The Option Investor Newsletter Sunday 12-08-2002 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: Got Work? Futures Market: White and Red makes Green Index Trader Wrap: PAUL WHO? Editor’s Plays: Setting Up for the Fall Market Sentiment: Out With the Old Ask the Analyst: Selecting strike, expiration then exit points Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Resigning Ourselves to New Levels Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 12-06 WE 11-29 WE 11-22 WE 11-15 DOW 8645.77 -250.32 8896.09 + 91.25 8804.84 +226.75 + 41.96 Nasdaq 1422.44 - 56.30 1478.74 + 10.05 1468.74 + 57.60 + 51.86 S&P-100 464.42 - 14.43 478.85 + 3.82 475.03 + 11.31 + 6.33 S&P-500 912.23 - 24.08 936.31 + 5.76 930.55 + 20.72 + 15.09 W5000 8629.16 -217.52 8846.68 + 63.55 8783.13 +199.08 +145.25 RUT 396.72 - 9.64 406.36 + 6.36 400.00 + 14.08 + 6.93 TRAN 2388.81 + 28.19 2360.62 + 46.64 2313.98 - 19.12 - 13.68 VIX 32.68 + 1.60 31.08 + 4.35 26.73 - 4.10 - 2.73 VXN 52.28 + 2.80 49.48 + 2.00 46.49 - 3.19 - 2.33 TRIN 1.11 1.04 1.05 0.67 Put/Call 0.91 0.62 0.70 0.57 ****************************************************************** Got Work? by Jim Brown If you have work then you are better off than the 8,508,000 currently unemployed. The markets did not take well to Friday's economic numbers and without the "timely" resignation of O'Neil and Lindsey the trading outcome could have been much different. Dow Chart – Daily Nasdaq Chart – Daily The big economic news on Friday was the jobs report and it was news the markets could have done without. The unemployment rose to 6.0% matching the high from April and the highest number in years. Jobs fell by -40,000 in November and was well below the consensus estimate for a gain of +28,000. This was the biggest drop in jobs since February. Manufacturers continued to cut employees and the retail sector lost -39,000 jobs. If the consumer is still buying then why would retail cut jobs just before the holiday season? Inquiring minds want to know! The numbers for Sept/Oct were revised up by +10,000 on better data but the total drop in private payrolls for the last three months was fixed at -103,000. If the recovery is really under way then it is being supported by fewer workers and we are far from a major improvement. With job losses declining in the supposedly strong seasonal period this does not bode well for the economy. The rising unemployment is also being felt in the consumer credit numbers. The October consumer credit came in at an increase of only +$1.4 billion instead of the +$8.5 billion expected. Come on guys, some of your wives are not contributing to the recovery. Give them back the credit cards! (grin) The numbers for Aug/Sept were also revised down considerably. The October number was the low for the year and well under the cycle peak in May. Considering the number of new auto loans undertaken in the last 90 days this means the retail consumer was positively hoarding money. Analysts claim that the mortgage refinancing boom has put money into consumer pockets and reduced the need to press the plastic into use. The trouble with this theory is that the cash is not flowing into the retail sector. If cash is available then consumers are stashing it for a rainy/snowy day. In a startling coincidence the resignation of O'Neil and Lindsey occurred on the same morning that very negative "economic" reports are announced and one day before the Iraq papers go public. What a stroke of luck for the markets! (grin) The administration instantly distracted the public from a possible market meltdown and a potential main event on the Iraqi front. The resignations had been rumored for several months and several analysts were on record as saying they had probably been in the hopper for several weeks in anticipation of a bad news event. Another report had VP Cheney delivering the bad news to O'Neil in his office yesterday and offering to let him resign. Whatever story you believe there is the problem of no immediate successor for either position. Had this been in the works for weeks you would have expected the administration to have a replacement ready. There are so many possible conspiracy theories as to why now that it is impossible to decide who is right. I sometimes think the simplest answer is the right answer. Bad economic news and potentially bad war news along with the start of the 2004 campaign required strong action to assure the public that the administration was in control and felt their pain. I would expect a flood of tax cut measures immediately to continue the distraction process and try to pump up consumer confidence. O'Neil was against further tax cuts. One of the front-runners for O'Neil's position is Charles Schwab. Next week we have a Fed meeting on the calendar on Tuesday but traders will be free to ignore it. They already said they were not going to cut again and the Fed funds futures are only showing a 10% chance of a hike. Now that would be a real surprise! With no change in posture expected the governors could go in the front, close the doors and go right out the back for a day of shopping and nobody would know. Put out a press release at 2:15 for no change, risks balanced and recovery under way. The next meeting is two days on Jan 28/29 and the rate hike rumors could be running rampant by then. After two moderately positive mid quarter updates by AMD and INTC the tech sector failed to follow through on Friday. There was news from IDC that the disk storage market had fallen on hard times and global demand was down -3% in the 3Q. IDC also said PC "shipments" would grow only +8% in 2003 and most of that would occur in the third or fourth quarter. Gateway computer instructed employees to take a mandatory five extra days off later this month. HPQ has instructed contract workers to take an additional 20 days off in December. This continued cost cutting shows that things are not picking up quickly in the PC sector. IBM was an exception and said they were not requiring anyone to take off. The IBM spokesman said "I guess we're busy." It was not exactly a strong vote of confidence. Dell Computer was initially included in the time off announcement but Dow Jones later printed a retraction. Dan Niles went on record as saying investors with a long time horizon should be aggressive about buying chip stocks on any pullback. QCOM, the leading maker of mobile phone chips, raised their forecast for chip shipments in the near term. They said demand in China and India as well as the U.S. was strong. The news reflected the strong demand for their CDMA technology. They said "aggressive holiday pricing" was behind the demand in the states. Even with the AMD, Intel and QCOM news the semiconductor index finished with a fractional loss. The Semiconductor Equipment and Materials International group said sales of equipment to make chips would fall by -30% this year. They had previously expected a -19% decline in their latest forecast. The said the non-existence of an upturn had soured their outlook. For 2003 the group is now expecting only a +15% increase to $21.8 billion instead of their earlier estimate of $29.4 billion. The $21.8 billion only represents a +$3 billion increase and they expect that gain to come late in the year. FLEX said it was closing circuit board fabrication facilities in California and Sweden to cut costs and reduce excess capacity. Niles says buy aggressively on dips but only if you have a long time horizon. The long awaited upgrade cycle will come eventually, maybe not until 2004 but it will come. Rumors were circulating that Gateway CEO Ted Wait had made the discouraging comments on Thursday in an effort to drive down the stock so the company could be taken back private. With a high in 1999 near $85 the company is trading near $3.50 now. Surely Ted has an extra billion laying around which with 324 million shares outstanding is what it would take to buy it back. That of course assumes he wants it back. With Dell and HPQ eating their lunch and the company having to resort to selling flat screen televisions to make a living he may be ready to bail instead. Kent Barton suggested on the Market Monitor on Friday that a better deal would be for Wal-Mart to buy them. WMT has said it wants to get into the computer business and what better way than to buy one already in production and put the WMT marketing power behind an established brand. An extra billion to WMT is pocket change which they could easily recover in the first year on marketing power alone. Talk about putting a crimp in the Dell/HPQ momentum. Way to think out of the box Kent! I received numerous emails on my retail comments on Tuesday. Far too many to answer individually. The vast majority were in agreement that keeping your eyes open to the world around you was a prudent task for an investor. Numerous emails recounted books by Peter Lynch on investing as well as nuggets from Warren Buffet, John Dessauer and others who make it a practice to be alert to trends before they make it into the news sources. I also got quite a few from readers recounting their mall trips of late. Only a couple reported packed malls. Dozens reported scarce shoppers carrying no packages and no lines at the registers. With only two weeks left before Christmas any buying frenzy will have to appear very soon. WMT, TGT and Sears were the stores of choice and most high end stores were mentioned as vacant. I would urge readers to continue to send me your observations and let's see if the "official" results match our unofficial poll by educated investors. Next week should be interesting. The economic schedule is very light until Thursday and the FOMC meeting on Tuesday is a non-event. The challenge will continue to be earnings warnings as we move full speed into the 4Q cycle. The break in the eight week winning streak for the Dow was no big deal and it was due for a breather. If we only have a one week drop after eight weeks of gains we would all be excited. The Dow dropped to support at 8500 on the jobs news and rocketed back +140 points. While this was pleasing to watch it did not really have enough power to convince traders that it would stick. Overhead resistance at Dow 8700 and 8800 should keep a lid on any rebound and strong support at 8350 should prevent any serious drop, this time. The consensus of opinion is that we could get an oversold bounce on Monday to something in the Dow 8800 range and then another bout of selling. The strong gains from the last eight weeks may not have been digested with only one week of profit taking. If we do roll over again then the key level is 8350. If that holds then the Santa Claus rally could begin. If it fails Santa could be delivering lumps of coal to all the bullish investors. Dan Niles may be suggesting aggressive buying and the coming tax changes may be very bullish but there is still a minefield to cross in our immediate future. Enter Very Passively, Exit Very Aggressively! Jim Brown "It is not the return on my investment that I am concerned about; it is the return of my investment." - Will Rogers ************** FUTURES MARKET ************** White and Red makes Green By John Seckinger jseckinger@OptionInvestor.com Futures sold off sharply following a soft jobs report; however, a statement from the White House became the catalyst for all three contracts to go from red to green. Will the rebound have legs? Friday, December 6th at 4:15 P.M. Contract Net Change High Low Volume ES02Z 913.75 +5.25 916.00 891.75 700,990 YM02Z 8674.00 +34.00 8682.00 8486.00 22,278 NQ02Z 1067.00 +1.04 1075.00 1030.00 325,662 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: Equities were on the defensive early, as a weaker-than-expected November employment report (-40k versus expectations of a 35k rise) included a rise in the unemployment rate to 6.0% (5.8% estimates). Also weighing on stocks was a downgrade of IBM by Salomon Smith Barney (“in-line” from “outperform”) based on valuation concerns. Then came the bullish catalyst, as Treasury Secretary Paul O’Neill and Chief White House Economic Advisor Lawrence Lindsey both announced their resignations (one after the other). This allowed for the increased possibility of an aggressive fiscal stimulus package being passed. Mr. O’Neill was know for being supportive of a strong dollar (as well as not admitting the U.S. was in a recession), and it will be interesting to see if the dollar is allowed to slide and help multinationals. In other news, Qualcomm (QCOM) raised its fiscal Q1 MSM chip shipment guidance; propelling shares higher on Friday 4.8% to close at 41.48. Note: The Iraqi weapons declaration deadline is December 8th. Technical News: The XAU index and the 30-year (ZB03H) both hit solid resistance levels on Friday, and the resignation from Mr. O’Neill seems to apply to both. The Gold and Silver Index rose 3.43% to 71.29, closing just underneath a strong P&F buy signal at 72. The strength in Gold seemed to be related to the weakness in the dollar, falling 0.74 points to 105.36. The 30-year was higher by a full point and a half, only to fall two full points (64/32) before slightly recovering as the session ended. There is a daily trend line from the high on October 8th that bisects with the high on November 13th; coming in on Friday at 110’23. The intra-day high was 110’26. Going forward, a move above 72 in the XAU should be accompanied by a weakness in the dollar and bonds. The relationship to stocks under this scenario is actually unclear, and will depend on price pressure from multinationals able to take advantage of a weak dollar. ================================================================= The December Mini-sized Dow Contract (YM02Z) Let us take a step back and look at the long-term picture first. With the Dow recording its first weekly loss in nine weeks, odds have to favor prices being lower this time next week. With the weekly divergence now a reality, does it make sense to load the boat up on short positions and take a vacation for the next few months? If only it was that easy. There are two approaches shorts might take: One is selling as soon as next week goes into the red (could of course happen on Monday’s open); the other waiting until the 8500 level is taken out. Ideally, the market attempts at a rally and then comes back through 8645 and begins printing red. Risk to the upside is tiered: 8750, 8800-8825 area, and then near 9025. If the market does rally back above 8750, I would look for underpinning bids until the 8645 area is taken out. The reason is because traders most likely expect the downward trend to continue, and there should be a fair number of shorts ready to get squeezed during a rise higher. Chart of Dow Jones, Weekly It really does come down to trading levels. If the market opens significantly lower on Monday, say 8400, does it make sense to go short? At 8400, begin to establish the risk parameters. If flat, I would give the market 30 minutes to trade and then use 8400 as a pivot. If above, look for a move back to 8500. If below, look for a move to 8250 in the next few days while keeping a stop at 8410. Since this scenario occurred on Friday (market almost immediately hitting the 8490 area and then rising), begin to think like a market maker in all the stocks that influence the YM contract. They are all hedging their risk, using these levels to manage their inventory. With the YM contract on the top of the previous wedge, sentiment can still be slightly bearish; however, there is no confirmation and the next intermediate pivotal levels are far away (8500 and 8825). Short-term traders can use the tiered levels mentioned above, adding the 22 PMA to the list. I certainly think traders can benefit from the long side; however, solid bullish readings will not be achieved until the high above 9000 is taken out (or the market trades to 8000). A move from one pivot to the next (8750 to 8825) can certainly exist, however. Chart of YM02Z, 60-minute YM02Z Support Resistance Pivot 8585 8700 8825 8475 8750 8585 8425 8825 8350 8900. The December E-mini Nasdaq 100 Contract (NQ02Z) There appears to be more negatives than positives within the NDX (under pivotal zone, bearish cross within PMA’s, and lower highs and lower lows), but the 1065.97 settlement does not paint an extremely clear picture for bears. Traders certainly have to debate the fallout from the O’Neill’s resignation, soft jobs report, and Iraqi situation. It should not be long before the picture becomes a little more transparent. Without the fundamentals, all signs still point towards a test of 1023 in the near term. Note: The previous 1083-85 pivotal area is now being adjusted upward because of the rising regression channel. 1085 corresponded with the channel on Friday, but 1085 will be underneath during trading on Monday and going forward. Chart of NDX, 120-minute Gap openings have defined trading on Thursday and Friday, with the NQ02Z contract outlining a solid 30-point channel (1086 to 1036). The 50% retracement of this range comes in at 1061. Looking at a 5-minute chart of the NQ, the recent level appears to be in an extremely efficient area; however, the 1067 level does have the contract above both the 50% retracement and the apex of a pennant formed near 1063. This should give the contract a very slight bullish tilt. Expectations? 1075, and then ideally a test of 1086 and a challenge to shorts. Intermediate traders can wait until either 1086 or 1036 is tested, and then evaluate conditions there. Once outside these levels, prices should stay outside by session’s end. Chart of NQ02Z, 5-minute NQ02Z Support Resistance Pivot 1046 1075 1100 1035 1085 1085 1023 1100 1055 1000 1110 1040 Bold signifies levels within the NDX. The December E-mini S&P 500 Contract (ES02Z) The S&P 500 contract almost traded the entire range seen on November 20th, when the SPX moved from 894 to 915 and really set the stage for the rally afterwards. Also important is the fact that the long-term bearish trend line (from March) was tested once again. Additionally, this index closed right on its 22 DMA. So, what should a trader be looking for? If price action on Monday takes out Friday’s high (give a cushion of 3 points), expect some short covering back to the 927 level. Bears will be watching to see if the +DI oscillator moves underneath the –DI and gives a sell signal. They are touching at present. Chart of S&P 500 Index, Daily A chart of the ES contract shows resistance currently being tested (also seen on the MACD), but bears are certainly not out of the woods. A few things to watch for: If the contract bids, look to see if the shorter-term moving averages (22 and 50, exp) cross above the 200. Also look for the MACD oscillator to be higher. As far as the downside is concerned, a move under 905 should take sentiment to slightly bearish readings and quickly test 900. Note: If the contract does come under weakness, make sure Friday’s low is taken out before adding to positions. A common occurrence is for the contract to not quite test the relative low and trap shorts hoping for such a sell-off. Chart of ES02Z, 30-minute ES02Z Support Resistance Pivot 905.25 918.75 927 900 927 915 890 937 905 894 Bold signifies levels within the S&P 500. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** PAUL WHO? By Leigh Stevens lstevens@OptionInvestor.com Well, most informed investors/traders and maybe the general public – this is the “public” mind you who can’t pick out Iraq on a map either – could probably tell you that the Secretary of the Treasury is or rather WAS Paul O’Neill. Not so the other guy – Larry Lindsay, the White House economic advisor. But I didn’t know who is his counterpart was under Clinton – but I and everyone else sure knew who Robert Rubin was as he was visible, elegant and articulate on the U.S. economy. Anyway, of course, on Friday both Mr. O’Neill and Mr. Lindsay announced their resignations – this on a day when the U.S. Unemployment rate jumped to 6% in November, from 5.7% in Oct. and the important non-farm payroll headcount fell by some 40,000 versus a 33,000 expected gain. Payrolls don’t foretell the future of course, but it’s a sharp reminder of that manufacturing is continuing to suffer. This situation helps the bond market as was seen Friday, but the fall in yields tends to make equities more attractive too, looking at the long haul. Speculation on replacement for the Treasury Secretary is that it may be a Wall Street veteran, in contrast to from the manufacturing sector wince came Paul O’Neill – makers of things such as Mr. O’Neill can tend to be more blunt and not the glib talkers and thinkers from the Street of Dreams. Secretary O’Neill was famous for his gaffs, apparent insensitivities and for going his own way – this, the kiss of death in the Bush team of pull together, on the same page always, kind of guys and gals. Anyway, the news of the sharp fall in folks on payroll – a precious thing these days (and I noticed that the out of work were out of luck as far as congress failing to pass an extension of added Federal Unemployment benefits once the State allotment was done) – and the jump in the jobless numbers was enough to send early trading on Friday into a swoon. However, enough buying surfaced after the resignations news to bring back the averages on the thought, hope or expectation that President Bush was serious about doing something to revive the economy. It seems that not only does he want to better Bush Senior and take out Saddam, but he remembers the reason why his father was NOT reelected – remember Clinton’s campaign watchword “it’s the economy stupid”? It didn’t hurt the rebound any that the indices got down to some technical support areas and were oversold according to my 21- (trading) hour stochastic. Nevertheless the winning streak was snapped as Dow was off nearly 3% for the week and the Nasdaq down 3.8%. Bellwether stocks influencing the Indexes – Intel (INTC) increased its outlook for Q4 sales late Thursday and so this was out there in market news on Friday. However, INTC was down a quarter point to 18.71 – their announcement had been expected for days and semiconductor stocks had been in a rally for some weeks already. Tech stocks got a boost when IBM announced that it would cough up $2.1 billion for Rational Software (RAIL). Not much for IBM but not chicken feed either – more importantly, it reinforces the perception that the strong and smart tech companies are preparing for the next upturn in the business cycle which should boost tech spending. The IPO market – remember Initial Public Offerings, where companies actually go public? – was given a boost by the Chicago Mercantile Exchange (CME) offering which was priced above expectation (at $35) and ran up to near $40 by the close. These are the folks that trade pork bellies (bacon) and Eurodollar futures – and, oh yes, have the most successful stock index futures contract in the S&P 500! LOOKING AHEAD – UAL still has to resolve its situation – reports were that they were headed to bankruptcy court on Sunday – their remains the slim possibility that their Unions get sensible, along with a revised business plan that reflects the new air travel realities which gets federal support for a loan, which staves off bankruptcy – as I pointed out last week: the airline’s difficulties would rain on the bullish parade. I guess as we near Christmas I start to believe in Santa Claus again! UAL fell to under a buck last week and was taken out of the Dow Transportation Index – how the mighty have fallen. The threat of war with Iraq looms ahead also, as we come up on the initial 12/8 deadline for them to “declare” their weapons of mass destruction – it will then take the bean counters and CIA a day or two to figure out that Saddam is NOT going to suddenly become this open guy and make a confession of what he’s got. A dictatorship seems ever the same in regards to hiding the truth! Retail sales and consumer confidence will also provide key readings on the economy and are anticipated to be modestly favorable. The Federal Reserve's policy board will also meet, though there is almost not expectation of another rate cut MY INDEX OUTLOOKS - S&P 500 Index (SPX) – Hourly chart: The “easy” part of the decline is probably behind us but key support looms in the low-900 area in the S&P 500 (SPX). 903 is a fibonacci 62% retracement of the previous advance and 900 is a key psychological support level. Given the near-term oversold condition on the hourly stochastic, especially with both the 5 and 21-hour models at the bottom of their range, I would not be expecting another down leg just at this juncture. On the other hand, expect the 920-925 area to “cap” rally attempts and provide resistance. However, if 900 is penetrated on an hourly closing basis and SPX does not rebound over subsequent trading then I have to assume that the Index is vulnerable to falling back to the rally starting point in the low-870 area. 870-875 then becomes a target. S&P 100 Index (OEX) – Daily and Hourly charts: The 465 support area held in the 100 (S&P) or OEX and there may be some further attempts to rally, such as back up to near resistance in the 470 area. OEX has to get, and stay, above 470 to suggest more than a temporary rebound. The basic “problem” to a resumption of a bullish outlook from a technical perspective, is that OEX needs to get again to an oversold reading on the DAILY stochastic model before the Index has the potential to rally in a more sustained manner. 465 is key near technical support – if penetrated, OEX is vulnerable to a fall of another 20 points and I would play it accordingly in OEX puts. DJ Industrial Index (INDU) Daily: Not surprisingly the Dow found initial support at 8500. This should continue short term, but the Industrials are vulnerable to a move to the 8400-8340 zone. I would be a buyer in the 8350 area in terms of the purchase of DJX calls. NASDAQ COMPOSITE (COMPX) Daily chart – For now, 1420 support has held as support in that there has not been two consecutive daily closes below this “line” of expected support given the rebound on Friday. 1400-1420 is the key support; then, if exceeded, 1375, with 1320-1325 as an area where, if reached, I would again have some confidence in going back into Nasdaq related call positions. My best guess is that we basically drift sideways this week in a fairly narrow (trading) range. “Basing” action in the 1400 area would be the most bullish outcome in terms of the Index mounting a challenge to very key resistance in the 1500 area. QQQ Daily/Hourly charts: As with the S&P, I would key off from the Q’s ability to hold (or not) a 62% retracement of the prior upswing. This view suggests that if QQQ can hold at or above about 25.70, a “normal” correction is suggested, still within an uptrend. 25.40 on an hourly closing basis is the next level to watch on the downside – a break of this level suggests further downside potential the (down) swing low in the 24.25 area. Near-term I see minor rally potential, given the hourly oversold readings – but 27.50-28.00 would have to be exceeded on the upside to suggest that the Nasdaq 100 was going to do anything more than go sideways for awhile in a consolidation of recent gains which could then better set the stage for the appearance of the “Santa Claus” rally later in the month. Stay tuned! ************************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 ************** Setting Up for the Fall Remember my comments from last week? I showed you a chart of RFMD as a prime example of why we did not want to go long despite the bullish sentiment. I reprinted that chart below along with a chart from this week. It reminds me of those drug commercials with the eggs in the skillet. This is your brain, this is your brain on drugs. Well the RFMD chart below I changed the saying slightly. "This is a bullish stock on hope followed by a bullish stock on profit taking." Glad we did not go long yet there was not enough conviction to go short. RFMD Chart RFMD Chart on profit taking The Cisco straddle did not move enough to be profitable but CSCO gapped up on Monday to $15.50 at the open and the put side could have been purchased for .55 to .60 cents. It traded as high as $1.40 on Wednesday after Chambers comments. If you were quick on the trigger you could have been well rewarded. ******************** Climbing the ladder again. This is a directional play for the coming week. I personally feel the markets have a lot of overhead resistance around 9000 and strong support at 8350. I may be crazy but I am expecting a rally back to somewhere in the 8850-9000 range and then another sell off over the next couple weeks. We have tax selling, portfolio rebalancing and simple profit taking ahead of us as well as two weeks of earnings warnings. I think this process will be over by Christmas week and therefore by expiration Friday. Christmas week is normally bullish so fund managers will want to be done with selling and loaded up for the rally by expiration Friday as well. This gives us about eight days for this play to work. The plan is to similar to ones shown here in the past. I would ideally like to buy 50 contracts of the DJX Dec-85 put for an average cost of about .75 cents. It is currently $1.35. I want to buy 10 contracts at each of five different levels on the DJX. This lowers our cost by averaging down as each level is passed. I always get the question "Why not just buy 50 contracts when the DJX hits the top level?" I would gladly do that if anyone could tell me where that top level is going to be in advance. The high for next week could be 8750, 8850 or even 9050. We simply do not know. By purchasing a small number of contracts at each level as the Dow moves up we are always in the trade once the first level is hit and we can profit from any drop not just a drop from the very top. Here is the plan: Buy 10 DJX Dec-85 puts at DJX $87.00 (est $1.15) Buy 10 DJX Dec-85 puts at DJX $87.50 (est $1.00) Buy 10 DJX Dec-85 puts at DJX $88.00 (est $0.75) Buy 10 DJX Dec-85 puts at DJX $88.50 (est $0.60) Buy 10 DJX Dec-85 puts at DJX $89.00 (est $0.45) Estimated cost = $3,950 or $.79 each. You can obviously modify this in any manner you like that fits your trading profile. Buy fewer at the bottom and more at the higher ranges. Double up on the last buy if $89.00 is hit. There are many possibilities. If the Dow does retest 8350 before expiration as I expect then the $85 puts will be worth $1.65 or more each. That is $8,250 for 50 contracts. I strongly suggest putting in a sell stop well in advance at 83.50 or even 83.75 to exit as any dip to that level could be short and fast like the dip to 8500 on Friday morning. You want to get out while the excitement is high and not after the rebound has started. To protect against a total loss if the Dow suddenly rallied and never sold off again I suggest buying 20 contracts of the DJX Dec-90 call on Monday morning. They should be $.50 cents and would cost you about $1,000. A rally to 9000 or above would easily double the price and a rapid move to 9050 could triple it. This is only an insurance policy against a run away market and not intended to replace the entire amount spent on the puts. If we did break 9050 on the upside I would close the puts for any remaining value and ride the calls for as much as I could get. There is no magic potion and no miracle trade. I have outlined several like this that have turned into really profitable winners and several that did not work out. It is up to the individual trader to consider the risks and make their own decision to enter the trade or not. Obviously this is predicated on my opinion that the market will A) go up early next week and B) drop back to something below 8400 before expiration. Obviously I do not have a crystal ball or divine guidance. This is a calculated guess on my part. DOW/DJX Chart - 90 min If you are not convinced that this scenario will play out as outlined then maybe you should take the other side of the trade. If you follow the logic then a drop to 8350-8400 and a rally through Christmas week could easily setup a call play of the same type. The only difference would be that you would need to buy January or longer options since the best chance of a rally will occur after expiration. If you are really a type "A" trader then do both as neither are mutually exclusive. For the bullish trader: Buy 10 DJX Jan-90 Calls at DJX $86.00 (est $1.75) Buy 10 DJX Jan-90 Calls at DJX $85.00 (est $1.45) Buy 10 DJX Jan-90 Calls at DJX $84.00 (est $1.15) Buy 10 DJX Jan-90 Calls at DJX $83.50 (est $0.80) Buy 10 DJX Jan-90 Calls at DJX $83.00 (est $0.45) Estimated cost = $5,600 or $1.12 each. You may notice that I skewed the entry points to favor a slower entry and a larger position at the low point. This was due to the larger cost of the January options. My exit point would be 89.00, maybe 89.50. If you are planning on using both strategies then you don't need insurance on the calls as your puts from the first move would protect you on the downside. The ideal scenario, just remember ideal never happens, would be for a rally on Mon/Tue to 8950 and a crash by Friday to 8350 then a rebound by the week after Christmas to 9000. After that all bets are off. Remember, ideal never happens. Protect yourself and engage your brain before entering either side of this scenario. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Out With the Old by Steven Price The schizophrenia continues! Last night Intel released good news, raising its revenue guidance for the fourth quarter, sending the stock briefly higher in the after hours session. The bulls were getting ready for an end of the week run after five straight down days in the Dow. That was until a disappointing jobs report this morning showed the unemployment rate rose to a higher than expected 6%. This was the same number we saw back in April 2002 and the highest since July 1994. Economists were expecting a gain of about 30,000 jobs, and instead we got a loss of 40,000. So much for the positive initial claims report earlier in the week. That report was based on a short week, but still came in better than expected. The markets sold off hard on the open, with the Dow crashing through yesterday's support at 8600 and bouncing just above 8500. The low was 8501.86, giving us a snapshot of the new floor. The drop was short lived, however, as news hit the wire that Treasury Secretary Paul O'Neill had resigned, at the request of the White House, clearing the way for President Bush's economic stimulus package. The package includes further tax cuts that O'Neill opposed, saying the economy was fundamentally strong and that growth would eventually pick up steam. With O'Neill out of the way and the now republican Congress set to convene next month, the markets reacted positively, tacking on almost 180 points from the low intraday. By the close, the Dow had revisited both sides of 8600, eventually finishing the day up 22.49 points at 8645.77. Top Bush economic adviser Larry Lindsey, the architect of the President's $1.3 trillion, ten-year tax cut, also resigned. While conspiracy theorists will say the announcement was timed to take attention away from the poor jobs report, there is no denying we are still seeing a downtrend developing in the broader markets. The Dow had given up 542 points from Monday's high to this morning's low and was due for a bounce. In fact, I was getting nervous about short plays with so many down days in a row. Today's bounce may have shaken out some of the bottom feeders, but it is possible that we may re-test the 8700-8800 range once more before a more pronounced sell-off. Markets do not go straight down, or straight up. Too many days in one direction are bound to lead to a correction, before resuming the trend. In this case, if we roll back over below 8500, then I expect a re- test of 8350 before the next bounce. That would support the formation of a new head and shoulders, as I mentioned in last night's Sentiment, but we'll wait for another failed bounce before declaring a right shoulder. For those readers who missed it, I'm looking at the possibility of a left shoulder at 8800, with the head at 9043. The Semiconductor Index (SOX) dropped hard this morning, as well, in spite of the positive Intel news. AMD also raised guidance yesterday, so the drop over the last two days, after losing 63 points from Monday's high, has looked very bearish. However, the SOX did recover for the second day in a row to finish over 329, which had been previous resistance on the way up and appears to be the new support level. For those traders tracking this average (few of whom still have hair that hasn't fallen out or turned gray over the last couple of months), we saw a tremendous rally the past couple of months, on disappointing earnings and predictions of lower revenue. Now that we are getting raised guidance and some evidence of an uptick in PC demand, the sector is selling off severely. There seems no better time to rely on technical analysis, since the fundamentals seem to run contrary to the price action we are seeing. Relying on the price action is simply giving us a better indication of how institutions are valuing the stocks in the sector. National Semiconductor (NSM) also released earnings today that beat estimates by 7 cents per share, but said it expects revenues to be flat to down 5% this quarter. However, with the Intel and AMD news, we still could have expected a jump. It seems that if we are going to get a bounce, then this level, which has now held for the last few days, should be that bounce point. For that reason, I am weary about shorting chip stocks until the 329 level is broken on a closing basis, or until we get that failed bounce. If we do get a bounce, then I'll be looking to short it on a rollover underneath the August high around 365. There is additional support below 329 at 310, 300 and 280. The Nasdaq Composite also broke down through support at 1400 in the morning, and followed the rally back up to its August high of 1426. It broke through briefly, trading as high as 1430, but fell back to close at 1422. If the COMP continues to fail that level, then the old resistance level may be back in play again and can be used as a gauge for long plays on a breakout, or shorting resistance. With the choppiness of the last couple days, however, traders should wait for a more defined range to develop here before choosing levels. Today's action is a little hard to interpret because of the one time news event and light trading volume - the NYSE traded only 1.2 billion shares and the Nasdaq 1.5 billion. However, we continued to see another day of lower highs, with today's rally topping out at Dow 8679, and lower lows (8500). The trend is still down, but we are definitely in bounce territory. Traders should look for the earlier mentioned resistance below 8800 to short on a bounce, or a break below 8500 to land at 8350. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8645 Moving Averages: (Simple) 10-dma: 8777 50-dma: 8330 200-dma: 9154 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 912 Moving Averages: (Simple) 10-dma: 926 50-dma: 879 200-dma: 980 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1065 Moving Averages: (Simple) 10-dma: 1097 50-dma: 984 200-dma: 1113 ----------------------------------------------------------------- The Retail Index (RLX.X): The Retail Index has sold off the last few days, following mixed same store sales results after the Thanksgiving weekend. Many stores have said that even better than expected sales following the holiday have not been significant enough to improve disappointing November sales numbers by much. While some specialty retailers posted better than expected numbers, Federated (FD), which owns Macy's and Bloomingdale's, said that that better than expected Thanksgiving sales did not offset weakness early in the month and now sees November-December holiday sales at the lower end of its prior guidance of flat to down 2.5%. Wal-Mart posted same store sales gains of 2.6% for November, after predicting 2-4% growth, in spite of record one day revenues on the Friday following Thanksgiving. According to Avalon, Kohl's (KSS) sales will suffer due to bigger than expected department store discounting designed to drive sales at the expense of revenues, which is a trend that we will likely see more of as we approach Christmas. The shortened shopping season, due to a late Thanksgiving, may not result in fewer purchases, but a higher percentage of purchases in the last two weeks before Christmas, when prices are marked down aggressively. 52-week High: n/a 52-week Low : 244 Current : 283 Moving Averages: (Simple) 10-dma: 288 50-dma: 281 200-dma: 314 ----------------------------------------------------------------- A combination of factors brought down the VIX today. First, the rally off of 8500 in the Dow after 5 straight down days reassured traders that there may be a bottom between the current levels and the October lows. Second, a look at the intraday charts shows weekend premium pirates selling hard into the close, over the last half hour of trading. While this coincided roughly with the end of day bump in the Dow, the VIX still ended the day lower than it was when the Dow was testing 8700. CBOE Market Volatility Index (VIX) = 32.68 –1.60 Nasdaq-100 Volatility Index (VXN) = 52.28 –1.88 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.91 483,530 438,535 Equity Only 0.73 347,703 253,584 OEX 1.00 24,385 24,502 QQQ 2.04 35,332 72,095 ----------------------------------------------------------------- $bpnya Bullish Percent Data Current Change Status NYSE 50 + 0 Bull Confirmed NASDAQ-100 75 + 0 Bull Correction Dow Indust. 70 + 0 Bull Confirmed S&P 500 67 + 0 Bull Confirmed S&P 100 68 + 0 Bear Alert Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.52 10-Day Arms Index 1.35 21-Day Arms Index 1.27 55-Day Arms Index 1.17 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 1741 1095 NASDAQ 1706 1480 New Highs New Lows NYSE 36 21 NASDAQ 54 27 Volume (in millions) NYSE 1499 NASDAQ 1509 ----------------------------------------------------------------- Commitments Of Traders Report: 12/03/02 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 reduced long positions by about 3,000 contracts, while reducing shorts by only 800. Small traders increased long positions by 6,000 contracts and shorts by 600. Commercials Long Short Net % Of OI 11/12/02 437,683 476,540 (38,857) (4.3%) 11/19/02 446,668 480,270 (33,602) (3.6%) 11/26/02 447,024 488,250 (41,226) (4.4%) 12/03/02 444,345 487,411 (43,066) (4.6%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 11/12/02 141,389 70,624 70,765 33.4% 11/19/02 143,070 77,332 65,738 29.8% 11/26/02 155,975 81,962 74,013 31.1% 12/03/02 162,192 82,584 79,608 32.5% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials left positions mostly unchanged with a small percentage increase to the long side and a small decrease to the short position. Small traders reduced long positions by 4,000 contracts, while reducing shorts by 2,500. Commercials Long Short Net % of OI 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 43,231 52,425 ( 9,194) ( 9.6%) 12/03/02 43,709 51,977 ( 8,268) ( 8.6%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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 17,574 12,329 5,245 17.5% 12/03/02 13,749 9,869 3,880 16.4% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials maintained the status quo, while small traders showed small reductions to long and short positions. Commercials Long Short Net % of OI 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 20,499 15,015 5,484 15.4% 12/03/02 20,176 15,427 4,749 13.3% 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 11/12/02 5,736 8,513 (2,777) (19.5%) 11/19/02 4,428 8,203 (3,775) (29.9%) 11/26/02 6,544 10,350 (3,806) (22.5%) 12/03/02 5,885 9,781 (3,896) (24.9%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Selecting strike, expiration then exit points Jeff: What strike and expiration would you suggest for your bearish profile in BRCM on the break at $18? I receive a lot of e-mails from subscribers asking, "what strike and expiration should I buy" in a particular put or call option. This type of question, believe it or not, is rather open ended and one must consider their own trading style (outlined in the trader's business plan) as to the trader being a very short-term options trader (1 to 5-day holder), swing trader (6-days to 3- weeks), or trend trader (as long as the trend lasts to my target). LEAPS traders are really "investors" that have a much longer time frame and will not be addressed in this commentary. While both strike and expiration selection will really depend on each individual trader's time horizon, the analysis I use is to first analyze the MARKET/INDEX I'm trading in, then the SECTOR of the STOCK I'm looking to trade. It's my (Jeff Bailey's) view that the broader S&P 500 generally depicts the MARKET. If it were to rise 25% from 800 to 1000, then generally speaking, the bulk of SECTORS and STOCKS would tend to show price appreciation. Granted, some SECTORS would outperform to the upside, as will certain stocks, but generally speaking a rising tide tends to lift most boats. It is also my opinion, that the MARKET is pretty smart and somehow, it is NEVER wrong. As to why the market is so smart, I simply don't know. However, I do know that the MARKET is NEVER wrong. I have come to reason that the MARKET will usually, and with rather great success, sell high and buy low. I have yet to read any book that discredits such a notion. One tool that some subscribers have come to know over the years which tends to fluctuate from high to low and low to high is the bullish % charts. The bullish % is simply a tool designed to measure and then chart the percentage of stocks showing a point and figure (supply/demand) buy signal. Many believe that the bullish % charts are very good at quantitatively measuring risk. So what does the bullish percent have to do with strike and expiration selection in options? The bullish % is perhaps useful for beginning to establish what type of option expiration is needed. The assumptions made with the bullish % chart are this. The market tends to buy low risk environments which we will call "oversold" levels, and sell higher risk market environments. As time passes, the MARKETS will efficiently reduce risk to a level where the market will then determine a sufficient amount of risk has been reduced to warrant attractive value and more favorable risk reward. Using history as a guide a trader/investor that wants to mimic historical tendency of the MARKET, which is NEVER wrong, can begin analyzing the bullish % charts to get a feel for what level of RISK the market is currently at, but then look back at historical data to begin making TIME assumptions, which is KEY to selecting option expirations. Using Broadcom (NASDAQ:BRCM) $17.61 +2.68% as an example, we can make note that it is a component of the NASDAQ-100, which contains the NASDAQ market's largest publicly traded companies. We will call the NASDAQ-100 a MARKET. It is every traders GOAL to beat the MARKET. Therefore, we must first understand what the MARKET has been capable of as this serves as a traders benchmark. NASDAQ-100 Bullish % ($BPNDX) - 2% box On a quantifiable basis, a trader/investor can make the statement that the NASDAQ-100 shows a more bullish, yet more "overbought" level of bullish % than in December of last year. It is always helpful to make additional observations of relative high and low bullish % readings, and I have made note in prior commentary that the recent 82% level of bullish %, challenged the 82% level in late April of last year, but still falls short of the 92% high found in mid-November of 1999. Still, we can begin making reference to TIME and perhaps the amount of time a trader would have needed to buy if buying put options on certain NASDAQ-100 stocks with the thought that the higher levels of bullish % would eventually be reversed and market risk removed. It would make sense that as risk is removed, prices are falling. This can be "double tested" as the only way the NASDAQ-100 Bullish % can decline is by stocks generating sell signals. Conversely, once risk is removed to the MARKET's satisfaction and value be perceived, can prices then begin to rise and buy signals be generated. MINIMUM expiration considerations Under a technical scenario, based solely on the NASDAQ-100 Bullish %, a trader looking for a reversal from current "overbought" to "oversold" conditions would most likely plan on a MINIMUM expiration of two months if looking for the MARKET to reduce enough risk to have the NASDAQ-100 Bullish % reversing back to a more oversold position. The bullish % address the "market risk" portion of how higher levels of risk eventually gets sold as the MARKET begins to assess risk/reward and can be a starting point of what type of option expiration needs to be considered. We can also make observation from the bullish % charts back in December of last year that the bullish % did NOT IMMEDIATELY correct itself from oversold to overbought in a month. While the bullish % was lower in January (red 1) at 64%, than early December of last year at 70%, a trader that prefers buying near-term expiration begins to understand that a higher degree of in/out trade accuracy is needed as expiration Since we just looked at the NASDAQ-100 Bullish % and made a statement that a MINIMUM of two months was needed. Let's make direct reference to the NASDAQ-100 Trust (AMEX:QQQ) over the course of that 2 month time frame. From there we can move on to Broadcom and look to build on observations. NASDAQ-100 Trust (QQQ) - $1 box Reference points are made and easily found on the point and figure chart of the QQQ as it relates to early December and early February. I will note that the "red 2" was charted on February 6th. Based on historical QQQ trading as it relates to similar bullish % and "MARKET RISK" conditions as depicted by the NASDAQ-100 Bullish %, a short-term trader, trading near-month expiration begins to understand that it may take a VERY high degree of accuracy, with a limited window of opportunity to trade the QQQ if seeking a QQQ move of 9%. This may be particularly true during a more bullish market condition after a move higher from "oversold" conditions as there are undoubtedly some market participants arriving or still betting on the MARKET making new highs. Trading of near-term options is similar to a "race against time" and requires a VERY disciplined trader that CANNOT be swayed from selling his/her profit targets. When using history as a guide, the importance of calculating percentage move, not just $ moves should be noted. A $4 decline or gain in a $40 stock represents an entirely different percentage loss/gain than a $4 decline/gain in at $28 stock. A shorter-term QQQ trader buying near-month expiration can perhaps use a 9% MAXIMUM monthly decline based on correlative bullish % market conditions in the QQQ. By combining both the NASDAQ-100 Bullish % and tying in a "full range" of overbought to oversold condition, and "measuring" the potential impact it can have on QQQ price action, it becomes somewhat clear that to have an opportunity to participate in a meaningful move, MINIMUM expiration to be purchased is a full two month expiration. To allow for error, it is often the belief of option traders that it is better to buy more time than you may think is necessary. Apply MARKET to SECTOR then STOCK Let's move on to Broadcom (NASDAQ:BRCM). Unfortunately, I do not have permission to show you Dorsey/Wright and Associates semiconductor bullish % (BPSEMI). This is a long story, but more than a year ago, I did have their permission to show their sector bullish % charts, until one of their clients saw us showing our subscribers the sector bullish % charts and became somewhat angry. However, I've noticed over time that many of the subsectors of technology-related sector bullish % charts generally mimic the NASDAQ-100 Bullish % ($BPNDX) from www.stockcharts.com. Currently, Dorsey/Wright and Associates semiconductor bullish % (BPSEMI) is "bull confirmed" at 68.8%, with the recent high bullish % chart reading having been 74%. It would take a reading of 68% to have this sector reversing lower into "bear alert" status. As you can envision, the sector bullish % is within 0.8% of a "mimicking" reversal like the NASDAQ-100 reversal after Thursday's action. As a benchmark against the NASDAQ-100 Bullish %, in December (red C) of last year, Dorsey's semiconductor bullish % was at 70%, then in January (red 1) had fallen to 64%, and at its February lows (after red 2) fell to 30%. These levels of bullish % are almost "identical" to the NASDAQ-100 Bullish % readings from above. Broadcom Chart - $1 box (Dec - Feb historical test) A quick historical test between BRMC, the NASDAQ-100 Bullish % and the QQQ shows "amazingly" similar 9% decline from early December (red C) to early February (red 2). However, we see that BRCM put up a fight in the first half of January as the still high levels of bullish % found bulls aggressive bulls still willing to buy the stock to a new relative high. Once again, an options trader that didn't OVERLEVERAGE in a put trade, risked only in the option what his/her trading discipline had stated, may have been "saved" by the higher levels of risk that were eventually removed from the MARKET, SECTOR and stock. Just for grins, I went back to BRCM news that was being released at the time (Late-December, early January). Jan. 04. CNBC reported that JP Morgan had made positive comments on BRCM. Later that day, JP Morgan said it saw short-term upside with company expected to announce new design wins, but stock was richly valued. On January 9, when BRCM hits its high of $53, company says at Morgan Stanley Conference that it expects to profitability later this year (2002) and expects to return to historical growth rate of 50% later this year (2002). Prudential excited on news and with stock trading $52.78 at 01:39 PM Pru raises price target to $68 from $48. Oh goodness! I wonder if Pru took some profits at their initial target of $48? Everything on BRCM's p/f chart was saying "buy." The only thing that advised caution? The high levels of bullish % in both the NASDAQ-100 Bullish % and Semiconductor Bullish %. So lets look at current action in BRCM. With what we know happened around this time last year what expiration are we thinking about, if the trade fits your trading/business plan? We'll get to strike in a minute. Are you leaning toward the bullish or bearish side in BRCM, which is a "semiconductor" related stock and a component of the NASDAQ-100. Broadcom Chart - $1 & $0.50 box Based on historical evidence, I would prefer February expiration. March would be ideal as it gets me an extra month. Unfortunately there are currently no March or April expiration right now. On Tuesday evening, I had no risk/reward profile as I had no bearish count to work with at that point. The stock had not given a sell signal yet. If the stock did trade $18, the initial bearish count would begin as .... $19.50-((4*2)*0.5) = $15.50. So, at $18, I'm risking $4 to a stop at $22 with potential reward to $15.50 of $3.50. However, the bearish vertical count column has now grown to the $17 level and bearish count is now still building to $13.50. Risk reward from $18 has improved a bit. What if the bearish count column grows to $16.50 or $16 or $15.50 or $15 before BRCM reverses 3-boxes? This is why I profiled 1/4 or 1/2. Now that I have a pretty good feel for time that may be needed for a put trade to stand a higher probability of working in my favor, I can then begin making some assumptions toward price targets using initial bearish counts, but also have an idea from PAST trading under similar MARKET and SECTOR conditions to select a strike. Broadcom Put Option Montage - $17.50 and $20 strikes On Wednesday morning, shares of BRCM opened for trading at $17.49. On Friday, the stock closed at $17.61, so the put options are going to be fairly close in price today as they were Wednesday morning (Feb $20's traded $4.40 at open). If a STOCK trader is willing to short BRCD at $18 with stop at $22, then his/her price target had better be at least $10 on a dollar-to-dollar risk/reward minimum of 1:2. While I admit, a stop at $22 is "generous" that stop appears to be warranted on a technical basis, especially if Prudential upgrades the stock again with the bullish % so high. If a stock trader were willing to risk $4 to a stop, then an options trader might look at the February $20 puts (RCQND) which are currently bid/offer $4/$4.10. This would allow an options trader bearish exposure to the stock, with risk immediately assessed at $4.10/contract. If my account management formula allowed for a $5,000 full short position in the stock, then that would be equivalent to a $2,500 1/2 short position in the stock, or at $18, 138 shares ($2,500 / $18 = 138 shares). This would equate to 1 contract, maybe two. However, with last year's ability show some bullishness a trader that is buying some time may want to establish just 1 contract and keep some powder dry in case history were to repeat itself. I also placed a * by the May $20 puts, as that would allow additional time for a bearish trader, where last year, the NASDAQ-100 Bullish % fell further below the 30% "oversold" level on the bullish % chart (May is red 5), and also found BRCM trading $30, which would have represented a 28.5% decline from $42. Hmmmm.... these May numbers don't look very good based on stock percentage decline of 28.5% from $18.50 do they? Therefore, I would tend to shy away from this expiration with the data currently at hand. What about the February $17.50's? To break-even, and not considering any type of time premium, I would need a BRCM trade at $14.85 to have that strike being "break-even." I calculate that $14.85 by simply taking the strike=$17.50 and subtracting the $2.65 premium I'd have to pay at the offer. If I think BRCM has $15.00 in it, then I begin to think that the $20.00 strike is the higher probability trade for profit. Summary: There really isn't a "cookie cutter" approach to selecting the "best" option expiration or strike, but there can be a method to this madness. At first, it seems like a lot of work. However, once the trader/investor analyzes the MARKET condition they're in and assesses who has the greater degree of "risk" and which way that risk is shifting toward, the trader can then begin making observations as to any historical significance. In the above commentary, I think an OPTIONS trader can see the correlative nature of the NASDAQ-100 Bullish % ($BPNDX) and the NASDAQ-100 Trust (QQQ). The same would be true for the NASDAQ- 100 Index (NDX.X) itself. Now, this isn't a revelation as the two are derived from each other. But the QQQ or the NDX used solely by itself does little good in the scheme of "buy low, sell high." For highest odds of winning, it is theory that trader/investors make money when they are buying low and selling high. The Bullish % does appear to have a very unbiased approach to the "buy low, sell high" profit strategy. Yes, there will be stocks that continue to give buy signals and move higher when the NASDAQ bullish % is falling and more and more stocks are generating sell signals. However, it is often times the stocks with strong RELATIVE STRENGTH that have been outperforming against the group and that have broken above LARGE basis that tend to outperform. History is NO guarantee of the future. Even when performing a historical check on BRCM last December, January and February, we see that the stock was trading strong relative to the QQQ and the NASDAQ-100 Bullish % for at least a month. But then, despite the COMPANY issuing some positive comments and Prudential raising it price target the MARKET seemed to think differently and sent the stock lower and it performed "in line" with the QQQ. Did the MARKET know something the Pru and perhaps even BRCM didn't know? Or was the MARKET simply too risky and "overbought" as depicted by the bullish %? I could argue in favor in of all four. The MARKET always knows and in NEVER wrong, Pru evidently didn't know, BRCM didn't know, but bullish % seemed to know or at least tell bullish traders that they were in a high risk environment. Once a trader has his/her MARKET analysis complete, then they can work on the sector and eventually the stock. As you do this, you will find similarity of how most stocks "all look the same" technically. It's similar to a school of salmon. Most of them look the same and they usually all swim together. As you roll to stock selection, in an overbought market and sector environment, its usually the weaker fish in the school that begin to lag. Perhaps give a sell signal before others in the group. Why is it that a stock falls below a previous level where demand held firm? Does the MARKET know something about that stock that has yet to be revealed? Once a trade candidate is identified the correlative time horizons from the bullish % and the Index can be correlated against the sector. If it's true a school of fish tend to swim together, then most likely the stock will correlate on a time basis for option expiration selection. Most often, the weaker fish reach their destination first on a downward move, and lag a move higher when strength resumes. We didn't discuss the impact of higher levels of Market Volatility, but that impacts option premiums and there's nothing an option trader can do about that. The only way to deal with it is to weigh it against risk/reward profiles not only in the stock you're trading, but the MARKET and SECTOR. Odds are, if you buy a put option on an apparently weak stock near a top when the bullish % are high, volatility will rise should the broader markets fall. If a trader buys enough time, he/she can live with higher volatility. Jeff Bailey ************* COMING EVENTS ************* ========================================= Market Watch for the week of December 9th ========================================= ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ABS Albertson's Mon, Dec 9 Before the Bell 0.48 HOV Hovnanian Ent, Inc. Mon, Dec 9 -----N/A----- 1.45 IDT IDT Corporation Mon, Dec 9 After the Bell N/A ------------------------- TUESDAY ------------------------------ None ----------------------- WEDNESDAY ----------------------------- ROP Roper Industries Wed, Dec 11 After the Bell 0.60 TOL Toll Brothers Wed, Dec 11 Before the Bell 0.89 ------------------------- THURSDAY ----------------------------- ADBE Adobe Systems Thu, Dec 12 After the Bell 0.23 AZO AutoZone Thu, Dec 12 Before the Bell 0.95 CIEN CIENA Corporation Thu, Dec 12 Before the Bell -0.17 COST Costco Wholesale Corp Thu, Dec 12 Before the Bell 0.31 FDS FactSet Research Sys Thu, Dec 12 Before the Bell 0.32 GTK GTECH Holdings Corp. Thu, Dec 12 Before the Bell 0.52 HNZ H.J. Heinz Company Thu, Dec 12 Before the Bell 0.58 MDZ MDS Inc. Thu, Dec 12 Before the Bell N/A ------------------------- FRIDAY ------------------------------- PSO Pearson plc Fri, Dec 13 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable JBLU JetBlue 3:2 Dec. 12th Dec. 13th CCFH CCF Holding Co. 3:2 Dec. 19th Dec. 20th -------------------------- Economic Reports This Week -------------------------- Corporate confession season continues with only two and a half weeks left before Christmas. Aside from the FOMC meeting on Tuesday, most of the economic events and reports are scheduled for Friday morning. ============================================================== -For- Monday, 12/09/02 ---------------- None Tuesday, 12/10/02 ----------------- Wholesale Inventories (DM) Forecast: 0.2% Previous: 0.5% FOMC Meeting (DM) Wednesday, 12/11/02 ------------------- None Thursday, 12/12/02 ------------------ Initial Claims (BB) 12/07 Forecast: 393K Previous: 355K Current Account (BB) Q3 Forecast:-$135.0B Previous: $130.0B Retail Sales (BB) Nov Forecast: 0.3% Previous: 0.0% Retail Sales ex-auto(BB)Nov Forecast: 0.2% Previous: 0.7% Export Prices ex-ag.(BB)Nov Forecast: N/A Previous: 0.1% Import Prices ex-oil(BB)Nov Forecast: N/A Previous: -0.1% FOMC Minutes (DM) 11/06 Friday, 12/13/02 ---------------- PPI (BB) Nov Forecast: 0.0% Previous: 1.1% Core PPI (BB) Nov Forecast: 0.0% Previous: 0.5% Business Inventories(BB)Oct Forecast: 0.1% Previous: 0.6% Mich Sentiment-Prel.(BB)Dec Forecast: 85.0 Previous: 84.2 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 ********************* Resigning Ourselves to New Levels Now, normally when the CFO of a corporation resigns, we see a sell-off. But when the corporation happens to be the United States and the Treasury Secretary was seen as a stumbling block to the President's tax-cut laden fiscal stimulus package, it was time for investors to pop the champagne. 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. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 12-08-2002 Sunday 2 of 5 In Section Two: Stock Pick: Long stock with put insurance Daily Results Call Play of the Day: CTXS Put Play of the Day: CDWC Dropped Calls: None Dropped Puts: APOL, BDK ************************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 ********** MON - $18.66 Strategy: Long stock with put insurance St. Louis Missouri is the home of our latest addition to the stock plays section. Monsanto (NYSE:MON) provides agricultural products and integrated solutions that bring together chemicals, seeds, and biotechnology traits to improve farm productivity and food quality. (Source company web site.) You normally won’t here Monsanto mentioned in the same breath as many of the high flying technology stocks of days gone by. Some sources list Monsanto as a Specialty Chemical company, while others place MON in their list of Biotechnology stocks. Regardless of the sector, Monsanto has certainly experienced its share of rough times the past six months. For most of 2001, into May of 2002, MON actually held up fairly well, trading between $28 and $38. Shortly after filing for a $2 bln. debt offering in the middle of May, the bottom began to fall out for the company and its shareholders. Monsanto also came out with a negative pre-announcement. The negative news and the lack of a catalyst to turn the company around sent shares of MON to a low of $13.80 by the end of July. So what’s changed that makes Monsanto an attractive play at this time? In the middle of August MON replaced PALM in the S&P 500, putting the company into the limelight a bit more. During the month of August the company was also completely spun off from Pharmacia Corp. In early October, Monsanto warned again, saying sales of its Roundup herbicide plunged. Admittedly the news in recent months surrounding MON, has been anything but positive. However, and this IS significant, many times it’s not necessarily the news that’s important; it’s how a stock reacts to the news that’s important. With all the negative press, shares of Monsanto have managed to consolidate and edge higher since the retest of the May lows in late September. Overall, the volume behind the recent move has been strong, which further indicates MON is gaining momentum. The stock has now established its fourth higher low and third higher high on the recent consolidation above $17. This past Wednesday the company’s CFO spoke at a Chemical Conference, saying MON backed its 2002 earnings guidance. CFO Terry Cruz also said MON expects to be able to sustain a “strong free cash flow through 2004.” Later in the day, Wall Street applauded the news that Monsanto and Chemical Products Technologies were dismissing lawsuits against each other, that involved the use of glyphosate, an herbicide technology. How do we approach our new play? We believe there are several viable alternatives depending on your outlook and personal risk tolerance. Monsanto is approaching resistance at $18.75. Technically it’s also moving into overbought territory on the daily charts, but remains on a buy signal on both MACD and stochastic oscillators. We may see a bit of consolidation or a pullback to intraday support between $16 and $17. Solid support is found at $15.50. However, if MON moves through resistance on strong volume, we would expect the bulls continue to support the price of MON shares up to the next resistance level at $20. A challenge of the 200 dma at $22.08 over the near term, may not be out of line. Option 1. Purchase MON stock at the current level and purchase 1, July 15 or $17.50 Put for every 100 shares of stock. If the stock is under $15.00 by July expiration, then exercise the put and sell the stock. In the event you are still bullish on the stock, you may also want to consider taking whatever profit you have from the original put and buy another put six to nine months out, however this strategy will increase your breakeven level. Option 2. Consider buying a January 2004 or 2005 deep In-the- Money LEAP Call, rather than purchasing the stock. As of Friday’s Close, Jan 2004 & 2005 $12.50 LEAP Calls were priced at $7.30 and $8.10 respectively. For those that want added protection, the purchase of 1, July $15 or $17.50 put for each LEAP Call purchased, could also be considered. However, be advised, the premium paid for all the options can begin to add up, and have a significant effect the breakeven levels of the position. Option 3. Purchase MON stock at the current level and wait for the stock to move through resistance near $20.00. At that time buy 1 $17.50 Put or a $15.00 Put for every 100 shares of stock owned in case 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 4. Purchase stock or a LEAP Call without protection and close out the position if it MON falls below support near $15.50. Monsanto(MON) Weekly Chart *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week CTXS 13.00 -0.17 0.17 -0.11 0.69 1.00 new support GENZ 34.43 1.34 0.96 -1.64 –0.14 0.53 consolidation ICOS 31.01 0.37 -0.57 -1.36 –0.17 –1.16 nice bounce OMC 67.90 -0.19 -1.96 0.20 –0.12 –1.45 New, uptrend PUTS AIG 60.49 -2.36 -0.67 -0.17 –1.46 –2.36 very weak APOL 42.08 -0.50 -0.80 1.26 –0.29 0.28 Drop, sideways BDK 42.03 -1.54 -1.09 0.58 0.38 –1.32 Drop, back up CDWC 47.76 -1.44 -0.70 -0.97 –1.66 –4.34 New,weak bounce DLX 43.81 -0.77 -1.44 1.00 0.15 0.20 200-dma failure ************************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: ********************* CTXS – Citrix Systems $13.00 (+1.25 last week) See details in play list Put Play of the Day: ******************** CDWC – CDW Computer Centers $47.76 (-3.21 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 ^^^^^ None PUTS ^^^^ APOL $42.08 (+0.55) APOL seems to have a hard time deciding which way it should be heading. While it's not rebounding with any strength, it hasn't broken down the way were hoping for, either. Today's bounce could certainly be the formation of a right shoulder in a head and shoulders pattern, but with the number of bounces we've seen from $40 the last few days, along with today's bounce, it is going to take some real selling pressure to break that level. We'll close the play and re-visit if APOL breaks $40, rather than allow further premium decay. Traders wishing to give the stock a little more time can look for another bounce at that level as confirmation to close the position. --- BDK $42.03 (-0.94) It has been interesting how some of these stocks that were getting punished when the broad market was rallying, seem to have reversed course. BDK couldn't find a buyer earlier in the week, as it plunged down to just above $40. But the past few days have seen consistent improvement. It isn't a bullish trend yet, but there's enough strength that we no longer want to try leaning on the stock to the downside. The 10-dma turned back the buyers on Friday afternoon, but the fractional gain made it three in a row for BDK. Take advantage of any weakness on Monday to exit open positions or else adhere to strict stops at $42.50. *********** 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 12-08-2002 Sunday 3 of 5 In Section Three: New Calls: OMC Current Calls: CTXS, ICOS, GENZ New Puts: CDWC ************************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 ************** OMC – Omnicom Group $67.90 (-0.15 last week) Company Summary: Omnicom Group is a marketing and corporate communications company. The company has grown its strategic holdings to over 1500 subsidiary agencies operating in more than 100 countries. OMC's wholly and partially owned businesses provide communications services to clients on a global, pan-regional and national basis. The company's agencies provide an extensive range of marketing and corporate communications services, including advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, business-to-business advertising, employee communications and environmental design. OMC also provides field marketing, healthcare communications, marketing research, promotional marketing and sports and event marketing. Why We Like It: Judging from the dismal comments from AOL last week, the prospects in the advertising business are not encouraging over the near term. But perhaps that is just a company-specific problem and not an indication of the industry trend overall. That argument would certainly seem to hold water if you look at the chart of OMC. Recall that the stock got pummeled back in June and July on concerns about accounting irregularities. Now that those problems appear to be solidly in the past, the stock is making some solid progress up the chart. After putting in a significantly higher low back in October, OMC has been steadily advancing, leaving a string of higher lows and higher highs in its wake. The most recent high (last Monday) coincided with the first test of the 200-dma near the $70 level. It's no surprise that the first attempt was turned back, but the limited nature of the stock's pullback suggests the bulls are getting ready to take another run at it. Apparently CSFB agrees with this bullish view, as they started coverage of the stock with an Overweight rating on Friday. Note that the $64-65 area of prior resistance now appears to be providing solid support on the pullbacks. A subsequent rebound from the $65 area would make for a solid entry into the play ahead of the next breakout attempt. In addition to historical support, OMC is likely to find support at the 20-dma ($65.10) and its ascending trendline (from the October lows) near $65.50. Momentum traders will want to see the stock push through the 200-dma (currently $69.80) and the $70.50 level (site of Monday's high) before initiating a position. We are initially placing our stop at $64. *** December contracts expire in two weeks *** BUY CALL DEC-65*OMC-LM OI=1551 at $4.20 SL=2.50 BUY CALL DEC-70 OMC-LN OI=2311 at $1.25 SL=0.50 BUY CALL JAN-65 OMC-AM OI=1865 at $5.90 SL=4.00 BUY CALL JAN-70 OMC-AN OI=8691 at $3.10 SL=1.50 Average Daily Volume = 2.40 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 ****************** CTXS – Citrix Systems $13.00 (+1.25 last week) Company Summary: Supplying application server products and technologies that enable effective and efficient enterprise-wide deployment and management of Microsoft Windows applications is Citrix Systems’ core business. The company's MetaFrame and WinFrame product lines, developed under license and strategic alliance agreements with Microsoft, permit organization to deploy Windows applications without regard to location, network connection, or type of client hardware platforms. Its products are marketed through multiple indirect channels such as distributors, value-added resellers and original equipment manufacturers in the United States, Europe and the Asia-Pacific region. Why We Like It: While we are admittedly late to the party on our bullish play on CTXS, up until recently, it looked like the stock was rallying on the same catalyst as the rest of the Technology sector - Short Covering. When the company updated its guidance last Monday, the true catalyst became clear -- the company's business was improving! Wow! After raising its guidance for the fourth quarter to 12-17 cents per share, CSFB and Lehman Brothers upgraded the stock and that was enough to push it through the $12 resistance level. We initiated coverage of the stock, expecting to get a pullback to support to afford us easy entry into the play, but that hasn't been the case so far. Despite the weakness in the broad market, CTXS has continued to push higher, hitting a new recent intraday high of $13.48 on Friday, before dropping back a bit at the close to end right at $13. Recall our cautious stance about trying to buy a breakout in the stock due to the significant resistance that begins near $13.50 and extends up to about $15.50? It's not that we don't expect the stock to push through this zone, it's just that risk is so much easier to manage by entering on a pullback to support. Speaking of support, that $12 level is certainly looking strong and a dip and bounce near that level would make for a solid entry. Should we get a continuation of last week's broad market weakness, then a more substantial dip near the $11.00-11.50 level would give us an even better entry point. Until CTXS can close above the $13.50 level, let's keep a loose stop set at $10.50. *** December contracts expire in two weeks *** BUY CALL DEC-10 XSQ-LB OI=2614 at $3.20 SL=1.50 BUY CALL DEC-12 XSQ-LV OI=2963 at $1.10 SL=0.50 BUY CALL JAN-12*XSQ-AV OI=1484 at $1.60 SL=0.75 BUY CALL JAN-15 XSQ-AC OI=1353 at $0.60 SL=0.25 Average Daily Volume = 3.65 mln --- GENZ – Genzyme General $34.43 (+1.63 last week) Company Summary: Genzyme General, a division of Genzyme Corporation, is focused on developing innovative products and services to solve major unmet medical needs. GENZ has nearly 600 products and services on the market and a strong pipeline of therapeutic products for the treatment of rare genetic diseases. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. With a solid, profitable revenue base, this research is intended to maintain the company’s high rate of earnings growth. Why We Like It: It wasn't an exciting week for the bulls in any sector, but Friday's action certainly was sufficient to inject new hope for those bullish Biotech investors. Sure, the whole market rebounded smartly from its intraday lows, but the BTK index looks good, not so much for the rebound, but for the limited selloff the sector experienced throughout the week. This hints that perhaps the group doesn't have as much downside risk built into it right now, and could outperform the broad market to the upside in the near future. Our GENZ play was clearly a bit disappointing in that it really couldn't make any progress off its lows on Friday, but we like the way it is stabilizing just above $34, while the oscillators are rapidly bleeding off their overbought condition. There hasn't been any meaningful news over the past few days, so we're just left to work with the natural supply and demand equation in the stock. That equation appears to be stabilizing near current levels and a dip and bounce near $34 can be used for implementing new positions. More cautious traders may want to wait for that rebound to extend back over the $35.50 (just above the intraday highs of the past several days) before putting fresh capital to work. Those with a bent towards momentum trading will need to see a volume-backed push through the $37 level to have a solid entry into the play. Speaking of volume, it has been declining throughout the past week, providing additional confirmation that the recent weakness is likely just some controlled profit taking, rather than a potential end of the bullish trend. Keep stops set at $33.50, just in case selling volume does pick up and change the nature of the trend. *** December contracts expire in two weeks *** BUY CALL DEC-32 GZQ-LP OI=2282 at $2.65 SL=1.25 BUY CALL DEC-35 GZQ-LG OI= 919 at $1.15 SL=0.50 BUY CALL JAN-32 GZQ-AP OI=3958 at $4.30 SL=2.75 BUY CALL JAN-35*GZQ-AG OI=3776 at $2.90 SL=1.50 BUY CALL JAN-37 GZQ-AO OI=1568 at $1.80 SL=1.00 Average Daily Volume = 3.72 mln --- ICOS – ICOS Corporation $31.02 (-0.81 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: The recent trading in the Biotechnology sector (BTK.X) certainly looks like controlled profit taking. Despite a pretty sharp pullback in the broad market last week, the BTK kept finding buyers in sufficient quantities to keep the index above the critical $360 level. That resilience was evident in the trading of ICOS, as the stock consistently found support near the $30 level throughout the week. Friday's early dip down to the $27.50 level seems to have been an anomaly, generated by the broad market weakness. Note how fast the stock rebounded back over the $30 level and then continued improving during the course of the day, closing out right on the $31 level. Kudos to those of you that recognized the early selloff for what it was (a great entry point) and ventured into new positions. It was an aggressive entry, but profitable for those with the intestinal fortitude. The stock still appears to be in consolidation mode, but could start marching higher next week, especially if the broad market can shake off its blues. Look to open new positions on another rebound from the $30 level or on a decisive (read:volume) breakout over $31.50 (intraday highs of the past few days). A true momentum trader will need to wait for renewed buying volume and the sector strength to propel ICOS through the $33 level before playing. Recall that once above $33, the stock is back to working its way back towards the top of the gap near the $39 level. For now, keep stops in place at $28.50. *** December contracts expire in two weeks *** BUY CALL DEC-30 IIQ-LF OI=1282 at $2.20 SL=1.00 BUY CALL JAN-30*IIQ-AF OI=1306 at $3.50 SL=1.75 BUY CALL JAN-35 IIQ-AG OI=1048 at $1.20 SL=0.50 Average Daily Volume = 1.03 mln ************* NEW PUT PLAYS ************* CDWC – CDW Computer Centers $47.76 (-3.21 last week) Company Summary: Providing customized computing solutions to its customers, CDWC is a direct marketer of over 80,000 computer products, including hardware, software, peripherals, networking/communication and accessories. The company provides a nearly endless list of products, from companies such as Apple, Canon, Epson, Hewlett-Packard, IBM, Microsoft, Adobe, Cisco, and 3Com. Using catalogs, telesales, and the Internet, the company has over 630,000 customers and receives most of its business online. Why We Like It: Is there a new PC upgrade cycle in progress? To listen to DELL, there just might be, while that could just be an indication of how well that company runs its business. Throughout the remainder of Tech-land, signs of a new spending binge either by consumers or corporate IT departments are few and far between. Price action tends to trump everything else in the stock market, and based on the recent pattern in shares of CDWC, the news is not good. After topping out near $56.50 in early November, the stock has been posting a series of lower highs and lower lows. Just over a week ago, CDWDC fell to test the 200-dma, and eager bulls rushed in to support the stock at those levels. But this past week was a different story. Without the support of a buoyant market, CDWC failed on its second test of the 200-dma, plunging through it to the downside and generating a fresh PnF Sell signal on Thursday. Unfortunately, that column of O's needs to extend to at least $46 to eliminate the possibility of a bear trap setup. CDWC rebounded with the rest of the broad market on Friday and it looks like we could be setting up for another test of the 200-dma next week, this time from below. A rally failure at that level, or possibly as high as $50 should set up a solid bearish entry point, ahead of the next shot at $46 support. Those looking to trade the breakdown will need to wait for the $46 level to be cracked (preferably on strong volume) before taking a position. We're initially placing our stop at $51. *** December contracts expire in two weeks *** BUY PUT DEC-50*DWQ-XJ OI=1241 at $3.40 SL=1.75 BUY PUT DEC-45 DWQ-XI OI= 760 at $1.05 SL=0.50 BUY PUT JAN-45 DWQ-MI OI=1019 at $2.75 SL=1.25 Average Daily Volume = 1.89 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 12-08-2002 Sunday 4 of 5 In Section Four: Current Put Plays: DLX, AIG Leaps: Decision Time! Traders Corner: The Iron Condor Rises Again – On Schedule ************************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 ***************** AIG - American Intl. $60.49 -0.66 (-4.66 for the week) Company Description: AIG is the world's leading U.S.-based international insurance and financial services organization, the largest underwriter of commercial and industrial insurance in the United States, and among the top-ranked U.S. life insurers. Its member companies write a wide range of general insurance and life insurance products for commercial, institutional and individual customers through a variety of distribution channels in approximately 130 countries and jurisdictions throughout the world. AIG's global businesses also include financial services, retirement savings and asset management. AIG's financial services businesses include aircraft leasing, financial products, trading and market making, and consumer finance. (source: company press release) Why We Like It: An unexpected rise in unemployment numbers sent the market lower on Friday morning. AIG gapped down with the major indices and bounced just over the PnF bullish resistance breakdown level of $60.00, hitting a low of $60.05. The stock remained rangebound between $60.50 and $61.00 for most of the day before a late- session breakdown took AIG to the $60.05 level. Bulls will point to the subsequent rebound as a positive sign, but we wouldn't read too much into this successful test of support - It looked like many short traders simply wanted to get flat before the weekend. Today's relative weakness versus the Dow Jones and IUX.X Insurance index (which violated its 50-dma on an intraday basis) bodes well for the bears. The recent triple-bottom breakdown on the PnF chart sure isn't going to inspire much buying either. New entries can be gauged on a move below $60.00. We think AIG could quickly fall to the $55.00 area once this level of support gives way. Our stop is set at $65.51, twelve cents above the 200-dma. BUY PUT DEC-65*AIG-XM OI= 6795 at $5.00 SL=2.50 BUY PUT DEC-60 AIG-XL OI= 6022 at $1.85 SL=0.95 Average Daily Volume = 6.45 mil --- DLX - Deluxe Corp. - $43.81 +1.26 (+0.41 for the week) Company Description: Deluxe Corporation's business units provide personal and business checks, business forms, labels, self-inking stamps, fraud prevention services and customer retention programs to banks, credit unions, financial services companies, consumers and small businesses. The Deluxe group of businesses reaches clients and customers through a number of distribution channels: the Internet, direct mail, the telephone and a nationwide sales force. (source: company press release) Why We Like It: We initiated this play with a stop above the 200-dma, based on the probability that any near-term rebound in DLX would peter out below that moving average. Now our expectations are being put to the test. DLX has had a distinct buy-side bias ever since it bounced from the $41.00 level on Wednesday. Shares showed relative strength throughout today's session and finished with a gain of nearly 3%. The buying finally subsided just below short- term resistance at $44.00, two cents under the declining 200-dma. At this point it's hard to make a bearish case for DLX. The recent reversal has sent the oscillators higher, and today's gains took the stock above its short-term descending channel. We'd fully expect this play to be stopped out if the market shows any kind of strength on Monday. However, today's failure to move above resistance suggests that the bears may offer a spirited defense at the 200-dma. A rollover from current levels would give speculative traders an opportunity to add to short positions, but not until DLX falls below intraday support/resistance at $43.50. Our alternate, low risk entry, came on a rollover from the $44 level, with the stop set at $44.25 and this may be that opportunity. Traders should be patient and wait for the breakdown, but the failure at the 200- dma is no coincidence. BUY PUT DEC-45*DLX-XI OI= 84 at $1.90 SL=1.00 BUY PUT DEC-40 DLX-XH OI= 184 at $0.30 SL=0.00 Average Daily Volume = 344 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 ***** Decision Time! By Mark Phillips mphillips@OptionInvestor.com After 8 weeks of gains (although several of those weekly gains were pretty anemic), the broad market finally broke its winning streak with a loss across the board. No matter what index you use for reference or how you draw the trendlines, the ascending trends that have been in place since mid-October were all tested. In the process, we also some internal weakening in the various indices, with the OEX reversing into Bear Alert and the NDX reversing into Bull Correction. This is the first time since the October lows that we've seen any appreciable weakening in these measures of market risk, and I believe we can attribute it to investors taking profits and removing some of the risk in their portfolios after running up to test major resistance. Since we've been talking about the OEX in this column lately, I want to continue to use it as our benchmark for what is happening in the broad market. This isn't to say that it is the most appropriate, but I think we are developing a level of familiarity and it does show some of the very important levels that are coming (have come) into play. Daily Chart of the OEX (S&P 100) Given the steep slope, it was only a matter of time until the aggressive ascending trendline off of the October lows was broken, and testing major resistance between $487 (August high) and $489 (50% retracement) was the key. While we're looking in hindsight right here, you can scroll back a couple weeks in this column and see how we were talking about the significance of that resistance level. But before we stumble over ourselves launching bearish trades galore, I think a closer view is warranted. Take a look at the chart below and I think you'll see what I mean. Note that the 180-minute scale has no significance other than that was what was necessary to compress the data so you can see enough of the chart. Closer View of the OEX (S&P 100) - 180 Minute After two successful tests of the aggressive ascending trendline, it finally failed and broke down after Monday's rejection at resistance. That got the markets in profit-taking mode for the remainder of the week, culminating with Friday's early sell off and rebound. Ignoring the initial launch off of the October lows, I've started this ascending trendline (red) at the low on October 15th. We got our second data point (allowing for the construction of the trendline) on November 13th and lo and behold, the bulls defended support there last Friday. To be sure, there is still a lot of downside risk in this market, but given the bullish seasonality in play, the still very bullish position of the Bullish % readings and strong support near $455-458, I think we're setting up for another assault on resistance. It may not commence on Monday, but I think bearish traders looking for a big breakdown and selloff next week are setting themselves up to be disappointed. Don't forget that it now appears the Bush administration is getting serious about fixing the economy through stimulus (details to be released soon, if we can believe what we hear on CNBC). This has the potential to revive any tired bulls. Lest you think I'm basing my near-term bullish opinion on a convenient trendline on the OEX, I invite you to apply a similar trendline to the major index of your choice -- DOW, SPX, NDX or NASDAQ Composite. They all rebounded (to varying degrees) on Friday from very similar trendlines, all of which began on or about October 15th. Coincidence? I think not! And that brings me to the topic of the VIX. We were all wondering if it was just going to continue downwards after falling below 27 prior to Thanksgiving. My thesis last week was that the significant rise in the VIX with the rally surrounding the holiday, meant that we were very soon due for some weakness in the market, which was being reflected in an increase in put buying, and hence a suspicious rise in the VIX. Sure enough, after the initial spike higher on Monday, the market sold off, and the VIX spent the remainder of the week charging higher. The high for the week was pegged on Friday morning at 35.58. Look at a daily chart of the VIX and you can see this is an important level of support turned resistance (35-36) on the way down in mid-November. That sharp reversal on Friday hints to me that a lot of the feat that had moved into the market a week ago is already beginning to dissipate. All clear for the bulls? Not by a long shot, as there is still a lot of downside risk in this market. By the same token, I don't think you can make a strong argument for the bottom falling out of this market anytime in the next 3 weeks. We're in that indecision zone, where the most prudent trades will consist of selling resistance and buying support. Speaking of trades, we had a lot of action in our list of plays this week, with nice gains in the Portfolio, and a couple new entries too. Let's get to it! Portfolio: LEN - Now that's more like it! I mentioned last week that LEN was looking a bit top-heavy as it was resting right below its 50-dma and 200-dma, both of which were rolling lower. Sure enough, the stock got a slight pop on Monday morning and then it was all downhill from there. The real key was the $49 level, as we needed a print at $49 to generate that PnF Sell signal. Thursday's decline suspiciously stopped at $49.10, but the bears delivered on Friday morning, with the stock trading as low as $48.76 give us that quad-bottom breakdown. Now we can calculate our tentative bearish price target to be at least $44, depending on how long this column of O's becomes. In the near-term, we still aren't out of the woods yet. This could simply be a bear-trap Sell signal, and we need a print at $48 to remove that risk. My gut feel says we still might get a bit of a bounce before selling off further down the chart. So let's refrain from getting too aggressive with our stop. I'm lowering it to $54 this weekend, which is just above the late-November highs. Note that a trade at $54 would also create a PnF Buy signal, negating this week's Sell signal. Traders that are sitting on a solid gain and don't want to risk giving it back could consider closing the trade here and then look for a new entry on the next failed rebound. NEM - Patience IS rewarded! It was nip and tuck for a few weeks there as NEM muddled along just above its $22 support level. But things improved dramatically this week, with currency fears translating into a nice move up in the price of Gold. Looking at the daily chart of NEM, I sure do like the increasing buying volume throughout the week, culminating with Friday's $.4% advance on nearly double the average daily volume. We definitely need to exercise caution here though, as the XAU index was unable to generate a PnF Buy signal, despite the fact that the Gold futures did. The December contract (GC02Z) hit $328 - EXACTLY - on two separate occasions on Friday before pulling back. My interpretation is there just wasn't enough buying pressure to constitute a real breakout. This is perhaps more clearly seen in the chart of NEM, which moved up right to significant resistance on Friday, closing just a few pennies under the 200-dma. Once clear of that obstacle, we're going to need to see the stock finally break out over the descending trendline resistance. The top of the descending trendline on the candle chart is $27.25, but I want to see $28 to convince me the breakout is for real. Looking at the PnF chart, a trade at $27 generates a fresh Buy signal, but again, I want to see a trade at $28 to convince me, as that will remove the possibility of a bull-trap pattern. Over the near-term, my expectations are for a pullback from Friday's high, most likely into the $24-25 area, before the gold bulls take a serious run at breaking out of the current neutral wedge. Things are looking good, but let's not get too aggressive on the stop just yet. I'll raise it to $23 this weekend, but that's as far as I'm willing to go until we see a real breakout. MO - The Consumer Cyclicals were left out of the most recent market run up the charts, and they continued to trade contrary to the broad market again this week. Our bullish MO play worked out quite nicely, getting the party started on Wednesday, when the stock blasted out of the base it had been confined in since mid-November. Don't break out the champagne just yet, as the stock still has a lot of work to do to get back on the recovery path. There's going to be stiff resistance in the $41-43 area, and I won't breathe easy until I see a close above $45. Incidentally, a print above $45 is what we need to get the PnF chart back on a Buy signal. The chart looks like the early stage of a recovery is in process, but only time will tell from here. Keep stops set at $35. Watch List: DELL - We're getting closer on a daily basis to an actionable entry point. It should come as no surprise that the stock has been weakening steadily since its strong earnings report, as investors likely bought the stock in advance, expecting a positive report. It has been interesting to note that there sure isn't a rush for the exits over the past couple weeks, with consistent support being found near the $28 level. But we don't want to rush into a rash entry here, as there is likely some more downside before we'll be presented with what I think is a good entry. Friday's rebound back through the 50-dma is likely just a tease, and I'm more interested in what happens when the stock gets back down near the 200-dma, which is positioned conveniently in the $26-27 area, which is where we want to enter the play. GD - See how GD is still vacillating in the low $80s? That's a sure sign that investors haven't yet made up their mind about this stock. While there isn't a rush to exit the stock (that was taken care of back in July), there also isn't an overwhelming urge to buy it here. Sounds like a perfect time to start hunting for an attractive entry point, don't you think? And that's precisely why I haven't been in a hurry to take an entry yet - I think we still have the luxury of time on our side. If I'm wrong, then we miss out on the play. But first and foremost, we want to manage our risk by getting the appropriate entry close to support. my preference is still for a dip and rebound near the $78 area, and we'll follow that up with a stop at $76. During the process of writing this column, I always go back and review what I said the week before. Sometimes a blind squirrel does find an acorn, but I invite you to check out what I wrote last weekend. Recall my preference was for a failed OEX rally to the $484-494 area and then a subsequent pullback into the $455-460 area to test strong support. I don't think I could have scripted it any better, with a Monday moonshot up to 487.94 and then a low on Friday morning of 455.94. Eerie, isn't it? Nobody gets it that accurate on a regular basis, so to be honest, I'll be surprised if I captured the future with this week's prognostications quite as accurately. But time will tell. Without sounding too much like a broken record, Sell Resistance and Buy Support appears to be the game plan for now. The bull run isn't over just yet, but I'll be surprised if we're able to move higher in December and then continue that move into the new year. My forecast (subject to change, just like the weather) is for some limited upside and then another significant leg down, hopefully after the New Year begins. Here are the two things to watch for that would give a clear indication that I'm dead wrong in my forecast. 1. A violation of that new trendline (beginning in mid-October) on a closing basis. 2. The VIX closing above the 36.50 level, indicating a renewed surge in fear. Barring those events coming to pass, I like the odds of my forecast being on target. Keep listening to what the market has to say, and we should all have a very Happy Holiday season! IMPORTANT REQUEST: In my never-ending quest to provide what you (my readers) want, I think it's time I solicited some feedback. After all, with the caveat that I need to express my true market view, this column needs to be all about what makes the most sense to the most of you. So tell me what you want me to change. I want to respect everyone's time, and this week's column ran to nearly 9 full pages -- I know that takes a lot of time to read. So what would you like? Leave it the way it is? Less commentary or more? More plays or less? More aggressive or more conservative plays? How's the weekly coverage of the current Watch List and Portfolio plays. The only thing that I'll tell you up front that I can't do is intra-week updates on the LEAPS plays. I don't have the time to do that with my other writing duties, and there isn't space to cram it into the newsletter. But other than that issue, your wish is my command. Thanks for your time! 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 $ 4.40 +12.82% $23 '05 $ 30 ZIE-AF $ 6.10 $ 6.10 + 0.00% $23 MO 11/13/02 '04 $ 40 LMO-AH $ 3.90 $ 4.80 +23.07% $35 '05 $ 40 ZMO-AH $ 4.80 $ 5.70 +18.75% $35 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $10.70 +24.41% $54 '05 $ 50 XFF-MJ $11.20 $15.10 +34.82% $54 BBH 12/02/02 '04 $ 85 KBB-MQ $12.10 $12.30 + 1.65% $93.50 '05 $ 80 XBB-MP $14.40 $14.40 + 0.00% $93.50 GM 12/02/02 '04 $ 35 LGM-MG $ 5.20 $ 6.60 +26.92% $45 '05 $ 30 ZGM-MF $ 5.50 $ 6.50 +18.18% $45 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: DJX 12/08/02 $90-91 DEC-2003 $ 88 ZDJ-XJ DEC-2004 $ 88 YDJ-XJ New Portfolio Plays BBH - Biotech HOLDR $89.52 **Put Play** We've been hemming and hawing about taking an entry in the BBH for a few weeks now, and the sharp reversal of Monday's rally attempt in the broad market finally pushed me off the fence. While I would have liked to entered the play up in the $91-92 area, we'll have to take what we can get. The rally failure is easier to see in the BTK index, as it moved up to just below the late-November highs before rolling over. At any rate, I logged the entry into the play as of the close of trading on Monday, and was feeling pretty smug about in on Wednesday morning as the BBH dropped back under $87. But the past few days have seen the bulls active in the sector, and at the end of the week, the BBH came to rest at $89.66, fractionally above our entry level. So what comes next? My expectation is that we're going to get another rally attempt, and the critical feature of this next rally will be to see how it behaves if it moves up to test the 200-dma, currently at $92. A failure below that level should get the bears active again, while a breakout will send the signal that I was premature in trying to short this group. Traders still looking for an entry will want to look for entry on the hoped-for rollover near the 200-dma. While the weekly Stochastics are looking like they want to roll over, they haven't really done so just yet, so caution is advised. I'm initially placing the stop at $93.50, just above the August high. BUY LEAP JAN-2004 $85 KBB-MQ $12.10 BUY LEAP JAN-2005 $80 XBB-MP $14.40 GM - General Motors $39.95 **Put Play** Ask, and it will be given! At least that's what I was thinking on Monday, after GM soared with the rest of the market to trade as high as $41.50, before collapsing down to close just below $40 at $39.95. Any bullish aspirations for the stock were quickly dashed as the broad market fell, and the picture got even gloomier (good for us) on Tuesday when each of the major auto manufacturers revealed that auto sales were far from robust, with each of the company's reported double-digit sales declines. That's good for our play and led the stock to trade back under $37 on Friday before recovering a bit with the rest of the market. There was apparently a bad tick on Thursday down to the $33.05 level, which has the PnF chart showing a larger column of O's than actually occurred. But no matter, that will be corrected soon enough. What really has me excited about the play is the fact that we have bearish divergence setting up on the weekly Stochastics, and that bodes well for the downside. That's right, the weekly Stochastics reached just a bit higher than they did in August, but price didn't get anywhere near the August highs. I expect we'll see some pretty substantial support in the $35-37 area and we should get a bounce in the stock between here and the end of the year, which will probably challenge the $41-42 area once again. So this isn't the point to plunge into new positions. If you missed the rollover last week, then you've got time to wait for the next failed rally. Look for it over the next few weeks. To allow for the stock to move around without tripping us out of the play, we're going to start with a pretty wide stop at $45. We'll look to lower it once the stock breaks down below $35. BUY LEAP JAN-2004 $40 LGM-MG $5.20 BUY LEAP JAN-2005 $40 ZGM-MF $5.50 New Watchlist Plays DJX - Dow Jones 30 Index $86.46 **Put Play** If you're looking at the bullish percent readings and thinking we're a bit early to be gaming a long-term play to the downside in the DOW, then you're thinking exactly the same as I am. After giving back a fair amount of ground in the past week, the DOW looks to me like it is due for a rebound in the near-term. But with the DOW bullish percent already up in overbought territory, the risk has definitely shifted to the downside. With the bullish tendencies due to seasonality, I'm looking for the index to remain strong through the end of the year, but my expectation is that we'll then have a nice setup for a longer-term bearish play in the index. Monday's rally effectively tested the August highs near the 9000 level and we immediately sold off from there. Stubborn bulls will want to take another run at that resistance level and if they fail to break through it decisively, those growling bears will be back with a vengeance. You see, the bulls have used up a lot of their strength just getting the market back to the level of the August highs and right now they're catching their breath for another attempt. If they fail at the same level (which by the way, will likely be close to the 200-dma by that time), we ought to see at least a 38% and maybe even a 50% retracement of the rally off of the October lows. Note that we are predicting a breakdown below those lows right now. While that could happen, we don't want to get overzealous expecting a total collapse. Ideally, that next ramp up to resistance will have the VIX falling back down into the low 20s again as well. For now, we wait and watch for the right entry. I think that will occur with a failed rally in the $90-91 area. After we enter a position, we'll set our stop at $94. While that induces a fair amount of upside risk into the play, it is the best point for an initial technical stop, as it is the site of the July highs before the breakdown. BUY LEAP DEC-2003 $88 ZDJ-XJ BUY LEAP DEC-2004 $88 YDJ-XJ Drops None ************** TRADERS CORNER ************** The Iron Condor Rises Again – On Schedule By Mike Parnos, Investing With Attitude Just as the silver birds of United Airlines are about to come tumbling down to earth, the Couch Potato Trading Institute is proud to announce that our Iron Condors have once again taken flight and are alive and well and PROFITABLE! Call and put buyers are plastered to their computer all day, day after day, hoping and praying for a few dollar move. The only move CPTI students are concerned about is the five-yard dash to the refrigerator for a slice and a beer during the commercial. The five-yard snack dash is rumored to soon be an Olympic event. We discussed Iron Condors in previous columns, but this discussion will be enlightening for new CPTI students and a welcome refresher for our “oldies but goodies.” Many CPTI students have been following our monthly portfolios and been consistently collecting profits on their Iron Condors. Today’s column includes a checklist for the Iron Condor strategy. It will help you organize the information you accumulate as you research each potential Condor trade. If you have a problem getting the checklist on one sheet, email me (mparnos@OptionInvestor.com) and I’ll be glad to send you a Microsoft Word file with everything already laid out and ready to print. Once you print out a good copy, take it to your friendly Office Depot or Office Max and copy it onto 3-hole punch paper. Keep these sheets in a trading loose-leaf for easy reference. It will be a valuable trading tool for you. _____________________________________________________________ The Iron Condor Rises The Iron Condor often has a wide wingspan, but a intentionally short life span. We’re trying to establish a position that will allow a stock (or index) to vacillate (no, it’s not a lubricant) up and down within a trading range without violating the integrity of the position. The Iron Condor consists of establishing a bear call spread on top of a trading range and a bull put spread at the bottom of the trading range. We normally use the front month for both spread positions. The Iron Condor is a credit strategy. That means the maximum we can make on the trade will be the credits we take in at the inception of the position. We will take in a credit from both spreads and, if the option Gods smile upon us, we’ll keep all the money. All the options will expire worthless and ascend to option heaven -- where all good expired options go to when they die. The Underlying We want to find a relatively volatile stock that is trading within a range. The volatility will provide us with some decent premium. Hopefully, the support and resistance levels will hold the underlying within its range and we all live happily ever after. If not, there are adjustments we can make when necessary. Let’s use an old favorite – QLGC (Q-Logic Corp.) – closed Friday at $39.19. It’s had a history of trading within the $35-$45 range. It has good volatility and should be good for this hypothetical example. The Actual Trade The Bear Call Spread: Sell 10 contracts of Jan. $45 call @ $1.70 Buy 10 contracts of Jan. $50 call @ $.75 Credit for Bear Call spread: $.95 The Bull Put Spread: Sell 10 contracts of Jan. $35 put @ $2.35 Buy 10 contracts of Jan. $30 put @ $1.30 Credit for Bull Put spread: $1.05 From the two spreads, we have taken in a total of $2.00. If you’re a shrewd trader, you might be able to get another dime, but let’s go with the $2.00 for our calculations. Our Exposure The nice part about the Iron Condor is that you can’t be wrong in both directions. Technically it’s possible, but the likelihood of it happening is infinitesimal (another big word, huh?). Let’s say CEO of QLGC suddenly publicly quits to have an operation and join the Dixie Chicks -- causing QLGC to drop to $20 overnight. Our exposure is only the difference between the strike prices of the bull-put spread -- $5.00 ($35.00 - $30.00). Now, considering that we’ve already taken in $2.00 in credit when we put on the Condor, our actual risk is only $3.00 ($5.00 – $2.00). Our Return This is the fun part. This part is truly exciting. It causes heart palpitations, eyebrows and various other body parts to rise just at the thought of these returns. Based on what you read in the paragraph above, you can see that we took in $2.00. Our risk is only $3.00. If QLGC behaves and finishes inside the predetermined range, our return on our risk is 67% -- for six weeks!! Sure beats the Hell out of a Treasury Note!! Maintenance Requirement Your brokerage firm will want to hold $5,000 per spread in your account as collateral in case to cover catastrophic situations. That would be a total of $10,000 (for a 10 contract position) for the two spreads – less the $2,000 that you took in. The requirement can be in the form of cash or marginable securities. If you are using cash to handle the trade requirement, it will continue to earn money-market interest while it’s resting comfortably in your account. Check your brokerage to confirm their policy. Adjustments If, and when, QLGC moves up or down through the short strike, we can simply buy 1,000 shares of the stock to cover the call or short the stock to cover the put. When QLGC returns back below the short strike, we simply sell the stock or cover our short shares. You may incur a few commissions and a little slippage, but it’s the best way to cover your positions. At the CPTI, we like to limit and define our risk so we can sleep nights and wake up with money in our pocket. As George Carlin so aptly put it – “Don’t sweat the petty things and don’t pet the sweaty things.” ____________________________________________________________ The CPTI Iron Condor Checklist Stock / Symbol: ____________________________________________ Last Trade: ______________ Current Bid: _____________ Current Ask: ________________ Bear Call Spread: Long Call: Ask: ___________ Short Call: Bid: ____________ Bull Put Spread: Long Put: Ask: ___________ Short Put: Bid: ____________ Total Credit From Both Spreads: _________________ Potential Risk: ________________ Maintenance Requirements: _____________________ Implied Volatility: _________ Historical Volatility: _________ Primary Support Level: ______________________ Secondary Support Level: ____________________ Primary Resistance Level: ______________________ Secondary Resistance Level: ____________________ Trend Line Support: _______________ Resistance: ___________________ Average Monthly Move: ____________________ Date Entered Trade: ________________________ Time Remaining to Expiration: ___________________ Keep It On The Watch List: _____ (Yes) _____ (No) Notes: ____________________________________________________ __________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ CPTI PORTFOLIO UPDATE – As Of Friday’s Close BBH Iron Condor – Currently trading at $89.66 We want BBH to finish the December option cycle anywhere between $80 and $95. Big up day on Friday. We’re still looking good – till in mid-range. TTWO Short Strangle – Currently trading at $28.92. We want TTWO to finish the December option cycle anywhere between $22.50 and $35.00. Looking good! We’re about halfway between the strikes. IMCL Covered Call – Currently trading at $13.50. We want IMCL to finish the December option cycle over $10 so it will be called away. Looking good! IMCL has pulled back from the $15 level, but we still have a nice cushion with only two weeks to go. QQQ ITM Strangle – Currently trading at $26.45. Before rallying later in the day Friday, the QQQs dipped to $25.74. For the traders who were still holding their long $26 or $25 put, it was a good profit-taking opportunity. I suspect that most CPTI students are already out of the position. Last week, the QQQs finally made its predicted 3-point move – and then some – it turned out to be a $4.25 move. CPTI students, sold their long calls, covered the cost of the strangle, and are now profiting from the long puts as the market has reversed direction. ____________________________________________________________ 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 12-08-2002 Sunday 5 of 5 In Section Five: Covered Calls: Understanding Terms & Definitions Naked Puts: Q&A With The Naked-Puts Editor Spreads/Straddles/Combos: A Key Test Approaches! 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: Understanding Terms & Definitions By Mark Wnetrzak Some of the most common questions I receive from new readers concern the meaning of a word, phrase, or term used in this section. Attn: Covered-Calls Editor Subject: Terms used in the Covered-Calls section Mark, In your comments for the Covered-Call play summary, I have often seen you mention the term overbought and oversold. I assume you are referring to the chart pattern that occurs with the use of indicators like Stochastics?!?. Also, when you talk about the "premium" levels in options, what exactly are you referring to? Thanks, FJ Greetings FJ, Most traders refer to implied volatility as "premium." However, the word premium can be confused with the option price relative to the underlying security and traders often make comments such as "premium levels are high" when they are really referring to the implied volatility in options. A more correct statement would be "implied volatility is high" or "implied volatility is low." To understand premium, you need to be aware of the basic types of volatility: historical volatility and implied volatility. Historical (statistical) volatility is based on past prices. It is derived through mathematical computation, and it is stated as a percentage, which reflects how much the price of an asset has changed in a given period of time. Historical volatility is used in option pricing models to determine the fair value of an option and to calculate the probability of a given move (magnitude) in price. In contrast, implied volatility starts with the option price as a given and extrapolates the theoretical value of volatility equal to the market price minus any intrinsic value. Without going into great detail, implied volatility is simply the volatility value that makes an option's fair value equal to its actual market price. From a purely statistical viewpoint, the measurement of volatility is the standard deviation of the daily price fluctuations in the underlying instrument. The more volatile the underlying issue, the greater the price of the option. Of course, lots of other things affect the "premium" in an option price and option pricing knowledge is one of the keys to success in this game. That is why option pricing theory (and many other subjects) are explained so thoroughly in Options 101, Trader's Corner and Broker's Corner, on the OIN website. If you really want to understand this stuff (and you must to be successful), read the appropriate chapters in "Option Pricing and Volatility" by Sheldon Natenburg. This is one of the bibles of floor traders and it will shed some more light on the subject. As far as overbought/oversold indicators: The use of Stochastics, which is a technical indicator in the category of oscillators, is common among traders who are trying to identify potential entry and exit points. At the same time they are also among the most misunderstood chart indicators. In the study of stock and other financial instruments, oscillators offer a mathematically derived measure of the underlying market's momentum; its rate of acceleration or deceleration. In any trend, stock prices are always gaining, maintaining, or losing momentum. A loss of momentum can be a hidden reversal signal or a warning sign that "the trend may be coming to an end." The stochastic oscillator compares the current stock price to its price range over a specifically identified period of time. This technique is based on the idea that in an upward trending market, stocks tend to close near their highs while in a downward trending market, stocks tend to close near their lows. This idea suggests that as an upward trend erodes, stocks close further away from the highs and vice versa. The stochastic indicator attempts to show when prices start to group around their lows in an bullish market, and just the opposite in a down-trending market. The theory is that these are the conditions which indicate a trend reversal is about to occur. The stochastic indicator is plotted as two lines on a chart with values ranging from 0 to 100. They are the %D line and %K line and the %D line is considered the more significant of the two. Readings above the 80 line are extreme and indicate that the price is probably closing near its high and likewise, readings below 20 indicate that price is closing near its low. Analysts identify these extreme areas of the chart with the terms "overbought" and "oversold" and when used correctly, the stochastic oscillator can often demonstrate a change in price before the reversal actually occurs, and that can be very helpful in determining the best time to enter or exit a position. Trade Wisely! 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 5.99 DEC 5.00 1.05 *$ 0.57 11.2% SIMG 5.44 5.90 DEC 5.00 1.10 *$ 0.66 11.0% CIEN 5.58 5.96 DEC 5.00 1.00 *$ 0.42 10.0% INHL 7.96 9.02 DEC 7.50 1.05 *$ 0.59 7.4% IMCL 8.97 13.50 DEC 7.50 2.15 *$ 0.68 7.2% MATK 22.07 22.68 DEC 20.00 3.30 *$ 1.23 7.1% CRYP 5.57 5.20 DEC 5.00 0.80 *$ 0.23 7.0% ISSX 24.48 22.15 DEC 22.50 3.50 $ 1.17 6.1% FLEX 11.01 10.08 DEC 10.00 1.40 *$ 0.39 5.9% MVSN 18.68 17.51 DEC 17.50 1.85 *$ 0.67 5.8% V 13.96 16.22 DEC 12.50 2.35 *$ 0.89 5.6% USG 6.25 7.56 DEC 5.00 1.60 *$ 0.35 5.5% LAVA 11.59 12.72 DEC 10.00 1.95 *$ 0.36 5.4% CMOS 11.11 9.91 DEC 10.00 1.65 $ 0.45 5.2% CTIC 8.60 8.27 DEC 7.50 1.50 *$ 0.40 4.9% BLDP 13.80 13.70 DEC 12.50 1.80 *$ 0.50 4.5% TXN 19.22 18.23 DEC 17.50 2.40 *$ 0.68 4.4% IDCC 15.20 17.82 DEC 12.50 3.30 *$ 0.60 4.4% MDCO 14.33 15.97 DEC 10.00 4.90 *$ 0.57 4.4% ALXN 17.53 15.90 DEC 15.00 2.95 *$ 0.42 4.2% DCTM 18.13 16.56 DEC 15.00 3.80 *$ 0.67 4.1% IDCC 14.74 17.82 DEC 12.50 2.90 *$ 0.66 4.0% MATK 23.16 22.68 DEC 20.00 3.70 *$ 0.54 4.0% BRCM 15.45 17.61 DEC 12.50 3.50 *$ 0.55 4.0% SEE 18.26 36.57 DEC 15.00 3.90 *$ 0.64 3.9% JDEC 14.13 11.97 DEC 12.50 2.15 $ -0.01 0.0% DCTM 19.90 16.56 DEC 17.50 3.10 $ -0.24 0.0% OSUR 7.97 5.75 DEC 7.50 1.45 $ -0.77 0.0% *$ = Stock price is above the sold striking price. Comments: Well, it was fun while it lasted, but all "good" things must come to an end. The major averages finally succumbed to well deserved profit taking after rising for 8 straight weeks. Time to evaluate the strength of your positions as they consolidate and jettison any issues that act weaker than expected. OraSure Technologies (NASDAQ:OSUR) is now at a key moment: the convergence of the Oct. high and its 150-dma. Time to exit on further weakness or roll forward and/or down to the April or July expiration? Other issues that might warrant an early exit or adjustment include: Ballard Power Systems (NASDAQ:BLDP), Restoration Hardware (NASDAQ:RSTO), Documentum (NASDAQ:DCTM), and J.D. Edwards (NASDAQ:JDEC) 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 AVGN 9.40 DEC 7.50 GKU LU 2.20 125 7.20 14 9.1% DNDN 5.72 DEC 5.00 UKO LA 1.00 13 4.72 14 12.9% ELN 2.90 JAN 2.50 ELN AZ 0.65 15322 2.25 42 8.0% IMCL 13.50 JAN 10.00 QCI AB 4.10 2138 9.40 42 4.6% MLNM 11.19 DEC 10.00 QMN LB 1.55 8518 9.64 14 8.1% SEBL 8.30 DEC 7.50 SGQ LU 1.05 26947 7.25 14 7.5% VISG 5.72 JAN 5.00 TUM AA 1.05 950 4.67 42 5.1% 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 DNDN 5.72 DEC 5.00 UKO LA 1.00 13 4.72 14 12.9% AVGN 9.40 DEC 7.50 GKU LU 2.20 125 7.20 14 9.1% MLNM 11.19 DEC 10.00 QMN LB 1.55 8518 9.64 14 8.1% ELN 2.90 JAN 2.50 ELN AZ 0.65 15322 2.25 42 8.0% SEBL 8.30 DEC 7.50 SGQ LU 1.05 26947 7.25 14 7.5% VISG 5.72 JAN 5.00 TUM AA 1.05 950 4.67 42 5.1% IMCL 13.50 JAN 10.00 QCI AB 4.10 2138 9.40 42 4.6% 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). ***** AVGN - Avigen $9.40 *** What's Up Doc? *** Avigen (NASDAQ:AVGN) is focused on the development of gene therapy products for the treatment of disease. Avigen has developed a proprietary technology based on adeno-associated virus (AAV) vectors. This technology is designed to deliver DNA into cells of patients in order to produce therapeutic results as an alternative to existing pharmaceutical and surgical treatments. Traditional medicine primarily focuses on treating the symptoms of disease. The company's gene-based products target the root cause of the disease at the fundamental cellular level, which may assist in treating a wide variety of diseases and conditions that are not adequately addressed by medical science. No recent news to explain the strong rally off the November lows but the technical indications suggest the issue has successfully completed a recent consolidation and is undergoing a change-of-character. Investors who agree can use this position to speculate conservatively on the future movement of the issue. DEC 7.50 GKU LU LB=2.20 OI=125 CB=7.20 DE=14 TY=9.1% ***** DNDN – Dendreon $5.72 *** Phase III Trial Adjustment *** Dendreon (NASDAQ:DNDN) is devoted to the discovery as well as development of novel products for the treatment of diseases through its manipulation of the immune system. Dendreon's product pipeline is focused on cancer, and includes therapeutic vaccines, monoclonal antibodies and a pathway to small molecules. Their most advanced potential products are therapeutic vaccines that stimulate a patient's immunity for the treatment of cancer. Provenge is a therapeutic vaccine for the treatment of prostate cancer and is in Phase III clinical trials, the final stage of product development. The company is conducting Phase II clinical trials for Mylovenge, its therapeutic vaccine for the treatment of multiple myeloma, and Phase I clinical trials for APC8024, its therapeutic vaccine for the treatment of breast, ovarian and colon cancers. Shares of Dendreon surged this week after the company said it's moving forward with late-stage patient testing of an experimental treatment for prostate cancer. We simply like the bullish break-out on high volume and traders can speculate on the near-term performance of the issue with this conservative position. Try target shooting a smaller "net-debit" to lower the cost basis and increase the potential yield in the position. DEC 5.00 UKO LA LB=1.00 OI=13 CB=4.72 DE=14 TY=12.9% ***** ELN - Elan $2.90 *** Bottom-Fishing *** Elan (NYSE:ELN) is a worldwide biopharmaceutical company. Prior to June 10, 2002, the company conducted its operations through two primary business units: Biopharmaceuticals and Drug Delivery. As of June 10, 2002, Elan reorganized its business units to focus on three core areas: neurology, pain management and autoimmune diseases. The company will still operate the Drug Delivery unit as a stand-alone, discrete business, and has created a new business unit, Elan Enterprises, which focuses on optimizing the company's venture program. In late November, Elan sold majority-owned Athena Diagnostics for $122 million as the company strives to cut its debt. The stock has formed a 6-month stage I base and has recently moved above its November high on increasing volume. Investors who believe the company will succeed in its restructuring attempt can use this position to obtain a favorable cost basis in the issue. JAN 2.50 ELN AZ LB=0.65 OI=15322 CB=2.25 DE=42 TY=8.0% ***** IMCL - ImClone $13.50 *** All Is Forgiven Now *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product candidate, Erbitux (cetuximab), is a therapeutic monoclonal antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. ImClone's next most advanced product candidate, BEC2, is a cancer vaccine. In addition to the development of its lead product candidates, the company conducts research, both independently and in collaboration with academic and corporate partners, in a number of areas related to its core focus of growth factor blockers, cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. Shares of IMCL soared recently amid a rumor that Bristol-Myers will buy the company. There are other reasons for the stock's strength, such as short-covering and some positive fundamental news on the company's drug products. This position offers long- term investors an entry point with a cost basis near technical support. JAN 10.00 QCI AB LB=4.10 OI=2138 CB=9.40 DE=42 TY=4.6% ***** MLNM – Millennium $11.19 *** Filing For Approval *** Millennium Pharmaceuticals (NASDAQ:MLNM) is a biopharmaceutical company focused on applying its comprehensive and integrated science and technology platform to discover and accelerate the development of drugs and predictive medicine products. These drugs and products could enable physicians to more closely customize medical treatment by combining knowledge of the genetic basis for disease and the genetic characteristics of a patient. Millennium Pharmaceuticals primarily focuses its research and development and commercialization activities in four key disease areas: cardiovascular, oncology, inflammatory and metabolic. This week, Millennium announced that the company plans to file for FDA approval on Velcade, a cancer treatment for multiple myeloma, in early 2003. Velcade is the most promising product in Millennium's near-term drug pipeline. Investors who believe Millennium will ultimately gain approval can use this position to establish a low risk cost basis in the issue. DEC 10.00 QMN LB LB=1.55 OI=8518 CB=9.64 DE=14 TY=8.1% ***** SEBL - Siebel Systems $8.30 *** Bottom-Fishing: Part II *** Siebel (NASDAQ:SEBL) is a provider of e-business applications software. Siebel eBusiness Applications are designed to meet the information system requirements needed to manage these relationships from small businesses to the largest multinational organizations and government agencies. The company's customer relationship management applications enable an organization to sell to, market to and service its customers across the Web, call centers, field, resellers, retail and dealer networks. Siebel's partner relationship management applications seamlessly unite the organization's partners, resellers and customers in one global information system to facilitate greater collaboration and increased revenues, productivity and customer satisfaction. Siebel's employee relationship management applications enable an organization to drive employee and organizational performance and increase employee satisfaction through the support of each stage of the employee life cycle. Siebel Systems has been forming a 5-month stage I base and this position offers traders a favorable entry point from which to speculate on the company's future. DEC 7.50 SGQ LU LB=1.05 OI=26947 CB=7.25 DE=14 TY=7.5% ***** VISG – Viisage $5.72 *** New Contracts *** Viisage Technology (NASDAQ:VISG) is engaged in the field of biometrics technology and in providing digital identification systems and solutions. The company focuses on ID solutions that improve personal convenience and security, deter fraud and reduce identification program costs. Viisage combines its systems integration and software design capabilities with its proprietary software and hardware products and other industry- standard products to create complete customized solutions. These turnkey solutions integrate image and data capture, create relational databases, incorporate multiple biometrics and improve customers' ability to move and manage information. Applications can include driver's licenses, voter registration, national ID's, law enforcement, social services, access control and PC network and Internet access security. Viisage rallied in November after the company announced that is had been awarded a $20 million contract from the state of Georgia to design, develop and implement a new digital driver's license program. This week, Viisage announced that the company has added the state of Delaware to its recent drivers' license contract wins. We simply favor the bullish technical indications and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. JAN 5.00 TUM AA LB=1.05 OI=950 CB=4.67 DE=42 TY=5.1% ***** ***************** 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 CRXA 7.84 DEC 7.50 CVQ LU 1.45 6189 6.39 14 37.7% FHRX 7.31 DEC 7.50 FUF LU 0.50 74 6.81 14 16.0% IGEN 42.08 DEC 40.00 GQ LH 3.80 5654 38.28 14 9.8% MEDI 26.21 DEC 20.00 MEQ LD 7.00 1595 19.21 14 8.9% CTXS 13.00 DEC 12.50 XSQ LV 0.95 2963 12.05 14 8.1% HAL 20.19 DEC 17.50 HAL LW 3.30 19638 16.89 14 7.8% BCGI 14.74 DEC 15.00 QGB LC 0.50 21 14.24 14 7.6% MATK 22.68 DEC 20.00 KQT LD 3.20 447 19.48 14 5.8% GFI 13.08 DEC 12.50 GFI LV 0.90 1805 12.18 14 5.7% ORCL 11.28 DEC 10.00 ORQ LB 1.50 61744 9.78 14 4.9% DAKT 12.79 DEC 12.50 QKC LV 0.55 1 12.24 14 4.6% XMSR 3.05 JAN 2.50 QSY AZ 0.85 3372 2.20 42 9.9% BMRN 8.10 JAN 7.50 NUR AU 1.25 123 6.85 42 6.9% JDSU 2.99 JAN 2.50 UQD AZ 0.70 18885 2.29 42 6.6% ***************** NAKED PUT SECTION ***************** Options 101: Q&A With The Naked-Puts Editor By Ray Cummins One of our readers submitted a question about naked-put recovery strategies. Attn: Contact Support Subject: Potential recovery strategies Hi Ray, I have a naked put position that has gone awry and I was hoping you could help me with a recovery strategy. The stock is Humana (NYSE:HUM) and my position is (short) DEC-$12.50 Puts. I sold 5 of these options back in October for a $1.25 credit and thought I was safe with the trading range support near $12. In November, the healthcare sector slumped and Humana went with it. Now the stock is at 2002 lows and although it seems heavily oversold, I don't know whether to close the play for large loss or hold and wait for a recovery. I would appreciate some expert advice on how to get out of this situation. Thank You, EL Hello EL, Unfortunately, advice is the one thing I can't give but that's not necessarily a bad thing because I don't know where HUM is going any more than you do. At this point, there are no magic answers to your situation. Any action relative to an exit or "roll-out" strategy would have been more timely when the issue moved through the sold strike. Now the alternatives are based simply on your outlook for the issue. The obvious options are: close the position for a loss; roll it down and/or forward to a different strike option; accept assignment of 500 HUM shares in anticipation of a future recovery (and possibly writing covered calls on the issue); or simply wait for two weeks and hope for a significant rebound in the stock. Of course there are other, more complex adjustment strategies but they usually include far too much downside risk to warrant their use. You will have to determine the outlook for HUM and act accordingly. If you have any further questions on the strategies listed above, please send me another E-mail and I will happily explain them further. Additional Information: An option seller has a number of different alternatives when the underlying issue moves beyond the sold strike price (call or put) in a short position but in most cases, the appropriate action should be taken prior to that event, when the issue experiences a technical change in character (such as breaking out of a recent trading range or closing above/below a near-term moving average). Most methods for taking profits and preventing losses (as well as making adjustments or rolling up/down and out to new positions) fit into one of two categories: a pre-arranged target profit or loss limit; or a technical exit based on the chart indications of the underlying issue. The most popular technique; using a mental or mechanical closing stop to terminate a position or initiate a roll-out, is very simple as long as you adhere to the originally established limits. The alternative method, a technicals-based exit, can be slightly more difficult. However, there are a wide variety of indicators available to establish an acceptable exit point; moving averages, trend-lines, previous highs/lows, etc., and with this type of loss-limiting system, you simply close the play after a violation of a pre-determined level. Another common question concerns the most difficult decision that traders face: when (and also why) to exit or adjust an existing portfolio position. In general terms, that determination should be based on the existing market/sector/industry conditions as well as the current outlook for the underlying issue and the ratio of potential gain to additional risk. While this idea is relatively simple, one outstanding principle that new traders fail to adhere to is the need to outline a basic exit strategy, before initiating any position, to eliminate emotional decisions. This plan must be simple enough to implement while monitoring a portfolio of plays in a volatile market. In addition, these exit (adjustment) rules should apply across a wide range of situations and be designed to compensate for one's weaknesses and inadequacies. To be effective in the long term, they must be formulated to help maintain one's discipline, and at the same time, offer a timely memory aid for difficult situations. Utilizing this type of system addresses a number of problems, but the most significant obstacle it removes is the need for "judgment under fire." In short, a proven exit strategy will help you avoid exposing your portfolio to excessive losses and that's very important because the science of successful trading is far less dependent on making profits, but rather on avoiding undue outflows. 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 HAL 21.37 20.19 DEC 17.50 0.45 *$ 0.45 12.7% MATK 22.07 22.68 DEC 17.50 0.45 *$ 0.45 10.1% NWRE 20.19 17.31 DEC 15.00 0.30 *$ 0.30 10.0% IMCL 15.04 13.50 DEC 10.00 0.30 *$ 0.30 9.8% NWRE 17.68 17.31 DEC 12.50 0.55 *$ 0.55 9.7% ESIO 22.99 22.93 DEC 17.50 0.55 *$ 0.55 9.3% HAL 18.85 20.19 DEC 15.00 0.35 *$ 0.35 9.2% ALXN 17.55 15.90 DEC 12.50 0.30 *$ 0.30 8.6% IMCL 11.77 13.50 DEC 7.50 0.25 *$ 0.25 8.4% MSTR 18.16 17.27 DEC 12.50 0.30 *$ 0.30 8.3% BBY 27.68 26.60 DEC 22.50 0.35 *$ 0.35 8.1% ISSX 22.19 22.15 DEC 17.50 0.45 *$ 0.45 8.0% BSTE 31.02 31.70 DEC 22.50 0.75 *$ 0.75 7.8% PHTN 35.25 32.32 DEC 27.50 0.40 *$ 0.40 7.8% HAL 17.85 20.19 DEC 12.50 0.35 *$ 0.35 7.8% PPD 28.65 28.40 DEC 22.50 0.30 *$ 0.30 7.2% CYMI 33.43 33.33 DEC 25.00 0.60 *$ 0.60 7.2% RINO 19.40 18.37 DEC 17.50 0.30 *$ 0.30 7.1% PHTN 28.50 32.32 DEC 22.50 0.50 *$ 0.50 7.0% GNSS 17.17 18.40 DEC 12.50 0.30 *$ 0.30 7.0% PLMD 30.31 31.05 DEC 22.50 0.60 *$ 0.60 6.5% ESIO 24.50 22.93 DEC 17.50 0.30 *$ 0.30 6.3% KOSP 19.13 19.76 DEC 15.00 0.35 *$ 0.35 6.1% SEE 21.33 36.57 DEC 15.00 0.25 *$ 0.25 6.0% RIMM 16.58 14.73 DEC 12.50 0.30 *$ 0.30 6.0% NPSP 28.24 29.67 DEC 20.00 0.50 *$ 0.50 5.9% POSS 14.20 14.42 DEC 12.50 0.35 *$ 0.35 5.9% IGEN 38.65 42.08 DEC 30.00 0.55 *$ 0.55 5.8% ESIO 21.15 22.93 DEC 15.00 0.35 *$ 0.35 5.5% MEDI 28.07 26.21 DEC 20.00 0.30 *$ 0.30 5.5% AMZN 22.21 22.61 DEC 17.50 0.30 *$ 0.30 5.5% JEC 36.31 36.20 DEC 35.00 0.50 *$ 0.50 5.3% PPD 27.08 28.40 DEC 20.00 0.35 *$ 0.35 5.3% GP 20.62 17.10 DEC 17.50 0.45 $ 0.05 1.3% *$ = Stock price is above the sold striking price. Comments: The recent decline in the major equity averages came as little surprise with the overbought condition of stocks and no catalyst to drive prices higher. Friday's recovery rally, although at a key technical support area, should be viewed with caution until the bullish trend is firmly established. In the event of further consolidation, buying pressure should emerge near 870 (SPX) but below that range, the bear market resumes. With that (cautious) outlook in mind, investors should monitor their portfolios daily and exit any issues that have poor technical indications. Plays on the watch-list include: Research In Motion (NASDAQ:RIMM), JEC Engineering (NYSE:JEC), Blue Rhino (NASDAQ:RINO), and Neoware (NASDAQ:NWRE). Conservative traders should consider exiting the Georgia-Pacific (NYSE:GP) position on any close below the current price support near $17. 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 FAST 38.25 DEC 35.00 FQA XG 0.35 62 34.65 14 6.1% HAL 20.19 DEC 15.00 HAL XC 0.25 6087 14.75 14 12.7% IGEN 42.08 DEC 35.00 GQ XG 0.50 2149 34.50 14 10.6% NEM 26.77 DEC 25.00 NEM XE 0.35 4351 24.65 14 8.2% PHTN 32.32 DEC 27.50 PDU XY 0.50 507 27.00 14 12.6% PPD 28.40 DEC 22.50 PPD XX 0.30 2136 22.20 14 10.9% SCIO 33.72 DEC 30.00 UIO XF 0.50 339 29.50 14 10.6% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield HAL 20.19 DEC 15.00 HAL XC 0.25 6087 14.75 14 12.7% PHTN 32.32 DEC 27.50 PDU XY 0.50 507 27.00 14 12.6% PPD 28.40 DEC 22.50 PPD XX 0.30 2136 22.20 14 10.9% IGEN 42.08 DEC 35.00 GQ XG 0.50 2149 34.50 14 10.6% SCIO 33.72 DEC 30.00 UIO XF 0.50 339 29.50 14 10.6% NEM 26.77 DEC 25.00 NEM XE 0.35 4351 24.65 14 8.2% FAST 38.25 DEC 35.00 FQA XG 0.35 62 34.65 14 6.1% 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). ***** FAST - Fastenal $38.25 *** On The Rebound! *** Fastenal (NASDAQ:FAST) was founded in 1967 and the unique company has expanded to become the fastest growing full-line industrial distributor, and is the largest fastener distributor in the nation. The firm's service-oriented business network currently includes an in-house Manufacturing Division, a product Quality Assurance and Engineering Department, a strategic system of Distribution Centers in the U.S., a fleet of over 100 company-owned semi-trucks and trailers and over 1100 branch sites with locations all across the United States as well as Canada, Mexico, Puerto Rico and Singapore. Shares of FAST have rebounded in recent sessions and the bullish technical indications suggest the rally will continue. Traders can profit from future upside activity in FAST with this position. DEC 35.00 FQA XG LB=0.35 OI=62 CB=34.65 DE=14 TY=6.1% ***** HAL - Halliburton $20.19 *** 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 recently amid bullish news in the asbestos litigation arena. Sealed Air and Fresenius Medical said they had settled all current and future asbestos claims and the announcement was positive for other firms in similar circumstances. Traders can speculate on the near-term results of the ongoing asbestos litigation with this position. DEC 15.00 HAL XC LB=0.25 OI=6087 CB=14.75 DE=14 TY=12.7% ***** IGEN - IGEN International $42.08 *** Rally Mode! *** IGEN International (NASDAQ:IGEN) develops and markets products that utilize its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. ORIGEN is incorporated into instrument systems and related consumable reagents, and the company also offers assay development as well as other services used to perform analytical testing. Products based on IGEN's ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. Lots of speculation on this issue recently due in part to ongoing litigation and also a potential deal (merger/buyout?) with Roche Diagnostics, which markets products based on IGEN's ORIGEN technology. Aggressive traders can profit from future upside activity in the stock with this speculative position. DEC 35.00 GQ XG LB=0.50 OI=2149 CB=34.50 DE=14 TY=10.6% ***** NEM - Newmont Mining $26.77 *** Broad Market Hedge! *** Newmont Mining (NYSE:NEM), along with its subsidiaries, is a worldwide company engaged in the production of gold, exploration for gold and acquisition of gold properties. The company also has an interest in a copper/gold mine that commenced production in late 1999. In addition, the company produces zinc, lead and copper concentrates at its property in Western Australia. The company approved earlier this year a restructuring to facilitate the acquisitions of Normandy Mining Limited and Franco-Nevada Mining Corporation Limited, and to create a flexible corporate structure. Gold stocks climbed Friday for a fourth consecutive session to close at their highest levels in more than two months as gold futures ended the week higher by 3%. Traders who want to hedge against further selling pressure in the broader market should consider this position. DEC 25.00 NEM XE LB=0.35 OI=4351 CB=24.65 DE=14 TY=8.2% ***** PHTN - Photon $32.32 *** Just One Chip Stock! *** 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 performed very well in recent weeks but the rally has come to an end in the near-term. However, Photon Dynamics is one of the leading issues in the segment and traders who believe the upside activity in semiconductors will eventually continue can profit from that outcome with this position. DEC 27.50 PDU XY LB=0.50 OI=507 CB=27.00 DE=14 TY=12.6% ***** PPD - Pre-Paid Legal $28.40 *** More 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 recently after Thestreet.com published a report by Gotham Partners that argues a bullish case for the company. The news generated some volatile moves in the stock, as buyers and short-sellers battled for control, but that has often been the character of this unique issue. Traders who want to speculate on the future trend of the stock should consider this position. DEC 22.50 PPD XX LB=0.30 OI=2136 CB=22.20 DE=14 TY=10.9% ***** SCIO - Scios $33.72 *** New All-Time High! *** 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. Shares of SCIO closed at a new "all-time" high Friday and the bullish technical indications suggest the trend will continue in the near-term. DEC 30.00 UIO XF LB=0.50 OI=339 CB=29.50 DE=14 TY=10.6% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CREE 20.02 DEC 17.50 CVO XW 0.50 947 17.00 14 18.1% ESIO 22.93 DEC 20.00 EQO XD 0.45 1157 19.55 14 14.6% BRCM 17.61 DEC 15.00 RCQ XC 0.30 3111 14.70 14 13.8% GFI 13.08 DEC 12.50 GFI XV 0.30 900 12.20 14 13.2% AFCO 19.52 DEC 17.50 UOF XW 0.30 10 17.20 14 10.7% AMZN 22.61 DEC 20.00 ZQN XD 0.30 7305 19.70 14 9.7% BBY 26.60 DEC 22.50 BBY XX 0.30 10582 22.20 14 9.5% QCOM 41.48 DEC 37.50 AAW XU 0.50 6727 37.00 14 8.3% VZ 40.19 DEC 37.50 VZ XU 0.50 1669 37.00 14 7.8% IMCL 13.50 JAN 7.50 QCI MU 0.25 1086 7.25 42 6.1% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Key Test Approaches! By Ray Cummins The recent correction in equity values paused Friday but market bears say the fundamental and technical indications suggest a resumption in the overall downtrend. The Dow Jones Industrial Average fought back from early losses to close the session 22 points higher at 8,645. The blue-chip group found strength in Hewlett-Packard (NYSE:HPQ), J.P. Morgan Chase (NYSE:JPM) and Dupont (NYSE:DD). Technology stocks were boosted by International Business Machine's (NYSE:IBM) surprise buy-out of Rational Software (NASDAQ:RATL) and the optimism led the NASDAQ to a 11 point gain at 1,422. The broader Standard & Poor's 500 Index finished 5 points at 912 with restaurant, drug and shipping stocks among the best performers. Gold issues also rallied as futures prices vaulted to two-month highs. Market breadth was positive as advancing stocks outpaced decliners by roughly a 3-to-2 margin on the New York Stock Exchange and by a 6-to-5 ratio on the NASDAQ. Volume was 1.2 billion on the Big Board and 1.5 billion on the technology exchange. In the bond market, Treasurys rallied as the yield on the 10-year note fell to 3.99%, with prices up more than a point. Trim Tabs reported that $1.3 billion flowed out of stock mutual funds in the seven days ending Wednesday, as compared to inflows of $800 million during the previous week. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status BR 42.01 41.45 DEC 35 37 0.30 37.20 $0.30 Open EBAY 64.79 68.54 DEC 50 55 0.55 54.45 $0.55 Open IGEN 36.49 42.08 DEC 25 30 0.65 29.35 $0.65 Open SLM 102.94 100.64 DEC 85 90 0.65 89.35 $0.65 Open DE 49.00 48.55 DEC 40 45 0.65 44.35 $0.65 Open INTU 52.91 51.90 DEC 40 45 0.50 44.50 $0.50 Open LLY 62.24 65.44 DEC 50 55 0.55 54.45 $0.55 Open IGT 77.06 76.05 DEC 65 70 0.55 69.45 $0.55 Open KSS 66.90 61.88 DEC 55 60 0.55 59.45 $0.55 Open PIXR 55.67 59.22 DEC 45 50 0.50 49.50 $0.50 Open AZO 85.32 79.96 DEC 70 75 0.45 74.55 $0.45 Open FPL 59.87 57.35 DEC 50 55 0.55 54.45 $0.55 Open UOPX 36.65 36.31 DEC 30 33 0.45 33.30 $0.45 Open ABK 62.51 59.60 DEC 50 55 0.40 54.60 $0.40 Open AGN 58.79 57.99 DEC 50 55 0.55 54.45 $0.55 Open RE 57.90 55.74 DEC 50 55 0.55 54.45 $0.55 Open Kohls' (NYSE:KSS) is the new issue on the watch-list and a close below the sold strike at $60 will signal our exit in the spread. Everest RE Group (NYSE:RE) has also lost its upward momentum and a key test awaits the issue as it approaches recent support near the sold strike at $55. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status ABC 72.45 62.31 DEC 85 80 0.65 80.65 $0.65 Open MCO 45.12 43.91 DEC 55 50 0.40 50.40 $0.40 Open WLP 74.04 69.05 DEC 90 85 0.60 85.60 $0.60 Open UNH 86.83 83.35 DEC 105 100 0.55 100.55 $0.55 Open DNA 35.46 34.15 DEC 45 40 0.60 40.60 $0.60 Open DP 40.40 35.18 DEC 50 45 0.40 45.40 $0.40 Open LXK 63.75 65.52 DEC 75 70 0.60 70.60 $0.60 Open IDPH 39.27 32.61 DEC 45 40 0.45 40.45 $0.45 Open UHS 44.85 45.65 DEC 55 50 0.30 50.30 $0.30 Open AAP 51.55 50.75 DEC 60 55 0.50 55.50 $0.50 Open ACDO 35.19 35.93 DEC 43 40 0.35 40.35 $0.35 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) remains 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 NXTL 9.69 12.90 JAN 12 7 0.10 2.50 2.60 Closed FCS 13.30 12.23 FEB 17 10 0.10 1.40 1.50 Closed LTXX 6.83 6.99 FEB 10 5 0.00 1.10 1.10 Closed MENT 10.35 8.55 JAN 12 7 0.10 1.00 1.10 Closed FLEX 11.15 10.08 JAN 12 10 0.10 0.50 0.60 Closed ABT 45.89 42.94 DEC 50 40 0.10 0.00 0.10 Open COX 30.25 29.89 DEC 35 25 0.10 0.20 0.30 Open OMC 66.32 67.90 DEC 75 55 0.15 0.30 0.45 Open SCIO 32.84 33.72 JAN 40 25 0.00 0.25 0.25 Open CY 8.64 7.00 JAN 10 7 0.10 0.10 0.20 Open? ZRAN 18.80 21.53 DEC 22 15 (0.25) 2.00 1.75 No Play All of the speculative small-cap positions were closed this week as the market retreated from its recent rally. The position in Nextel (NASDAQ:NXTL) was the best performer, however FCS, LTXX, MENT and FLEX also offered favorable profits. The bullish play in ZRAN, although not available at our target price, achieved an excellent gain. The new positions were a mixed lot as Cypress Semiconductor (NYSE:CY) faded with the technology stocks while Scios (NASDAQ:SCIO) enjoyed a small profit during Friday's rally in the drug sector. CALENDAR SPREADS **************** Symbol Pick Last Long-Opt Short-Opt Debit M/V Status HNT 25.75 26.50 JAN-30C DEC-30C 0.60 0.60 Open WSM 24.53 27.93 FEB-30C DEC-30C 0.80 1.35 Open GISX 20.21 19.08 FEB-22C DEC-22C 0.95 0.75 Open UAL 3.59 0.93 FEB-5C DEC-5C 0.35 0.25 Closed After a brief rally early in the week, United Airlines (NYSE:UAL) fell to all-time lows near $1 after the government decided not to bail out the #2 U.S. carrier. United is now preparing to operate in bankruptcy and it looks like the company's stock will soon be worthless. The only consolation comes from one reader who said he used Monday's rally to close the speculative spread for a small ($0.05) gain. Unfortunately, our exit was not as fortuitous. On the positive side, Williams Sonoma (NYSE:WSM) has been a great performer and the position offered up to a $1.35 closing credit this week; a potential profit of over 65% in only 14 days. SHORT-PUT COMBOS **************** Symbol Pick Last Short-Opt Long-Opt Credit G/L Status AES 2.92 2.59 J04-7.5P J03-2.5P 4.50 0.25 Open IMCL 7.77 13.50 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. AES Corporation (NYSE:AES) has finally begun to rebound with the issue closing near a recent resistance area (above $3) on Thursday. Stocks in the utility industry should continue to recover in the coming months so we will remain in the position unless the trend turns bearish. CREDIT STRANGLES **************** Symbol Pick Last Month S/C S/P Credit C/V G/L Status ERTS 64.13 66.02 DEC 70 55 2.40 0.85 1.55 Open SLAB 25.16 21.90 DEC 30 20 1.00 1.10 (0.10) Open MDCO 12.70 16.78 DEC 17 7 1.25 0.45 0.80 No Play Silicon Laboratories (NASDAQ:SLAB) has been very active with the technology group and after a vigorous rally to the sold call at $30, the issue has retreated to a recent low near $21. Traders said the sell-off was due to two major brokerage downgrades, thus it will be interesting to see if the issue can remain above buying support at $20. Those who don't want to own SLAB at a cost basis near $19 should exit the play now at a break-even or better debit. The Medicine Company (NASDAQ:MDCO) position, although profitable, was not initiated due to a significant "pre-open" announcement on 11/18/02. Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** 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. ***** APC - Anadarko Petroleum $49.59 *** Bullish Sector! *** Anadarko Petroleum (NYSE:APC), through RME Petroleum Company, RME Holding Company, Anadarko Canada Energy, Anadarko Canada Corporation, RME Land and Anadarko Algeria Company, is a global independent oil and gas exploration and production company. The The company's major areas of operations are located in the United States, primarily in Texas, Louisiana, the mid-continent region and the western states, Alaska and in the shallow and deep waters of the Gulf of Mexico, as well as in Canada and Algeria. APC is also active in Venezuela, Qatar, Oman, Egypt, Australia, Tunisia, Congo and Gabon. PLAY (conservative - bullish/credit spread): BUY PUT JAN-40 APC-MH OI=2419 A=$0.40 SELL PUT JAN-45 APC-MI OI=1185 B=$0.90 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(monthly)=12% B/E=$44.45 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=81% ***** VLO - Valero Energy $36.39 *** On The Rebound! *** Valero Energy Corporation (NYSE:VLO) is a United States refining company that operates in two business segments: refining and retail. Valero's refining segment includes refinery, wholesale marketing, product supply and distribution, and transportation operations. The refining segment is segregated geographically into the Gulf Coast, Mid-Continent, West Coast and Northeast regions. Valero's retail segment includes their company-operated convenience stores, Canadian dealers, truck stops, card-lock and home heating oil operations. Valero also has a logistics system that complements its refining and marketing assets in the United States Gulf Coast and Mid-Continent regions. PLAY (conservative - bullish/credit spread): BUY PUT JAN-30.00 VLO-MF OI=580 A=$0.50 SELL PUT JAN-32.50 VLO-MZ OI=303 B=$0.75 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$32.20 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=75% ***** JCI - Johnson Controls $81.79 *** Trading Range? *** Johnson Controls (NYSE:JCI) is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems, and batteries. For non-residential facilities, JCI provides building control systems and services, energy management and integrated facility management. Johnson Controls conducts business in two operating segments: Controls Group and Automotive Systems Group. The Controls Group is a worldwide supplier of control systems, services and integrated facility management to the commercial buildings market. The Automotive Systems Group makes automotive interior systems for original equipment manufacturers (OEMS) and automotive batteries for the replacement and original equipment markets. PLAY (moderately aggressive - bearish/credit spread): BUY CALL DEC-90 JCI-LR OI=78 A=$0.20 SELL CALL DEC-85 JCI-LQ OI=450 B=$0.65 INITIAL NET CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$85.50 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=74% ***** LEH - Lehman Brothers $56.72 *** Sector Slump! *** Lehman Brothers Holdings (NYSE:LEH) is a global investment bank serving institutional, corporate, government and high-net-worth individual clients and customers. The firm is engaged primarily in providing financial services and operates in three business segments: Investment Banking, Capital Markets and Client Services. Other businesses in which the firm is engaged represent less than 10% of consolidated assets, revenues or pre-tax income. Lehman's business includes capital raising for clients through securities underwriting and direct placements, corporate finance and other strategic advisory services, private equity investments, stock sales and trading, research and the trading of foreign exchange and derivative products and certain commodities. The firm acts as a market-maker in all major equity and fixed-income products in both the domestic and international markets. PLAY (aggressive - bearish/credit spread): BUY CALL DEC-65 LEH-LM OI=3732 A=$0.15 SELL CALL DEC-60 LEH-LL OI=3801 B=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$60.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=74% ******************* 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. ***** GG - Goldcorp $11.15 *** Market Slump = Gold Rally! *** Goldcorp (NYSE:GG) is a North American-based gold producer with a high grade mine in Red Lake, Northwestern Ontario, Canada and its Wharf Mine in the historic Lead Mining area in the Black Hills of South Dakota, United States. In addition, the company owns an industrial minerals operation in Saskatchewan, Canada. Goldcorp's newest mine at Red Lake, located in northwestern Ontario, began commercial production last year and high grade reserves are now estimated to be in excess of three million ounces. The Wharf Mine in the Black Hills of South Dakota produces approximately 100,000 ounces of gold annually and has produced over 1.2 million ounces since 1983. Another subsidiary, Saskatchewan Minerals is a North American producer of high-quality natural sodium sulfate. PLAY (very speculative - bullish/synthetic position): BUY CALL JAN-12.50 GG-AV OI=7541 A=$0.45 SELL PUT JAN-10.00 GG-MB OI=2014 B=$0.45 INITIAL NET CREDIT TARGET=$0.10-$0.15 TARGET PROFIT=$0.40-$0.65 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $380 per contract. ***** PXD - Pioneer Natural Resources $26.11 *** Hot Sector! *** Pioneer Natural Resources Company (NYSE:PXD) is an oil and gas exploration and production company with ownership interests in oil and gas properties located in the United States, Argentina, Canada, Gabon, South Africa and Tunisia. The company is an independent oil and gas exploration and development firm. PXD explores for, develops and produces oil, natural gas liquids, and gas reserves. The company's asset base is anchored by the Spraberry oil field, located in West Texas; the Hugoton gas field, located in Southwest Kansas and the West Panhandle; and a gas field located in the Texas Panhandle. Complementing these areas, the company has exploration and development opportunities and oil and gas production activities in the United States Gulf of Mexico and onshore Gulf Coast areas, and internationally in Argentina, Canada, Gabon, South Africa and Tunisia. PLAY (conservative - bullish/synthetic position): BUY CALL MAR-30.00 PXD-CF OI=180 A=$0.95 SELL PUT MAR-22.50 PXD-OX OI=52 B=$0.90 INITIAL NET CREDIT TARGET=$0.05-$0.10 TARGET PROFIT=$0.50-$0.90 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $775 per contract. *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** GENZ - Genzyme General $34.43 *** Reader's Request! *** Genzyme General Division (NASDAQ:GENZ) is a division of Genzyme Corporation, a biotechnology and human healthcare company that develops products and provides services for unmet medical needs. Genzyme General develops and markets therapeutic products and diagnostic products and services with an emphasis on genetic disorders and other chronic debilitating diseases with defined patient populations. The firm is organized into two segments, Therapeutics, which focuses on developing and marketing products for genetic diseases and other chronic debilitating diseases, including a family of unique diseases known as lysosomal storage disorders, and specialty therapeutics, and Diagnostic Products, which develops, markets and distributes in-vitro diagnostic products. Genzyme's new drug, Fabrazyme is up for review by the Food and Drug Administration review on January 13, 2003. One of our readers suggested we offer some speculative straddles, to take advantage of the recent drop in implied volatility. All of the (straddle) candidates in today's section have relatively cheap option premiums, a history of adequate price movement and the potential for volatility in the near future. PLAY (speculative - neutral/debit straddle): BUY CALL JAN-35.00 GZQ-AG OI=3776 A=$2.90 BUY PUT JAN-35.00 GZQ-MG OI=3024 A=$3.50 INITIAL NET-DEBIT TARGET=$6.25-$6.35 INITIAL PROFIT TARGET=$1.50-$2.40 (25-40%) ****************************************************************** XLNX - Xilinx $22.06 *** Chip Sector Volatility! *** Xilinx (NASDAQ:XLNX) designs, develops and markets a wide range of complete programmable logic solutions, including advanced integrated circuits, software design tools, predefined system functions delivered as intellectual property cores, design services, customer training, field engineering and technical support. The programmable logic devices include various field programmable gate arrays and complex programmable logic devices. These devices are standard products that its customers program to perform desired logic functions. Its products are designed to provide high integration and quick time-to-market for those electronic equipment manufacturers primarily in the telecom, networking, computing, industrial and consumer markets. PLAY (very speculative - neutral/debit straddle): BUY CALL DEC-22.50 XLU-LX OI=7898 A=$1.00 BUY PUT DEC-22.50 XLU-XX OI=5228 A=$1.45 INITIAL NET-DEBIT TARGET=$2.30-$2.40 INITIAL PROFIT TARGET=$0.35-$0.60 (15-25%) ****************************************************************** L - Liberty Media $9.95 *** Cheap Speculation! *** Liberty Media Corporation (NYSE:L) is a holding company with a variety of subsidiaries and investments operating in the media, communications and entertainment industries. The company owns interests in a variety of video programming and communications businesses in the United States, Europe, South America and Asia. Liberty Media's principal assets include major interests in the Starz Encore Group LLC, Liberty Livewire Corporation, On Command Corporation, Discovery Communications, AOL Time Warner, QVC, USA Networks, Telewest Communications, Motorola, Sprint PCS and The News Corporation Limited. The firm has five operating segments: Starz Encore Group, Liberty Livewire, On Command, Telewest and Other. Liberty Media was previously a wholly owned subsidiary of AT&T. PLAY (speculative - neutral/debit straddle): BUY CALL JAN-10.00 L-AB OI=27386 A=$0.75 BUY PUT JAN-10.00 L-MB OI=4326 A=$0.75 INITIAL NET-DEBIT TARGET=$1.35-1.45 INITIAL PROFIT TARGET=$0.35-$0.55 (25%-40%) ****************************************************************** MEDI - MedImmune $26.21 *** More Premium Selling! *** MedImmune (NASDAQ:MEDI) is a biotechnology company with 5 major products on the market and a diverse product pipeline. MedImmune is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in the areas of infectious disease and also immune regulation. The company focuses on oncology through its wholly owned subsidiary, MedImmune Oncology. In addition, the company owns Aviron, a biotech firm focused on the prevention of disease through vaccine technology. MediImmune and Wyeth are trying to win approval for a new nasal spray flu vaccine (FluMist) and a Food and Drug Administration advisory panel is scheduled to review the product on December 17. Our plan is to close this position (hopefully for a small profit) prior to that date. PLAY (very aggressive - neutral/credit strangle): SELL CALL DEC-30 MEQ-LF OI=16776 B=$0.85 SELL PUT DEC-20 MEQ-XD OI=11715 B=$0.75 INITIAL NET-CREDIT TARGET=$1.60-$1.75 PROFIT(max)=23% UPSIDE B/E=$31.60 DOWNSIDE B/E=$18.40 ***** ************************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 ************************************************************** ************ MARKET WATCH ************ Back In Between To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_120802.asp ************** MARKET POSTURE ************** Ready To Bounce? 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