seen the "top" in the short-term. Despite the overbought conditions, we remain optimistic that equities will edge higher in the coming weeks but it pays to be cautious in this environment. Positions on the "early-exit" watch-list include: Research In Motion (NASDAQ:RIMM). A federal recently ruled that the wireless company infringed on patents held by NTP and the award of damages in the case could potentially include a one-time payment by RIM of approximately $23 million. With this new development in mind, it may be best to close the play now for a small gain rather than risk a potential loss. 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 ALXN 17.55 DEC 12.50 XQN XV 0.30 101 12.20 28 8.6% ESIO 24.50 DEC 17.50 EQO XW 0.30 624 17.20 28 6.3% HAL 18.85 DEC 15.00 HAL XC 0.35 8558 14.65 28 9.2% IMCL 15.04 DEC 10.00 QCI XB 0.30 1035 9.70 28 9.9% MATK 22.07 DEC 17.50 KQT XW 0.45 50 17.05 28 10.1% MEDI 28.07 DEC 20.00 MEQ XD 0.30 4943 19.70 28 5.5% MSTR 18.16 DEC 12.50 EOU XV 0.30 16 12.20 28 8.3% SEE 21.33 DEC 15.00 SEE XC 0.25 4075 14.75 28 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 MATK 22.07 DEC 17.50 KQT XW 0.45 50 17.05 28 10.1% IMCL 15.04 DEC 10.00 QCI XB 0.30 1035 9.70 28 9.9% HAL 18.85 DEC 15.00 HAL XC 0.35 8558 14.65 28 9.2% ALXN 17.55 DEC 12.50 XQN XV 0.30 101 12.20 28 8.6% MSTR 18.16 DEC 12.50 EOU XV 0.30 16 12.20 28 8.3% ESIO 24.50 DEC 17.50 EQO XW 0.30 624 17.20 28 6.3% SEE 21.33 DEC 15.00 SEE XC 0.25 4075 14.75 28 6.0% MEDI 28.07 DEC 20.00 MEQ XD 0.30 4943 19.70 28 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). ***** ALXN - Alexion $17.55 *** New Drug Speculation! *** Alexion Pharmaceuticals (NASDAQ:ALXN) develops pharmaceutical products for the treatment of heart disease, inflammation, cancer and diseases of the immune system. The company's two lead product candidates are genetically altered antibodies that target specific diseases that arise when the human immune system induces undesired 1inflammation in the human body. Alexion's product candidates are designed to block components of the human immune system that cause undesired inflammation while allowing beneficial components of the immune system to remain functional. Alexion shares rallied last week after the firm said its experimental drug pexelizumab failed to meet its primary goal in two clinical trials of heart-attack patients, but showed much-improved survival rates in one of the studies. Alexion said it was encouraged by the "robust" reduction of mortality with patients who received angioplasties and that it would discuss with U.S. regulators the appropriate development of the medicine. This position offers great short-term speculation with a relatively low-risk cost basis. DEC 12.50 XQN XV LB=0.30 OI=101 CB=12.20 DE=28 TY=8.6% ***** ESIO - Electro Scientific Industries $24.50 *** 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. On 10/28, 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. On Thursday, Esio announced an order for Electronic Component Systems equipment from Innochips Technology, a leading circuit design service company. Traders who like the outlook for the company can establish a low risk cost basis in the issue with this position. DEC 17.50 EQO XW LB=0.30 OI=624 CB=17.20 DE=28 TY=6.3% ***** HAL - Halliburton $18.85 *** Asbestos Settlement Pending *** Halliburton (NYSE:HAL) provides a variety of services, products, maintenance, engineering and construction to energy, industrial and governmental customers. The company operates in 2 business segments: the Energy Services Group, consisting of Halliburton Energy Services and Landmark Graphics, and the operations of product service lines; and the Engineering and Construction Group, which provides a wide range of services to energy and industrial customers and government entities worldwide. Halliburton shares have rallied in recent weeks on speculation the opposing sides in asbestos liability lawsuits are close to an agreement that would settle hundreds of thousands of claims against the company. The main unresolved issue was the amount of money to be paid to the claimants but Halliburton is striving to come up with a solution that will satisfy the opposing entities. Traders can speculate on the near-term results of the current asbestos litigation with this position. DEC 15.00 HAL XC LB=0.35 OI=8558 CB=14.65 DE=28 TY=9.2% ***** IMCL - ImClone $15.04 *** All Is Forgiven Now *** 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. Shares of IMCL soared recently amid a rumor that Bristol-Myers will buy the company. There are other reasons for the stock's strength, such as short-covering and some positive fundamental news on the company's drug products, and this position benefits from over-priced options and recent technical support near the cost basis. DEC 10.00 QCI XB LB=0.30 OI=1035 CB=9.70 DE=28 TY=9.9% ***** MATK - Martek Biosciences $22.07 *** Healthy Stuff! *** Martek Biosciences )NASDAQ:MATK) develops and sells products from microalgae. Microalgae are microplants. The company is engaged in the commercial development of microalgae into a portfolio of high value products and new product candidates consisting of Nutritional Products, Advanced Detection Systems and Other Products, primarily Algal Genomics. Their nutritional products include nutritional oils for infant formula, dietary supplementation and other products. Advanced Detection Systems products include fluorescent dyes from various algae for use in scientific applications for detection of certain biological processes. Martek announced Friday that its popular supplement DHA improves overweight children's cardiovascular health, thus reducing the risk factor for early coronary heart disease. A recent American Heart Association (AHA) Scientific Statement also outlined the health benefit of omega-3 fatty acids from plant and fish sources, specifically docosahexaenoic acid (DHA), which Martek offers to the public as an adult nutritional aid under the trade name "Neuromins. Investors who are interested in a unique Biotechnology company should consider this position. DEC 17.50 KQT XW LB=0.45 OI=50 CB=17.05 DE=28 TY=10.1% ***** MEDI - MedImmune $28.07 *** Speculation Stock! *** MedImmune (NASDAQ:MEDI) is a biotechnology company with 5 products on the market and a diverse product pipeline. MedImmune is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in areas of infectious disease and immune regulation. The company also focuses on oncology through its wholly owned subsidiary, MedImmune Oncology, Inc. In addition, the company owns Aviron, a biotech company. In January 2002, MedImmune acquired Aviron, a company focused on the prevention of disease through vaccine technology. MedImmune shares have been climbing since the biotech firm's partner Wyeth announced it was discontinuing a flu vaccine as the pharmaceutical company focusing on "new flu immunization technologies." Specifically, Wyeth is working with MedImmune to win approval for a new nasal spray flu vaccine, called FluMist. An FDA advisory panel is scheduled to review FluMist on 12/17. There is also speculation that the company could be a take-over candidate, especially if its lead drug, Actimmune, becomes the first and only effective treatment for patients with idiopathic pulmonary fibrosis, a fatal disorder marked by scarring of the lungs. DEC 20.00 MEQ XD LB=0.30 OI=4943 CB=19.70 DE=28 TY=5.5% ***** MSTR - MicroStrategy $18.16 *** Expanding Its Markets! *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via Web, wireless, and voice. PC Magazine selected MicroStrategy 7 as the "Editor's Choice" in 2001 for business intelligence software. MicroStrategy has expanded its market in recent months and its shares have been among the best performing issues in the business software group. Investors who wouldn't mind owning the stock near a cost basis of $12 should consider this position. DEC 12.50 EOU XV LB=0.30 OI=16 CB=12.20 DE=28 TY=8.3% ***** SEE - Sealed Air $21.33 *** Asbestos Claims Speculation *** Sealed Air (NYSE:SEE) through its subsidiaries, is engaged in the manufacture and sale of a wide range of food, protective and specialty packaging products. The company operates in two business segments: Food Packaging, which provides a variety of flexible films, bags and associated packaging and absorbent pads, and Protective and Specialty Packaging, which include its cushioning and surface protection products and certain other products. Sealed Air conducts substantially all of its business through two direct wholly owned subsidiaries, Cryovac, Inc. and Sealed Air Corporation (US). These two subsidiaries directly and indirectly own substantially all of the assets of the business and conduct operations themselves and through subsidiaries around the globe. Shares of corporations facing asbestos-related liabilities have rallied since the Republicans won control of the U.S. Congress, based on investor's optimism that new legislation will limit future asbestos lawsuits against businesses. Sealed Air has an asbestos claims trial due to start in early December that will determine whether the company is liable for part of the asbestos claims faced by W.R. Grace & Co. because of Sealed Air's 1998 acquisition of the specialty chemical maker's food packaging business. Speculative traders can profit from a continued recovery in the issue with this position. DEC 15.00 SEE XC LB=0.25 OI=4075 CB=14.75 DE=28 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 ELX 24.67 DEC 20.00 ELX XD 0.55 2004 19.45 28 10.4% CMVT 11.89 DEC 10.00 CQV XB 0.30 2862 9.70 28 10.3% CVC 17.55 DEC 15.00 CVC XC 0.45 2399 14.55 28 9.9% ZRAN 18.80 DEC 15.00 ZUO XC 0.35 585 14.65 28 9.3% GNSS 18.98 DEC 15.00 QFE XC 0.35 917 14.65 28 9.2% AMZN 23.99 DEC 20.00 ZQN XD 0.35 7055 19.65 28 6.4% QCOM 40.68 DEC 35.00 AAW XG 0.65 10592 34.35 28 6.3% BRCM 20.64 DEC 15.00 RCQ XC 0.25 3604 14.75 28 6.2% CREE 22.49 DEC 17.50 CVO XW 0.25 842 17.25 28 5.7% ISSX 24.48 DEC 17.50 ISU XW 0.25 135 17.25 28 5.3% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Consolidation Is Definitely In Order! By Ray Cummins Stocks ended mixed Friday as investors took profits after another week of bullish activity. Technology shares led a brief rally during the morning session but eventually faded to a mildly positive close with the NASDAQ finishing up 1 point at 1,468. Despite ending 40 points lower at 8,804, the Dow posted its seventh-consecutive positive week; a feat not seen in the past four years. The broader S&P 500-stock index was down 3 points at 930. All three major averages have enjoyed substantial gains since the early October lows. Trading volume came in at 1.61 billion on the NYSE and at 1.96 billion on the technology exchange. Winners just edged past losers on both the NYSE and on the NASDAQ. In the bond market, the 10-year note lost 6/32 to yield 4.18% while the 30-year government bond moved up 3/32 to yield 5.02%. On the equity fund-flow front, Trim Tabs estimated that all equity funds had outflows of $3.2 billion in the week ending November 20 compared with inflows of $2.6 billion in the prior week. Equity funds that invest mainly in U.S. stocks saw outflows of $3.2 billion versus inflows of $1.8 billion in the prior week. Surprisingly, bond funds had inflows of $2.4 billion for the second consecutive week. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status BR 42.01 40.99 DEC 35 37 0.30 37.20 $0.30 Open EBAY 64.79 70.09 DEC 50 55 0.55 54.45 $0.55 Open IGEN 36.49 38.89 DEC 25 30 0.65 29.35 $0.65 Open SLM 102.94 98.60 DEC 85 90 0.65 89.35 $0.65 Open? DE 49.00 49.72 DEC 40 45 0.65 44.35 $0.65 Open INTU 52.91 53.00 DEC 40 45 0.50 44.50 $0.50 Open LLY 62.24 65.73 DEC 50 55 0.55 54.45 $0.55 Open IGT 77.06 79.20 DEC 65 70 0.55 69.45 $0.55 Open KSS 66.90 65.45 DEC 55 60 0.55 59.45 $0.55 Open PIXR 55.67 58.10 DEC 45 50 0.50 49.50 $0.50 Open Strangely, shares of Sallie Mae (SLM Corp. - NYSE:SLM) plunged $5 after a speech by N.C. Senator John Edwards in which he proposed creating a program that would make the first year of college free. It remains to be seen whether this was the real cause for the drop thus traders should monitor the issue closely in the coming week. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status ABC 72.45 59.31 DEC 85 80 0.65 80.65 $0.65 Open SBGI 10.60 13.28 DEC 15 12 0.70 13.20 ($0.08) Closed MCO 45.12 43.48 DEC 55 50 0.40 50.40 $0.40 Open WLP 74.04 69.74 DEC 90 85 0.60 85.60 $0.60 Open UNH 86.83 84.62 DEC 105 100 0.55 100.55 $0.55 Open DNA 35.46 35.40 DEC 45 40 0.60 40.60 $0.60 Open DP 40.40 36.74 DEC 50 45 0.40 45.40 $0.40 Open LXK 63.75 66.17 DEC 75 70 0.60 70.60 $0.60 Open? Sinclair Broadcast Group (NASDAQ:SBGI) has rallied in conjunction with the bullish activity in the media group and conservative traders should consider closing the position. Lexmark (NYSE:LXK) has also renewed its upward trend, thanks to the strength in Hewlett-Packard (NYSE:HPQ), however the issue has another level of resistance near the sold strike at $70. SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V G/L Status ABT 45.89 43.80 DEC 50 40 0.10 0.00 0.10 Open NXTL 9.69 13.83 JAN 12 7 0.10 2.50 2.60 Open? FCS 13.30 13.40 FEB 17 10 0.10 1.00 1.10 Open LTXX 6.83 8.29 FEB 10 5 0.00 0.50 0.50 Open MENT 10.35 11.21 JAN 12 7 0.10 0.80 0.90 Open COX 30.25 30.81 DEC 35 25 0.10 0.20 0.30 Open OMC 66.32 66.58 DEC 75 55 0.15 0.00 0.15 Open Nextel (NASDAQ:NXTL) has been one of the best plays this month, offering up to $2.60 profit in the speculative position. The "Reader's Request" positions in FCS, LTXX, and MENT have also performed very well, offering favorable early-exit opportunities during the bullish activity. CALENDAR SPREADS **************** Symbol Pick Last Long-Opt Short-Opt Debit M/V Status HNT 25.75 26.30 JAN-30C NOV-30C 0.75 0.60 Open SHRP 22.90 23.43 FEB-25C DEC-25C 1.00 1.00 Closed WSM 24.53 25.18 FEB-30C DEC-30C 0.80 1.00 Open GISX 20.21 19.41 FEB-22C DEC-22C 0.95 0.75 Open The Sharper Image (NASDAQ:SHRP) took a turn for the worse this week despite reporting higher revenues and a smaller quarterly loss compared with a year earlier. The results exceeded the current consensus estimates amid excellent sales and greatly improved operating performance, but investors did not shower the stock with affection after the news. Based on the bearish activity, it may be time to move on to another play. Among the new positions, Williams Sonoma (NYSE:WSM) has already achieved a small profit while Global Imaging Systems (NASDAQ:GISX) has moved back to the middle of its recent trading range near $19. SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit G/L Status AES 2.92 1.77 J04-7.5P J03-2.5P 4.50 0.25 Open IMCL 7.77 15.04 J04-15P JO3-5P 8.00 2.25 Open? After over a month in the position, ImClone (NASDAQ:IMCL) has paid off nicely and with the issue now trading above $15, the profit in the play is up to $2.25. CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V G/L Status ERTS 64.13 67.18 DEC 70 55 2.40 1.50 0.90 Open MDCO 12.70 16.49 DEC 17 7 1.25 0.75 0.75 No Play The Medicine Company (NASDAQ:MDCO) gapped-up at the open Monday after the company presented clinical data Sunday suggesting that its blood-thinning drug, Angiomax, is as effective as heparin, but safer and less costly for patients undergoing procedures to remove blockages from coronary arteries. Had the position been initiated, it would be profitable but conservative traders would likely have avoided the issue until the volatility receded. 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. The positions in this section are speculative (out-of-the-money) spreads with low initial costs and large potential profits. ***** UAL - United Airlines $3.59 *** Cheap Speculation! *** UAL (NYSE:UAL) is a holding company, the principal subsidiary of which is United Air Lines, Inc. (United), which is wholly owned. United accounted for most of the company's revenues and expenses in 2001. United is a major commercial air transportation company throughout the United States and abroad. United's global network provides transportation service within its North America segment and to international destinations within its Pacific, Atlantic, and Latin America segments. This position offers favorable speculation with minimum risk and reasonable reward potential for traders who to profit from UAL's recent recovery and their attempt to avoid bankruptcy. PLAY (very speculative - bullish/calendar spread): BUY CALL FEB-5.00 UAL-BA OI=14444 A=$0.90 SELL CALL DEC-5.00 UAL-LA OI=14354 B=$0.55 HV(100 day)=179 LONG OPTION IV=177 SHORT OPTION IV=227 INITIAL NET DEBIT TARGET=$0.35-$0.40 TARGET PROFIT=0.30-$0.50 ************** 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. ***** AZO - Autozone $85.32 *** Earnings Speculation! *** AutoZone (NYSE:AZO) is a specialty retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. The company operated over 3,000 auto parts stores in the United States and 21 in Mexico. Each store carries an extensive product line for cars, vans and light trucks, including new as well as re-manufactured automotive hard parts, maintenance items and car accessories. The company also has a commercial sales program in the United States that provides commercial credit and prompt local delivery of parts and other products to repair garages, dealers and service stations. AutoZone does not sell tires or perform automotive repair or installation. In addition, the company sells automotive diagnostic and repair information software through its ALLDATA subsidiary, and diagnostic and repair information through alldatadiy.com. The company's quarterly earnings are due 12/12. PLAY (very conservative - bullish/credit spread): BUY PUT DEC-70 AZO-XN OI=1992 A=$0.70 SELL PUT DEC-75 AZO-XO OI=3279 B=$1.00 INITIAL NET-CREDIT TARGET=$0.45-$0.60 POTENTIAL PROFIT(max)=9% B/E=$74.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=89% ***** FPL - FPL Group $59.87 *** Utility Sector Hedge *** FPL Group (NYSE:FPL) is focused on energy-related products and services. The Company has a growing presence in 24 states and its principal subsidiary, Florida Power & Light Company, serves almost four million customer accounts in Florida. FPL Energy, LLC, FPL Group's energy-generating subsidiary, operates over 75 generating facilities in 16 states, with more than 6,500 megawatts of capacity. PLAY (conservative - bullish/credit spread): BUY PUT DEC-50 FPL-XJ OI=10229 A=$0.50 SELL PUT DEC-55 FPL-XK OI=882 B=$1.00 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$54.45 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=80% ***** UOPX - University of Phoenix Online $36.65 *** Rally Mode! *** University of Phoenix Online (NASDAQ:UOPX) is a provider of unique, accessible, and accredited educational programs for working adults. The firm began operations in 1989 by modifying courses developed by University of Phoenix's physical campuses for delivery via modem to students worldwide. University of Phoenix Online now offers 11 accredited degree programs in business, education, information technology and nursing. Students can participate in their online classes anytime via the Internet by using basic technology such as a Pentium-class personal computer, a 28.8K modem and an Internet service provider, thereby enhancing the accessibility of and the potential market for its programs. PLAY (more aggressive - bullish/credit spread): BUY PUT DEC-30.00 JSX-XF OI=141 A=$0.35 SELL PUT DEC-33.75 JSX-XZ OI=31 B=$0.80 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=15% B/E=$33.30 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=72% ***** IDPH - IDEC Pharmaceuticals $39.27 *** Trading Range? *** IDEC Pharmaceuticals (NASDAQ:IDPH) is a biopharmaceutical company engaged primarily in the research, development, manufacture and commercialization of targeted therapies for the treatment of many cancer and autoimmune and inflammatory diseases. The company's two primary commercial products, Rituxan and Zevalin (ibritumomab tiuxetan), are for use in the treatment of B-cell non-Hodgkin's lymphomas. The company is also developing new products for the treatment of cancer and various other autoimmune diseases such as rheumatoid arthritis, psoriasis, allergic asthma and allergic rhinitis. Rituxan, the company's first product, and Zevalin, its second product approved for marketing in the United States, as well as its other primary products under development, address immune system disorders such as lymphomas, autoimmune and many inflammatory diseases. In addition, the company has discovered other product candidates through the application of its unique technology platform. PLAY (conservative - bearish/credit spread): BUY CALL DEC-50 IDK-LJ OI=2202 A=$0.25 SELL CALL DEC-45 IDK-LI OI=16657 B=$0.80 INITIAL NET CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$45.60 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=80% ***** UHS - Universal Health Services $44.85 *** Sector Slump! *** Universal Health Services (NYSE:UHS) owns and operates acute care hospitals, behavioral health centers, ambulatory surgery centers, radiation oncology centers and women's centers. The firm currently operates 73 hospitals, consisting of 35 acute care hospitals and 38 behavioral health centers located in Arkansas, California, Delaware, the District of Columbia, Florida, Georgia, Illinois, Indiana, New Jersey, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Nevada, Oklahoma, Pennsylvania, Puerto Rico, Tennessee, South Carolina, Texas, Utah, Washington and also France. Universal Health, as part of its Ambulatory Treatment Centers Division, owns outright or in partnership with physicians, and operates or manages, 23 surgery and radiation oncology centers located in 12 states. PLAY (conservative - bearish/credit spread): BUY CALL DEC-55 UHS-LK OI=50 A=$0.30 SELL CALL DEC-50 UHS-LJ OI=204 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$50.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=85% ******************* 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. ***** FLEX - Flextronics $11.15 *** Earnings On Track! *** Flextronics International (NASDAQ:FLEX) is a provider of advanced electronics manufacturing services to a unique group of original equipment manufacturers, primarily in the hand-held electronics devices, information technologies infrastructure, communications infrastructure, computer and office automation and consumer devices industries. The company provides a network of design, engineering and manufacturing operations in 28 countries across four continents. The company's strategy is to provide its customers with end-to-end operational solutions where it takes responsibility for engineering, new product introduction & implementation, supply chain management, manufacturing and logistics management, with the goal of delivering a complete packaged product. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-12.50 QFL-AV OI=7812 A=$0.60 SELL PUT JAN-10.00 QFL-MB OI=4500 B=$0.65 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 $400 per contract. ***** ZRAN - Zoran Corporation $18.80 *** On The Rebound! *** Zoran Corporation (NASDAQ:ZRAN) develops and markets integrated circuits, integrated circuit cores and embedded software used by original equipment manufacturers (OEMs) in digital video and audio products for commercial and consumer markets. The firm's unique multimedia product line consists of four primary product families: DVD, comprised of video and audio decompression products based on MPEG, Dolby Digital and DTS; filmless digital cameras, comprised of video compression and decompression products; PC Video, based on video compression and decompression products that utilize JPEG technology and universal serial bus multimedia controllers, and Digital Audio, comprised of audio decompression products. PLAY (very speculative - bullish/synthetic position): BUY CALL DEC-22.50 ZUO-LX OI=60 A=$0.35 SELL PUT DEC-15.00 ZUO-XC OI=585 B=$0.35 INITIAL NET CREDIT TARGET=$0.10-$0.15 TARGET PROFIT=$0.40-$0.65 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $415 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. ***** SLAB - Silicon Laboratories $25.16 *** Premium Selling! *** Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and sells proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline and optical communications industries. Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. The company's mixed-signal engineers use standard complementary metal oxide semiconductor (CMOS) technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. The firm's expertise in analog CMOS and mixed-signal IC design allows the company to develop new products rapidly, which enables their customers to improve their time-to-market with end products that respond to consumer demand in the communications industry. PLAY (aggressive - neutral/credit strangle): SELL CALL DEC-30.00 QFJ-LF OI=333 B=$0.55 SELL PUT DEC-20.00 QFJ-XD OI=324 B=$0.40 INITIAL NET-CREDIT TARGET=$1.00-1.10 PROFIT(max)=16% STATISTICAL PROBABILITY OF PROFIT (100-day HV)=70% UPSIDE B/E=$31.00 DOWNSIDE B/E=$19.00 ***** ************************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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