The Option Investor Newsletter Sunday 12-01-2002 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: Eight Weeks and Counting Futures Market: A Little Indigestion Index Trader Wrap: Down in flames! Editor’s Plays: Stand Aside Market Sentiment: Knocking on the Door Ask the Analyst: Leftovers Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Digestion Pause Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 11-29 WE 11-22 WE 11-15 WE 11-08 DOW 8896.09 + 91.25 8804.84 +226.75 8579.09 + 41.96 + 19.49 Nasdaq 1478.74 + 10.05 1468.74 + 57.60 1411.14 + 51.86 - 1.41 S&P-100 478.85 + 3.82 475.03 + 11.31 463.72 + 6.33 - 0.77 S&P-500 936.31 + 5.76 930.55 + 20.72 909.83 + 15.09 - 6.22 W5000 8846.68 + 63.55 8783.13 +199.08 8584.05 +145.25 - 63.40 RUT 406.36 + 6.36 400.00 + 14.08 385.92 + 6.93 - 4.46 TRAN 2360.62 + 46.64 2313.98 - 19.12 2333.20 - 13.68 + 31.20 VIX 31.08 + 4.35 26.73 - 4.10 30.83 - 2.73 - 0.42 VXN 49.48 + 2.00 46.49 - 3.19 49.68 - 2.33 + 2.15 TRIN 1.04 1.05 0.67 1.80 Put/Call 0.62 0.70 0.57 1.05 ****************************************************************** Eight Weeks and Counting by Jim Brown For the first time since March 1998 the Dow has stretched it's winning streak to eight weeks. It did so with a +91 point gain for the week which was 1/3 of the Wednesday total. That gain was the largest Thanksgiving Wednesday gain ever. The challenge we will continue to face now is the nearly +1600 point Dow rise since the October lows that culminated on last Wednesday. Dow Chart – Daily Nasdaq Chart – Daily The markets tried to rally on Friday after the Semiconductor Industry Association said chip sales rose in October by +1.8%. Flash memory was up +6.9%, PC chips +6.5% and DSP chips +4.4%. This unexpected growth is pointing to a better than expected 2003 and some stealth growth possibilities for December. The Nasdaq Compx ran up to within three points of 1500 on the news but sold off to 1479 on profit taking in the shortened session. There were no economic reports on Friday and the negative sentiment came from UAL. Talks with labor unions regarding required cuts in labor costs had failed and it now appears more likely UAL will have to file bankruptcy because it cannot get a government guaranteed loan. The impact of a UAL bankruptcy would be the bankruptcy of several other airlines to avoid giving UAL an unfair advantage of a reduced cost structure. A bankruptcy would give an airline the opportunity to drop unprofitable routes, cancel rental contracts on unused gates, restructure debt and break unfavorable union contracts. Other airlines cannot afford to allow a major carrier like UAL to gain these advantages. This sets up a series of domino events if UAL files. After the bell Massachusetts announced it was going to appeal the federal judge's decision to accept the MSFT settlement. They were one of several states that had until Monday to file an appeal. Iowa issued a statement late Friday saying it had declined to appeal and West Virginia was the only state left which had not made an announcement. That announcement would be made on Monday. MSFT has traded flat for the last three weeks as the clock wound down on the appeal process. If Massachusetts is the only state to decline the settlement then MSFT should rally as fighting one state would have far less impact than a consortium of nine. In addition to the weight of an eight week winning streak the markets will have to fight a solid economic calendar and the beginning of earnings warning season next week. Economically the week begins with the ISM Index and Construction Spending on Monday, Productivity, Factory Orders and ISM Non-manufacturing on Wednesday. The big report comes on Friday with Non-farm payrolls. The triple threat of two ISM reports and the Non-farm payrolls could keep a lid on future gains. The trading on Friday was lackluster at best with the NYSE posting the lowest volume day for the year at 638 million shares. Nasdaq volume was less than 850 million shares. Ironically the VIX gained +4.35 for the week and closed well over the 26.73 level from the prior Friday. With the market up for the week and pressing upper resistance it is very clear that investors are scared this rally is about to fail. It is very rare that the VIX moves up this strongly on positive market gains. This increase in bearishness is actually good for the markets despite the possibility of profit taking next week. It simply means that the current irrational bullishness may have run its course and we are moving back into a more fundamental basis. The Nasdaq NDX fell back below its 200 DMA at 1121 despite the positive semiconductor news. This could be a clear indication that the tech stocks are running out of steam at this level and the +40% gains from the October low are about to shrink. Warnings from tech companies next week could accelerate this demise. The Compx has the same 200 DMA resistance at 1495. The Dow has plenty of room before hitting it's 200 DMA at 9183 but has plenty of resistance in the 9000-9050 range to keep it busy. Trading will be complicated by several high profile analysts meetings. Cisco will host a meeting on Tue/Wed to update analysts. HPQ will do the same thing on Tue/Wed with AOL also presenting on Tuesday and INTC on Thursday. Any of these meetings can cause serious market volatility with any unexpected positive or negative guidance. The outlook for next week is bullish on a sentiment basis and bearish on a technical basis. Without additional positive news from the economic reports or positive guidance from stocks, any attempt to move higher through current resistance will be difficult. Sentiment can only provide so much lift without some confirming fundamentals. With warnings likely to start next week this sets up some rocky days ahead. I fully believe there will be some dips but I also believe those dips will be bought by bargain hunters looking to stuff their mattress for the years ahead as well as stockings for the holiday season. Enter Very Passively, Exit Very Aggressively! Jim Brown "There is only one side to the market and it is not the bull side or the bear side, but the right side". - Jesse livermore ************** FUTURES MARKET ************** A Little Indigestion By John Seckinger jseckinger@OptionInvestor.com The major markets seemed to have a little indigestion after the impressive gains seen on Wednesday. Following Friday's shortened session, has anything changed? You might be surprised. Friday, November 29th at 1:15 p.m. Contract Net Change High Low Volume ES02Z 933.50 -4.50 942.50 931.00 151,426 YM02Z 8870.00 -57.00 8960.00 8850.00 4,813 NQ02Z 1117.00 -8.00 1136.00 1084.00 177,026 ES02Z = E-mini SP500 futures YM02Z = E-mini Dow $5 futures NQ02Z = E-mini NDX 100 futures Note: The 02Z suffix stands for 2002, December, and will change as the exchanges shift the contract month. The contract months are March, June, September, and December. The volume stats are from Q-charts. Fundamental News: There were no economic reports released during Friday's shortened session, and a lot of attention during Black Friday was towards the retail sector. A few companies making headlines was UAL and Sealed Air (SEE). UAL mechanics voted to reject pay cuts that was critical for the airline ability to receive financial aid, sending shares of UAL 23% lower to 2.79. The intra-day low was 1.72. Shares of Sealed Air (SEE) rose 13.33 points, or 54.45%, after reports on settling its W.R. Grace asbestos litigation. Technical News: The Dow posted its eight consecutive weekly gain, a streak not achieved since 1998. For the Nasdaq, seven out of the last eight weeks have resulted in gains. On Friday, there was solid buying in shorter-term maturities and is viewed as slightly bearish for equities. The dollar (DX00Y) did come under slight pressure, and solid resistance at 106.75-106.90 level proved to be too much for longs. A close above 106.90 would be viewed as bullish for stocks, while a move back under 106 could pressure stocks going forward. Another index to watch the next few weeks will be the Retail Sector ($RLX), lower on Friday but solidly higher for the week. Currently at 291.87, price compression seen from mid-September indicates an increase in volatility is likely. A move either above 300 or below 275 should be the catalyst for an extended move towards either 325 or 260, respectively. ================================================================= The slight weakness in the YM, NQ, and ES contract didn't threaten to erase this week's gains; however, it would have been nice for bulls if prices stayed above the resistance cleared just a few days earlier. With the ISM report due out on Monday at 10:00 a.m. (estimates for 49.5 versus 48.5, month prior), sentiment should be clearly defined and either the 9077 or 8650 level will come into play. Note: Because of the significant increase in the Chicago PMI report, I would not be surprised to see a 51 ISM number. Currently, least resistance is still higher; however, for the first time, we are starting to see PRICE confirmation within short-term charts on the possible bearish divergence profiled last week. Disclaimer: The only time I would recommend trading a bearish divergence BEFORE price confirmation is on a weekly chart. Currently, we do NOT have a bearish confirmation on a weekly basis. Moreover, if the Dow closes above 9077, there is a good chance the market(s) will begin a new wave higher and squeeze traders selling based off unconfirmed longer-term bearish divergence readings. The December Mini-sized Dow Contract (YM02Z) With the Dow unable to test the 50% retracement at 8935 and 200 DMA (exp) at 8946 (most likely triggering a move to 9077), it is once again time to see if the slight weakness could amount to something. It is interesting that trading volume has been weak while prices have been rising, a weak sign. Of course, we could get a spike in volume and technicians could call it a top. Since On Balance Volume is not making a lower high and still showing signs of demand, we will keep this weak volume on the back burner, for now. Chart of Dow Jones, Weekly Looking at a chart of the YM contract, prices falling under 8785 does give an indication of technical weakness (confirming bearish divergence); however, light volume on Friday does become a factor. Fortunately, there was not any more technical damage, and going forward bulls will have to make sure the 8650 area holds. There should be support at 8750 along the way. If taking things on a short-term basis, traders can look for a bounce at both 8825 and 8800. In order to keep the bullish sentiment intact, prices will need to rise above 9000 and turn the resistance (diagonal blue line) sloping upward into support. Chart of YM02Z, 60-minute YM02Z Support Resistance Pivot 8850 8915 9077 8825 9000 9000 8800 9077 8750 8750 9102 8650 8650 Bold signifies levels within the Dow Jones. The December E-mini Nasdaq 100 Contract (NQ02Z The Nasdaq 100 closed above the 1000 level once again, but unable to test solid resistance from 1138 to 1142. A close back underneath 1000 should have the index falling to the 1070-80 area. Sentiment would turn neutral near 1080, but a close under 1070 would certainly have bearish implications. As always, a close above serious resistance (1142) should keep the market above 1142 until a test near 1175 is attained. Chart of NDX, Daily A chart of the mini-Nasdaq contract (NQ02Z) shows prices selling off shortly after 1 p.m. on Friday (1114 to 1084 on basically no volume) and almost setting a new relative low. With the On Balance Volume (OBV) indicator compressing, look for a decrease in OBV on a pullback for confirmation if short. A rise in OBV will be expected if the ND02Z index finds a bid. Since the contract is within a range of 1145 to near 1080, aggressive traders can use 1000 as a pivot and play for a move either to 1030 or 1090 once above or below 1000. Chart of NQ02Z, 60-minute NQ02Z Support Resistance Pivot 1100 1130 1142 1079 1138 1085 1072 1142 1065 1172 1058 1200 Bold signifies levels within the NDX. The December E-mini S&P 500 Contract (ES02Z) The positives within the ES contract include prices staying above the bearish trend line that began in March, as well as a weekly close above 936. Moreover, there was a higher high and low for the week. If prices continue to bid, look for resistance at 944.75 and then, more importantly, near the 50% retracement level of 971. The negatives regarding the ES contract include declining volume and lack of strength in the on balance volume indicator (note: there is not a bearish divergence). Weakness should be accompanied by support at 927 and 912 (weekly low). Chart of S&P 500 Index, Weekly A chart of the ES02Z contract shows prices setting a new high at 942.50; however, late day weakness did manage to take the index back below 941 (previous high) and even the 931.50 slightly after the 1 p.m. close. Nevertheless, this could be viewed as a "bearish hook reversal" and might signal some longs are trapped. Bulls will now most likely need a move back above 942, or be forced to liquidate. If the ES contract stayed above the 937.50 to 941 area, we would now be talking about a quick move to 950. Going forward, the 927 area can only be tested so many times before failing to hold. If prices do fall underneath, a move to 918.75 will most likely materialize. Key support under 918.75 is seen at 908.50. Chart of ES02Z, 60-minute ES02Z Support Resistance Pivot 927 941-942 918.75 923 944.75 944.75 918.75 965 908-910 971 Bold signifies levels within the S&P 500. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Down in flames! By Leigh Stevens lstevens@OptionInvestor.com Not the market, but it looks like this will be the fate of UAL after the UAL Machinists Union requested pay cuts vital to the airlines survival or at least to keep it out of bankruptcy. This news helped put a lid on further upside in the Indices, which was in light post-holiday trade anyway. If I was a different person I might get on a RANT about how short-sighted unions and their members can be! – they would seemingly rather go down in flames also rather than think of the larger good of the company that makes the money that pays their wages. Not too many far-sighted workers these days, especially when they see senior managers making off with millions from the company coffers and they are looking at hourly earnings as their sole way to get a piece of the pie. Shares of UAL plunged $1.18 (33%), to $2.45 in heavy trading in Friday's shortened session. The stock had already fallen to 40- year lows this fall. UAL is in the Dow Transportation average. The labor savings are the backbone of the airline's request for a $1.8 billion federal loan guarantee, and UAL has warned of a likely Chapter 11 bankruptcy filing soon if the government rejects its request. The Air Transportation Stabilization Board is expected to announce its decision at any time now. United's pilots and other employee groups have accepted proposed wage cuts, but their agreements expire Dec. 31 unless all the airline's workers agree to concessions. United faces a $375 million debt payment Monday and says it is in urgent need of a $2 billion loan to shore up dwindling cash reserves, believed to have fallen to less than $1 billion. It says lenders are unwilling to grant such a loan without the government guaranteeing 90% of it. Stay tuned on Monday – a missed loan payment may roil the market and it (the market) looks due for a correction technically as I will get into shortly. TRADING ACTIVITY AND OUTLOOK – The Dow lost 36.68 to end at 8895 in very light trading, while the Nasdaq Composite Index gave back about 9 points to end at 1478.77. The bond market also had an shortened trading days, ending at 2 p.m. While stocks slipped a bit on Friday, they still managed to end in the black for the week, marking the 8th straight week of advances. The Dow industrials rose 1% for the week, while the Nasdaq Composite (COMPX) climbed 0.7% and the S&P 500 index (SPX) was up 0.6%. It was the longest winning streak for the Dow since early-98, when the Industrials moved higher every week for some 11 weeks. Investors and traders focused on consumer spending for the shopping season ahead. The look is for evidence that the consumer, THE key pillar for the economy this year, is still shelling out big bucks for goods and services. Friday market the optning of the holiday-shopping season, and retailers are offering shoppers a promotional frenzy aimed at generating spending. A lack of must-haves, combined with a season 6 days shorter than a year earlier, exacerbates what is already expected to be a difficult holiday given the sluggish economy. Moreover, there are expectations of fewer goods on the shelves as the 10- day West Coast dock strike slowed down crucial merchandise shipments. Renewed violence overseas also kept a lid on bullish sentiment. Terrorism is a restraining factor whenever we have seen these big “events” – we got this in the coordinated assault on Israelis in Kenya involving a car bombing and an attempted missile attack on a chartered Israeli passenger jet – the reports were that two shoulder fired missiles were used but they fortunately missed their intended target. I can certainly imagine a bigger market reaction if this jetliner had been brought down. This is a new threatening element if these guys have Stinger missiles in their arsenal of evil. MY INDEX OUTLOOKS - S&P 100 Index (OEX) – Daily and Hourly charts: We still cannot say from a technical perspective that the trend is UP in the S&P indices. The S&P 100 or OEX would have to climb above it August high in the 486 area to “confirm” a reversal of its trend from down to up. The equivalent figure in the S&P 500 (SPX) is 960 – the 100 index has come close to its prior high, as can be seen on the chart below. (SPX has been shy of its prior high by 20 points so far.) My commentary is unchanged from last week in one respect – “pivotal” near support is seen at 470, at the prior recent highs that were exceeded the week before last. While OEX could still get above 486 in the coming week, I think there is more likely to be a corrective pullback or correction than there is a move to a new high. This based on the approach of prices last week to the major weekly down trendline and the overbought condition registering on the 14-day stochastic model and, which is being approached by the 8-week RSI – see these oscillator type indicators on the charts below: I am still of the view that recent highs or the 486 prior price peak will cap the present rally for the near-term and a correction follows. My suggestions are to take trading profits on OEX long calls held from lower levels and purchase OEX puts as a play on the downside. Risk to a new high close above 486 – although one day above 486 would not be enough to make a convincing case for a new up “leg” – better that we see two consecutive closes above the prior (August) 486 high. On the downside, the suggested “layers” of support in OEX are 470 – if penetrated, then next support is pegged at 455. A 30 point correction off the recent high is about what I would expect, with a possible drop to 445 in a retest of technical support in this area. A close under 445 for 1-2 days would suggest that OEX is still in a bear trend and the recent rally has been a bear market rally only – which, of course, is the view of our fuzzy furry bear friends. My view is that the market may be turning or emerging into a moderate bull market. However, the case must still be made (or “proven”) in terms of the S&P and the Dow. DJ Industrial Index (INDU) Daily: In terms of the Dow, 9000 is pivotal resistance – 9077 is the prior (up) swing high from August. A “minimum” upside objective based on the bullish flag consolidation has been met already. I think its tougher sledding from here and suggest selling rallies for a next trade for the Dow 30 Index, if not already long DJX puts. Risk to reward of a bearish play here looks favorable - I estimate downside potential to at least near trendline support in the 8600 area – versus “risk” to a close over 9000, which would be my exit point in a bearish put play. I said last week that the most bullish outlook was suggested by a “bull flag” pattern on the daily Dow chart, suggesting a “minimum” upside objective to the 8900 area without much pause or only minor corrections. Flag patterns imply typically that after the brief consolidation (e.g., a few days) that forms the flag formation, this will be followed by another rapid and strong move in the same direction as the prior initial thrust. Sometimes flag patterns work out the way described on the indices, sometimes not – the pattern is more reliable on stocks in terms of “fulfilling” the minimum objective implied by the pattern and for the tendency to have a rapid further move in the same direction. For more on flags, you can go to my Trader’s Corner article on the subject at – http://www.OptionInvestor.com/traderscorner/081502_1.asp NASDAQ COMPOSITE (COMPX) Daily chart – As suggested previously, COMPX achieved the predicted move to 1500, which I thought would be significant technical and psychological resistance. Since 1500 appears to be the key resistance it was also an area to at least take all or partial profits on Nasdaq index calls and then to possibly also go the other way - into puts. Also, the risk-to-reward looks favorable here for puts in that the index is both “overbought” (from having had a prolonged move already) and is up against significant technical resistance (in this case implied by its 200-day moving average) at 1500. By “risk” being favorable relative to reward or downside potential, what is meant is that the index hit a significant target (1500) and an “exit” point on puts makes sense at just above 1500; i.e., not far from the entry point which also makes sense from the chart perspective. Risking a small amount doesn’t always make sense if only a minor fluctuation will cause a “stop” point to be triggered. However, when at a significant support/resistance point, achieving a breakout above/below this point is tough. Its like when the home team is 5 yards from an opposing team touchdown – they dig in and its tough going to get that last little bit of ground. Yes Virginia, the market is like a football game. Relative to an amount “risked” in this kind of situation where an index is hitting resistance - downside potential can be 2-3 times greater (than the risk/stop point) as the odds build that there will be a reaction or pullback from that resistance. In this case exit on a close over 1500 or an intraday move to above 1510. Near support is 1400-1425, with a close below 1400 suggesting further downside potential to the next estimated support at 1375; next lower technical support then looks to be around 1320. QQQ Daily/Hourly charts: The resistance area I’ve been suggested around 28 has been capping QQQ rallies so far. The odds of further upside, say to the 29-30 zone looks to be less after viewing the past week’s action and considering the odds for some profit taking selling in the Nasdaq 100 stocks considering the run up they’ve had. A close above 30 is my exit point for QQQ shorts and QQQ put positions. What is suggesting to me that the Q’s are due for a correction is the slowing volume trend – volume is no longer expanding – and the bearish price/RSI divergence as QQQ has gone to a new high on less “relative” strength. Moreover, the tracking stock has gotten up to resistance implied by the top end of its uptrend channel on the daily chart and to its upper trendline on the hourly chart – see the side by side charts above. ************************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 ************** Stand Aside This was one of those frustrating weekends where I simply found nothing that I was willing to bet on. With bullish sentiment running rampant and about to hit a resistance wall do you buy the leaders and hope for a break through or do you sell the weak stocks and hope for a break down? Either way you are betting on hope and nothing stronger than a directional chart. If you buy strong charts like RMFD or ORCL they could end up looking like TLAB today. RFMD Chart TLAB Chart The coming week is going to be pivotal. I expect some volatility to come back into the markets and with CSCO, HPQ, AOL and INTC all providing updates on Tue/Wed/Thr there will be no shortage of news. Hopefully good news but that is just hope at this point. I can't see playing calls on Monday and buying puts could be stepping in front of the train. I know this is heresy to some but I would favor staying flat unless the Nasdaq broke above 1500 or bounced off 1425. Anything in the middle is dangerous. For those of you that must buy something on Monday I think RFMD is looking strong. Very extended but over the 200 DMA and strong. Very risky! If you want to play the mid-quarter analysts meetings then the Dec-$15 straddle on CSCO is only $1.60 and the odds are very good it will move more than $1.60 in either direction. The INTC $20.00 put/$22.50 call strangle is $1.30 with INTC at $20.87. It could easily hit $15 or $25 depending on the news on Thursday. There is just nothing that just jumps out at me. I think there is a good chance the QQQ could hit support at $25.50 again but with four large tech companies having analyst meetings it could explode just as easily. I would much rather buy the straddle on CSCO for $1.60 than bet $1.00 naked on the QQQ. If you do not want to remain flat then that would be my suggested play. ***************** Play Recap: ***************** Rational Software call RATL never penetrated to the 10.60 resistance level with 10.20 being the high for the week on Monday. It pulled back to consolidate at the 9.00-9.25 level. We are patiently waiting for the eventual breakout. ***************** TLAB Breakout call Tellabs did not break the $10 entry level with a $9.57 high for the week. We are still waiting for an entry above $10.00 but it appears the trend might have changed. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Knocking on the Door By Steven Price Not much to report on a day when most traders stayed home and most investors either went shopping or found themselves in a food coma following Thanksgiving. We are approaching some significant resistance levels in the broader indices and even in today’s abbreviated session, we got some tests to decipher. After seeing gains of over 1700 points in the Dow, 370 points in the Nasdaq Composite and 300 points in the NDX, over the last six weeks, we are staring right at the 200-dmas in all three averages. It will take a renewed round of buying to blast through those averages, and today simply did not attract enough activity to get over the hump. That doesn’t mean we should be taking a bearish market view. In fact, we have tested these averages for the last few days in the tech indices and the pullbacks have fallen to successively higher levels. It certainly looks like the formation of another bullish triangle formation in the COMP and NDX, with a rising bottom and a flat top. The last time we saw this formation, we broke out in a powerful up move just a week ago. The August highs had formed the ceiling on the COMP, with the NDX finding a ceiling just above that level. The NDX was the first to break the August high, but it took a breakout in the COMP to confirm and get them both moving; the Dow and SPX followed. With the 200-dma now forming resistance in both of the techs, we have a pretty good idea what the breakout point will be. Both indices actually spent some time above the 200-dmas today, but were turned back by an end of day sell-off. The COMP made it over for the first time since March, while the NDX has closed above that level on 2 of the last 4 trading sessions. The NDX has been the first average to give us a directional signal recently and the fact that it seems to be building strength at this level looks good for the upside. A close of both averages above the 200-dma could be the catalyst for the next wave of buying. That breakout would coincide with a similar breakout in the COMP bullish percent. Right now the COMP is directly on top of the bearish resistance line that has contained the last few rallies. The current rally has already led to a higher high in the current column of “X,” following lower highs on the last two rebound attempts. A breakthrough of bearish resistance, when combined with a 200-dma breakout, will look very bullish, especially considering the signs of a turnaround we are starting to see in recent economic reports. The durable goods report that was released earlier this week showed a 65% increase in demand for communications equipment. Taiwan Semiconductor, the world’s largest chip foundry, recently said it saw an increase in PC demand for the fourth quarter. Today, the Semiconductor Industry Association reported that worldwide chip sales rose 1.8% sequentially in October, indicating demand is recovering. The economy is not going to turn around 180 degrees in a few days. We will most likely begin to see positive reports mixed in with the negative during the turnaround period. That seems to be what we are now seeing. If the techs get rolling, the broader indices should follow, if history is any indication. The Dow also has the 200-dma sitting just above it at 9183 and its August high at 9077. We may continue to see a struggle with these averages so close to the 200-dmas. This level no doubt brings in some shorts looking to pick a top. However, we continue to test the top of the range and each attempt is bringing us a little higher. The Dow, COMP and NDX all set new relative intraday highs again today and the sell- off at the end of the day looks like end of the month profit taking. While I have been bearish about the spending environment during much of the recent rally, I am starting to see signs of life. While the rally seems overdone, the previous sell-off during the fall seemed overdone, as well. Right now we are seeing most dips bring in more buyers, and this is a healthy sign for a continuing rally. As I write from a window that looks out on Chicago’s Michigan Avenue, I must admit that there is one seed of doubt that continues to cloud my vision of a rally. We are heading into the busiest shopping season of the year. While we are seeing some signs of an economic turnaround, we are certainly not there yet. There will be fewer Christmas bonuses this year and this week’s jobs report showed an increase in continuing claims, indicating it is taking longer for people to find jobs once they are unemployed. If retail numbers come in below already lowered expectations, we could see a more pronounced market pullback. After years of fighting crowds immediately after Thanksgiving, I didn’t have much trouble negotiating the walk from my hotel, down Michigan Avenue. This is the street that contains the majority of the high-end shops and malls in the downtown area. While there is certainly an increase from a normal shopping day, it is certainly not what I had grown accustomed to. Bebe warned today that same store sales were below expectations this month, following similar warnings from Wal-Mart and Federated. A poor shopping season could certainly slow down the rally, but still the tide seems to be turning in the right direction. We may not be beyond the possibility of another pullback, but I expect the pullbacks to continue to find higher levels of support. Look for a breakout above the 200-dmas in the tech indices as another long signal. The Dow is also finding resistance at the 38.2% retracement level from The January 2000 high, to last month’s low. That level lies at 8936 and not only adds to the current resistance, but also the significance of a breakout. While there will be short opportunities, I expect most dips to find buyers, so be quick to take profits on the downside, at least until the tide changes direction. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8896 Moving Averages: (Simple) 10-dma: 8716 50-dma: 8245 200-dma: 9183 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 936 Moving Averages: (Simple) 10-dma: 920 50-dma: 873 200-dma: 983 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1116 Moving Averages: (Simple) 10-dma: 1089 50-dma: 963 200-dma: 1121 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX pulled back 2% today, but after a gain of almost 80% since the middle of October, this does not seem like more than a slight correction. The last four pullbacks have come at successively higher levels and continue to look bullish. Traders should not expect the torrid pace of the recent rally to continue, but that doesn’t mean we aren’t headed higher. Remember, however, that the more furious the rally, the bigger a pullback can be without changing the trend. If we continue to see buyers each time we get a dip, then there is no reason to close long positions until we test 400. If, however, we get even a single lower low, traders may want to take profits and sit on the sidelines until the consolidation ends. 52-week High: 657 52-week Low : 214 Current : 373 Moving Averages: (Simple) 10-dma: 350 50-dma: 285 200-dma: 408 ----------------------------------------------------------------- The VIX held up over 30, as the Dow pulled back under 8900 and the Nasdaq and NDX failed their 200-dmas. After the big run of the last few weeks, traders were reminded that there is still a downside, and kept the puts pumped up. Readers should note the VIX increase the last couple of days, and be cautious with long plays. Someone is buying puts, indicating some downside fear still exists. While a market pullback may not be as severe as those in the past, the possibility still exists and is being reflected in the volatility measurement. CBOE Market Volatility Index (VIX) = 31.08 +0.24 Nasdaq-100 Volatility Index (VXN) = 49.48 +2.06 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.62 249,801 154,025 Equity Only 0.47 195,139 92,248 OEX 1.01 7,618 7,747 QQQ 1.04 15,367 16,074 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 49 + 2 Bull Confirmed NASDAQ-100 81 + 3 Bull Confirmed Dow Indust. 73 + 3 Bull Confirmed S&P 500 67 + 2 Bull Confirmed S&P 100 73 + 2 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.17 10-Day Arms Index 1.00 21-Day Arms Index 1.13 55-Day Arms Index 1.18 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 1238 1499 NASDAQ 1982 1529 New Highs New Lows NYSE 42 26 NASDAQ 96 28 Volume (in millions) NYSE 827 NASDAQ 821 ----------------------------------------------------------------- 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 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%) 11/26/02 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 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% 11/26/02 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 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%) 11/26/02 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 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% 11/26/02 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 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% 11/26/02 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 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%) 11/26/02 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 *************** Leftovers Jeff: If by any chance as the majority people pick, would like to have article on "HOW TO TRADE LIKE A MARKET MAKER AND TRADE LEVELS". This is my last "Thanksgiving themed" article. You can probably tell that the Thanksgiving holiday is one of my favorite times of year and perhaps in an earlier life I lived during that time. As it relates to "leftovers," we could discuss the coming week's lunch and dinner menu, but last week's "Ask the Analyst" poll had quite a few respondents asking me for come comments on how to trade stocks, or get in the mindset, of how a market maker will trade. I'll call those questions, which by count came in second to "Plan the trade and trade the plan" as "leftover questions." Then, as if that's not enough "leftovers," I'd like to start out with some technicals that a trader may look for as the bullish % charts get back into the upper ends of their more "overbought" conditions. Trading like a market maker has nothing to do with some type of forecast toward the fundamentals of a stock. At least not from the market maker's perspective. In its purest form, trading like a market maker has only to do with order flow (supply/demand), which you and I can't accurately measure, and matching that order flow between supply (sellers) and demand (buyers) as it relates to inventory held (long or short) and directional price movement of the stock, that latter of which you and I can easily ascertain. For a market maker, he/she is responsible for providing liquidity to market participants under ANY market condition. This is a rule that is enforceable by the NASDAQ on any market maker that has registered to take on market making activities in NASDAQ listed stocks. For an NYSE listed stock, orders are either matched between ECNs or the specialist where buyer and seller come in direct contact. In essence, when trading NASDAQ stocks, unless the order is matched directly through an ECN, then more times than not, a larger amount of stock is traded at the market maker level than any other means. With the premise of providing liquidity to market participants under ANY market CONDITION it is then understood how important it becomes to understand and monitor inventory RISK. With emphasis on RISK. Now... before you the trader thinks that this article has no impact on you as a trader, then I encourage you to read further. If you're short or long Intel (NASDAQ:INTC), Cisco Systems (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT) or any other NASDAQ stock, the bearish position you hold is INVENTORY or the bullish position you hold long is INVENTORY. As an options trader, if you're long calls, think of yourself as being long INVENTORY of the underlying stock at strike + premium paid. If you're long puts, think of yourself as being short INVENTORY as strike + premium paid. Then think of yourself as a MARKET MAKER and at any time, must be willing and able to provide liquidity to the markets. Don't "brush off" the simplicity of an option trader thinking strike + premium paid as this can come into play when looking at establishing a call/put position. If a stock is trading $55 and you're looking at paying $5.00 for the calls, then the stock needs to trade $60.01 or higher on or before expiration for the trade to be profitable. The MAIN reason a market maker makes markets in stocks is to generate revenue from ticket orders (buy or sell) in the form of a fee. This can be validated by looking at more illiquid stocks that do not trade heavy volume on a daily basis. When looking at Level II, you will often times see just 10 market maker IDs for stocks that trade low volume. Conversely, stocks that trade millions of shares daily tend to have hundreds of market makers in the underlying stock as there is greater likelihood that your institutional client will be looking to buy/sell that stock at some point in the future and you must have the "right" inventory balance in order to facilitate the trade. Making markets in a stock is NOT to try and benefit financially from inventory held long or short. Inventory held long or short is to be thought of as "icing on the cake." However, it is that INVENTORY position, and net profitability/loss over time which can dictate to a market maker a bullish or bearish influence with respect to their market making activity. It is that very "bullish" or "bearish" bias, which then creates support and resistance LEVELS until an inventory position is brought to "neutral" or PROFITABLE and order flow from buyers or sellers begins to dry up. Once you and I the trader begin thinking in terms of millions of shares instead of hundreds or thousands can we begin thinking like market makers as it relates to inventory risk and future LEVELS of trading. To drive home this point, imagine yourself being LONG 1 million shares of stock at net $25 and the stock currently trading in the market at $20 or $30. In our November 17th column, we talked about how good traders and investors have some type of business/trading plan, which serves as a longer-term guide, or stated set of rules/discipline, that helps keep the trader/investor focused on achieving some type of goal. Just as YOU now have a stated business/plan, which outlines MAXIMUM risk allowed and GOALS to be achieved, so does the market maker when relating to his/her inventory levels. Since you and I are not a market maker and constantly trading at the bid or offer during a day, then week and month, or answering phone calls from other traders "looking for stock to buy" or "looking to see if you're a buyer for a 3 million share block", you and I are not able to get as accurate of a feel for order flow. But! We do have the bullish % charts to give us an observation of "market risk" and a tool called RETRACEMENT which helps us ascertain LEVELS within a range. For the trader that has ever "wondered" why stocks tend to "suspiciously" trade these LEVELS of retracement, then think about the market maker who's job it is to provide LIQUIDITY to market participants under ANY market condition and not get sideways in his her inventory. If YOU are a market maker and are net short 10 million shares of MSFT and an institutional client of yours is looking to buy 1 million shares of the stock as it's on the move higher and you're unable to provide that liquidity as you're already sideways (at a loss) in inventory, then you most likely have to either short more stock to that client to keep his/her business and begin getting more aggressive from the buy side to get inventory to neutral, or lose the trade/business to your competition. Anyone that understands the business world understands that you run the risk of losing future business when you tell a current customer you can not facilitate their current needs and to go visit the competition for the product and service they currently desire. A market makers business plan is simply stated. I'm in business to provide liquidity (long or short) to my customers (the market) regardless of market conditions. At the same time, I must be able to do so without blowing my business up and getting too lopsided in my inventory. For MAXIMUM business success, the keys to my future success is to be a willing and able seller when my clients want or need to buy, and be a willing and able buyer when my clients want or need to sell. As we progress through this weekend's column, we now "know" this. The market maker has a better feel for order flow than you and I. This gives the market maker and advantage when a stock reaches its eventual "top" or "bottom" as the market maker begins to make observation of order flow. To make this point, you can I can look at the volume bar on a chart and see a volume spike on the chart. However, only the market maker that is fielding phone calls from buyers and sellers and actually seeing order fills at his/her bid and ask can truly sense order flow and if that order flow is buy or sell biased. When a stock is tanking lower and there's no bottom in sight, the MARKET MAKER that is net short 10 million shares in inventory that is the one market participant that can step in and facilitate the "sell order" for his/her institutional client that needs to sell (mutual fund redemptions, news on the stock, geopolitical worries). Once those sellers are through selling and the "sell phone" quits ringing and the "buy phone" begins ringing and the market maker finds he/she is getting hit at the offer more frequently than at the bid, does the market maker then sense a bottom in the stock and a "bullish bias" then begin to present itself. Now... for the fundamentalist, the above may be absurd to think that such thinking could actually have any type of impact on stock price. However, with some of the basics in place on how a market maker must think, lets apply that thinking to the world of a technician and a market maker. In our weekend "Ask the Analyst" column from November 17th, we showed a weekly interval chart of CMGI Inc. (NASDAQ:CMGI) as it related to a business plan and account management. In that article, we showed a horrific looking chart in the Internet incubator when it closed at $0.69. So lets reach into our toolbox, pull out the retracement bracket tool and define a range that a market maker might use in order to make some type of buy/sell decisions or INVENTORY-related adjustments to. Just as we consider the bullish % charts "playing field" or range from 0%-100% as a range of RISK, let us make a similar tie between 0% retracement and 100% retracement. However, let us understand that while the bullish % readings CANNOT exceed 100% or drop below 0%, a stock CAN exceed its 100% retracement level and fall below its 0% retracement. Still, for a market maker, the retracement from 0% to 100% now has YOU the trader that thinks like a market maker beginning to make some risk/reward adjustments (without knowledge of order flow) and beginning to trade levels. I use CMGI only as a stock that currently lacks any type of "fundamentals" from an earnings standpoint. The only reason to be a market maker in the stock is if you thought you might find some trade revenue from order flow, and were disciplined enough in your trade/account management to garnish that trade revenue without blowing yourself up in the inventory management process. CMGI Inc. (CMGI) - Daily Chart (11/15/02 close) As a trader, it is helpful to place a retracement bracket on a stock that attempts to define a range that a market maker looks to trade within and use the levels of retracement for buy/sell decisions. While the market maker has the benefit of order flow, technical traders can attempt to interpret volume and price action related with the volume to determine if it is buy or sell influenced. The LEVELS of retracement must have a good correlation with past levels traded by the MARKET and market makers otherwise these levels have no credence going forward. Once the retracement is in place, the trader (you and I) place TWO trading plans in place using our IF, THEN and ELSE execution statements in place and look to plan the trade, then trade the plan. CMGI Inc Chart - Daily Chart (11/21/02 close) On 11/21/02, CMGI would have traded a previously BULLISH trading plan as the stock traded the $0.77 level. A systematic approach to market making would have had a market maker seeing some increase in order flow (note the pick up in volume that day at 7.7 million shares) and perhaps not being a BIG seller at the offer/ask and perhaps becoming a more aggressive buyer at his/her bid. If so, then the thinking of a trader (you and I) is stock should firm up, if not continue higher should order flow increase from the buy side. But... what does a market maker do that is trading this retracement IF the stock breaks above $0.89? Where might he/she look as further upside levels where he will be called upon to provide liquidity to buyers under ANY market condition? Let's be very systematic and look to "roll up" our retracement to the next relative high, but make sure we have some type of correlative levels still being represented from a historical perspective. CMGI Inc. Chart - Daily Interval (11/22/02) The chart directly above now uses a "rolled up" retracement that gives the market maker new upside levels to assess inventory against and might systematically have the market maker bidding stock more aggressively should order flow from the bulls build. The market maker already defined downside levels in the previous chart. For you and I, we don't "know" what the true order flow is, but price action hints that there must be some type of demand building if price is rising at this point. For a trader like you and I, the first trade is the most uncertain, but now, just like a market maker we have levels to monitor going forward. When I profiled the bullish trade in CMGI, target was $1.50, stop $0.50 to begin with. Does that profile of entry, target and stop make sense to the above retracement? My "mindset" as it relates to the market maker is that he/she would have a "buy side" influence currently, but more so on a pullback to $0.52, providing support above our stop, but the market maker's RANGE on a break much above the August relative high would have further upside to 100% retracement of 100%. CMGI Inc. Chart - Daily Interval (11/29/02) Now, a trader that may have traded CMGI bullish from $0.77 with a $10K account most likely would have only been interested in a rather small position (4% of capital with wider % stop loss). It may not have mattered that the company lacks fundamentals, that Stochastics may have been "overbought" or "oversold" or that MACD was trending a particular direction. Maybe it only MATTERED that upside levels were being violated and unbeknownst to you and I the individual trader, order flow at the market maker level was heaviest from the "buy side" or market maker phones were ringing as some shorts were looking to lock in gains from $100, $50 or even $20 as the market has been in a bullish phase as depicted by the bullish %. Now, a trader could view the point and figure chart of CMGI and see a "less than" bullish picture from the supply/demand chart (traditional $0.25 box size at current levels to $5.00), but using the retracement brackets and thinking like a market makers helps the trader not only look back and put themselves in the market makers shoes BEFORE a trade is run (long or short), but then define a very systematic approach to trading LEVELS with IF, THEN and ELSE statements. In the November 26th market monitor, I did suggest that traders take some profits off the table at $1.16. I may have deviated from plan of $1.50, but as I said before, it is OK to deviate from plan if it means BUILDING a PROFIT in your account. It is also OK to not have sold original target of $1.50, as long as a trader is comfortable with giving up potential gains from $1.50, with a stop just under $1.30. After all, when looking at the trade as it relates to current retracement, a market maker just showing up on the scene is faced with the same buy/sell decision that was outlined in the first chart shown in tonight's "Ask the Analyst" column. For all you traders than only trade listed NYSE stocks, this technique of thinking like a market maker can also be used. Specialists are there to simply match buyers and sellers together, but all those traders you see running around on the floor of the NYSE serve their institutional clients and will hold long/short inventory in their firm's accounts. Don't think for a second that those traders moving blocks of 100,000 shares of IBM or HPQ run up to the post and ask the specialist if he will sell them 100,000, many trades are crossed between the floor trader holding inventory from his/her firms trading account to their institutional client looking for some liquidity. Same disciplined approach to trading levels and managing a position that is held in inventory. Understand. What we've done here is take a much "closer look" at levels and how to use the retracement tool in the mindset of a market maker. But that doesn't mean the point and figure charts which are VERY good at establishing bullish and bearish risk/reward on both a near-term and longer-term basis aren't also useful. If a stock's p/f chart currently shows just $2 loner- term bullish price vertical counts and trades in the upper end of retracement when the bullish % charts are all "overbought," then without order flow knowledge, put together a "buy" and "sell" type of trading plan from a market makers perspective. If the plan unfolds for selling or buying, then most likely, that's what you the trader might want to do. The technique of "trading like a market maker" is not 100% foolproof. NO TRADING SYSTEM IS!!!!! However, what it FORCES you and I the trader to do, is LOOK BACK and try to figure out what a market maker that has his/her inventory under control or on the right side of things has done. The BEST trades come when we figure out at what POINT or LEVEL those market makers that don't have their inventory under control or other market participants that find their position out of control and moving AGAINST them become AGGRESSIVE buyers or sellers of the stock we look to trade. Then, using a systematic approach of IF, THEN and ELSE can we plan the trade and then trade the plan. Jeff Bailey ************* COMING EVENTS ************* ========================================= Market Watch for the week of December 2nd ========================================= ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ ADCT ADC Tue, Dec 3 After the Bell -0.09 CHS Chico's FAS Tue, Dec 3 Before the Bell 0.18 JDEC J.D. Edwards Tue, Dec 3 After the Bell 0.11 NAV Navistar Intl Tue, Dec 3 Before the Bell -1.07 PETM PETsMART Tue, Dec 3 Before the Bell 0.12 ----------------------- WEDNESDAY ----------------------------- BTH Blyth Inc. Wed, Dec 4 Before the Bell 0.63 LYG Lloyds TSB Group Wed, Dec 4 02:00 am ET N/A PLL Pall Corp. Wed, Dec 4 After the Bell 0.17 SIGY Signet Group Wed, Dec 4 07:00 am ET 0.11 SNPS Synopsys Wed, Dec 4 After the Bell 0.93 ------------------------- THURSDAY ----------------------------- CSG Cadbury Schweppes Thu, Dec 5 -----N/A----- N/A ENL Elsevier NV ADS Thu, Dec 5 -----N/A----- N/A MBG Mandalay Resort Group Thu, Dec 5 After the Bell 0.50 RUK Reed Elsevier NV/Plc. Thu, Dec 5 -----N/A----- N/A SXC Six Conts Htl Rsrts Thu, Dec 5 -----N/A----- N/A UU United Utilities Thu, Dec 5 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- NSM National Semicon Fri, Dec 6 12:15 pm ET -0.03 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable 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 -------------------------- Economic Reports This Week -------------------------- December is traditionally a bullish time of year for equities but Wall Street will be paying close attention to the Auto & Truck sales out on Monday as well as the Construction spending numbers. Wednesday reveals the productivity report and Friday will have several reports before the opening bell. ============================================================== -For- Monday, 12/02/02 ---------------- Auto Sales (NA) Nov Forecast: 5.5M Previous: 5.3M Truck Sales (NA) Nov Forecast: 7.5M Previous: 7.1M ISM Index (DM) Nov Forecast: 49.5 Previous: 48.5 Construction Spnding(DM)Oct Forecast: -0.2% Previous: 0.6% Tuesday, 12/03/02 ----------------- None Wednesday, 12/04/02 ------------------- Productivity-Rev. (BB) Q3 Forecast: 4.5% Previous: 4.0% ISM Services (DM) Nov Forecast: 53.2 Previous: 53.1 Factory Orders (DM) Oct Forecast: 0.9% Previous: -2.3% Thursday, 12/05/02 ------------------ Initial Claims (BB) 11/30 Forecast: N/A Previous: 364K Friday, 12/06/02 ---------------- Nonfarm Payrolls (BB) Nov Forecast: 13K Previous: -5K Unemployment Rate (BB) Nov Forecast: 5.8% Previous: 5.7% Average Workweek (BB) Nov Forecast: 34.2 Previous: 34.1 Hourly Earnings (BB) Nov Forecast: 0.3% Previous: 0.2% Consumer Credit (AB) Oct Forecast: $7.3B Previous: $9.9B 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 ********************* Digestion Pause There wasn’t much follow through after Wednesday’s resistance breakout, as the markets paused to take a breath with most traders and investors still taking it easy the day after Thanksgiving. The session was abbreviated and Jim decided to raise the stop on the LONG signal, to avoid a slow bleed down on a pullback. We certainly think Wednesday’s breakout is a bullish signal for the near term, but without any follow through Friday, we could be settling in for some more consolidation. In any case, we did not want to see another three days of premium decay over the weekend, so when the OEX dropped under 479, we closed the play. 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. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Sunday 12-01-2002 Sunday 2 of 5 In Section Two: Stock Pick: Long stock with put insurance Daily Results Call Play of the Day: NVDA Put Play of the Day: SLM Dropped Calls: ADBE, IMCL Dropped Puts: JBLU ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** Stock Pick ********** TYC - $17.75 Strategy: Long stock with put insurance In the last ten months Tyco has been the headline story more times than most of us would care to remember. It was just over ten months ago that a negative article in Barron’s hit the newsstands addressing accounting concerns within the conglomerate. Then came the disclosure from the TYC that the company had made a $20 mln. payment to a director and his charity to broker a deal. Our intent is not to dwell on the Kozlowski mess, the company’s acquisitions or accounting problems, although the turmoil surrounding the company pushed the price of TYC from near $60 to a low this past summer at $6.98. Is the worst over? The company has a new CEO in Edward Breen. Breen was the former president at Motorola. Michael Useem, a Wharton professor came on board to advise in matters of corporate governance. In his time at the helm, the new CEO has restated earnings for three quarters and has indicated to Wall Street that there should be no more surprise restatements forthcoming. The CEO is in restructuring negotiations in an attempt to handle Tyco’s $26 billion debt load. Last week news circulated that TYC plans to raise about $3.5 billion from the sale of securities convertible into company Stock by early February. A convertible sale could make sense for the conglomerate as mot only did TYC see its share price fall by more than 80%, it also lost its investment-grade credit rating from Moody’s Investor service. Depending on how it’s structured, a convertible sale might help restore it. In addition it was reported Tyco may try to concurrently obtain a new bank credit line. Demand for convertibles has been strong, including “junk” and lower-rated convertibles. A convertible sale along with a restructuring of its debt load could be just what the doctor ordered to help get TYC back on its feet again. A look at the chart would seem to indicate that TYC has done little to spur investor excitement or confidence in the past few months. In fact since early June, most trades have taken place in a fairly narrow range between $11 and $16. A closer look shows that since late July, TYC has been quietly consolidating and edging higher. The volume’s been somewhat moderate, compared to the norm, although respectable averaging just over 15.0 mln. shares per day. So what makes TYC so attractive at this time? Frankly the conglomerate has been beaten down and tossed aside like a rag doll. Yet with all the negativity surrounding the company, investors seem to be stepping back in to give TYC another chance. For those that still consider analysts comments, forecasts for fiscal 2003 earnings are projected at 1.58 per share. While it may take a while to turn this ship around, in the long term Tyco prove to be a solid play. the long-term. So here’s our play. Technically, TYC has support between $12 and $14. For those looking for a pullback, a bounce off those levels could prove to be a suitable entry. If Tyco continues find buyers standing in line, the a pullback and consolidation to $16 to $17 area may be suitable as well. Option 1. Purchase TYC stock at the current level and purchase 1, July 15 Put for every 100 shares of stock. If stock is under $15.00 buy July expiration, then exercise the put and sell the stock. Option 2. Purchase TYC stock at current level and wait for Stock to approach resistance near $20.00. At that time buy 1 $17.50 put or a $15.00 put for every 100 shares of stock owned incase of a rollover from those levels. This option provides less downside protection, but is more bullish initially, while locking in profit at a higher level and also letting the stock run on a breakthrough the $20 level. Option 3. Purchase stock without protection and sell the underlying if it falls below support near $12.00.. *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week ADBE 29.56 0.47 -1.40 0.73 0.00 –0.25 Drop, resistance GNSS 19.90 2.21 -1.91 -0.26 0.00 0.70 hanging on ICOS 31.56 1.37 -1.91 1.37 0.00 0.81 up against $32 IMCL 13.78 -0.78 -1.04 -0.47 0.00 1.71 drop, sideways MSFT 57.70 0.17 -1.33 0.48 0.00 0.06 over $57 NVDA 17.15 -0.16 -0.52 0.56 0.00 0.70 New, consistent QCOM 41.30 1.24 -1.45 0.47 0.00 0.64 higher support PUTS APOL 41.39 -0.09 -2.21 0.70 0.00 –2.39 New, giving in BDK 42.97 -0.20 -1.33 0.52 0.00 –0.73 weak bounce HSIC 42.38 -1.76 -0.47 1.20 0.00 –0.91 bounce stalled JBLU 37.01 0.99 0.46 1.64 0.00 3.15 drop,trend break MEDI 26.42 -0.06 -0.95 0.39 0.00 –1.66 New,risk/reward SLM 97.73 1.76 -2.91 -0.34 0.00 –1.27 weak under $98 ************************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: ********************* NVDA – NVIDIA Corporation $17.15 (+1.43 last week) See details in play list Put Play of the Day: ******************** SLM – SLM Corporation $97.73 (-0.87 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 ^^^^^ ADBE $29.56 (-0.25) Despite holding over the 200-dma again on Friday, the strength of the Software index (GSO.X) looks like it is starting to fade, and this could be seen in our ADBE play, which once again tested its 200-dma. While it didn't fall below this important level on Friday, with daily oscillators rolling over, it looks like the bulls are carrying the bulk of the risk and we would prefer to err on the side of caution. Our preference is to exit here and look for another opportunity to play this strong Software stock bullish from a lower level. --- IMCL $13.78 (-1.26) After the strong push through the $15 resistance level, IMCL looked like it was in the midst of a strong momentum run, but lately appears to have lost that loving feeling. Last week saw only declines in price, which is not a good sign considering the stock fell with the broad market on Tuesday and then fell further as the broad market rallied on Wednesday. As expected, Friday was a quiet day of consolidation, leaving us with the impression that IMCL is done with its upside move for now. Rather than wait for our stop to be triggered, we're dropping IMCL this weekend. Use a rebound on Monday to exit open positions. PUTS ^^^^ JBLU $37.01 (+4.00) After bottoming at $33, JBLU has been going ballistic, rising on strong volume. After taking out the $36 resistance level on Wednesday, it looked like Friday's session could provide the breakout attempt on the 20-dma and 50-dma near $37.50. While the stock couldn't hold above that level, it was likely only due to a lack of buying volume to get the job done. We want to use this weakness to exit the play before the bulls attempt another run at resistance next week. *********** 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 12-01-2002 Sunday 3 of 5 In Section Three: New Calls: NVDA Current Calls: GNSS, ICOS, MSFT, QCOM New Puts: APOL, MEDI ************************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 ************** NVDA – NVIDIA Corporation $17.15 (+1.43 last week) Company Summary: NVIDIA Corporation designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of desktop personal computer user. Used in a wide variety of application including games, the Internet and industrial design, the company's products were the first to incorporate a 128-bit multi-texturing graphics architecture. This design approach delivers to users a highly immersive, interactive 3D experience with compelling visual quality and stunning effects at real-time frame rates. NVDA sells its products to major PC manufacturers such as Compaq, Dell, Gateway, Hewlett-Packard and IBM. Why We Like It: Throughout the summer and the early autumn, investors were asking themselves if the Semiconductor stocks would ever stop falling. Lately, the question seems to be whether they will ever stop rising. The Semiconductor index (SOX.X) has rebounded an astounding 78% from its low in early October, predominantly on a string of bad news. The only bright light in the sector came from last week's TSM comment about a drop in demand failing to appear. NVDA has been riding this wave higher, having more than doubled from its early October lows. Judging by the price action, investors are gobbling up the good news and ignoring the bad. A week ago, UBS Warburg downgraded the stock citing pricing pressures and a continuation of the PC slump. But on the same day, the company's CFO made some bullish comments, pointing to improving demand for the company's graphics processors. Investors focused on the positive news in a historically bullish time period and NVDA spent the bulk of last week creeping higher. While we can certainly see that the stock appears to be getting a bit extended up here, with the move above $16.50, we've got to give the benefit of the doubt to the bulls. And rightly so, with the PnF chart giving another Buy signal and the Bullish vertical count now pointing to $29. There is still some formidable overhead resistance to contend with, first in the $18-19 area and then again up near $23. So clearly the best entries will come on a rebound from support. The $15.50-16.00 are is now shaping up as strong support, helped along by the 10-dma, which has risen to $15.47. Look to enter the play on a successful bounce above this level, so long as the SOX is continuing to hold above the important $360 support level. Place stops initially at $14.50. BUY CALL DEC-15 UVA-LC OI=11330 at $2.80 SL=1.50 BUY CALL DEC-17 UVA-LW OI= 8215 at $1.30 SL=0.75 BUY CALL JAN-17*UVA-AW OI= 3552 at $2.05 SL=1.00 BUY CALL JAN-20 UVA-AD OI= 3770 at $1.15 SL=0.50 Average Daily Volume = 9.23 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 $19.88 (+0.90 last week) Company Summary: Genesis Microchip designs, develops and markets integrated circuits that receive and process digital video and graphic images. Its integrated circuits are typically located inside a display device and process images for viewing on that display. The company also supplies reference boards and designs that incorporate its proprietary integrated circuits. GNSS is focused on developing and marketing image-processing solutions and targets the flat-panel computer monitor and other potential mass markets. Why We Like It: After the stock's meteoric rise of the past month, shares of GNSS have been taking a brief siesta over the past few sessions. With a stock price that has more than tripled since the October lows, a bit of a rest is definitely in order. Actually, traders are probably just waiting for the outcome of the company's mid-quarter update on Monday after the closing bell. The way Chip stocks have been rallying lately, the stock should continue its upward trend following that meeting, so long as there isn't any really bad news. Aggressive traders can take advantage of the lull before the storm, looking to initiate new positions on another intraday rebound above our $19 stop, so long as we don't see appreciable weakness in the Semiconductor index (SOX.X). More conservative traders will want to wait until after the meeting before playing, either gaming a rebound above the $19 level or entering on a breakout to new recent highs above $21.50. The one big concern we have is that the consolidation over the past few days (Friday not included, because it clearly didn't matter) have come on heavy volume. That is not typical of a consolidation pattern, it is more typical of a topping formation. The solution is to manage the risk by sticking to your stop at $19. BUY CALL DEC-17 QFE-LW OI=2161 at $3.30 SL=1.75 BUY CALL DEC-20*QFE-LD OI=3228 at $1.75 SL=0.75 BUY CALL DEC-22 QFE-LX OI=1861 at $0.85 SL=0.40 BUY CALL JAN-20 QFE-AD OI= 400 at $2.60 SL=1.25 BUY CALL JAN-22 QFE-AX OI= 147 at $1.65 SL=0.75 Average Daily Volume = 2.30 mln --- ICOS – ICOS Corporation $31.56 (+0.90 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: Prudent investors avoided Friday's low-volume session and the result was that not much of anything went anywhere. Some groups moved up, and others moved down, but all of the moves were fractional, reinforcing the message that if you're looking for direction, you're going to have to wait until next week. ICOS held onto the bulk of its Wednesday gains, leaving the stock poised to go either way on Monday. It could break out above recent resistance ($32.25) or we could see a bit more consolidation. It is worth pointing out that the stock is up strongly in the past few weeks, and it may need to trade sideways before continuing up the chart. Likely, ICOS is going to need the Biotechnology index (BTK.X) to break decisively through the $390 level (just above the 200-dma at $388) if it is going to break out to new highs. Alternatively, a pullback to the $29-30 area along with the BTK pulling back and finding support near the $360 level. Make no mistake, there is risk in the play due to the recent run. But now that ICOS is above the bottom of the late-April gap and the 200-dma, it should continue to work its way up the chart until encountering the next stiff level of resistance near $39. Momentum traders need to wait for a breakout accompanied by strong volume before jumping into the play, but when it occurs, it should provide a strong entry for the next leg up. Keep stops set at $28.50. BUY CALL DEC-30*IIQ-LF OI=1234 at $3.00 SL=1.50 BUY CALL DEC-35 IIQ-LG OI= 545 at $0.70 SL=0.25 BUY CALL JAN-30 IIQ-AF OI=1617 at $2.80 SL=1.50 BUY CALL JAN-35 IIQ-AG OI= 900 at $1.10 SL=0.50 Average Daily Volume = 1.10 mln --- MSFT – Microsoft $57.70 (-0.52 last week) Company Summary: Although best known for its ubiquitous Windows PC operating system, MSFT develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. The company's software products include scalable operating systems for servers, PCs and intelligent devices, server applications for client/server environments and software development tools. The MSFT's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. Why We Like It: MSFT has been churning around the $57-58 area for over a week now, as though it is waiting for something. Friday's session was no different, with the stock giving back a portion of Wednesday's gains, but without the conviction of volume. Once again, the stock is sitting above the $57 level, but below the $58 level, which the stock needs to hold above to be able to confirm a breakout. Perhaps what investors are waiting for is the answer to whether the company's anti-trust woes are truly behind it. Monday is the deadline for eight states to either accept the settlement worked out by the Bush administration, or appeal to the courts for tougher penalties. Late-breaking news Friday night, had all these states buy Massachusetts agreeing to accept the settlement. The breakdown of the coalition of states likely points to the problems for MSFT truly being behind, and that could finally give us the breakout we've been waiting for. Friday's price action is inconsequential now. What we want to see is either a dip and rebound from the vicinity of $57 (also the site of the 10-dma) or possibly as low as $56 (just below the 20-dma) to provide for more attractive entries into the play. If the settlement news is well-received, then look for a breakout to be the next move. Momentum traders can jump on board with a breakout over $58.75, so long as volume is robust and the broad market is going along for the ride. BUY CALL DEC-55 MSQ-LK OI= 31078 at $3.90 SL=2.50 BUY CALL DEC-60 MSQ-LL OI= 71904 at $1.10 SL=1.25 BUY CALL JAN-55 MSQ-AK OI= 70251 at $5.00 SL=3.00 BUY CALL JAN-60*MSQ-AL OI=111443 at $2.20 SL=1.00 Average Daily Volume = 45.3 mln --- QCOM – Qualcomm, Inc. $41.30 (+0.62 this week) Company Summary: Based on its proprietary CDMA technology, QCOM is engaged in developing and delivering digital wireless communications services. The company's business areas include integrated CDMA chipsets and system software and technology licensing. QCOM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by the worldwide standards-setting bodies. Currently, QCOM has licensed its CDMA patent portfolio to more than 80 telecommunications equipment manufacturers around the world. Why We Like It: One thing is certain and that is that Friday's session failed to shed any light on what the markets might do next week. All of the major indices vacillated in very narrow ranges, and when you look at the price action of individual equities, the reason becomes clear. There just wasn't much trading interest and as a result, not much happened. QCOM gave back a portion of Wednesday's gains, but still is looking strong. The $40 level is shaping up as pretty decent support now, with the backing of the 10-dma at $40.06. Intraday dips and rebounds from the $39-40 area can be used for new entry points, provided the Wireless Telecom index (YLS.X) continues to show strength. Without a pullback first, new entries are going to fall into the realm of the momentum traders, as QCOM breaks out over the $42 level. Of course, we'll need to keep an eye out for a head-fake move, as there is more resistance up near $44. A breakout over $45 will take out another important level of resistance and bring the stock's PnF vertical count of $60 that much closer to reality. Until we get the breakout over $42, keep stops set at $36.75. BUY CALL DEC-40 AAW-LH OI=11318 at $2.80 SL=1.50 BUY CALL DEC-42 AAO-LV OI= 5407 at $1.45 SL=0.75 BUY CALL JAN-40 AAW-AH OI=17771 at $4.00 SL=2.50 BUY CALL JAN-42*AAO-AV OI= 5649 at $2.70 SL=1.25 BUY CALL JAN-45 AAO-AI OI=13188 at $1.70 SL=0.75 Average Daily Volume = 16.6 mln ************* NEW PUT PLAYS ************* APOL – Apollo Group, Inc. $41.39 (-2.41 this week) Company Summary: The Apollo Group provides higher education to working adults. The company operates through its subsidiaries, The University of Phoenix, Inc., Institute for Professional Development, The College for Financial Planning Institutes Corporation and Western International University, Inc. APOL offers its programs and services at 58 campuses and 102 learning centers in 36 states, Puerto Rico, and Vancouver, British Columbia. Why We Like It: Have the Education stocks topped out? While this group spent the bulk of the past year heading up, that trend is looking a bit tired, and we think there is an attractive downside play shaping up. APOL has avoided the bane of many sectors of the market over the past year, that of setting new 52-week lows. Instead, the stock has been setting new 52-week highs up until recently. But something appears to be changing, as the recent peak just below $45 marks the first lower high since late July and the first time in many months that it has done so when the broad market is strong. It's not lights out yet, but apparently investors are moving out of stocks like APOL and into the hotter areas again. Momentum traders need to be very careful with this play due to significant support between $40-41 and then the 200-dma down at $38.16. Rather than try to initiate new positions on a breakdown, we think the better approach will be to fade a failed rally near the $44.50-45.00 area, which has now proven itself to be a significant level of resistance. Should the bulls fail to generate that strong of a bounce, we can also look to leg into new positions on a failed rally near the $42.50 level, which in addition to being solid resistance, is also the site of the 50-dma. Set stops at $45. BUY PUT DEC-45 OAQ-XI OI= 63 at $4.20 SL=2.50 BUY PUT DEC-40*OAQ-XH OI=1078 at $1.25 SL=0.50 Average Daily Volume = 2.46 mln --- MEDI – MedImmune Inc. $26.42 (-1.65 last week) Company Summary: MedImmune is a biotech company focused on developing and marketing products that address medical needs in areas such as infectious disease, autoimmune disorders, cancer, and transplantation medicine. The company has six products on the market and a diverse product development portfolio. The products currently on the market include Synagis, CytoGam, RespiGam, Ethyol, Neutrexin, and Hexalen. Why We Like It: Contrary to popular belief, not every sector of the Technology market is breaking out to new multi-month highs. Some are languishing just below important resistance, unable to muster the strength to stage the breakout. The Biotechs are one such sector, with the BTK.X index being smacked down from a breakout attempt early last week, by a dual downgrade of BGEN and IDPH. While the BTK did struggle back from the initial selloff, the damage was done. By looking at the stocks in the industry that are failing to recover from the downgrade-related selloff, we can uncover some pockets of relative weakness that are susceptible to further downside. MEDI is one such stock, having fractionally broken Tuesday's closing low on Friday. The other interesting aspect of the stock's behavior is that Friday's selling volume was almost as large as the buying volume during Wednesday's oversold bounce. This hints that supply is in control and the stock has further to fall. The other sign of weakness is that the recent rally ran into a brick wall near $29, just above the site of the August highs before rolling over. And if the bulls did manage to break out over that level, they'll have to contend with the 200-dma at $29.84. Look for another failed rally in the $28-29 area to provide for the best entries into the play, although a breakdown under $26 (just under Friday's intraday high) can be used for entries as well, so long as the BTK index is showing signs of weakness. Initial stops are set at $30, just above the 200-dma. BUY PUT DEC-30 MEQ-XF OI= 729 at $4.70 SL=2.75 BUY PUT DEC-25*MEQ-XE OI=5063 at $1.90 SL=1.00 Average Daily Volume = 4.42 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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 12-01-2002 Sunday 4 of 5 In Section Four: Current Put Plays: BDK, HSIC, SLM Leaps: The VIX - Anomaly or Portent? Traders Corner: Giving Thanks – Not Just One Day A Year ************************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 ***************** BDK – Black & Decker Corporation $42.97 (-0.73 this week) Company Summary: Black & Decker is a global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems. BDK operates in three reportable business segments: Power Tools and Accessories, Hardware and Home Improvement and Fastening and Assembly Systems. The Tools and Accessories segment includes consumer and professional power tools and accessories, electric lawn an garden tools, electric cleaning and lighting products and product service. Hardware and Home Improvement includes security hardware and plumbing products. The company's products and services are marketed in over 100 countries. Why We Like It: Just as investors have apparently thrown in the towel on the home-improvement related stocks, so too did they throw in the towel on Friday's session. As expected, volume was anemic and there wasn't even a hint of a directional bias. The bulls tried to push BDK up in a continuation of Wednesday's late-day rebound, but it wasn't to be. The stock fell under its own weight, closing very near the flat line in the abbreviated session. Given the fact that we've now had a nice little oversold rebound and that rebound failed right at the $43.50 level, we're looking for the bearish trend to reassert itself next week. Above this intraday resistance level, there's more resistance at $44, which happens to be the site of the converged 10-dma and 50-dma. Traders looking for a fresh entry into our BDK play will want to target a rollover near this level, preferably in conjunction with a failed rally in the broader market. Momentum entries are going to be a bit tougher to come by, as we first need to see a break down under recent support down at $41.90. Keep stops set at $44.50, as a closing price above that level would hint at a change in the recent bearish trend. BUY PUT DEC-45*BDK-XI OI=280 at $3.10 SL=1.50 BUY PUT DEC-40 BDK-XH OI= 71 at $0.85 SL=0.40 Average Daily Volume = 804 K --- HSIC – Henry Schein, Inc. $42.40 (-1.20 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: With no material news events to drive shares of HSIC on Friday, the stock was left to trade at the whims of the few traders that bothered to show up. As you can see from the almost nonexistent price movement and volume that tracked right around half the ADV, there wasn't much enthusiasm for the stock to move either way. We can look at Fridays' action as a continuation of the oversold bounce seen on Wednesday. The real question is whether this rebound is on its last legs, or if we are at the edge of an actual trend change. Given the stock's lack of participation in Wednesday's rally, we're still leaning to the downside on HSIC. The stock has been building intraday resistance near the $43 level, although the stronger level of resistance is up at $44, backed up by our stop at $45. Traders still looking for an entry will want to target the next rollover below resistance, while momentum traders are still waiting for a breakdown under $40.50 before playing. Like most other plays, Friday's action can be ignored, meaning we need to look to next week to give us clues about the market's intent. Should the broad market rally, then we'll want to see signs of a rally failure in HSIC. Should the rest of the market weaken, then we'll need to see HSIC finally break down. It's as simple as that. BUY PUT DEC-45*HQE-XI OI=385 at $3.60 SL=1.75 BUY PUT DEC-40 HQE-XH OI=125 at $1.15 SL=0.50 Average Daily Volume = 563 K --- SLM – SLM Corporation $97.73 (-0.87 last week) Company Summary: Formerly USA Education, Inc., SLM is a private source of funding, delivery and servicing support for higher education loans for students and their parents in the United States. The company provides a wide range of financial services, processing capabilities and information technology to meet the needs of educational institutions, lenders, students and guarantee agencies. Primarily a provider of education credit, the company serves a diverse range of clients, including approximately 6000 educational and financial institutions and guarantee agencies. SLM serves in excess of 7 million borrowers through its ownership or management of student loans. Why We Like It: Typical of everything else in the market, SLM traded in an exceedingly narrow range on Friday, refusing to give an indication of what it might do next week. Such is the nature of light-volume holiday-shortened sessions. That forces us to base our decisions on what came before that session. Up through Wednesday, SLM was continuing to make solid downhill progress, but there could be trouble brewing for the bears. While the stock has broken near-term support at $100 and subsequently found resistance at $101, the stock has yet to generate a PnF Sell signal, which will occur with a print at $95. Not only would that put the stock on a Sell signal, but it would also break the bullish support line. Alas, that has not yet happened, so we are still stuck in the middle where SLM looks like a good bearish play, but has yet to really prove that fact. Another failed rally below $101 resistance is really the best approach for initiating new positions, as momentum players really don't want to press their luck to the downside until SLM breaks below $95 (also the site of the 200-dma). Another potential resistance level that could generate a rollover would be the 50-dma (now at $99.73). As you can see, the best risk/reward for this play is to be found in fading a rally near resistance. BUY PUT DEC-100*SLM-XT OI=555 at $4.40 SL=2.75 BUY PUT DEC- 95 SLM-XS OI=382 at $2.00 SL=1.00 Average Daily Volume = 972 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 ***** The VIX - Anomaly or Portent? By Mark Phillips mphillips@OptionInvestor.com Considering all the impressive bullish action last week, I find it interesting that the technical levels I laid out last weekend related to the OEX are still very much in play. That's right, it took until Wednesday afternoon for the OEX to finally claw its way above the $479 resistance level. This historical trend surrounding the Thanksgiving holiday is playing out in typical bullish fashion, and it will really be interesting to see what develops next week. I've included the chart from last week's article for reference, with the updated price action through Wednesday's close. S&P 100 (OEX) Daily Chart While the descending trendline has now fallen near the $484 level and the 200-dma has dropped a bit to the $494 level, we can see that the highs from August ($487), 50% retracement at $489 and strong resistance at $490 are all still obstacles that need to be scaled. This puts last week's action in a different perspective, don't you think? Suddenly, the action around the $479 resistance level becomes less significant in light of all of the significant resistance levels that are about to come into play. They may in fact do that on Friday, if the bulls still sitting in front of their computers have their way. I won't be one of them, having taken leave of my technological accouterments Wednesday night. This brings us back to the title of this week's column, the VIX. It has been a long time since we saw a large gain in the broad market (+2.84% for the OEX) that was accompanied by a large gain (+7.30%) in the VIX. That's a marked departure from normal market action, and I think what it is telling us is that there was a significant increase in put buying on Wednesday. This may be speculation on an imminent market drop, or it could just be traders looking to hedge their bullish positions over the long weekend. Whatever the cause, traders were clearly concerned about the downside risks and I think that stems directly from the array of technical resistance levels looming overhead. We've focused on the OEX here due to its position of relative strength, but I think you can find some very similar levels in the other major indices. They may be closer (in the case of the NASDAQ Composite, which is right at its 200-dma) or further away (in the case of the DOW, which is still 250 points below its 200-dma), but the bottom line is that traders should be focusing on the downside risks here, taking action to prevent a pullback from taking too large a bite out of their recent bullish gains. I believe it is that dynamic which is responsible for the large rise in the VIX on Wednesday. As I see it, there are two possible outcomes over the near-term. The first possibility is that the OEX rallies up to this $484-494 resistance area and then promptly reverses. That scenario is actually the one that I feel would be the healthiest, as it would likely usher in the next bout of profit taking. We've had a nice run over the past few weeks and a push up to resistance should then see a healthy pullback into the $455-460 area. So long as the market internals (read: Bullish Percent) stay strong, that level should provide a solid base to break decisively through the $500 level and possibly give us a pleasant Santa Claus rally into the end of the year. The second possibility is that the OEX rockets unperturbed through all of those resistance levels without so much as a hiccup. While it would be encouraging due to the confirmation of the double-bottom formation down at $384 (which required us to breakout over the August highs to confirm), I think it could set us up for a painful failure near the $500 level. Whether it happens below the defined resistance I listed above, or after moving up to test resistance, I think a significant pullback is necessary over the next week or two. There are some substantial recent gains that need to be digested, and we are going to need to see confirmation that they are sustainable with a pullback to a higher low. I suppose there is a third possibility, where we pullback from current levels without seriously probing those resistance levels, but I find that unlikely, based on Wednesday's strong finish. Note that no matter what scenario you tend to believe, breaking out over resistance and then continuing up the chart without a pause is an unlikely scenario. For this reason, I would caution you against trying to enter new bullish positions (except for short-term trades) prior to that pullback. Conversely, when that rollover at resistance comes to pass, I would consider it an advantageous time to be cautiously probing the downside with longer-term bearish plays. Having given you my broad market forecast (which is now guaranteed to be wrong, now that I've put it in print! GRIN), let's turn our attention to our list of plays. Needless to say, it didn't fare quite so well this week. Portfolio: LEN - Those pesky, stubborn bulls just keep propping up the shares of the home building stocks every time it looks like they're ready to break down. Of course, it doesn't help that the housing-related economic reports have not yet revealed the weakness that I believe to be present in the industry. Tuesday's decline looked like the beginning of the next leg lower, but positive economic reports on Wednesday had the stock reversing higher again, albeit on rather anemic volume. The past couple weeks action is rather interesting, as it has LEN rising on declining volume, which is a bearish sign. The stock is also continuing to find resistance below the trendline that had provided support up until the breakdown in early November. Look for this resistance line (former support) to act in concert with the 50-dma and 200-dma to turn back the bulls below our $55 stop again next week. NEM - Gold and Gold stocks had another rough week, with the broad market looking strong. On Wednesday, NEM once again challenged its $22 support level, but found buyers at the end of the day. While the battle seems to be going against us on this one, I still like the way both the Gold Futures (GC02Z) and NEM continue to consolidate in their neutral wedges. In order to feel more confident, I really want to see the GC02Z contract hold above $320 and NEM hold back over $25. In the meantime, we wait and watch with our stop set at $22. MO - The action in shares of MO has been as exciting as watching grass grow -- well almost. Don't get me wrong, I actually like what I see, as the stock seems to be building a new base from which the next rally can sprout. The lack of positive action in any of the other Consumer Cyclicals like PG tells us that this sector is currently out of favor, but I expect it to turn in our favor as sector rotation takes hold in the near term. In the meantime, we continue to hold and wait, with our stop remaining at the $35 level. Watch List: BBH - What a wild week for the Biotechs. The early weakness on Monday could have had aggressive traders taking an entry into the play as the rollover commenced right at the site of the August highs. But I decided to stick with our prescribed entry plan, looking for a drop below $89 before entry. Well, we got that on Tuesday and in a big way, following downgrades of both BGEN and IDPH. The problem is that the downgrades created a sizable gap down (which as you know, I detest using for new entries) that sent the BBH below $87 by the end of the day. True to form, the market reversed on Wednesday, pushing the BBH back as high as $89.74, almost completely filling the gap from Tuesday. I like the location of the rollover early in the week, and still like the prospects of our play. But given the positive market tone, I'm leaning toward taking a more aggressive approach and targeting a failed rally near resistance in the $92-93 area, the top of which is reinforced by the 200-dma at $92.90. More conservative traders will want to wait for a decline back under $89 (without a gap) before entering the play. GM - I just had a feeling that we ought to hold off on new entries in GM last week. With the bullish market action, GM actually broke out over $38 and the PnF chart is looking downright bullish with a fresh Buy signal and vertical count that stretches up to $52. Clearly, with the play still on our Put Watch List, I think that is a rather unrealistic and lofty target for GM. While auto sales may not have been as bad as expected lately, neither is there much hope for incentives to ride in and save the day either. Consumers have about all the vehicles they need, and that can be seen in the glut of used cars in the secondary market. Stopping just shy of $40 on Wednesday, I like a rollover anywhere in the $40-42 area for new entries. I want to give the play room to move though, so I've softened my stance a bit since last week. Having reviewed support and resistance over the past several months, I now think a stop at $45 makes more sense from a risk management perspective. DELL - In contrast to the action in the broad market last week, DELL really didn't do much. The stock continues to consolidate in the $28-29 area, as the 50-dma rises to meet this support level. While aggressive players could possibly take an entry near the $28 level, with the weekly Stochastics early in their decline from overbought, I still favor a rebound from the $26-27 area for new entries. GD - Tuesday's dip into the area of all those moving averages did seem a bit tempting, and the rebound on Wednesday was encouraging as well. But I remain of the mindset that the trading over the past 2 days has been rather artificial. Rather than pile into a new bullish position before it runs away from me, I want to exercise a bit more patience. Look for a dip closer to the $78 level. Additionally, we want to see the rebound come on more convincing volume, preferably close to 2 million shares. Remember, we're trying to enter this play close to support to maximize the risk/reward dynamic. If we can get an entry near $78, that gives us downside risk of only $2 and a potential reward (according to the PnF vertical count) of $21. Those are my kind of odds. While I'm still holding onto my cautious bullish stance, the steady rise of the Bullish Percent readings has me more concerned about the potential downside over the near term. There really aren't any meaningful signs of weakness yet, so it is clearly too early to be getting aggressive with bearish trades. But the broad market is getting pretty extended up here and any significant gains next week may be tough to come by until we get another period of consolidation. The rise in the VIX on Wednesday (in the face of a strong rise in the broad market) tells me that I'm not the only one with this concern. This rise in the VIX is likely the result of increased put buying, as traders look to hedge their downside risks while not quite yet giving up on the upside. In keeping with the theme of Options 101 article on Wednesday, I'm getting an early start on the weekend, writing this column Wednesday night so that I can enjoy an extended visit with family. In that vein, all of the play updates above were done without the benefit of seeing Friday's action. Please take that into account when reading the updates, in case something meaningful did occur on Friday. If anything slipped through the cracks, then we'll catch up next week. Additionally, as you can see, I refrained from adding any new Watch List plays this weekend. Certainly, I found a couple that looked interesting, but nothing that couldn't mature for another week before we add it to the list. Let's wait and see whether last week's push higher was the last hurrah for the bulls or another important technical development. Now would be a good time to have another one of those tasty turkey sandwiches! Enjoy, and I'll see you next week! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None NEM 10/30/02 '04 $ 30 LIE-AF $ 3.90 $ 2.65 -32.05% $22 '05 $ 30 ZIE-AF $ 6.10 $ 4.90 -19.67% $22 MO 11/13/02 '04 $ 40 LMO-AH $ 3.90 $ 3.60 - 7.69% $35 '05 $ 40 ZMO-AH $ 4.80 $ 4.70 - 2.08% $35 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $ 9.30 + 8.14% $55 '05 $ 50 XFF-MJ $11.20 $12.00 + 7.14% $55 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 None Drops SMH - $29.31 As I mentioned last week, our SMH play was making me nervous, the way it had been blasting through resistance levels. I still left our liberal stop up at $29.25, just above the August highs on the theory that this would be in important level. Sure enough it was, but not the way I had expected. On Monday, the SMH closed at $29.31 (just barely stopping us out of the play), before reversing sharply lower on Tuesday. But Wednesday's action proved that we did the right thing by sticking to our stop, as the SMH trekked higher throughout the day, coming to rest just shy of the $30 level. Needless to say, our bearish play on the Chip stocks didn't play out as well as the last time, and we're out with a small loss. JNJ - $56.41 JNJ's trend was looking a bit weak last week, and this week's action proved that point. While Monday's action provided an intraday dip below support, it didn't last and the stock held above $58 at the close. That all came to a screeching halt on Tuesday, with the DOW losing close to 200 points and JNJ plunging to just above $56. That left no question as to our violated stop. The bullish trend has now clearly been broken (although we don't yet have a lower low) and it is time to get out of the play. Wednesday's bounce provided an opportunity to do just that, and subsequent failed rallies at the 200-dma should be used to exit any remaining bullish positions. ************** TRADERS CORNER ************** Giving Thanks – Not Just One Day A Year By Mike Parnos, Investing With Attitude Thursday, Thanksgiving, was a very special day! It was a day to give thanks – for countless things that have blessed our lives throughout the year. It shouldn’t be the only day of the year that we show our gratitude. But, for many people, Thanksgiving is the only day they bother – and that’s only between forkfuls of turkey and wiping the gravy stains from their shirt. In all seriousness, I want you to know how incredibly gratifying it is for me to impart knowledge and a smile at the same time. I can tell by the many astute questions and positive comments that the CPTI student body is developing very nicely. A large number of CPTI readers have put some of our strategies to use and walked away with a pocketful of crisp green lettuce for their retirement salad. Once you’ve grasped the strategies we talk about here every week, you’re in a position to potentially generate a consistent healthy income while risking relatively little. When I first started writing for OI, back in July, the bulk of the questions I received started with – HELP!!! They were from readers who had entered positions, were losing money, and who were desperate to know how they could salvage some of their trading capital. The market makes David Copperfield look like an amateur. It can make your money disappear before your eyes – IF you don’t know what you’re doing. As weeks and months passed, those “HELP!!” questions have diminished and I’m now getting suggestions from these same readers on how they’ve thought of a variation that might improve upon the strategies that we discuss. Wow! It doesn’t get any better than that. To stimulate thought and creativity is an educator’s dream. And once a person has learned to think, analyze and develop self-discipline, it doesn’t stop there. It spreads and enhances other areas of life. I especially want to give a Thanksgiving thanks to OI, my fellow writers, and, above all, to Jim Brown who has created this magnificent interactive information source for option traders. This has been, and continues to be, a goldmine for those who seriously want to learn to trade – recognizing that these skills will serve them well for the rest of their lives. Teach a man to fish and he’ll . . . . . need a lot of tarter sauce. Not only will these skills you well, they will serve you steak and lobster and soy products (can’t leave out the vegetarians). Vegetarians need this knowledge even more than the rest of us. They think they’re going to live forever so they have to be prepared to make money for a long long time. Of course, there are always a few who use OI as a tout sheet, randomly buying puts and calls – winning a few and losing a few. I give thanks for these readers as well. They have no idea why they’re doing it, but they like the action. They salivate at the thought of big winning trades and are willing to lay their hard earned dollars on the line in the hope of doubling and tripling their money. These straight buy and sell traders are the primary source of income for CPTI graduates and students – may their funds never run out. Then, there are others who deserve our thanks: 1. Thanks for Black & Scholes – Clint, for the great songs and to Dr. Scholes, for those great footpads. 2. Thanks for all retail investors – who are wrong most of the time. 3. Thanks for the Internet – without which we’d have to actually speak to a broker who knows less than we do! 4. Thanks for free charting sites – the price is right and even I can figure them out. 5. Thanks for earnings warnings – they consistently cause panic while we stay calm and profit from panic. 6. Thanks for CEO indiscretions – if they were all honest, we wouldn’t need skepticism – which is a good thing. Too many people didn’t learn skepticism after they found out there was no Santa Claus. Now they’re learning the hard way. 7. Thanks for cable and DSL modems – Remember dial-ups? I’d rather fight than switch (with apologies to Tarryton cigarettes). 8. Thanks for “premium” – It used to be the toaster we received for opening a bank account. Now we collect premium and put it IN our bank account. 9. Thanks for fast food and fast women – you can fit both into a commercial break and together usually cost less than a bad trade. 10. Thanks for televised baseball – so boring that it will never interfere with your trading. 11. Thanks for CNBC’s Martha MacCallum – who listens? But she sure is cute. 12. Thanks for CNBC’s Joe Kernan – who knows it’s all a crock and doesn’t take himself that seriously. 13. Thanks for Dr. Kevorkian – who is always ready to assist deep in-the-money call buyers and put sellers. and finally a thanks goes out to Tim Allen who, in For Richer or Poorer, provided us with the perfect prayer before Thanksgiving (and other) meals: “Good Food, Good Meat, Good God – Let’s Eat!!! Remember to smile – it’s the second best thing you can do with your lips. And when you’re shopping this week, think of this sign seen recently in the window of a jewelry store: “Now is your chance to have your ears pierced and get an extra pair to take home, too.” ___________________________________________________________ CPTI PORTFOLIO UPDATE– As of Wednesday’s Close. BBH Iron Condor – Currently trading at $88.21 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 – right near the middle of the range. TTWO Short Strangle – Currently trading at $29.93. We want TTWO to finish the December option cycle anywhere between $22.50 and $35.00. TTWO is showing strength and may be breaking through some strong resistance around $30-$31. But we’re still in good shape, comfortably 4+ points below our short $35 call. IMCL Covered Call – Currently trading at $13.73. We want IMCL to finish the December option cycle over $10 so it will be called away. Looking strong! IMCL ran up to over $15 and is now retracing a little. But we are still holding comfortably above the $10 strike price with a nice cushion. QQQ ITM Strangle – Currently trading at $27.62. Went as high as $28.20 on Wednesday. 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 a few days ago. Those that held on and kept a close stop, could have made an extra $.15 by selling on Wednesday. Either way, you now own the $25 put free and clear with a 3+ weeks to go and you’ve already put some profits in your pockets. CPTI students, who were slightly bearish and put on the $24/$26 strangle could have recently sold the $24 call for $4.20 and own the $26 put at only $.15 with 3-1/2 weeks to go. We’re still looking for a typical Fibonacci retracement. Prepare for a potential cash infusion! Essentially, we have a free or almost a free trade going here. You gotta’ love it! ____________________________________________________________ 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 12-01-2002 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Q&A With The Editor Naked Puts: Options 101: Position Selection For Naked Puts Spreads/Straddles/Combos: Another Bullish Week! Updated In The Site Tonight: Market Watch Market Posture ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Trading Basics: Q&A With The Editor By Mark Wnetrzak One of our readers asked for an explanation of the benefits of writing covered-calls: A tale of the tortoise and the hare? Attn: Covered-calls editor Subject: Covered-call benefits Hello Mark, I recently sent in a question and I appreciated the response. I do have another one and from researching the archives I can't seem to find the answer to it. I am sure it has been asked before. Here's the question... I'm trying to understand the benefit of using covered calls. When I look at the returns it seems like one could just use a stop loss strategy to accomplish the same thing. In addition, you then have the upside run potential. Seems like for the most part the downside risk is about the same. I guess you do have little more protection as your cost basis would be less then if you just purchased the stock outright. However, from what I understand the idea is to have the stocks called away. I guess I'm just a bit confused. Have I missed something? Still trying to learn this stuff! Thanks, Mike Mike, As you said, covered-calls have less risk than outright stock ownership because the premium received reduces the cost basis in the underlying issue. Still, whether the covered-write strategy is applied short-term or longer-term, it requires a neutral to slightly bullish outlook on the underlying equity and the overall market. As with stock ownership, you are exposed to the risk of a drop in the stock price and the premium you receive for writing a covered call may not be enough insurance to protect yourself against this risk. Therefore, utilizing proven money-management techniques will be required (as it is in all trading) to preserve capital and limit excessive losses. In-the-money (ITM) covered-calls simply offer a higher probability of success and require no movement in the underlying equity. The fact that it is really difficult to predict stock movement (just ask the shorts over the last few weeks) reinforces our reasoning to hedge stock ownership with ITM covered writes. The key to this strategy is the "magic" of compound interest: earning 3% per month (on average) may not seem like "big" money, but a 36% yield for the year is definitely better than the "average" investor's return for 2002. Many investors lose sight of the magic of compound interest and start to focus more on single-transaction returns. In short, they become greedy, especially during extremely bullish market environments! If you're good at picking stock movement, I agree that it would be better to just trade the stock (or buy calls and puts) instead of capping your potential profits with a covered-call position. It simply depends on your risk-reward tolerance. The other, more aggressive sections of the newsletter may be better suited to your temperament and trading style. The ITM covered-write strategy is for conservative investors who prefer the higher probability of obtaining an acceptable return, which correlates with a low risk-reward tolerance. Excitement (Greed) is for those other guys! Good Luck, Mark mark@OptionInvestor.com SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield RSTO 5.48 8.00 DEC 5.00 1.05 *$ 0.57 11.2% SIMG 5.44 6.99 DEC 5.00 1.10 *$ 0.66 11.0% CIEN 5.58 6.65 DEC 5.00 1.00 *$ 0.42 10.0% ISSX 24.48 25.03 DEC 22.50 3.50 *$ 1.52 7.9% INHL 7.96 9.13 DEC 7.50 1.05 *$ 0.59 7.4% IMCL 8.97 13.73 DEC 7.50 2.15 *$ 0.68 7.2% MATK 22.07 23.16 DEC 20.00 3.30 *$ 1.23 7.1% CMOS 11.11 10.82 DEC 10.00 1.65 *$ 0.54 6.2% V 13.96 16.20 DEC 12.50 2.35 *$ 0.89 5.6% USG 6.25 7.85 DEC 5.00 1.60 *$ 0.35 5.5% CTIC 8.60 9.60 DEC 7.50 1.50 *$ 0.40 4.9% DCTM 19.90 18.62 DEC 17.50 3.10 *$ 0.70 4.5% BLDP 13.80 15.03 DEC 12.50 1.80 *$ 0.50 4.5% TXN 19.22 20.11 DEC 17.50 2.40 *$ 0.68 4.4% IDCC 15.20 18.25 DEC 12.50 3.30 *$ 0.60 4.4% MDCO 14.33 16.78 DEC 10.00 4.90 *$ 0.57 4.4% DCTM 18.13 18.62 DEC 15.00 3.80 *$ 0.67 4.1% IDCC 14.74 18.25 DEC 12.50 2.90 *$ 0.66 4.0% BRCM 15.45 19.55 DEC 12.50 3.50 *$ 0.55 4.0% SEE 18.26 37.81 DEC 15.00 3.90 *$ 0.64 3.9% OSUR 7.97 5.99 DEC 7.50 1.45 $ -0.53 0.0% *$ = Stock price is above the sold striking price. Comments: Will the DOW and SP-500 follow the NASDAQ and take out the August high? Now isn't that a loaded question; which will be answered in the next few days. The bullish euphoria of the last decade seems to be slowly creeping back into the markets. Not necessarily a bad thing, but symptomatic of some "call-selling" regret as stocks power up day after day or rocket higher like Sealed Air (NYSE:SEE). Remember though, even with the recent rally, there are a lot of long-term investors (and fund managers) who still have a long way to go just to break-even for the year. As for the covered-call portfolio, OraSure Technologies (NASDAQ:OSUR) remains on our watch list this week as the stock approaches a key support area: the convergence of the October high and its 150-dma. Be optimistic, but don't drop your guard. 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 17.53 DEC 15.00 XQN LC 2.95 347 14.58 21 4.2% CRYP 5.57 DEC 5.00 UFW LA 0.80 175 4.77 21 7.0% FLEX 11.01 DEC 10.00 QFL LB 1.40 12076 9.61 21 5.9% JDEC 14.13 DEC 12.50 QJD LV 2.15 1652 11.98 21 6.3% LAVA 11.59 DEC 10.00 UPB LB 1.95 128 9.64 21 5.4% MATK 23.16 DEC 20.00 KQT LD 3.70 450 19.46 21 4.0% MVSN 18.68 DEC 17.50 MVU LW 1.85 60 16.83 21 5.8% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CRYP 5.57 DEC 5.00 UFW LA 0.80 175 4.77 21 7.0% JDEC 14.13 DEC 12.50 QJD LV 2.15 1652 11.98 21 6.3% FLEX 11.01 DEC 10.00 QFL LB 1.40 12076 9.61 21 5.9% MVSN 18.68 DEC 17.50 MVU LW 1.85 60 16.83 21 5.8% LAVA 11.59 DEC 10.00 UPB LB 1.95 128 9.64 21 5.4% ALXN 17.53 DEC 15.00 XQN LC 2.95 347 14.58 21 4.2% MATK 23.16 DEC 20.00 KQT LD 3.70 450 19.46 21 4.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ALXN - Alexion $17.53 *** 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. ALXN shares rallied recently after the company said its experimental drug pexelizumab failed to achieve 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 at technical support. DEC 15.00 XQN LC LB=2.95 OI=347 CB=14.58 DE=21 TY=4.2% ***** CRYP - CryptoLogic $5.57 *** Betting On The Rally! *** CryptoLogic (NASDAQ:CRYP) is an Internet software development and licensing company operating in the Internet transaction processing market. The principal focus of the company is the development, licensing and support of Internet-based software and e-commerce software for the Internet gaming industry. The company, through WagerLogic Limited, licenses and supports its proprietary Internet- based software package to 17 Internet casino licensees located in various countries around the world. The company provides support and technology to WagerLogic licensees, and maintains, through subsidiaries, accounts for both merchants of its software and their end users. The company reports and remits to its licensees their respective share of the net transaction revenues. Investors have grabbed-up shares of CRYP after several bills to prohibit Internet gaming have failed. Recently, the first US federal legislation that shares the company's position in favor of the regulation of online gaming has been introduced in congress. We simply favor the bullish breakout on heavy volume that suggests further upside potential in the near-term. DEC 5.00 UFW LA LB=0.80 OI=175 CB=4.77 DE=21 TY=7.0% ***** FLEX - Flextronics $11.01 *** New Trading Range? *** Flextronics (NASDAQ:FLEX) is a provider of advanced electronics manufacturing services to OEMs, primarily in the hand-held electronics devices, information technologies infrastructure, communications infrastructure, computer and office automation and consumer devices industries. FLEX provides a network of design, engineering and manufacturing operations in 28 countries across four continents. The company's strategy is to provide customers with end-to-end operational solutions where it takes responsibility for engineering, new product introduction and implementation, supply chain management, manufacturing and logistics management, with the goal of delivering a complete packaged product. Flextronics has confirmed that it remains on track to meet its previous financial forecasts for the next two quarters. This week, the U.S. October durable goods report showed a jump in orders for computers, electronic products and communications gear, which should bode well for future earnings. We simply like the move above a six-month base and this position offers excellent reward potential at the risk of owning an industry-leading issue at a favorable cost basis. DEC 10.00 QFL LB LB=1.40 OI=12076 CB=9.61 DE=21 TY=5.9% ***** JDEC - J.D. Edwards $14.13 *** Bracing For A Break-Out? *** J.D. Edwards (NASDAQ:JDEC) is a provider of agile, collaborative solutions for the connected economy. JDEC delivers integrated, collaborative software for supply chain management (planning and execution) procurement and customer relationship management, in addition to workforce management and other functional support. Its enterprise software is designed to help organizations manage and execute internal business functions, such as manufacturing, finance, distribution/logistics and other core operational processes. The company distributes, implements and supports its software worldwide through 55 offices and more than 350 3rd-party business partners. JDEC has been in a trading range from $9 to $14 for the last 8 months as the stock forms a long-term stage I base. This position offers favorable short-term speculation at the risk of owning this issue with a cost basis at near-term technical support. DEC 12.50 QJD LV LB=2.15 OI=1652 CB=11.98 DE=21 TY=6.3% ***** LAVA - Magma Design $11.59 *** On The Mend? *** Magma Design Automation (NASDAQ:LAVA) provides design and implementation software that enables chip designers to reduce the time it takes to design and produce complex ICs used in the communications, computing, consumer electronics, networking and semiconductor industries. Its Blast Fusion and Blast Chip products utilize a new methodology for complex, deep submicron chip design that combines into one integrated design flow what traditionally has been separate logic design and physical design processes. In addition, LAVA provides consulting, training and chip design services to help its customers more rapidly adopt its technology, as well as post-contract support, or maintenance, for its products. There's little news to explain the recent bullish activity in LAVA but the issue has moved above the October consolidation area amid continued buying pressure and excellent volume. Traders can speculate on the near-term performance of the issue with this conservative position. DEC 10.00 UPB LB LB=1.95 OI=128 CB=9.64 DE=21 TY=5.4% ***** MATK - Martek Biosciences $23.16 *** 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 recently announced 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=3.70 OI=450 CB=19.46 DE=21 TY=4.0% ***** MVSN - Macrovision $18.68 *** Rally Mode! *** Macrovision (NASDAQ:MVSN) develops and licenses rights management and copy protection technologies. The company's customers include Hollywood studios, independent video producers, enterprise and consumer software vendors, digital set-top box manufacturers and digital pay-per-view (PPV) network operators. Macrovision provides content owners with the means to market, distribute, manage and protect video, software and audio content. The company also is in the business of consumer software copy protection. Macrovision offers CD-ROM copy protection and rights management technologies to a variety of software publishers in the personal computer games, home education, information publishing and desktop applications software markets. Macrovision doubled its share value in little over a month and the break-out above the August high completed a short-term double bottom. We favor the technical support near the cost basis in this position and investors who are interested in a long-term portfolio stock in the media sector should consider Macrovision. DEC 17.50 MVU LW LB=1.85 OI=60 CB=16.83 DE=21 TY=5.8% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ROXI 5.55 DEC 5.00 RXU LA 0.85 187 4.70 21 9.2% WDC 8.45 DEC 7.50 WDC LU 1.25 3353 7.20 21 6.0% USG 7.85 DEC 7.50 USG LU 0.65 549 7.20 21 6.0% RATL 9.25 DEC 7.50 RAQ LU 2.05 6392 7.20 21 6.0% NTAP 13.87 DEC 12.50 NUL LV 1.85 6085 12.02 21 5.8% PCS 5.76 DEC 5.00 PCS LA 0.95 10824 4.81 21 5.7% BRCM 19.55 DEC 17.50 RCQ LW 2.70 6719 16.85 21 5.6% PLNR 20.82 DEC 20.00 PNQ LD 1.55 105 19.27 21 5.5% MERX 11.17 DEC 10.00 KXQ LB 1.50 27 9.67 21 4.9% FHRX 6.09 DEC 5.00 FUF LA 1.25 30 4.84 21 4.8% ADSK 15.49 DEC 15.00 ADQ LC 0.95 1159 14.54 21 4.6% NWRE 20.19 DEC 17.50 QQA LW 3.20 946 16.99 21 4.3% ELX 24.14 DEC 20.00 ELX LD 4.70 3826 19.44 21 4.2% WEBX 19.46 DEC 17.50 UWB LW 2.45 502 17.01 21 4.2% ***************** NAKED PUT SECTION ***************** Options 101: Position Selection For Naked Puts By Ray Cummins One of our new readers wants to know how we choose the plays for this section. Attn: questions@OptionInvestor.com Subject: Stock Selection To The Naked-Puts Editor, I recently started my trial with the newsletter and I am trying to figure out which section I should focus on. My experience is mostly related to long-term investing but I know a person can buy stock by selling puts and having it "put" to them. That is a strategy I am interested in so I would like to find out more about the naked puts section. Mainly, how do you pick stocks for selling puts? Also, do you say when to exit the trades and how much money do you expect to make on each one? Thank You, DL Hello DL, First, thanks for your inquiry concerning the Naked-Puts section of the Option Investor Newsletter. The Naked-Puts section is produced mainly for new option traders who need relatively conservative, easy-to-understand strategies. To generate the initial group of candidates, we (Mark Wnetrzak and I) evaluate stocks with overpriced options, reviewing the technical outlook of the underlying issue as well as its industry group or sector. If we feel a position has a high probability of success and a reasonable risk-reward outlook, it is placed on a list for further evaluation. After we have reviewed all of the potential selections for a specific day, we simply choose those which, in our opinion, appear most favorable. Generally, we try to achieve a 4-8% monthly profit with at least 10-15% downside protection. That can be a difficult task when the market is in a bearish trend but since our readers expect new plays regardless of the outlook for stocks, we list a minimum of seven candidates each week. The truth is, writing naked puts is generally not a favorable strategy unless the current trend is neutral or bullish but one thing should be understood: If we don't have confidence in what we have to offer, it won't be published, and that's the overriding measure of any candidate we provide in the section. We also provide a group of additional candidates to supplement your search for profitable trades. These plays, for one reason or another, simply did not make the final list. As you might expect, the process of choosing the "published" positions is very subjective and there are always additional issues that warrant consideration. That is why we now include some of the candidates that missed our final cut -- so that YOU may decide if they meet your criteria for a favorable play. Remember, our primary job is to provide you with a list of potential plays, greatly reducing your research time. Your task is to decide which ones fit your risk-reward profile and hopefully, with research and analysis far beyond that which we can perform in the few hours between Friday's closing bell and Saturday's publishing deadline, you will select only those positions that are winners. As far as commentary and analysis after the position is open: I try to monitor the plays in each section regularly but I do not make specific recommendations about when they should be closed or adjusted. Again, my job is to provide candidates for your careful scrutiny and to identify plays that have a favorable risk-reward outlook. The determination of how and when to trade is solely yours. I will, however, try to point out those occasions when a position offers a favorable "early-exit" return, or when I notice an issue that has reversed direction and may require adjustment or an exit trade to avoid substantial losses. Keep in mind, I often monitor over 100 positions in three sections on a daily basis and I may not always observe the crucial turning point or change in character of a specific issue. The weekly summary "comments" are not intended as a substitute for your own trading techniques nor does it replace your fundamental duty to manage the positions in your portfolio. In addition, any actions based on the commentary would generally be far too late to be effective. I hope this has helped you understand the difficulties associated with producing the Naked-Puts and maybe you will eventually benefit from some of the plays offered in that section. Always remember, they are really just candidates and should only be considered with respect to your personal risk-reward attitudes and trading style. 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 MATK 22.07 23.16 DEC 17.50 0.45 *$ 0.45 10.1% IMCL 15.04 13.73 DEC 10.00 0.30 *$ 0.30 9.8% NWRE 17.68 20.19 DEC 12.50 0.55 *$ 0.55 9.7% ESIO 22.99 24.37 DEC 17.50 0.55 *$ 0.55 9.3% HAL 18.85 21.38 DEC 15.00 0.35 *$ 0.35 9.2% ALXN 17.55 17.53 DEC 12.50 0.30 *$ 0.30 8.6% IMCL 11.77 13.73 DEC 7.50 0.25 *$ 0.25 8.4% MSTR 18.16 18.24 DEC 12.50 0.30 *$ 0.30 8.3% ISSX 22.19 25.03 DEC 17.50 0.45 *$ 0.45 8.0% BSTE 31.02 28.52 DEC 22.50 0.75 *$ 0.75 7.8% HAL 17.85 21.38 DEC 12.50 0.35 *$ 0.35 7.8% CYMI 33.43 36.33 DEC 25.00 0.60 *$ 0.60 7.2% PHTN 28.50 35.25 DEC 22.50 0.50 *$ 0.50 7.0% GNSS 17.17 19.90 DEC 12.50 0.30 *$ 0.30 7.0% PLMD 30.31 28.74 DEC 22.50 0.60 *$ 0.60 6.5% ESIO 24.50 24.37 DEC 17.50 0.30 *$ 0.30 6.3% KOSP 19.13 20.64 DEC 15.00 0.35 *$ 0.35 6.1% SEE 21.33 37.81 DEC 15.00 0.25 *$ 0.25 6.0% RIMM 16.58 15.28 DEC 12.50 0.30 *$ 0.30 6.0% NPSP 28.24 29.56 DEC 20.00 0.50 *$ 0.50 5.9% POSS 14.20 16.18 DEC 12.50 0.35 *$ 0.35 5.9% IGEN 38.65 37.78 DEC 30.00 0.55 *$ 0.55 5.8% ESIO 21.15 24.37 DEC 15.00 0.35 *$ 0.35 5.5% MEDI 28.07 26.38 DEC 20.00 0.30 *$ 0.30 5.5% AMZN 22.21 23.35 DEC 17.50 0.30 *$ 0.30 5.5% PPD 27.08 28.65 DEC 20.00 0.35 *$ 0.35 5.3% *$ = Stock price is above the sold striking price. Comments: Friday's lackluster session provided a rather dull ending to the Thanksgiving holiday week, however the recent bullish activity leaves the door open for additional upside movement in the final month of 2002. Analysts are looking for a move above the August highs to confirm the recovery rally but without that event, a fairly strong decline will likely occur in early December. With that in mind, investors should continue to closely monitor the issues in their portfolios daily and exit any positions that exhibit unfavorable technical indications. Research In Motion (NASDAQ:RIMM) rebounded Monday and moved higher all week, thus the stock may have successfully weathered the news of RIM's patent infringements on products made by NTP Inc. We will continue to watch the issue for signs of a renewed downtrend. 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 BBY 27.68 DEC 22.50 BBY XX 0.35 9930 22.15 21 8.1% GP 20.62 DEC 17.50 GP XW 0.45 287 17.05 21 11.7% HAL 21.37 DEC 17.50 HAL XW 0.45 5002 17.05 21 12.7% JEC 36.31 DEC 35.00 JEC XG 0.50 0 34.50 21 5.3% NWRE 20.19 DEC 15.00 QQA XC 0.30 308 14.70 21 10.0% PHTN 35.25 DEC 27.50 PDU XY 0.40 502 27.10 21 7.8% PPD 28.65 DEC 22.50 PPD XX 0.30 2213 22.20 21 7.2% RINO 19.40 DEC 17.50 AGQ XW 0.30 82 17.20 21 7.1% 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 HAL 21.37 DEC 17.50 HAL XW 0.45 5002 17.05 21 12.7% GP 20.62 DEC 17.50 GP XW 0.45 287 17.05 21 11.7% NWRE 20.19 DEC 15.00 QQA XC 0.30 308 14.70 21 10.0% BBY 27.68 DEC 22.50 BBY XX 0.35 9930 22.15 21 8.1% PHTN 35.25 DEC 27.50 PDU XY 0.40 502 27.10 21 7.8% PPD 28.65 DEC 22.50 PPD XX 0.30 2213 22.20 21 7.2% RINO 19.40 DEC 17.50 AGQ XW 0.30 82 17.20 21 7.1% JEC 36.31 DEC 35.00 JEC XG 0.50 0 34.50 21 5.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** BBY - Best Buy Company $27.68 *** Hot Sector! *** Best Buy Company (NYSE:BBY) is a specialty retailer of consumer electronics, personal computers, entertainment software and appliances. The company operates retail stores and commercial Websites under the brand names Best Buy, Media Play, On Cue, Sam Goody, Suncoast, Magnolia Hi-Fi and Future Shop. Traders took to retail stocks this week amid a slew of economic reports that suggest consumers are buying and will continue to do so in the near future. BBY shares benefited from the upside activity and investors who believe the trend will continue can profit from that outcome with this position. DEC 22.50 BBY XX LB=0.35 OI=9930 CB=22.15 DE=21 TY=8.1% ***** GP - Georgia-Pacific $20.62 *** Asbestos Settlements *** Headquartered in Atlanta, Georgia-Pacific (NYSE:GP) is one of the world's leading manufacturers and distributors of tissue, packaging, paper, building products, pulp and related chemicals. With 2001 sales of $25 billion, the firm employs approximately 60,000 people at 400 locations in North America and Europe. Its familiar consumer tissue brands include Quilted Northern, Angel Soft, Brawny, Sparkle, Soft 'n Gentle, Mardi Gras, So-Dri, Green Forest and Vanity Fair, as well as the Dixie brand of disposable cups, plates and cutlery. Georgia-Pacific's building products distribution segment has long been among the nation's leading wholesale suppliers of building products to lumber and building materials dealers and large do-it-yourself warehouse retailers. Georgia-Pacific has benefited from the bullish news related to asbestos lawsuit settlements and based on the recent technical indications, the risk-reward outlook in this play is favorable. DEC 17.50 GP XW LB=0.45 OI=287 CB=17.05 DE=21 TY=11.7% ***** HAL - Halliburton $21.37 *** More Asbestos Settlements *** 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 rallied again this week amid bullish developments in the asbestos litigation arena. Both Sealed Air and Fresenius Medical reported they had settled all current and future asbestos claims and the news was positive for other firms in similar situations. Traders can speculate on the near-term results of the ongoing asbestos litigation with this position. DEC 17.50 HAL XW LB=0.45 OI=5002 CB=17.05 DE=21 TY=12.7% ***** JEC - Jacobs Engineering Group $36.31 *** New Trading Range! *** Jacobs Engineering Group (NYSE:JEC) is a professional services firm focused exclusively on providing a broad range of technical professional services to a large number of industrial, commercial and governmental clients worldwide. The types of technical and professional services the firm provides to its clients include project services, process, scientific and systems consulting services, operations and maintenance services and construction services. The company concentrates its services on selected industry groups and markets, including chemicals and polymers, buildings (including projects in the fields of healthcare and education, as well as commercial and governmental buildings), federal programs, pharmaceuticals and biotechnology, exploration, production and refining, infrastructure, technology and also the manufacturing and pulp and paper. Shares of JEC vaulted to the top of a recent trading range near $32 and the issue now appears poised for future upside activity. DEC 35.00 JEC XG LB=0.50 OI=0 CB=34.50 DE=21 TY=5.3% ***** NWRE - Neoware Systems $20.19 *** Entry Point? *** Neoware Systems (NASDAQ:NWRE) provides software and solutions to enable appliance computing, a web-based computing architecture targeted at business customers that is designed to be simpler and easier than traditional personal computer-based computing. The company's software and management tools power and manage a new generation of smart computing appliances that utilize the benefits of open, industry-standard technologies to create new alternatives to PCs used in business and a variety of proprietary business devices. Neoware Systems provides its software on top of a number of embedded operating systems, including Microsoft's Windows CE and NT Embedded, as well as an embedded version of the Linux operating system. Shares of Neoware Systems moved higher this week after a business publication gave the computer company an A-plus overall rating compared with its computer-manufacturer peers. Investor's Business Daily's Web site ranked Neoware the best stock overall in the computer-manufacturer group and the company garnered top rankings in the technical, fundamental and attractiveness categories. Investors looking for a long-term portfolio holding in the technology segment can use this play to obtain a low risk entry point in the issue. DEC 15.00 QQA XC LB=0.30 OI=308 CB=14.70 DE=21 TY=10.0% ***** PHTN - Photon $35.25 *** Sector Rally Continues! *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display (FPD) industry. The company also offers yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries and the cathode ray tube display and CRT glass and auto glass industries. The firm's test, repair and inspection systems are used by manufacturers to collect data, analyze product quality and identify and repair product defects at critical steps in the manufacturing. Stocks in the Semiconductor-Equipment group have continued to perform very well and Photon Dynamics is one of the leading issues in the segment. Traders who believe the trend will continue can profit from that outcome with this position. DEC 27.50 PDU XY LB=0.40 OI=502 CB=27.10 DE=21 TY=7.8% ***** PPD - Pre-Paid Legal $28.65 *** Premium Selling! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. Legal services include unlimited attorney consultation, traffic violation defense, auto-related criminal charges defense, letter writing/document preparation, will preparation and review and a general trial defense benefit. Pre-Paid has always been a controversial issue and its shares rallied again last week after Thestreet.com published a report by Gotham Partners that argues a bullish case for the company. The news generated some large moves in the stock, but that has often been the character of PPD and traders who want to speculate on the future movement of the issue should consider this position. DEC 22.50 PPD XX LB=0.30 OI=2213 CB=22.20 DE=21 TY=7.2% ***** RINO - Blue Rhino $19.40 *** Bullish Outlook! *** Blue Rhino (NASDAQ:RINO) is a top national provider of branded propane cylinder exchange and complementary propane-fueled products to consumers. Blue Rhino cylinder exchange is offered at leading home center/hardware, mass merchants, grocery and convenience stores, with branded cylinder displays at more than 26,000 retail locations in 48 states plus Puerto Rico. Rhino's cylinders are delivered to retailers through a national network of 46 distributors. The firm's propane-fueled products segment is focused on appliances such as grills and patio heaters that use cylinders as their fuel source. These products are marketed through many of the same retailers that offer the firm's branded cylinder exchange service. The company's quarterly report was outstanding and the future earnings outlook is also favorable. Investors who want to establish a conservative cost basis in the issue should consider this position. DEC 17.50 AGQ XW LB=0.30 OI=82 CB=17.20 DE=21 TY=7.1% ***** ***************** 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 CLHB 14.69 DEC 12.50 QPB XV 0.30 332 12.20 21 10.9% IDCC 18.25 DEC 15.00 DAQ XC 0.30 679 14.70 21 10.0% FEIC 18.65 DEC 15.00 FQE XC 0.25 107 14.75 21 8.9% AFCO 20.25 DEC 17.50 UOF XW 0.35 2 17.15 21 8.9% VRST 20.39 DEC 17.50 UVQ XW 0.30 77 17.20 21 7.8% GENZ 32.80 DEC 30.00 GZQ XF 0.55 580 29.45 21 7.3% ELX 24.14 DEC 17.50 ELX XW 0.25 1386 17.25 21 7.1% SNDK 27.75 DEC 22.50 SWQ XX 0.30 490 22.20 21 7.1% NOK 19.21 DEC 17.50 NOK XW 0.30 2328 17.20 21 6.9% QCOM 41.22 DEC 35.00 AAW XG 0.45 25992 34.55 21 6.1% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Another Bullish Week! By Ray Cummins The major equity averages ended lower Friday but the consolidation was seen as acceptable for a market that has rallied over 20% from its 2002 nadir. The Dow Jones Industrial Average slid 35 points to 8,886 despite large gains in Honeywell (NYSE:HON), which rebounded 6% amid news of a key asbestos settlement related to a company it had acquired. The tech-laden NASDAQ index slumped 9 points to 1,478 as computer hardware and semiconductor shares retreated after recent advances. The broader S&P 500-stock index finished slightly negative, down 2 points as retail, airline, building materials, and home healthcare stocks turned lower. Volume was light during the holiday-shortened trading session with only 637 million shares changing hands on the Big Board and 833 million shares traded on the NASDAQ. Breadth was neutral with advances and declines roughly equal on the major stock exchanges. The bond market was upbeat as Treasurys advanced in an abbreviated session. The 10-year note rose 10/32 to yield 4.21% while the 30-year bond added 1 4/32 to yield 5.04%. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status BR 42.01 42.12 DEC 35 37 0.30 37.20 $0.30 Open EBAY 64.79 68.92 DEC 50 55 0.55 54.45 $0.55 Open IGEN 36.49 37.78 DEC 25 30 0.65 29.35 $0.65 Open SLM 102.94 97.73 DEC 85 90 0.65 89.35 $0.65 Open DE 49.00 51.15 DEC 40 45 0.65 44.35 $0.65 Open INTU 52.91 53.94 DEC 40 45 0.50 44.50 $0.50 Open LLY 62.24 68.30 DEC 50 55 0.55 54.45 $0.55 Open IGT 77.06 77.72 DEC 65 70 0.55 69.45 $0.55 Open KSS 66.90 68.50 DEC 55 60 0.55 59.45 $0.55 Open PIXR 55.67 57.74 DEC 45 50 0.50 49.50 $0.50 Open AZO 85.32 81.70 DEC 70 75 0.45 74.55 $0.45 Open FPL 59.87 58.80 DEC 50 55 0.55 54.45 $0.55 Open UOPX 36.65 35.15 DEC 30 33 0.45 33.30 $0.45 Open SLM Corporation (NYSE:SLM) and Autozone (NYSE:AZO) are on the watch-list but both issues appear to be stabilizing after recent declines. University of Phoenix Online (NASDAQ:UOPX) has also endured some profit-taking but for now, the bullish trend remains intact. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status ABC 72.45 58.02 DEC 85 80 0.65 80.65 $0.65 Open MCO 45.12 44.02 DEC 55 50 0.40 50.40 $0.40 Open WLP 74.04 65.83 DEC 90 85 0.60 85.60 $0.60 Open UNH 86.83 81.45 DEC 105 100 0.55 100.55 $0.55 Open DNA 35.46 33.00 DEC 45 40 0.60 40.60 $0.60 Open DP 40.40 36.28 DEC 50 45 0.40 45.40 $0.40 Open LXK 63.75 66.14 DEC 75 70 0.60 70.60 $0.60 Open IDPH 39.27 32.90 DEC 45 40 0.45 40.45 $0.45 Open UHS 44.85 44.75 DEC 55 50 0.30 50.30 $0.30 Open Sinclair Broadcast Group (NASDAQ:SBGI) rallied in conjunction with the bullish activity in the media group and the position has been closed to protect profits and/or limit losses. The bearish spread in Lexmark (NYSE:LXK) is also on the watch-list as the issue has renewed its upward trend during the recovery in technology stocks. However, the issue has another level of resistance near the sold strike at $70 and the supply at that price should provide significant opposition to further upside movement. SYNTHETIC (BULLISH) ******************* Symbol Pick Last Month L/C S/P Credit M/V G/L Status ABT 45.89 43.78 DEC 50 40 0.10 0.00 0.10 Open NXTL 9.69 13.75 JAN 12 7 0.10 2.50 2.60 Open? FCS 13.30 15.31 FEB 17 10 0.10 1.40 1.50 Open LTXX 6.83 9.22 FEB 10 5 0.00 0.90 0.90 Open MENT 10.35 12.06 JAN 12 7 0.10 0.80 0.90 Open COX 30.25 30.28 DEC 35 25 0.10 0.20 0.30 Open OMC 66.32 68.05 DEC 75 55 0.15 0.10 0.25 Open FLEX 11.15 11.01 JAN 12 10 0.10 0.15 0.25 Open ZRAN 18.80 21.53 DEC 22 15 (0.25) 1.00 0.75 No Play Nextel (NASDAQ:NXTL) remains 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 and the speculative play in ZRAN, although not available at our target price, achieved a favorable gain. CALENDAR SPREADS **************** Symbol Pick Last Long-Opt Short-Opt Debit M/V Status HNT 25.75 25.81 JAN-30C NOV-30C 0.75 0.60 Open WSM 24.53 26.34 FEB-30C DEC-30C 0.80 1.10 Open GISX 20.21 19.41 FEB-22C DEC-22C 0.95 0.75 Open UAL 3.59 2.45 FEB-5C DEC-5C 0.35 0.25 Open United Airlines (NYSE:UAL) was the big mover this week, falling to a recent low near $2.50 after the group's mechanics rejected pay cuts that are a key element of its financial recovery plan. Fortunately, the premium in the sold option reduced our basis to a price near the current value of the long position. The question now is whether or not UAL can come to terms with the mechanics' union before the deadline for financing. The Sharper Image (NASDAQ:SHRP) position has been closed to limit losses. SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit G/L Status AES 2.92 2.12 J04-7.5P J03-2.5P 4.50 0.25 Open IMCL 7.77 13.73 J04-15P JO3-5P 8.00 2.25 Open? After over a month in the position, ImClone (NASDAQ:IMCL) has paid off nicely with a profit of up to $2.25 in the speculative play. CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V G/L Status ERTS 64.13 67.86 DEC 70 55 2.40 1.50 0.90 Open MDCO 12.70 16.78 DEC 17 7 1.25 0.75 0.75 No Play SLAB 25.16 29.29 DEC 30 20 1.00 2.00 (1.00) Open Silicon Laboratories (NASDAQ:SLAB) has been very active with the technology group and any continued upside activity will suggest an exit (or adjustment) in the bearish portion of the position. Traders with a bullish outlook on the semiconductor sector may consider buying the stock to cover the sold (short) call at $30. The Medicine Company (NASDAQ:MDCO) position, although profitable, was not initiated due to a significant "pre-open" announcement. Questions & comments on spreads/combos to Contact Support ************** E-MAIL REPLIES ************** Attn: Contact Support Subject: Abbreviations & Acronyms To The Spreads Editor, Ray, I feel kind of stupid because I have been reading these for several years, but have not done a lot of spreads. What does C/B mean in the spread tables as well as M/V and C/V. Thanks in advance! Have a great day, PE Hello PE, Thanks for your interest in the Spreads/Combos section. The abbreviations used in that segment of the OIN are generally straight-forward but a few deserve further explanation. C/B = Cost Basis The break-even or "profit/loss point" in a position -- can be both upside and downside break-even if a volatility based play (such as a straddle or strangle). M/V = Maximum Value The maximum value observed in a suggested position. Either a credit or a debit depending on the strategy and often involves subtracting the cost (to close) of the short option from the value (bid price) in the long option. For example, the maximum value in a synthetic position would be the initial credit plus any premium received in selling the long option and buying the short option). CV = Current Value The composite total of the closing prices (bid or ask as appropriate) as of the summary date. For example, the Current Value of a debit straddle would be the (bid) price of the long put added to the (bid) price of the long call, thus giving the trader an indication of the gain or loss in the position (based on the initial debit in the straddle). In the case of a credit strangle, Current Value is the sum of the ask prices of both the call and the put options -- the total cost of repurchasing both (short) options. Once again, it is intended to help reflect the current profit or loss in a play. Hope that helps...and remember, the weekly play summary is nothing more than a reasonable (Interquote-based) account of the positions previously offered in this section. No representation is being made as to the actual performance of the portfolio, due to the many ways which each play can be opened, closed and/or adjusted. In addition, trade suggestions made in the OIN are simply 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. Have a great day! Ray Editors note: Readers often ask about the different summaries for for the "Premium-Selling" section, which is published on Wednesday and the "Spreads-Combos" section, which is offered in the week-end edition of the OIN. The Premium-Selling plays (previously called Big-Cap plays) published during the week are completely separate from the Spreads-Combos candidates listed on Saturday afternoon. As such, the play summaries are also separate; they do not include positions from the other sections. The most obvious reason for this is the time-consuming nature of the summary, which has to be done after the market closes but prior to any research (and the publishing deadline) for new positions. You may have noticed that the mid-week "Premium-Selling" summary is now based on Tuesday's market prices, which allows for a full three hours of research after the market closes (on Wednesday) before the plays are sent to the home-office for publishing. A similar condition exists Friday after the market close, as the summary must be completed before research can begin on the new candidates. In short, dividing the two sections (and their respective summaries) allows more time to be devoted to the most important newsletter service: finding new candidates for our readers. ************* 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. ************** 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. ***** ABK - Ambac Financial $62.51 *** Another Trend Reversal! *** Ambac Financial (NYSE:ABK) is a holding company that, through its many subsidiaries provides financial guarantee products and other financial services to clients in the public and private sectors around the world. The company provides financial guarantees for municipal and structured finance obligations through its primary operating subsidiary, Ambac Assurance Corporation. Through its financial services subsidiaries, the company provides financial and investment products including investment agreements, interest rate swaps, funding conduits, investment advisory and financial management services, principally to its guarantee clients, which include municipalities and their authorities, school districts, healthcare organizations and asset-backed issuers. PLAY (very conservative - bullish/credit spread): BUY PUT DEC-50 ABK-XJ OI=356 A=$0.35 SELL PUT DEC-55 ABK-XK OI=2677 B=$0.65 INITIAL NET-CREDIT TARGET=$0.35-$0.45 POTENTIAL PROFIT(monthly)=9% B/E=$54.65 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=89% ***** AGN - Allergan $58.79 *** Trading Range? *** Allergan (NYSE:AGN) is a technology-driven, global healthcare company that develops and commercializes specialty pharmaceutical products for the ophthalmic, neurological, dermatological and other specialty markets, as well as ophthalmic surgical devices and contact lens care solutions. Its worldwide, consolidated revenues are generated by prescription and also non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intraocular lenses and other ophthalmic surgical products, and contact lens care products. The company's products are sold to drug wholesalers, independent and chain drug stores, pharmacies, commercial optical chains, opticians, mass merchandisers, food stores, hospitals, ambulatory surgery centers and medical practitioners, including neurologists, dermatologists and plastic surgeons. PLAY (conservative - bullish/credit spread): BUY PUT DEC-50 AGN-XJ OI=361 A=$0.25 SELL PUT DEC-55 AGN-XK OI=147 B=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$54.45 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=76% ***** RE - Everest Re Group $57.90 *** Recovery Underway? *** Everest Re Group (NYSE:RE), through its subsidiaries, principally provides reinsurance and insurance in the United States, Bermuda and international markets. The company underwrites reinsurance both through brokers and directly with ceding companies. Everest underwrites insurance mainly through general agency relationships. Everest Reinsurance company specializes in property and casualty reinsurance and insurance. Everest Reinsurance (Bermuda), Ltd., established in 2000, principally writes property and casualty reinsurance and also offers reinsurance and insurance with respect to life and annuity classes of business. PLAY (conservative - bullish/credit spread): BUY PUT DEC-50 RE-XJ OI=70 A=$0.30 SELL PUT DEC-55 RE-XK OI=97 B=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$54.45 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=72% ***** AAP - Advance Auto Parts $51.55 *** Trading Range? *** Advance Auto Parts (NYSE:AAP) is a specialty retailer of auto parts, accessories and maintenance items for "do-it-yourself" customers in the United States. The company had 2,444 stores operating under the Advance Auto Parts and Discount Auto Parts trade names in 37 states in the northeastern, southeastern and midwestern regions of the United States at December 29, 2001. In addition, as of that date, Advance Auto Parts had 40 stores operating under the Western Auto trade name located in Puerto Rico, the Virgin Islands and California. Its stores offer a wide selection of brand-name and private-label automotive products for domestic and imported cars and light trucks. The firm also serves do-it-for-me (DIFM) customers via sales to commercial accounts. Additionally, Advance Auto Parts operates a wholesale distribution network, which offers automotive parts, accessories and certain other merchandise to approximately 470 independently-owned dealer stores in 44 states. PLAY (conservative - bearish/credit spread): BUY CALL DEC-60 AAP-LL OI=2290 A=$0.20 SELL CALL DEC-55 AAP-LK OI=5080 B=$0.70 INITIAL NET CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$55.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=77% ***** ACDO - Accredo Health $53.32 *** Pure Premium-Selling! *** Accredo Health (NASDAQ:ACDO) provides specialized contract pharmacy services on behalf of biopharmaceutical manufacturers to patients with chronic diseases. The company's services help simplify the difficult and often challenging medication process for patients with a chronic disease and help ensure that patients receive and take their medication as prescribed. The company's services benefit biopharmaceutical manufacturers by accelerating patient acceptance of new drugs, facilitating patient compliance with the prescribed treatment and capturing valuable clinical information about a new drug's effectiveness. Their services include contract pharmacy services, reimbursement services, clinical services, and delivery services. The company's stock will split 3-for-2 on 12/03/02. PLAY (less conservative - bearish/credit spread): BUY CALL DEC-65 DZU-LM OI=50 A=$0.25 SELL CALL DEC-60 DZU-LL OI=204 B=$0.80 INITIAL NET CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$60.60 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=82% ******************* 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. ***** CY - Cypress Semiconductor $8.64 *** Bottom-Fishing! *** Cypress Semiconductor Corporation (NYSE:CY) designs, develops, manufactures and markets a broad line of high-performance digital and mixed-signal integrated circuits for a wide range of markets, including data communications, telecommunications, computing, consumer and instrumentation systems. The company's products are sold to a wide range of customers, including Alcatel Alsthom S.A., Cisco Systems, Inc., Ericsson AG, International Business Machines Corporation, Intel Corporation, Lucent Technologies, Motorola, NEC Corporation, Nortel Networks Corporation, Philips Corporation, 3Com Corporation and Sony Corporation. The company's core product lines are Memory, Datacom, Timing Technology and Personal Communication. The company has traditionally organized its product offerings in two business segments, memory products and non-memory products. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-10.00 CY-AB OI=417 A=$0.65 SELL PUT JAN-7.50 CY-MU OI=529 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 $300 per contract. ***** SCIO - Scios $32.84 *** Cheap Speculation! *** Scios (NASDAQ:SCIO) is a biopharmaceutical company developing novel treatments for cardiovascular and inflammatory diseases. The company's disease-based technology platform integrates new protein biology with computational and medicinal chemistry to identify novel targets and rationally design molecule compounds for large markets with unmet medical needs. Scios is focused on the development of three primary product candidates: Natrecor, for the treatment of acute congestive heart failure, SCIO-469, an oral small-molecule inhibitor of p38 kinase for the treatment of rheumatoid arthritis, and small molecule inhibitors of the receptor for TGF-beta, a cytokine that has been implicated in diseases characterized by chronic scar formation, or fibrosis. PLAY (very speculative - bullish/synthetic position): BUY CALL JAN-40.00 UIO-AH OI=30 A=$0.45 SELL PUT JAN-25.00 UIO-ME OI=465 B=$0.30 INITIAL NET DEBIT TARGET=$0.00-$0.10 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 $700 per contract. ***** ************************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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