The Option Investor Newsletter Sunday 12-15-2002 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: Buyers Strike Futures Market: Seeking Support Index Trader Wrap: NO BULL FOR THE NEW YEAR Editor’s Plays: Nasdaq-100 Shuffle Market Sentiment: What Good News? Ask the Analyst: Buy/Sell Program Premium Levels Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Next Leg Down Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 12-15 WE 12-06 WE 11-29 WE 11-22 DOW 8433.85 -211.92 8645.77 -250.32 8896.09 + 91.25 +226.75 Nasdaq 1362.42 - 60.02 1422.44 - 56.30 1478.74 + 10.05 + 57.60 S&P-100 451.81 - 12.61 464.42 - 14.43 478.85 + 3.82 + 11.31 S&P-500 889.48 - 22.75 912.23 - 24.08 936.31 + 5.76 + 20.72 W5000 8426.26 -202.90 8629.16 -217.52 8846.68 + 63.55 +199.08 RUT 387.98 - 8.74 396.72 - 9.64 406.36 + 6.36 + 14.08 TRAN 2318.47 - 70.34 2388.81 + 28.19 2360.62 + 46.64 - 19.12 VIX 32.12 - 0.56 32.68 + 1.60 31.08 + 4.35 - 4.10 VXN 50.92 - 1.36 52.28 + 2.80 49.48 + 2.00 - 3.19 TRIN 1.34 1.11 1.04 1.05 Put/Call 0.87 0.91 0.62 0.70 ****************************************************************** Buyers Strike by Jim Brown Worries over global problems weighed on the markets on Friday and lack of volume suggested more of a buyers strike than a rush to sell. A continued sell off in overseas markets and a weak dollar combined to knock the markets back to near key support levels at Friday's open. Dow Chart – Daily Nasdaq Chart – Daily The morning began with several shocks. The PPI fell by -0.4% when analysts had expected it to be flat. This was the largest drop since May and indicates that inflation is nowhere in sight. Also deflationary pressures appear to be abating as well. Core intermediate and crude prices are rising slightly. Unless the core prices begin to fall it indicates manufacturing is holding steady. The current glut in global capacity is slowly being absorbed into the outlook for 2003. Business inventories also rose slightly for the sixth consecutive month but not enough to change the current trend. The +0.2% growth was slightly less than the growth in sales at +0.4% and left the inventory-to-sales ratio at 1.36. Most of the gain was due to a buildup in retail inventories for the holidays. The low I-T-S ratio will help produce a stronger rebound when the recovery eventually occurs. There will be a rush to restock once demand exceeds the current maintenance levels. The University of Michigan Consumer Sentiment bounced +2.8 points to 87.0 in early December and while more than expected it did not paint a picture of a bullish consumer hitting the malls. This was the second monthly gain from the October low of 80.6 but the rate of increase is less than exciting. The gains in the market from the October lows have been evaporating and with them the bounce in bullish sentiment. With unemployment rising and credit becoming harder to get the lower interest rates are becoming less of a stimulus for the economy and for consumers. This bounce is another step in the right direction but at a snail's pace compared to what economists would like to see. Global problems included a -192 point slide in Tokyo adding to the eight day drop so far in December. Continued rumblings about Iraq continue to point to an imminent war. One source said only 300 pages of the 12,000 page disclosure was new with the rest being left over from the last inspection effort. According to the U.S. there are massive omissions and according to inspectors most of the Iraq scientists are missing. Traders know where this is headed. In South America the riots in Venezuela are increasing and oil output is on the verge of a complete stoppage. President Bush called on Hugo Chavez to hold early elections to resolve the current civil problems. Since elections are likely to replace Chavez I would not hold my breath for that to happen soon. Oil futures closed near $28 and a two month high. If a civil war breaks out in Venezuela there are fears that unrest could spread to other neighboring countries with additional financial risk to U.S. companies. The holiday shopping season is running into further snags as shoppers accelerate their last minute buying. There are reports of lack of inventory on store shelves and selection deteriorating. It appears many retailers were not very confident about ordering for this holiday season and were worried about getting stuck with excess inventory. They ordered less and are now suffering from lack of sales. While this is a problem for shoppers it is going to be a bigger problem for retailers when profits come in below estimates. One spot check on Amazon showed a drought in popcorn poppers with only three models in inventory on Friday, down from a dozen models just a week before. On the flip side are the retailers that did order too much and are now frantically trying to blow out slow inventory at fire sale prices well before the last minute. Omaha Steaks for instance sent out a mass email Friday offering their popular $52.95 top sirloin package at 50% off and get 12 quarter pound burgers free. A visit to the webpage for this offer showed many other 50% off products. This may have been their planned strategy from the start to capture last minute shoppers but a quick walk through the malls shows the same markdowns. I strolled through a Kohl's on Wednesday night and carts of marked down merchandise filled the isles. This was good since a quick count showed less than 40 customers in the entire store. There were no customers in line and three checkers sitting idly by waiting for someone to help. These two paragraphs may seem like a conflict of events but I think it shows the hit or miss buying patterns of consumers this holiday. The high demand items are quickly disappearing due to low inventory levels while the mass merchandise categories are not seeing mass buying. Wal-Mart, with full parking lots, hit a new two-month low on Friday while Sears is actually showing strength. I attribute this strength to the Lands End business Sears acquired and which appears to be performing well online this season. Reports from UPS drivers claim Lands End packages are running a close second to Amazon in numbers. I suggested Sears as an investment buy in the Market Monitor earlier this week. Another challenge for this holiday season was a profit warning from TSG on Friday. Sabre Holdings, TSG, includes Travelocity.com and they are a major booker of holiday travel. They said demand continued to be weak and they were cutting the 4Q and full year estimates. They said dropping capacity and lack of travelers would continue to haunt the industry well into 2003. The fear of another terrorist attack as well as lack of business travel is making the travel business very difficult. In the same sector the UAL bankruptcy is sending ripples through the economy in ways many had not expected. Since most planes are purchased by investors and corporations and then leased to the airlines the bankruptcy allows UAL to cancel those leases. UAL has already cancelled over 100 planes and considering the depressed airline sector those planes are now worth far less to investors than they were just a year ago. Several companies have already warned that earnings will be impacted by lack of revenue from prior leases. Some companies with heavy exposure to airline leases include GE, BA, F, MO and DIS. Those companies must now remarket or resell the planes in an economy where parking spaces for out of service aircraft is already at a premium. Not only can they not resell them but there is no place to park them while trying. If UAL can lower costs by dumping hundreds of plane and gate contracts then others may have to file to achieve the same benefits. This chain reaction could reach all the way to American Airlines. US Air has already rejected 75 leases and has permission to abandon another 125. This gives you some indications of how serious the UAL lease abandonment could be. The chip sector took another hit on Friday as Intel and AMD were rated at "underweight" by JPM. They said the company is under pressure from slowing growth of PC sales. They said slowing growth and over capacity remains a problem and the estimated 2003 growth of only +2% to +4% is still questionable. Adding to the chip slump was a warning from CRUS that revenue would be down due to both lower sales and cancelled orders. Cirrus makes chips for consumer electronics gear like audio and video products. They said a wide range of manufacturers had cancelled orders for chips to make these products. ZRAN, another maker of these chips fell as well. It has been a rough two years for chipmakers and the Nasdaq-100 rebalancing on Monday Dec-23rd proves it. These 15 companies will be dropped from the Nasdaq. AMCC, ATML, CHTR, CNXT, IDTI, PMCS, VTSS, ABGX, ADRX, CYTC, IMCL, ITWO, PDLI, RATL, SEPR. Half of them are chip stocks. All of them are previous high flyers and sold for many times their current values. While I am at it the 15 stocks being added to the Nasdaq-100 are: EXPD, ROST, XRAY, LAMR, WFMI, FHCC, PETM, PIXR, FAST, APCC, CHRW, PTEN, GNTX, HSIC and RYAAY. The Nasdaq-100 is supposed to represent the 100 largest non-financial stocks on the Nasdaq stock market. The rebalancing occurs in December each year and is timed to coincide with the triple witch expiration Friday. Got your smallpox vaccination yet? Of course you don't but the airwaves have been full of the news that we could be at risk from terrorists using the disease sometime in the future. Considering the risk from actually receiving the vaccination the government is taking the threat seriously. Still the market appears to have already contracted it just from the repeated mention in the news. You can say what you want about earnings, oil and riots but when you start adding in news about bio-terrorism and rogue nations trying to acquire nuclear weapons somebody is bound to start thinking about investing for safety. That appears to be what is happening. Gold is hitting new five-year highs, treasuries are up, utilities are up and money market funds saw an influx of $10 billion in new cash last week. The Fed is watching this economic plight and trying to float the markets on an ocean of cash. M2, the indicator of the nations money supply soared by +$142 billion last week. Interest rates are low and can't get much lower but the Fed is determined to keep this boat afloat if it has to buy new presses to print money faster. Inflation may not be a problem now but stick around a couple years. The long-term fundamentals, say for December 2003, are excellent but the outlook for the next 60 days is still rocky. By most estimates there is between $6 and $7.5 trillion in idle cash waiting on the sidelines earning minimal interest. This money will eventually find its way into the markets. There are tax cuts on the horizon and the Fed is hooked on speed. Bears have a very limited life expectancy at this point. Last Sunday I said I expected a small bounce and then another dip with 8350 as eventual support before the holidays. The bounce was weak and the dip did not quite reach 8350. Monday's open could finish that dip. Despite all the negative views I expressed above I think most of them are already priced into the market. We know we are going to attack Iraq next year. We know there will be a recovery in the PC sector eventually. Remember the much-anticipated second half recovery of 2002? Well that has now slipped slightly, by about twelve months. This lack of recovery means the markets rallied off the October lows a little prematurely and we have to tread water until the recovery catches up with the markets. We can still have a holiday rally but there are still some challenges ahead. If we are going to see Santa then we should see a change in the markets early in the week. I would not be surprised to see one last attempt to test solid support at 8350-8400 on Monday and then sideways to up from there. The 50 and 100 DMA are at 8408 and should blunt any drop attempt. I would be a buyer of the market at Dow 8425 with a stop loss at 8250. This would be to capture any end of year rally and I would sell on weakness after Dec-26th. Think of it as returning unwanted presents to spend the money on sale items later. The long awaited end of year renewal special begins this weekend and there is wealth of bonuses for readers who elect to lock in their subscription at the current rate. We will be raising the rates on Feb-1st so don't delay. Enter Very Passively, Exit Very Aggressively! Jim Brown "I'd be a bum on the street with a tin cup if the markets were always efficient." - Warren Buffett ********************** Annual Renewal Special ********************** The annual special this year is far too large to put into an email. The highlights include two option expiration mousepads to which we have added the FOMC meeting dates this year. There are also two videos with Jim, Jeff and Buzz and seven books by leading market professionals like John Murphy and and Jim Rodgers. We even brought back the Trading Strategies CD from last year for all the new subscribers who have been asking for it. Click here for the full details: https://secure.sungrp.com/03renewal/#m ************** FUTURES MARKET ************** Seeking Support By John Seckinger jseckinger@OptionInvestor.com One of these futures contracts (ES, NQ, or YM) closed on Friday on a solid support level. If support does in fact hold, will the other two contracts be pulled higher? They just might. Friday, December 13th at 4:15 P.M. Contract Net Change High Low Volume ES03H 886.50 -14.50 902.75 885.75 465,340 YM03H 8400.00 -125.00 8515.00 8382.00 15,429 NQ03H 1010.50 -34.00 1045.00 1009.50 191,749 ES03H = E-mini SP500 futures YM03H = E-mini Dow $5 futures NQ03H = 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. The December Contract is set to expire on December 20th. Volume has picked up dramatically in the 03H contracts, and all contracts will now be quoted in March. Fundamental News: Not even a better-than-expected Michigan Sentiment report (87.0 versus the estimates of 85.0) could help equities on Friday. Before the equity markets opened, economists did seem surprised by the Producer Price Index falling 0.4% in November after October’s rise of 1.1%. Most estimates revolved around an unchanged figure. Also weighing on the markets was JP Morgan noting that the end markets within computing, wireline, and wireless communication should remain depressed through the first quarter. Further negatives included a WSJ article implying that retailers planned too conservatively for the holiday shopping season, as well as a rumor that EBAY might be mentioned in a negative article in Barron’s due to possible accounting irregularities. Looking globally, a Venezuelan strike aimed at ousting President Chavez seemed to be responsible for a spike in oil prices. Technical News: The dollar imploded against the euro and yen on Friday, falling overall to 103.98 and hitting levels not seen since July 30th. The 52-week low for the DX00Y contract comes in at 103.54, seen on July 17th. Before July, the Dollar had not traded as low as 104 since February 2000. Looking elsewhere, the XAU index accelerated upward to 77.46 on Friday (closed at 77.11) and took out the last relative high at 77.34 during mid-September on an intra-day basis. Double top? If the XAU does go higher, more resistance is felt just above 81. Interesting enough, the 30-year bond fell ’28 ticks to 110’01 as equities came under pressure. Inflationary worries? Stagflation? Note: Bonds, the dollar, and stocks all moving lower definitely brings back memories of ’87. ================================================================= The December Mini-sized Dow Contract (YM03H) When I look at a chart of the Dow, I think of the quote “broke, but not broken.” I certainly expected more selling pressure under 8470; however, the market did not completely disappoint as selling took over during the last few hours of trading. If short, look for a rally to be firmly capped at the 50 DMA (exp) near 8517. Ideally for shorts, the Dow never rises above 8470. Looking downward, there certainly is support at 8400 and the 38.2% retracement at 8338. So, if flat, how do you play the market going forward? Responsively. Look for bids just underneath 8400,while expect selling if a move towards 8517 develops. Chart of Dow Jones, Daily A chart of the YM03H contract shows the contract in the middle of a regression channel; however, the pivot is calculated to be a few points higher at 8432. Notice how the 22 PMA is “poised” (read: did not yet) to cross under the 200 DMA, a bearish sign. It is not uncommon for shorts to trade based off a projected cross, but looking at other oscillators (MACD and RSI) shows the potential for a near-term bounce. With the Dow now falling for two weeks and all attempted rallies over the last few weeks sold into, there is no reason to fight the trend. With that said, look for resistance at 8482 and 8565 within the YM contract. Only a close above 8565 would have me thinking slightly bullish (would depend if Dow would be over 8625 – based on current arbitrage, Dow would be slightly under this level). Chart of YM03H, 60-minute YM03H Support Resistance Pivot 8349 8482 8432 8299 8565 869.0 8625 8725 Bold signifies levels based on Pivot Analysis. The December E-mini Nasdaq 100 Contract (NQ03H) When the open as the high and the close as the low, finding bullish things to say about the NDX becomes difficult. Institutions were most likely selling early and often. Will support be found at the 1000 area? Pivotal analysis thinks so, as support is calculated to come in at 998.33. Does this match up with other analysis? Except for a high back during the week of November 21st, this area appears to have more of a psychological meaning than anything else. If the 998.33 area is broken, I would get nervous (if short) if the NDX rose back above 1000. The intermediate objective remains at 973-975 area, but bids should be found near 986.17 along the way. What about if the market bids? Ideally for shorts the NDX does not rise above 1018 area until the 50% retracement area is hit. The 50 DMA is currently at 1020, but should slope down near 1018 during trading over the next few days. A close above the 50 DMA would definitely take sentiment towards more neutral levels. Chart of NDX, Daily The NQ03H contract formed another “b” liquidation pattern within a five-minute chart during trading on Friday. Notice how the contract failed to hit its objective of 1030 after retracing more than 50% of the day’s range (not including night session). In theory, after retracing more than 50% of a day’s range, the contract should come back to the 9:30 opening level before testing the 50% again. If the 50% area (1021) is penetrated and the contract comes back to 1021 before hitting 1030, look for more selling to take place as a failure has just occurred. This is a common practice by market makers, and does have a nice probability of success. Also, the apex on Friday came in at 1017 and shorts most likely got more aggressive once that area was taken out. These patterns occur quite frequently on all timeframes, so please look for them. Chart of NQ03H, 5-minute NQ03H Support Resistance Pivot 998.33 1018.00 1021.66 986.17 1033.82 973.00 1057.15 Bold signifies levels based on Pivot Analysis (Globex included). The December E-mini S&P 500 Contract (ES03H) The SPX contract, more than the other two, certainly looks as though support could be found at certain levels. An upward trend line (blue) bisects the falling trend line (green) and matches the low seen during trading on Friday. If support is found at current levels, look for a move to 897.57 and coming close to testing its 50 DMA (not 200) as seen below. If these trend lines fail to act as support, support should be found from 880-883 and the SPX contract will then use these lines as resistance. The downside objective comes in at 875. Since trade on Monday should be based solely on these aforementioned trend lines, execution will become even more important. Remember, if other oscillators look bullish, expect a bounce at 883 and then look to sell against these trend lines as they should turn into resistance. Note: I will be looking for the SPX contract as pivotal towards both the YM and NQ during trading on Monday. Chart of S&P 500 Index, 120-minute The ES03H contract also performed a “b” long liquidation pattern, but, unlike the NQ03H contract, the upside objective was hit. Notice that the ES contract rose above the 50% retracement and then hit 897 before coming back and testing the 50% area. Then, once the contract softened, the 50% acted slightly pivotal but couldn’t control the late day sell programs. Once the 891 apex area was broken, traders witnessed a nice failure into the close. According to my “open to close” article, (http://www.OptionInvestor.com/traderscorner/tc_100802_2.asp) there will normally be resistance at the day’s opening level (not including globex) if the market initially falls and then acts as a responsive market. In my opinion, it is more difficult than it looks; nevertheless, recognizing short-term patterns within these futures contracts can make all the difference. Chart of ES03H, 10-minute ES03H Support Resistance Pivot 880.58 897.57 891.66 874.67 908.65 869.0 910-915 Bold signifies levels based on Pivot Analysis (Globex included). Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** NO BULL FOR THE NEW YEAR By Leigh Stevens lstevens@OptionInvestor.com BOTTOM LINE – A bullish case has not been demonstrated given the failure of the S&P to take out its prior high (leaving a double top formation), the failure of the (Nasdaq) Composite to find support at its prior peak and the break of layers of technical support last week. As well, I will highlight the lower objectives than I’ve had previously given the formation of bear flag patterns on the charts and the fact that gold is poised for a multiyear breakout – if the financial assets can’t beat the gold uncertainty hedge, then this is telling us that Santa Claus may be bringing coal to investors’ stockings instead of a hoped for year-end rally. TRADING ACTIVITY – On Friday, the indices ended another week down, making two in a row – the main pockets of strength were defensive in nature, namely utilities and gold. More on gold further on. The Nasdaq Composite (COMPX) which had been leading the market higher, closed down on the week by nearly 60 points; the S&P 500 (SPX) was off 23 points and the Dow down by 212 points. Coming into Friday, the main bearish news was the dollar’s sharp decline against the Euro and the Yen and a spike in oil prices driven by OPEC’s move to cut quotas and the increasingly nasty Venezuelan general strike which has managed to shut down most oil production there – the U.S. imports a significant amount of crude from this southern neighbor. The market got a bit of a boast from the better than expected U. of M. Sentiment report – at 87, versus a consensus 85 – but not enough to offset other bearish influences. In particular, weak biotech sector and tech sectors in general lead by the semiconductor group. JP Morgan and Deutsche Securities can take the blame by calling it as they see it in chip land – they came out with some bearish ratings on stocks in this sector. In the blue chip stocks, weakness was seen in financial, transportation, drug and retail stocks. The Wall Street Journal ran an article that suggested that retailers planned too conservatively for the holiday season and that some of their hottest items were selling out – if they had been aggressive and consumers were in a lukewarm buying mood no doubt they (the retail companies) would have been lambasted for this! NEWS FROM TECHLAND – As you probably knew, the Nasdaq 100 (NDX) index is going to have 15 new component stocks and NONE of them (sign of the times?) represent high tech businesses. Issues going in: Expeditors International of Washington (EXPD); Ross Stores (ROST) Dentsply International Inc. (XRAY); Lamar Advertising (LAMR); Whole Foods Market (my favorite story) (WFMI); First Health Group (PETM); PetsMart (PETM); Pixar (PIXR); Fastenal (FAST); American Power Conversion (APCC); C.H. Robinson Worldwide (CHRW); Patterson-UTI Energy (PTEN); Gentex (GNTX); Henry Schein (HSIC); Ryanair Holdings (RYAAY). American Power Conversion, Fastenal, First Health Group, Petsmart and Ross Stores rejoin the Nas 100. Of course, the biggest share of the NDX which is capitalization weighted, remains Microsoft, Cisco Systems and Oracle. Technology related companies still make up about 2/3rds of the NDX. Companies being removed from the Nasdaq 100 index are: Abgenix (ABGX); Andrx Group (ADRX); Applied Micro Circuits (AMCC); Atmel (ATML); Charter Communications (CHTR); Conexant (CNXT); Cytyc (CYTC); Integrated Device Technology (IDTI); ImClone Systems (IMCL); 12 Technologies (ITWO); Protein Design Labs (PDLI); PMC-Sierra (PMCS); Rational Software (RATL); Sepracor (SEPR) and Vitesse Semiconductor (VTSS). Shares of each company being removed are included in the Nasdaq 100 tracking stock (QQQ) and the stock was also adjusted. Adjustment day was Friday and some of the drop in the Nasdaq was attributed to the portfolio rebalancing that was going on. A lot of change and all at once, considering that in all of 2001 only 13 stocks were added to the Nasdaq 100 – of course, the index was not down 33% for the year either. NEXT WEEK’S MARKET MOVING EVENTS – The week ahead is the last full week of trading before a couple of holiday shortened ones. If the market doesn’t rally, the Dow will have the lowest yearly close since ’97. Considering that money managers are winding down their activities I can’t see where a lift is going to come from. We will see some earnings coming in next week, such as from brokers Morgan Stanley (MWD) and Goldman (GS), retailer Best Buy (BBY), Micron Technology (MU), Nike (NKE), FedEx (FDX), and General Mills (GIS) – enough earnings news to perhaps provide some direction. Economic data includes November leading indicators, updates on GDP and Industrial Production and November housing starts. GOLD IN THEM THAR HILLS? - Gold stocks continued to outperform the market as this sector rose in conjunction with gold prices, which was buoyed by the weaker dollar (gold in typically priced in dollar terms), weakness in equities and flight to safety concerns – hey, I don’t see Iraq coming clean either! GOLD’S LONGER-TERM TECHNICAL OUTLOOK – Gold is an important harbinger of financial trends and tends to move inversely (opposite) to financial assets like bonds and stocks. Thom Calandra, at CBS Marketwatch has been highlighting in past months the viewpoints of the gold bulls, who see trouble ahead for the U.S. Stock and Bond markets in general, but a safe haven in gold with a related substantial further upside potential for gold stocks and bullion. To add my technical viewpoint, I looked at the longer term gold chart picture in various ways. The nearest-futures contract chart (monthly & weekly), which is “backward adjusted” to take out the effects of the interest rate “carrying” charge in order to give a truer picture of the actual price swings in the bullion, is shown below - Gold bullion prices have come up to long-term resistance as implied by a long-term monthly down trendline (see upper chart). However, the yellow metal has also penetrated near resistance as represented by its prior weekly closing high on the 100 oz. Comex exchange contract and gold looks like it will move still higher. Moreover, weekly price action as shown on the lower chart section above, has traced out a bullish “triangle” which the recent rally has penetrated to the upside, suggesting a next objective to at least $352 in terms of the front month bullion contract. 353 would represent a 62% retracement of the last big decline (’96- ’99)- the 350-355 area is likely a good “marker” for gold prices – if it climbs above this zone, it would look to have potential to move higher still, say toward 400 – conversely, a deflection from this area suggests a cap to the current rally. A move above 350 in gold is a bearish indicator for equities prices in my estimation. In terms of the widely followed Philly Gold stocks Index (XAU.X), its chart is shown next - What would suggest further staying power to XAU is the bullish rounding bottom formation. However, key resistance levels are close at hand also – at 80 and 86. A new high weekly close would suggest upside potential to the 100 to 110 area and also would also have a bearish correlation for a continued bearish view on the broader market. MY INDEX OUTLOOKS - S&P 100 Index (OEX) – Daily and Hourly charts: With last week’s price action the chart/technical picture becomes more bearish with greater likelihood that the double top is suggesting that OEX remains in a bear market trend. The most bearish part of the pattern, besides the break of the prior downswing low around 455 is the look of recent price action which has the appearance of a bear flag. Breakdown below this kind of formation then suggests a downside objective to around 430 and suggests that the 445 prior low will not hold as support, even though on a near-term basis the Index is oversold. It looks like there is an increasing likelihood that OEX is headed back down to “fill” or tough the (upside) gap area seen on the way up in early October and noted on the chart above – the price gap is also in the 430 area and becomes my next downside objective. Of course if the prior 445 low “held” as support, this has to be respected also – as always prior (down) swing lows are definitely a level to watch also. I noted that the Index was “oversold” – however, this is not the case on the weekly chart, where the RSI is showing downside momentum. To turn the technical chart picture back to one having renewed bullish potential would require a close above 455 and ability to hold above this level on subsequent price dips. This level (455) in fact could be a stop out or exit point for OEX puts. DJ Industrial Index (INDU) Daily: I would hold on my suggestion to again look at (purchasing) DJX calls on a move back down to the 8350 area. With last weeks price action, I see vulnerability for a fall to below near support in the 8400 area. 8300 should be watch – the prior downswing low is there – but I can see potential back to a retest of the 8000 region. Maybe the Dow will be in an 8000 to 9000 trading range. The Dow has to climb back above 8500 to suggest bullish potential again – absent that, sell rallies and play the downside with the DJX puts. NASDAQ COMPOSITE (COMPX) Daily chart – A key technical “failure” or breakdown began when the Composite retreated to below its prior rally high as highlighted by the level dashed line on the daily chart below - I now see lower objectives based on a Head & Shoulder’s top pattern in the Nasdaq Composite. 1275 is a “minimum” downside objective based on the bear flag outlined on the COMPX chart above. A minimum downside objective implied by the H&S top pattern is in the 1275-1250 area. We have this lower gap area to give a target to around 1225. I would stay bearish on Nasdaq unless the Composite can climb back above 1400 and stay there. QQQ Daily/Hourly charts: The bearish rising wedge on the hourly chart and the lack of a further volume confirmation in QQQ were telling bearish technical factors. Now that the Q’s have retraced MORE than a fibonacci 62% retracement, we can anticipate a “round trip” for a 100% retracement or back to the recent rally starting point on an hourly closing basis – to around 24.25. If 24 gives way, the main technical support doesn’t appear until about 2 points lower, or to around $22. If there was a rally back up toward the 25.75-26 area I would look to short the stock with (buy) stop protection at 26.50. My objective in that case would be to the 23.50-23.00 area. ************************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 ************** Nasdaq-100 Shuffle There are several potential plays for this weekend. With the Dow closing very close to strong support at 8350-8400 and only 14 points above its 50 and 100 DMA there is a very strong chance there will be a bounce on Monday assuming there are no major news events over the weekend. For those wishing to capture that potential bounce I would suggest the Jan-DJX call options that we are currently using in the laddered entry from last Sunday. There is a recap of that play at the end of this section. I would buy the January DJX-$90 call which closed at $.70 on Friday. I would buy any opening dip on Monday and use Dow 8250 as my stop loss. The other news event is the Nasdaq-100 rebalancing. There are 15 stocks being dropped from the NDX and 15 stocks being added. The complete list is in my weekend market wrap. Since index funds will have to buy huge amounts of the stocks being added there is a very good possibility they will rally into the first of the year. Many funds will buy as of next Friday but many others will wait for the hype to fade and buy the stocks as of Jan-2nd. There will be an initial bounce on Monday and then a potential rally with the markets into the holidays. The two stocks I would look at from the list are XRAY and PTEN. Both have good trends with decent volume and have options far enough out of the money to absorb the opening bounce and still provide potential to profit. XRAY - Dentsply Intl. For call buyers I would look at the Jan-$40 call, which is well out of the money as of Friday and closed at $.55 cents. It will open higher on Monday due to the announcement. XRAY has resistance at $43 and it remains to be seen if the millions in extra volume over the next two weeks can push it over. Because of the potential premium bounce at the open on Monday a better option could be a put spread where you buy the Jan $35 put, currently $1.10 but should be much less at the open on Monday, and selling the Jan-$45 put which closed at $8.20. This takes the premium risk out of the trade and you can profit from any move over the Monday open. If you can sell naked puts I would pull the trigger on the Jan-$45 immediately once a bid price appears on Monday morning. PTEN - Patterson Energy The same scenario exists on PTEN. I would look at the Jan-$35 call which closed Friday at $.95. The Jan $30/$40 put spread or the Jan-$40 naked put would be my choice. Play recap from last week Not even close! The potential short play was never activated because the DJX gapped down at the open on Monday and never recovered to the initial trigger point at 87.00. The long call side of the ladder got off to a good start due to the premium deflation from the Monday gap down. If you were playing the drop for a rebound into the holidays then you should have filled at the $86 level for $1.30 and the $85 level for $1.10. The call closed at $.70 on Friday so any opening dip on Monday could fill your $84 trigger even lower than that. The current unfilled limits are 84, 83.50 and 83. I don't think 83 has a chance but 84 looks possible depending on weekend events. It is possible we may not get an opening dip to 84 because the 50 and 100 DMA are both at 8408. I would look to raise my trigger to 84.25 for the next entry. This difference is not material in the long term and it could mean the difference between having 1/3 more contracts in your portfolio. See the editors plays from Sunday Dec-8th for a full description of this play. http://members.OptionInvestor.com/editorplays/edply_120802_1.asp ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** What Good News? by Steven Price Looks like that recent consolidation was just a pit stop on the way to new relative lows. After a slow week, during which the Dow set a series of higher lows, but could not manage to break out to the upside, the downside finally gave in. The sell-off came in spite of evidence from a falling Producer Price Index (PPI) that inflation was not a concern and a better than expected Consumer Sentiment reading of 87.0. The Consumer Sentiment bounce took the index to its highest level since August and represented a significant gain from its 9-year low reading of 80.6 in October. The expectations component rose to its highest level since June, giving retailers hope for a better than expected holiday shopping season. So far, sales have reflected anything but a higher degree of confidence, with the exception of home-related purchases. However, the news should still be considered positive and there hasn't been much of that recently. The PPI number actually stoked fears of deflation. While the economy may not have to worry about prices getting out of line, the report showed many prices are actually falling, meaning manufacturers have less pricing power. This could lead to a bottom line squeeze, eventually taking a bite out of earnings. The report doesn't take into account many of the services inputs, such as the cost of medical care, which has been on the rise. The market took out relative lows this morning, with the Dow, OEX and SPX all testing 50-dmas and getting failed rebounds off those levels. A mid-day rally looked as though we had finally found a bottom, with the bounce off those 50-dmas, but the last couple hours of trading saw a steady sell-off and a breakdown of that support into the close. The OEX actually finished below its 50- dma for the day. We are now approaching strong support from the beginning of November that should at least put a temporary halt to the slide. Combined with a traditionally bullish final couple weeks of the calendar year, traders should expect some type of bounce off Dow 8300/SPX 880/OEX 446. The Nasdaq also got creamed, losing 37.13 and approaching its 50- dma down at 1345.88. The index looks to have completed its own little head and shoulders pattern, but the shoulders at 1425 and 1411 are not well enough defined for me to bet on them. However, the measuring objective of the pattern would have the breakdown leading all the way down to 1200, for those interested. I referred in past articles to the possible formation of a head and shoulders in the Dow, as well. If that prediction were to come true, we are approaching a point at which we can expect a bounce and the formation of a right shoulder. It is far too early to tell if that will be the end result of the recent market action, but we're about 2/3 into the formation if it does take place. What that means is that if we do get a significant bounce in the near future, traders may want to get long for the ride up to around Dow 8800. The chip stocks also saw red today, but stopped short of recent support at 307 in the Semiconductor Index (SOX). The recent drop on December 9 took the index down to 307 and today's drop bounced at 308, finishing the day at 309. With previous support at 310 and 300, as well as the 50-dma at 302, there is an awful lot of congestion in the index and it will likely take a continued move under 300 to gain downside momentum. As these stocks tend to lead the Nasdaq, keep an eye on these support levels before either getting in short, or playing a bounce on the broader tech indices. Some of today's sector drop can be attributed to ratings released this morning. J.P. Morgan said the top three semiconductor end markets - computing, wireline and wireless communications - should remain depressed with the possibility of inventory corrections and pricing pressure through the first quarter. It initiated coverage of industry heavyweights Intel (INTC) and Advanced Micro Devices (AMD) with underweight ratings. Deutsche Securities also initiated coverage of a host of semiconductor stocks with sell ratings, including Texas Instruments and AMD. However, the firm rated Intel as a buy. While there was also disagreement between firms over MCHP (JPM- overweight, DB - sell), the message was clear to investors that the picture isn't as rosy as Taiwan Semiconductor's recent guidance increase may have indicated. After today's drop, it will be hard to simply step in and pick a bottom. After last week's slide, it seems the last few days were just a bear-pennant type reprieve, before today's drop. If we are going to bounce, the two most logical levels are the 50-dmas, which all indices are approaching together, or the late-October/ early-November lows. If that happens, then don't be too aggressive in shorting the first failed rally, as we may be headed for that right shoulder. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8433 Moving Averages: (Simple) 10-dma: 8622 50-dma: 8408 200-dma: 9113 http://www.OptionInvestor.com/charts/financial.asp?ticker=$INDU S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 889 Moving Averages: (Simple) 10-dma: 908 50-dma: 888 200-dma: 973 http://www.OptionInvestor.com/charts/financial.asp?ticker=$SPX Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1005 Moving Averages: (Simple) 10-dma: 1052 50-dma: 1002 200-dma: 1104 http://www.OptionInvestor.com/charts/financial.asp?ticker=$NDX ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX dropped almost 4% today, after coverage was initiated with negative ratings on a number of stocks in the sector. J.P. Morgan and Deutsche Securities disagreed on ratings for Intel and AMD, but other stocks getting 'SELL' or 'UNDERWEIGHT' ratings were RFMD, TQNT, ATML and TXN. JPM also said the top three semi end markets should remain depressed through the first quarter of 2003. While this was not news, as many chipmakers have said they do not necessarily see a recovery anytime soon (most recently Intel), the group still led the Nasdaq Composite through its recent lows. It is revisiting support around 300, after testing resistance at 400 just a couple of weeks ago, giving traders little clue as to its appropriate valuation. For the time being, traders can watch support and resistance levels, highlighted in the above article, for clues as to when we will get a breakdown, or bounce. 52-week High: 657 52-week Low : 214 Current : 309 Moving Averages: (Simple) 10-dma: 331 50-dma: 302 200-dma: 398 ----------------------------------------------------------------- Market Volatility The VIX rebounded on today's broad market sell-off. However, we only saw a gain of just over a point, as we are about to head into the weekend and essentially three days of time decay. Keep in mind that if institutions thought we were about to head back toward the October/July lows, we most likely would have seen a bigger gain in the VIX, as there would have been many more put buyers. The VXN actually dropped on the day, in spite of the NDX and COMPX taking out recent lows and testing the NDX's 50-dma at 1002. This would seem to contradict the day's market action and lend a less serious tone to today's drop in the techs. CBOE Market Volatility Index (VIX) = 32.12 +1.31 Nasdaq-100 Volatility Index (VXN) = 50.92 –0.13 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.87 467,567 405,748 Equity Only 0.67 357,394 240,328 OEX 1.13 27,405 30,929 QQQ 3.54 23,248 82,191 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 50 + 0 Bull Confirmed NASDAQ-100 66 - 4 Bear Alert Dow Indust. 63 + 0 Bear Alert S&P 500 63 - 1 Bull Confirmed S&P 100 64 + 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 1.32 10-Day Arms Index 1.42 21-Day Arms Index 1.18 55-Day Arms Index 1.18 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 928 1888 NASDAQ 974 2233 New Highs New Lows NYSE 46 34 NASDAQ 46 41 Volume (in millions) NYSE 1521 NASDAQ 1308 ----------------------------------------------------------------- Commitments Of Traders Report: 12/10/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added 2,000 long contracts and 16,000 shorts, leading to a 30% increase in the net short position. Small traders took the opposite approach, leaving the net long position unchanged, while reducing shorts by 9,000 contracts. Commercials Long Short Net % Of OI 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%) 12/10/02 446,831 503,583 (56,752) (5.9%) 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 11/19/02 143,070 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% 12/10/02 162,115 71,505 90,610 38.8% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials saw a small gain to the long side, but left shorts virtually unchanged. Small traders increased long positions by 1,300 contracts, while slightly reducing the short side. Commercials Long Short Net % of OI 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%) 12/10/02 44,651 51,716 ( 7,065) ( 7.3%) 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 11/19/02 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% 12/10/02 15,026 9,242 5,784 23.8% 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, with no significant changes to positions. Small traders followed suit, making only slight reductions to both the long and short side. Commercials Long Short Net % of OI 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% 12/10/02 19,953 15,759 4,194 11.7% 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 11/19/02 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%) 12/10/02 5,394 9,499 (4,105) (27.6%) 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 *************** Buy/Sell Program Premium Levels Jeff: I do not understand the buy and sell numbers you gave this morning for the buy and sell programs: $0.25 and $-2.72. What do they mean? Could you give examples and correlate them to what to watch for in the indices, for example at what value of an index are the programs to kick in? Could this be said in a single liner on the monitor? Explicitly? This is perhaps a timely question, but also a very frequently asked question as it relates to each morning's 09:00 Intra-day Update that PremierInvestor.com and OptionInvestor.com subscribers will either browse across, or find interesting, but feel there's no way they could ever find it useful. Even some "experienced" traders feel this tool has no application and is of little use. I will attempt to keep this simple and not get into all of the complexities of arbitrage trading, but that's exactly what these buy/sell program execution levels from HL Camp & Company will generate if the their "buy" or "sell" program premium level is traded. Lets start out with the "cash" market. The S&P 500 "cash" market is the S&P 500 Index (SPX.X) 889 -1.33%. At any second in time during market hours, the combined total of the 500 stocks in the S&P 500 Index will equal the SPX.X. In essence, its the current "cash" price of these 500 stocks combined. You will see why you need this to then "generate" the eventual buy/sell program alert. Each morning, we also talk about the S&P 500 futures (sp03h), which at 04:00 PM EST were trading 888. Here however is a price of a security that traders are actually trading based on FUTURE expiration in March. Notice the price difference? Sometimes we see a wider margin of discrepancy between the "cash" (SPX.X) and futures market quotes. That's when the also quoted "fair value" given in each morning's comments come into play, but that's a different topic all together. It should also be noted that S&P 500 futures don't ALWAY trade below the cash price like they are right now. There are times when they trade above the cash price. But its the "difference" between the cash and futures markets that then comes into play as it relates to the buy/sell programs that HL Camp & Company gives each day that can alert traders to institutional buy/sell programs being triggered. Now, we just noted a $-1.00 difference in the cash versus futures S&P 500 quotes didn't we? Do you see where I'm going? That's getting close to HL Camp & Company's ... computer sell programs are set for $-1.25. So. How do I "know" if some type of computer program is triggered? You and I could sit and watch the S&P futures trade with one eye, while watching the stock we're trading with the other eye. The thinking being "boy... if a computer sell program comes in and futures trades lower, then the stock I'm trading that's part of the S&P 500 could also see selling." Wow! That would make for a real efficient stock trader wouldn't it? Only thing is, I couldn't be watching much else if I had to always keep my eye on the futures for some type of sharp move lower. By establishing a buy/sell premium execution level, a trader using a trading station like Qcharts, which is what I'm using on a daily basis, can set some upside and downside alerts at what is called the S&P Premium levels. For Qcharts, the symbol is $prem.x . All this does is MEASURE the DIFFERENCE between the cash price of the S&P 500 and the futures price of the S&P 500. The DIFFERENCE can be thought of as the arbitrage spread. It's when the PREMIUM levels are achieved, that the market suddenly experiences a moment of inefficiency and "things get a little too far apart." It's at these "inefficient" moments that the premium alerts can be triggered, and alert the trader to a program buy or sell program coming into the market. Once again, the trader that thinks like an institution will better understand. If you're a Goldman Sachs, carrying billion of dollars in stock inventory and the markets are declining, is it feasible to coordinate an effort among your human traders to control the risk, or hedge that inventory risk? Certainly not. But if you've got a computer, that "knows" to the last share how much stock you have in inventory (or don't have if you're net short a stock in inventory) and what the cash market price is for all those different stocks, you can set market levels as buy or sell points and have your computer systematically buy or sell the S&P 500 to help hedge your broader inventory. How could I do this if I'm long $10 billion worth of S&P 500 socks in my inventory. If my net cost is SPX.X 850 at what lower level do I need to hedge that risk? I might consult my chief technical analyst and ask... "at what lower level should we hedge our downside?" The analyst might say... "if we trade below 900, then we might have downside risk to 880 and 61.8% retracement." OK, then if we trade below 900 we'll need to sell $3 million S&P futures short as a hedge, and sell $20 million worth inventory that we bought at SPX 835. The sell program for the futures is placed with the computer to sell $2. The above is a very simplistic example. Computer programs are actually being used on an minute-by-minute basis, but what a trader will be concerned about or perhaps monitoring is the more meaningful points where a buy/sell program is triggered. So without have to look at or monitor the minute-by-minute differences between the cash and futures market, lets simply look at a chart of the Premium of S&P 500 Futures ($prem.x) from Qcharts. What I'll do is build a "collar" on this chart, using the buy/sell program premium levels of $0.25 and -$2.72 that were given on Friday morning. With Qcharts, I can also set an "upside" alert on this chart at $0.25, and a "downside" alert at -$2.72. Then, if those levels are achieved, I will be "alert" to some type of computer program having been triggered that tells me that some institutional buying/selling is taking place. Premium of S&P 500 Futures ($prem.x) - 10-minute interval I show the above chart of the $prem.x only to give us a visual "perspective" of what's taking place as the "spread" between the futures and cash index varies marginally during a trading day. It's at the "extremes" of the buy/sell program levels that we want to be alert. That's when the market becomes "inefficient" and an arbitrage opportunity presents itself. As you can see from the above chart, there really were only "two" premium alerts generated. Sure, there were undoubtedly many other "computer programs" being run during the day, but nothing "major." Here's how a trader can perhaps "use" these alerts. If you're thinking that this information is only good for short-term traders, you'd be partially correct. After all, these buy/sell program levels change EACH DAY. But put on your thinking cap for a moment. What if you're trading the indexes, or a stock and you're getting close to your targeted level for closing the trade? After all, in your trading plan you probably had an entry point, profit target and stopping point defined right? Wouldn't it be helpful if you were $0.25 way from your bearish target in a stock option trade and all of a sudden you start getting "buy program" alerts in the broader S&P 500? That might alert you to lower a profit stop wouldn't it? What if you got a "sell program" alert as the stock option your trading nears its target and all of a sudden your stock fall $0.50 below your profit target? Is there something wrong with the stock, or is it trading with the computer programs that were just generated? This might have the trader simply lowering a trailing profit stop to his target and looking to see if the stock might not drop further as bulls simply want out and continue selling it lower. Couldn't a trader also make some sort of observations as to "why all of a sudden does the program alert get triggered here? Is there something important about this level that needs to be understood? Maybe I'd better make a note at what $spx.x level that program was triggered as it could come into play at a later date and time." I've found that good technical traders are always inquisitive and asking themselves questions and looking for answers in the charts. To get a better understanding that the S&P buy/sell premium alerts are a RESULT of the cash and futures markets, lets look at both the cash and futures charts on a 1-minute time interval. We'll also ask some question, make some observations, and chart those observations later on as the trading day unfolds. S&P 500 Index (top) versus S&P 500 futures (bottom) - 1-mnt chart It made "sense" that we'd get a "sell program" at the open as S&P futures (lower chart) had traded down last night and were around 893 when the cash market (upper chart) opened for trading at 09:30 AM EST. Institutional computers sold some stocks in order to "catch up" to what had happened between Thursday's close and Friday morning's open. Observation #1: Why is the cash breaking below a level of "support" that seemed to form early at 894, when the futures seemed more "disciplined" and held their low in neater fashion? Hmmm.... never sure, but 894 might be "key" level in cash, and 892 "key" level in futures. Obeservation #2: I set the "black box" in each chart to reflect the 09:47 AM time frame. You can look at a 1-minute interval of the $prem.x chart too and see the premium jumping to above $0.25, which was the buy program. Yes, its a sudden move higher, but that's what a little institutional capital hitting at once can do. Hey, if you were a bear and shorted/put the SPX or SPY on the break to a morning low below 894, the sudden jerk higher against you was at least "understood." Hey! That stinks. I just shorted and had a buy program crammed down my throat. I'd better make note of that 894 cash level as it might serve support later on today, but I'd sure feel better if no more buy programs are triggered in the next hour and the SPX falls back below. Then it might become resistance. Observation #3: 6-minutes later (you don't know it at the time) the SPX reaches a relative high, reverses lower and takes out the 894 level and breaks to a new intraday low. Hmmmm..... What's with this 898 level in the SPX? No buy programs, no sell program alerts, somebody doesn't like the SPX there. It's probably nothing, but I'll make a note of it. I also have a level at 900 marked as a potential "psychological" level of resistance. So lets look at the entire day of trading and see if our "buy" program level had any type of influence on today's trading. Let's also see if our "rally reversal" levels had any influence where we didn't find any "premium alerts" but may have been traded by "human intervention." S&P 500 Index (top) versus S&P 500 futures (bottom) - 10-mnt Remember, all of the above "levels" are based on today's trading and may not have any historical significance to past levels that may carry greater technical significance. I looked at the SPX daily chart and the only 894 level that I find interesting is two consecutive closes on November 12th and 13th, which ended up being pullback levels before the SPX made it recent relative high at 953 on December 12th. Maybe, just maybe there were some institutional buy programs set at this 894 that have this being some type of pivot. However, with just one buy program there, I can't put a lot of "faith" in it having significance. I can make a note in my journal about it, but nothing to major. However, our "human intervention" level near SPX.X 898 did find some technical significance at least on an intra-day basis. My thinking here is that "loss of faith bulls" may have simply "sold too early before 900" as Jim Brown always teaches, with the thought of "why try with the weekend just ahead." So... Friday's 1 "sell" (at the open) and 1 "buy" premium execution level in a day isn't that meaningful in the above example, but some days, several buy or sell premium execution levels are generated. These "buy/sell" premium levels aren't something I think a trader "has to have" to be successful in trading. However, like some tools in your toolbox, like that odd shaped screwdriver, you just never know when it might "come in handy." Like the time we shorted a full position in the SPY into a powerful rally and didn't know that 5 "buy programs" had been triggered in the previous hour, which found the newswires reporting 30-minutes later that world peace had been achieved. Hopefully this helps traders "understand" the basics of how and why we place the buy/sell premium execution levels in the 09:00 updates each morning. I think it would be neat if a trader set an alert at some target in the SPX, or stock they're trading and if short and the stock trades your target you had set, or very close, and all of a sudden you receive a "buy program" premium alert, instead of wondering if the trade should be closed out, you be ALERT as your trading station has given you two alerts at a level YOU deemed important is also deemed important by the market. At that point YOU the trader begins to exude confidence and become more disciplined in getting ready to trade your end-plan. YOU immediately think... "Aha! I need to be alert here for a potential reversal and can't hesitate if the stock/index I'm trading begin to rebound." It would also be neat if a trader set an alert at some type of bullish entry point where he/she thought a stock would either rebound from support or break-out of congestion and that technical alert on your trading station was triggered. However, you look at the S&P 500 trading sideways and perhaps lack some conviction in the trade due to lack of broader participation. But minutes later... you get a "buy program" premium alert! Hey, that's two bullish types of alerts. Then perhaps, the confirmation of prior thought that bullishness might take place at this level gets some confirmation. Are you holding current month index options that will expire next week? If so, then this shorter-term tool of daily buy/sell premium levels may give the SPX index trader some near-term levels to begin working with. If you hold some SPX 900 puts, you might at least think a stop above 892 is warranted. Is the SPX going to "peg" the 900 level at expiration? It might, but it might not if we get 10 sell programs at 892 on Monday. However, if we were to see a buy program at 892 on Monday, followed by a little pop to 895, then a pullback to 892 and get another buy program alert, then it might be a good idea to close out a December 900 SPX put. Conclusion: As you can perhaps see, the buy/sell premium levels aren't necessarily "tied" to an identifiable level in the SPX for S&P futures. In its most simplistic form, the premium alerts are generated by meaningful DISPARITY between the cash and futures markets. It the sudden and sometimes "unexplainable" level where a large amount of buying or selling in either the futures or cash markets becomes powerful enough to create a sudden inefficient market that "wakes traders up" to something. It's been said that "smart money" always knows first. If you knew that world peace was going to be announced in the next 30- minutes, most people would probably take their last dollar and either buy S&P futures or S&P January 900 calls wouldn't they? It's not that institutions are the "smartest" money in the market, but its institutions that have the most money in the market and its money on the buy or sell side that will drive price action. Institutions also use computers, which are very unemotional, to control their stock portfolio risks. It's these darned computers that can have impact on how the markets trade and one way to be alerted to a meaningful move in equities is the buy/sell premium levels. Last notes: 1) Interesting how the cash and futures both settled right on their 50-day SMA's. Monday morning will be interesting won't it? I would want to set an upside and downside alert on the SPX or S&P 500 futures (sp03h) and then Monday morning, set the buy/sell premium alerts for $prem.x. 2) I also made some final observations at the last part of today's trading between the SPX and futures chart. There we see that the futures extended losses in the final 15-minutes of trading. While fair value, which we also report each morning, is only to inform traders of how stocks will most likely open the session (up or down), we can envision how futures might be up 1- point at 887.20, but if fair value were $4.00, then a lower open in the cash market would be the likely result. 3) You've seen on CNBC when the market has made an up or down move greater than 160 Dow points, that they post "curbs in." That was put in place to limit computer initiated buy or sell programs. Again, computers are computers they don't "reason" anything. Can you imagine what could happen if a computer program had a software flaw and all of a sudden started buying $5 billion worth of S&P futures every 10 minutes? The only thing to shut it down is for trading curbs to go in place and not allow any further computer program trades to execute. 4) During the week, S&P futures trade around the clock for the most part. Did you know that? S&P futures didn't just fall from their 04:15 PM daily close on Thursday to our 09:00 AM update Friday morning. They worked their way lower as traders from around the world traded the contract lower. For the most part, fair value isn't "that important," but does give the trader a quick "feel" for how the cash market will open for trading. Well... I hope everyone has a great weekend! Once again, I can get a little long winded in my writing. I find this kind of stuff simply fascinating. What will they think of next? Single stock futures is my guess. Oh goodness, maybe I should develop buy/sell premiums for every single stock that trades futures on the underlying stock too! Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of December 16th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ BBY Best Buy Co., Inc. Tue, Dec 17 Before the Bell 0.25 CC Circuit City Stores Inc Tue, Dec 17 Before the Bell -0.13 DRI Darden Restaurants Tue, Dec 17 -----N/A----- 0.22 IBC Int Bakeries Corp Tue, Dec 17 -----N/A----- 0.48 MU Micron Technology Tue, Dec 17 After the Bell -0.23 PIR Pier 1 Imports, Inc. Tue, Dec 17 Before the Bell 0.33 RHAT Red Hat, Inc. Tue, Dec 17 -----N/A----- 0.01 ----------------------- WEDNESDAY ----------------------------- APOL Apollo Group Wed, Dec 18 Before the Bell 0.22 ATYT ATI Technologies Wed, Dec 18 Before the Bell 0.04 BSC Bear Stearns Wed, Dec 18 Before the Bell 1.23 BBBY Bed Bath & Beyond Inc. Wed, Dec 18 -----N/A----- 0.23 BMET Biomet, Inc. Wed, Dec 18 -----N/A----- 0.26 KMX CarMax, Inc Wed, Dec 18 Before the Bell 0.17 FDX FedEx Wed, Dec 18 08:00 am ET 0.79 GIS General Mills, Inc. Wed, Dec 18 Before the Bell 0.74 GPN Global Payments Inc. Wed, Dec 18 After the Bell 0.35 MLHR Herman Miller Wed, Dec 18 After the Bell 0.13 ORCL Oracle Wed, Dec 18 After the Bell 0.08 SCS Steelcase Inc. Wed, Dec 18 4:00 pm ET -0.08 SVU Supervalu Inc. Wed, Dec 18 -----N/A----- 0.43 TIBX TIBCO Software Wed, Dec 18 After the Bell 0.01 WOR Worthington Industries Wed, Dec 18 Before the Bell 0.25 ------------------------- THURSDAY ----------------------------- COMS 3Com Thu, Dec 19 After the Bell -0.03 CCL Carnival Corporation Thu, Dec 19 Before the Bell 0.30 CTAS Cintas Corporation Thu, Dec 19 -----N/A----- 0.38 COGN Cognos Thu, Dec 19 After the Bell 0.19 CAG ConAgra Foods, Inc. Thu, Dec 19 08:00 am ET 0.46 FDO Family Dollar Thu, Dec 19 -----N/A----- 0.32 GS Goldman Sachs Thu, Dec 19 Before the Bell 0.97 GUC Gucci Group NV Thu, Dec 19 Before the Bell 0.49 JBL Jabil Thu, Dec 19 2:30 pm ET 0.15 LEH Lehman Brothers Thu, Dec 19 Before the Bell 0.88 MWD Morgan Stanley Thu, Dec 19 Before the Bell 0.75 NKE Nike Thu, Dec 19 After the Bell 0.56 PAYX Paychex Thu, Dec 19 After the Bell 0.19 RAD Rite Aid Corporation Thu, Dec 19 -----N/A----- -0.09 SCHL Scholastic Thu, Dec 19 After the Bell 1.91 SLR Solectron Thu, Dec 19 After the Bell -0.02 TEK Tektronix Inc. Thu, Dec 19 After the Bell 0.09 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CCFH CCF Holding Co. 3:2 Dec. 19th Dec. 20th -------------------------- Economic Reports This Week -------------------------- Despite the holiday season, which is typically a bullish time for Wall Street, investors will have to watch out for those corporations who will be warning about their Q4 earnings numbers. This Tuesday we have the CPI, Housing Starts, and Industrial production numbers. Check the calendar for additional reports this week. ============================================================== -For- Monday, 12/16/02 ---------------- None Tuesday, 12/17/02 ----------------- CPI (BB) Nov Forecast: 0.2% Previous: 0.3% Core CPI (BB) Nov Forecast: 0.2% Previous: 0.2% Housing Starts (BB) Nov Forecast: 1.693M Previous: 1.603M Building Permits (BB) Nov Forecast: 1.700M Previous: 1.772M Industrial Prduction(DM)Nov Forecast: 0.2% Previous: -0.8% Capacity Utilization(DM)Nov Forecast: 75.4% Previous: 75.2% Wednesday, 12/18/02 ------------------- Trade Balance (BB) Oct Forecast: -$37.0B Previous: -$38.0B Thursday, 12/19/02 ------------------ Initial Claims (BB) 12/14 Forecast: N/A Previous: 441K Leading Indicators (DM) Nov Forecast: 0.3% Previous: 0.0% Philadelphia Fed (DM) Dec Forecast: 5.3 Previous: 6.1 Treasury Budget (DM) Nov Forecast:-$50.0B Previous: -$54.3B Friday, 12/20/02 ---------------- GDP-Final (BB) Q3 Forecast: 4.0% Previous: 4.0% Chain Deflator-Final(BB) Q3 Forecast: 1.0% Previous: 1.0% 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 ********************* Next Leg Down The opening bell brought a move below recent support in the Dow/OEX/SPX. It took the Nasdaq Composite a while longer, but eventually it too took out its recent low, as well. 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 subscribe@OptionInvestor.com 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: advertising@OptionInvestor.com
The Option Investor Newsletter Sunday 12-15-2002 Sunday 2 of 5 In Section Two: Stock Pick: Back in Business Daily Results Call Play of the Day: ISSX Put Play of the Day: MMM Dropped Calls: IDPH Dropped Puts: None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** Stock Pick ********** Back in Business EDS - $19.64 Strategy: Long stock with put insurance While the major indices closed out the week sitting in red ink, shareholders of EDS enjoyed a 16.2% gain. We realize closing at $19.64 is a far cry from $68.55, where the Information (IT) Services company started the year, but for now Electronic Data Systems appears to have weathered the storm. It’s not that we expect it to be clear sailing for EDS, however this is a company that could very well be on the mend. The chart below not only displays the carnage, but also shows why we believe EDS could provide an exceptional return in the coming months. In late June, Wall Street began to learn of EDS’s exposure to the problems at WorldCom. Several analysts tried to paint a pretty picture, maintaining profit estimates and keeping the company on their recommended lists. As you can see the picture on the chart is anything but pretty. Shares of EDS plunged from just over $46 to under $28 in the next four trading sessions. Large price moves up or down are generally exaggerated by fear or greed. It took EDS nearly two months to repair the damage done by the fear created when the WorldCom news hit the streets. By late August EDS began to loose its momentum as it approached the top of its channel consolidating between $37 and $40. The next shoe to drop came in the form of an earnings warning. This was not your everyday earnings warning. In an after hours conference call on September 18th, company officials caused the bottom to fall out, telling investors they expected a third quarter profit of just $0.12 to $0.15 per share, compared to the consensus estimates of $0.74. The announcement produced a $14 gap down at the start of trading the following morning. The price continued to plummet to a low of $11.68 over the next four sessions. The company did manage to muster profit of $0.18, when they announced third-quarter results at the end of October. This past Monday another potentially negative hurdle surfaced for the IT services company. Care to guess where this one came from? UAL Corp. UAL’s bankruptcy announcement will force EDS to shave 5 cents per share from its fourth-quarter earnings. EDS will take a charge to write down the value of some investments in aircraft leases with UAL. Now here’s the exciting part, EDS did trade lower on the day, but the losses were negligible compared to the earlier warnings, and frankly we view that as a positive for our new play. EDS Chairman, Dick Brown, was out doing damage control as he spoke at a meeting for industry analysts on Monday. Brown said his company remains “rock solid”, which probably helped prop up the price of company shares. Rumors circulated early in the week concerning a deal between EDS and Bank of America. The deal could be huge for EDS as it is the first multibillion-dollar contract won since their warning in September. Thursday, EDS and BAC announced a 10-year deal, worth $4.5 billion. Essentially, EDS will help Bank of America transform its voice and data network systems. The past two months EDS has formed a solid base between $13 and $15. A succession of higher lows and higher highs has began to appear. The volume on the move higher has not been stellar, however advances have come on average or better volume which further supports our bullish outlook. The technical picture has improved with stochastics and MACD beginning to point north as well. This week the investors pushed the price of EDS shares through resistance from earlier this month at $18.98. We realize stocks don’t go straight up or down, however there is little overhead resistance until the $27 to $30 area, which happens to be the top of the current channel. There are several different strategies that can be considered when entering our new play. Investors looking for a consolidation or pullback from current levels may consider a bounce off support between $16 and $17 for their entry. Others are outlined below: Option 1. Purchase EDS stock at the current level and purchase one June $15 or $17.50 Put for every 100 shares of stock purchased. If the stock is under $15.00 by June expiration, then exercise the put and sell the stock. In the event you are still bullish on the stock, you may consider taking whatever profit you have from the original put and roll down, buying another put six to nine months out, however this strategy can increase your breakeven level substantially. 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 $10.00 LEAP Calls were priced at $10.60 and $11.20 respectively. For those that want added protection, the purchase of one June $17.50 or $20.00 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 EDS stock at the current level and wait for the stock to move higher. Once you feel EDS has reached a point of consolidation or are expecting a pullback, buy 1 $20 Put or a $17.50 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 EDS falls below support between $14 and $15.00. Electronic Data Systems (EDS) Weekly Chart *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week CPS 38.91 0.46 1.22 0.76 –0.09 1.31 above breakout CTXS 12.09 -0.26 -0.13 -0.12 0.05 –0.82 holding $12 IDPH 33.43 0.77 -0.43 0.05 0.63 0.88 Drop, fading ISSX 22.30 -2.05 1.41 -0.83 1.62 0.35 New, strong MERQ 30.31 -0.80 0.99 1.37 0.32 0.70 Over support OMC 66.91 -2.34 1.88 1.13 0.42 –0.65 need 200-dma PUTS AIG 59.00 -0.68 1.18 0.87 –1.57 –1.25 PnF breakdown DLX 41.00 -1.26 -0.22 -0.37 0.13 –2.71 Below support MMM 121.77 -2.06 0.75 -0.39 –1.06 –4.34 Through 200-dma RKY 61.49 -0.48 0.13 -0.88 –0.87 –3.91 New, quick drop ROOM 59.45 -0.92 -1.72 1.19 –0.74 –5.72 New, bad bounce ************************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: ********************* ISSX - Internet Security Systems - $22.30 +0.25 (+0.15 for the week) See details in play list Put Play of the Day: ******************** MMM – 3M Company $121.77 (-4.33 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 ^^^^^ IDPH $33.43 -1.41 (+0.82 for the week) IDPH appeared on the verge of a breakout after trading above $35 and starting into its gap. While most of the market pulled back today, IDPH lost over 4% and if we were picking it today, we would not view it as a call candidate. The positive results from the recent Rituxan study have not been able to help the stock crack the $35 level. While the stock hasn't broken down, it appears to be out of gas on the current run. Without getting the ideal entry point for conservative traders, we are simply going to let this one go. We don't like dumping a stock after one day on the list, but the pull back was strong enough from a significant level that it shook our faith. Traders who would like to give it a little more time can look for support at $31 as a breakdown signal. PUTS ^^^^ None *********** 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: advertising@OptionInvestor.com
The Option Investor Newsletter Sunday 12-15-2002 Sunday 3 of 5 In Section Three: New Calls: ISSX Current Calls: MERQ, CPS, CTXS, OMC New Puts: RKY, ROOM ************************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 ************** ISSX - Internet Security Systems - $22.30 +0.25 (+0.15 for the week) Company Summary: Internet Security Systems (ISS) is a world leader in software and services that protect critical information assets from an ever- changing spectrum of threats and misuse. Software from Internet Security Systems dynamically detects, prevents and responds to sophisticated threats to networks, servers and desktops. Services include 24/7 system monitoring, emergency response and access to the X-Force, Internet Security Systems' renowned research and development team. Internet Security Systems is the trusted security provider for more than 10,000 corporate customers, including all of the Fortune 50, the top 10 largest U.S. securities firms, 10 of the world's largest telecommunications companies and major agencies and departments within U.S. local, state and federal governments. Headquartered in Atlanta, Ga., Internet Security Systems has additional operations throughout the Americas, Asia, Australia, Europe and the Middle East. (source: company summary) Why We Like It: ISSX is the classic example of a company benefiting from the recent surge in internet security spending. The company has already made inroads with the U.S. government, having been selected by the United States Department of Health and Human Services for comprehensive security protection across 12 divisions of the department, following a partnership with Northrop Grumman. Merrill Lynch estimates that the computer- security market will grow 11% a year over the next five years, from $9.8 billion in 2002 to $15 billion in 2006. The stock saw its price target raised to $24 today by Lehman, which gave ISSX an 'overweight' rating and said the company was well-positioned for growth in 2003 due to a new product cycle and growing momentum for intrusion protection software. While we've learned not to trust everything an analyst says, the price action in ISSX seems to confirm the bullish sentiment in the market for the stock. ISSX bottomed out just over $11 back in September, before taking off on a run to $25. The stock pulled back to its 50-dma, currently $19.86, a week ago, where it bounced and has been climbing higher ever since. ISSX has been impervious to the recent broad market sell-off the last couple of days, posting more than a 10% gain, in spite of a 156-point drop in the Dow and a 50-point drop in the Nasdaq. A look at the point and figure chart shows ISSX having pulled back to its ascending triple top breakout level and now reversing back up into a column of "X." The current bullish vertical count is $30.50, indicating plenty of room to run if the stock can make it past its recent top just under $27. Even if it struggles at that level, we'll still be happy with a gain of over $4. Our initial target on the stock will be that recent top, but our eventual goal will be fulfillment of the $30 count. We will enter the play at the current level, however more conservative traders can look for a move above the 21-dma of $22.99 with a trade of $23. Place initial stops at $19, just below the 50-dma and recent support. *** December contracts expire next week *** BUY CALL JAN-22.50*ISU-AX OI= 734 at $2.30 SL=1.15 BUY CALL JAN-25.00 ISU-AE OI=1454 at $1.30 SL=0.65 BUY CALL APR-22.50 ISU-DX OI= 734 at $4.20 SL=2.10 BUY CALL APR-25.00 ISU-DE OI= 228 at $3.30 SL=1.65 Average Daily Volume = 515 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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** MERQ - Mercury Interactive - $30.31 -1.19 (+0.29 for the week) Company Summary: Mercury Interactive, the global leader in business technology optimization (BTO), delivers Optane(TM), a suite of integrated products for enterprise testing, production tuning and performance management, that enables customers to optimize business processes and maximize business results. Customers worldwide -- including 75% of the Fortune 500 -- use Mercury Interactive solutions across their application and technology infrastructures to continuously measure, maximize and manage performance at every level of the business process and each stage of the application lifecycle to improve quality, reduce costs, and align IT with business goals. Why We Like It: Ouch! The entire market suddenly turned defensive on Friday as traders chose not to hold some positions over the weekend due to the higher geo-political risk. What does that mean in English? It means Wall Street is ready and willing to take some money off the table, we mean a whole lot of it, should the war in Iraq start soon or the North Koreans continue to thumb their noses at the U.S. over their nuclear plans. The NASDAQ fell, as did the GSO software index. The later was probably due to the big drop in MSFT, the biggest software component of the group, which will lead the group and thus affect shares of MERQ. Shares of MSFT fell sharply and closed below both its 50-dma and the 200-dma. Why the drop? We don't know. We doubt it was the new Windows vulnerability warning that came out late Thursday night. More likely it could be the rumors that MSFT is interested and a potential buyer for Borland Software and Rational (RATL) software. Yup, the same RATL that IBM just agreed to buy a few days ago. What are the odds of IBM and MSFT getting in a bidding war? Does MSFT see IBM's move as serious competition? We can't answer these questions today but the drag on the sector was felt in MERQ with a 3.7% drop. Our play managed to maintain support at the $30 level but we would be hesitant to jump into new positions right now. Let's wait and see what happens over the weekend and how Wall Street opens on Monday. If shares begin to bounce, then evaluate a new position. A move above $32.00 would evidence a strong recovery and new entries can target that level to initiate the play. *** December contracts expire next week *** BUY CALL JAN-30*RQB-AF OI=2441 at $3.10 SL=1.55 BUY CALL JAN-35 RQB-AG OI=4169 at $1.25 SL=0.00 BUY CALL APR-25 RQB-DE OI= 255 at $8.60 SL=4.30 BUY CALL APR-30 RQB-DF OI=1846 at $5.70 SL=3.00 Average Daily Volume = 3.96 mil --- CPS – ChoicePoint, Inc. $38.91 (+1.08 last week) Company Summary: ChoicePoint is a provider of identification and credential verification services. The company provides risk management and fraud prevention information and related technology solutions to the insurance industry. CPS also offers risk management and fraud prevention solutions to organizations in other industries. The company operates its business through two primary service groups, Insurance Services, and Business & Government Services. The Insurance Services group provides information products and services used in the underwriting, claims and marketing processes by property and casualty insurers. The Business & Government Services group provides information products and services and direct marketing services primarily to Fortune 1000 corporations, consumer finance companies, asset-based lenders, legal and professional service providers, healthcare service providers and federal, state and local government agencies. Why We Like It: Be careful what you wish for, you just might get it. When we began coverage of CPS last week, we were looking for confirmation of the stock's recent breakout with a dip back to that breakout level followed by a rebound. Well, based on Friday's action, it looks like we're going to get our wish, as the stock gave up more than 2.5% to fall back slightly under the $39 level. While this is the top of the breakout area, the support (former resistance) doesn't really start to become significant until the stock pulls back into the $38.00-38.50 area. A rebound from that vicinity should make for a solid entry point into the play, with strong confirmation coming with a subsequent rebound over last week's highs near $40.30. In the meantime, CPS seems to be at the mercy of the direction of the broader market, and for now that appears to be gradually down. Demonstrating the lack of conviction behind Friday's drop was volume which only came in around 60% of the ADV. Not an excess of sellers, just a lack of buyers. CPS generated a powerful triple-top breakout on its PnF chart last week when it cleared the $39 level, and barring a major negative news event, that bullish setup should continue to keep the bulls interested. Traders that prefer to enter on strength will need -to wait for a volume-backed move through the $40.50 level (just above last week's intraday highs) before taking a position. Our stop remains at $37, just below the ascending trendline that has supported the stock for the past 2 months. *** December contracts expire next week *** BUY CALL DEC-35 CPS-LG OI= 5 at $4.20 SL=2.50 BUY CALL DEC-40 CPS-LH OI= 30 at $0.50 SL=0.25 BUY CALL JAN-35 CPS-AG OI= 25 at $4.70 SL=2.75 BUY CALL JAN-40*CPS-AH OI=139 at $1.85 SL=1.00 Average Daily Volume = 515 K --- CTXS – Citrix Systems $12.09 (-0.91 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: To say that last week's market action was lackluster would be an understatement, as the major averages churned their way slightly lower but without any conviction. Such would be an apt description of our CTXS play as well, with the stock drifting lower, but without any conviction. Despite the fact that there wasn't enough selling pressure to break any important support levels, neither was there enough buying interest to give us a decent bounce. There was the sharp dip and rebound Wednesday morning, but that was more of an anomaly than a real move. Suffice to say, CTXS managed to creep its way right down to the bottom of the channel that has been supporting the stock's rise since late October. To be fair, the stock actually drifted through the bottom of the channel on Friday, as the channel rose to the $12.20 level. But the $12 level continued to provide support throughout the day. This still looks like an attractive level to initiate new positions, as the 20-dma (currently $11.66) rises to provide additional support. Clearly, this stock is going to need some renewed buying interest in the Technology sector to get moving northwards again, and that lack of buying volume (rather than heavy selling) is in large part responsible for the stock's lackluster performance last week. While new entries near current levels provide a solid risk/reward ratio (with our stop still set at $11.50), we really would prefer to see CTXS charge back into its ascending channel on stronger volume before taking a position. More conservative traders will still want to wait for a convincing move over $12.90 before playing. Those looking to trade another breakout move (not our favorite strategy for this stock) will need to wait for a volume-backed move through $13.50. Regardless of your entry strategy, look for confirmation from a rising NASDAQ. *** December contracts expire next week *** BUY CALL DEC-10 XSQ-LB OI=2604 at $2.15 SL=1.00 BUY CALL DEC-12 XSQ-LV OI=3262 at $0.35 SL=0.00 BUY CALL JAN-12*XSQ-AV OI=1696 at $1.00 SL=0.50 BUY CALL JAN-15 XSQ-AC OI=1531 at $0.30 SL=0.00 Average Daily Volume = 3.73 mln --- OMC – Omnicom Group $66.91 (-0.99 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: So you say the action of the past week has left you confused and not knowing which way to jump? Judging by the price action in shares of OMC, you aren't alone. On November 14th, the stock broke out above the $66 level, clearing the August highs and making a convincing case that it wanted to run higher. Here we are one month later, and the stock closed at $66.92, for a whopping 61-cent gain. Over that period of time, OMC has traded down to the $64 level and then as high as $70.50, but neither the bulls or the bears have had sufficient conviction to break out of this range. Since the PnF chart is still quite bullish, with the current vertical count of $86, we have a couple of different ways to play. Bargain-hunters can look to initiate new positions on successful rebounds from the $65-66 area in anticipation of a successful breakout to the upside. On the other hand, momentum traders will want to see a breakout over the $71 level (which would generate another PnF Buy signal) before committing cash to the trade. The thing that is creating so much overhead resistance is that pesky 200-dma, which has now fallen to $69.06. Note that this moving average capped the rally on December 2nd and then again this past Wednesday. While a successful breakout over the 200-dma will still have to contend with mild resistance just over the $70 level, such a breakout should generate more buying and get us out of this range. Of course, on the off chance that the bulls just plain run out of gas and OMC falls back through support, we've got our stop in place at $64. Not only would that break the current range in a bearish manner, but it would also generate a PnF Sell signal, negating the current bullish price target. *** December contracts expire next week *** BUY CALL DEC-65 OMC-LM OI=1568 at $2.80 SL=1.50 BUY CALL DEC-70 OMC-LN OI=2417 at $0.55 SL=0.25 BUY CALL JAN-65*OMC-AM OI=1857 at $4.90 SL=3.00 BUY CALL JAN-70 OMC-AN OI=8480 at $2.35 SL=1.25 Average Daily Volume = 2.40 mln ************* NEW PUT PLAYS ************* RKY – Adolph Coors Company $61.49 (-3.89 last week) Company Summary: Adolph Coors is a producer of beer, with a portfolio of brands designed to appeal to a wide range of consumer taste, style and price preferences. In addition to its principal subsidiary, Coors Brewing Company, the company also owns a brewer in the United Kingdom, Coors Brewers Limited, and has brewing and packaging facilities in Virginia and Tennessee. RKY owns major facilities in Colorado to manufacture aluminum cans and ends, as well as bottles and is a partner in ventures that operate these plants. Historically, RKY's beverages have been sold throughout the United States and in select international markets. Why We Like It: You know the economy is really having problems when "Joe Six Pack" is cutting back on his weekly brew consumption. If the price action of the major beer breweries is any indication, the economy isn't healthy. RKY moved to a new yearly high in late October, stalled out and has been sliding down the slippery slope of hope ever since then. Last Tuesday things started to unravel when the stock broke below the 50-dma (currently $64.99) and it went from bad to worse on Thursday with the violation of the 200-dma (now at $63.20). Just to cap off a rather dismal week for the bulls, RKY dropped below $62 on Friday, extending the column of O's on the PnF chart, removing the possibility of a bear trap. The Sell signal from last week projects down to $55 and now that the October 21st gap has been filled, that level looks like a definite possibility. While there is some mile support in the $60-61 area, the next real firm level of support appears to be down at $58 and then $56, the site of the October lows. Due to the various levels of support arrayed between here and our eventual target of $55, the best entries are likely to come from a failed rally near resistance. The $63.50-64.00 area looks like pretty solid resistance and that would be our choice for an entry on a failed rally. We are initially placing our stop at $65, the top of last Tuesday's gap and the site of the 50-dma. *** December contracts expire next week *** BUY PUT DEC-65 RKY-XM OI= 31 at $3.80 SL=2.25 BUY PUT JAN-65 RKY-MM OI=180 at $4.60 SL=2.75 BUY PUT JAN-60*RKY-ML OI=208 at $2.05 SL=1.00 Average Daily Volume = 386 K --- ROOM – Hotels.com $59.45 (-5.80 last week) Company Summary: Hotels.com is a provider of discount hotel rooms and other lodging accommodations, allowing customers to select and book hotel rooms in major cities through the company's websites and its toll-free call centers. ROOM contracts with hotels in advance for volume purchases and guaranteed availability of hotel rooms and vacation rentals at wholesale prices and sells these rooms to consumers, often at discounts to published rates. In addition, its hotel supply relationships often allow the company to offer its customers hotel accommodation alternatives for otherwise unavailable dates. At the end of 2001, ROOM had room supply agreements with over 4500 lodging properties in 178 major markets in North America, the Caribbean, Western Europe and Asia. Why We Like It: While clearly not the only cause, UAL's failure to secure a government loan guarantee has cast a pall over the travel industry, with weakness being felt throughout the leisure "food chain". What appears to be an even larger factor is the realization by investors that people just aren't traveling that much, leaving a glut of supply in this industry just like so many others. It was only a couple short weeks ago that ROOM broke out over the $70 level and posted a new all-time high of $75. Then, like Wile E. Coyote after running off the edge of the cliff, the stock has been plummeting, partially due to broad market weakness and other warning signs from the overall economy. While not a major factor, there was the slight downgrade from Pacific Crest Securities on Tuesday. Following the downgrade, ROOM traded down to the 50-dma near $61, found support and rebounded back above $63. But that's as good as it got. The wind had been taken out of its sails, and with the broad market weak on Friday, ROOM fell below $60, finally generating a new PnF Sell signal, and due to the long column of O's necessary to create the signal, it's a whopper! ROOM came to rest just below $60 on Friday and the PnF price target is currently $44. Friday's selloff violated the 50-dma in a big way and now the 200-dma is the only one currently capable of providing support, and it is clear down at $53. Aggressive traders can consider new entries on a break below the $59 level next week, while more patient traders will want to wait for a failed rally in the $61-62 area. That level of resistance will now be reinforced by the 50-dma. We are initially setting our stop at $63, just above Friday's intraday high. *** December contracts expire next week *** BUY PUT DEC-60 URD-XL OI= 944 at $2.20 SL=1.00 BUY PUT JAN-60*URD-ML OI=2044 at $4.90 SL=3.00 BUY PUT JAN-55 URD-MK OI=1722 at $2.80 SL=1.50 Average Daily Volume = 896 K ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: advertising@OptionInvestor.com
The Option Investor Newsletter Sunday 12-15-2002 Sunday 4 of 5 In Section Four: Current Put Plays: AIG, DLX, MMM Leaps: Still Undecided Traders Corner: A Strangle For Midgets With Brass Traders Corner: Of Chickens and Eggs: Technical Analysis and Fundamentals ************************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 International Group - $59.00 -1.09 (-1.49 for the week) Company Summary: 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: Breakdown! The technical picture for AIG has been deteriorating for nearly two weeks. First, shares rolled over from the 200- dma. This was followed by a break under the 50-dma ($62.59) and bullish support on the p-n-f chart (along with a tasty triple- bottom sell signal). The bulls managed to prop the stock up after it initially moved under support at $60.00, but were quickly turned back at the 50-dma. This bearish trend led to Friday's 1.8% decline, which took shares to fresh relative lows. AIG underperformed both the Dow Jones and IUX.X insurance index after stair-stepping lower throughout the session. With the stock now trading below the $60.00 congestion area, we'll be looking for shares to continue to retrace the mid-October rally and fall towards $52.00. Shorter-term traders can think about closing positions if AIG bounces from the $55.00 area. Those looking for new positions can target another rollover from $60.00 or a move below $58.86, but be aware that the late-September highs near $58.00 may provide support. Our stop has been lowered to $62.76, slightly above the 50-dma. BUY PUT JAN-60 AIG-ML OI=19542 at $3.50 SL=1.75 BUY PUT FEB-60 AIG-NL OI= 2741 at $4.50 SL=2.25 Average Daily Volume = 6.44 mln --- DLX - Deluxe - $41.00 -0.99 (-2.81 for the week) Company Summary: 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: It looks like our patience has been rewarded. We added this short play when DLX fell to multi-month lows, just before the stock rebounded and retraced its late-November losses. But as we had hoped would be the case, the 200-dma near $44.00 provided a ceiling. The past week has seen shares trend lower after rolling over from that moving average. The decline accelerated today after shares sold off from short-term support/resistance at $42.00. Shares underperformed the broader market and moved below $41.00 for the first time since early August. The daily chart shows no clear support until $37.00. But as much as we'd like to see a swift decline to that level, the stock will first have to break below its descending regression channel. If the current downtrend remains intact, DLX could fall to psychological support at $40.00, get a brief pop, and then roll over near $41.50. A wholesale violation of the $40.00 level would be decidedly bearish. BUY PUT JAN-45 DLX-MI OI=163 at $4.40 SL=2.20 BUY PUT JAN-40 DLX-MH OI=320 at $1.65 SL=0.80 Average Daily Volume = 370 K --- MMM – 3M Company $121.77 (-4.33 last week) Company Summary: Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. Why We Like It: Mmm, mmm, good! That was the sound the bears were making on Friday as they inflicted some significant technical damage on shares of MMM. We initiated coverage of the stock on Thursday, as it had been trading rather weakly and looked like it was about to fall through the 200-dma just above the $123 level. That breakdown didn't take long at all, as MMM opened in the red, fell through $123 early in the session and one failed rebound below that level continued southward right up until the close. While the price loss was fairly small at $1.88, the technical damage is more significant. As we've already stated, the stock broke the 200-dma, and then fell below the $122.72 level (38% retracement of the rally off the October lows) and then came to rest right at the top of the October 15th gap. If that gap (the bottom of which is $120.95) fails to support the stock, then we could be treated to a drop all the way back to $116, the level from which the October rally commenced. Traders that missed out on today's entry point will need to look for a failed bounce near the 200-dma, or possibly as high as $125 to provide entry. Due to the sometimes-volatile nature of MMM, we're going to leave our stop rather wide up at $127 this weekend in case of a bounce early next week. *** December contracts expire next week *** BUY PUT DEC-125 MMM-XE OI=4472 at $3.90 SL=2.50 BUY PUT JAN-125 MMM-ME OI=4400 at $6.10 SL=4.00 BUY PUT JAN-120*MMM-MD OI=6236 at $3.70 SL=2.00 Average Daily Volume = 2.73 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Still Undecided By Mark Phillips mphillips@OptionInvestor.com For all the false starts and reversals last week, you'd think we would have gone somewhere. But neither the bulls or the bears were able to garner a firm advantage, leaving us with the net result that the market drifted lower to post its second consecutive weekly close in the red. After the drop on Monday, the market basically went up a little and then down a little, ending near the low end of the weekly range. While there is strong support not too far below where we came to rest on Friday (445 for the OEX and 8350 for the DOW), there hasn't been enough selling pressure to give us a decent test. On the other hand, each fractionally lower low is being met with just enough buying to keep the market from falling, but not enough to break the string of lower highs. The result is that we continue drifting lower until the immovable object (support) meets the irresistible force (selling pressure). My gut feel says the result will be a decent oversold rally, but the evidence for that 'gut feel' certainly isn't present in the charts. Proving that we all get egg on our face on a regular basis when trying to prognosticate the market's future (hence the moniker, The Great Humiliator), all my analysis and trendlines last week were for naught. The market gapped down on Monday and that perceived support was toast. The only thing I see that gives a slight (very slight) nod to the upside next week (other than seasonality and triple-witch expiration) is the fact that the fear shown in the VIX early in the week has been slowly melting away. I guess that 36 level really was a meaningful level of resistance. After reversing from a high of 35.58, the VIX fell as low as 30.38 on Thursday before coming to rest at 32.12. Note that the VIX closed again just slightly above the 200-dma of the VIX at 31.73. Coincidence? I think not! Even the VIX is confused about what to expect next. Recall that last week I was looking for a break of the ascending trendlines on the major indices and a breakout in the VIX to tell me that my forecast was wrong. While we got the breakdown in the market, the VIX clearly didn't cooperate. That leaves us with mixed signals. Speaking of mixed signals, the market was full of them last week. For months and months, the equity market and bond market have been trading contrary to one another -- bonds up, stocks down or bonds down, stocks up. That relationship failed to work all week, leaving another question mark in traders' minds. The only concrete action that took place last week was that between the Dollar and Gold. Thursday's session saw the dollar index (DX00Y) breaking down hard, falling far enough on Friday to take out the October low and challenge the lows from July. There are as many opinions as to the root cause of the dollar's weakness as there are analysts, but it seems to have been driven by a combination of geopolitical concerns, as well as a belief that the US will no longer defend their strong dollar policy, now that Paul O'Neill has been replaced as Treasury Secretary. Corresponding to this weakness in the dollar, Gold absolutely exploded on Thursday and continued to rise on Friday, with the February futures contract hitting an intraday high of $336.70. Just for the record, Gold hasn't been that expensive since late 1997! The yellow metal fell back from its morning high on Friday, but the important work has already been done. In the process of rising to new multi-year highs, the PnF chart of the composite Gold Futures contract ($GOLD on stockcharts.com) issued a new Buy signal. But it isn't just any Buy signal, it’s a Bullish Triangle breakout, one of the strongest signals in PnF-land. At the same time, the XAU index generated another Buy signal, working ever closer to its current bullish price target of $94. Looks like there's still some upside to be had in gold trades, don't you think? Needless to say, I'm pretty pleased with the action we've seen in our NEM play, but more on that below. Based on the violation of what I though was strong support in the OEX near $455, you might think I'd be leaning big-time bearish heading into next week. Sorry to disappoint you. I think I was a bit too optimistic in my expectation for the $455 level to provide support. Going back to the daily chart, it looks like the real line in the sand is going to be near $445, a level that was repeatedly tested (and held) in late October and then early November. I would be very surprised if the bulls gave up without a fight near that level. Perhaps that's what they're waiting for is a successful test of support at that level before stepping back into the fray. After resting up for a couple weeks, I can see the possibility that they're looking forward to stampeding a few weak-handed bears. Only time will tell, and the technicals certainly do not yet warrant siding with the bulls, at least as far as the broad market goes. With respect to our individual plays, let's see what's shaking. Portfolio: LEN - Much like the rest of the market, LEN spent the week consolidating and trying to claw its way back over the $50 level. While Thursday's rebound may have been encouraging to the bulls, giving most of it back on Friday certainly doesn't look encouraging. On the other hand, I'm surprised there hasn't been more downside follow-through after the stock broke the $49 level. That quad-bottom breakdown on the PnF chart looks like a bear's dream, but we need to err on the side of caution. Until LEN prints $48, adding another O to the current column, we are faced with the risk that the breakdown is a bear trap. The result should be known soon, but until we see either a breakdown or bullish reversal, the best course of action is to stand pat. Since it would take a print of $54 to negate the current Sell signal, that's where we'll leave our stop. NEM - Wow! I thought last week's action was encouraging, but this week's moonshot was a real treat, with big breakouts in the Gold Futures and the XAU index helping NEM to really launch higher at the end of the week. Wednesday's trade at $27 created the PnF Buy signal and that combined with the weakness in the dollar, sent NEM surging north of $29 before the closing bell on Friday. To say we have a powerful bullish signal would be an understatement. With that said, now is NOT the time to go out and establish a position in the yellow metal or NEM. NEM has surged nearly $6 (25%) in the past 2 weeks. That is not the time to be entering long-term positions. If you missed entering on the last dip, then wait for the next one. My expectation is that we'll see a pullback into the $26-27 area, with historical support (former resistance) at $26.50 and the 200-dma at $26.88. Look to establish new positions (or add to existing positions) on a rebound from that level. Strong support should now exist at the $25 level, so that is the new site of our stop. MO - It certainly isn't exciting like the NEM play was last week, but we're starting to see some faint signs of recovery in MO. There's no huge volume or rush to enter the stock, but this beaten-down consumer stock is gradually advancing. The first obstacle was to get above the $40 level and the bulls accomplished that last week. But there is lots of overhead resistance to push through -- starting with the descending trendline at $42.50, then historical resistance in the $43-44 area and finally the PnF bearish resistance line at $45. As if that wasn't enough, there's the 200-dma, currently just below $48. But, I expect MO to slog through each of these resistance levels in the months ahead -- it's just going to take time. That's what makes it an ideal candidate for a LEAPS play. Buy on the pullbacks, and the next one ought to be coming along over the next week or so, ideally just below $40, at the site of the curling higher 50-dma. GM - Don't you just love it when a plan comes together? Our entry strategy was aggressive, but the market gave us precisely what we were looking for and it has been a steady downhill slide for GM ever since. The first bounce off the 50-dma was short-lived and it looks like we're going to get another test next week. My gut feel is that it will produce another rally into the $38-39 area, but that's going to be all she wrote. Then we'll commence with the downward trend anew. Of course, we've still got quite a ways to go before the PnF chart is going to give us a corresponding Sell signal on the traditional scale. But if we back out to a larger-scale view with a 2-point box, we see that GM is still laboring under the Sell signal generated back in August and September. The vertical count on that signal projects down to $12. We may not get there, but I think it shows that supply is still very much in control. I've lowered the stop to $40 this weekend, ensuring a break-even trade at worst. BBH - The sideways churn continues. BBH has been stuck in this $85-92 range for the better part of two months now, with neither the bulls or the bears able to garner a meaningful advantage. All the while, volume has been declining steadily, underscoring the lack of conviction in this area of the market. Until this range breaks, we sit on our hands, hoping for the breakdown under $85 and protecting ourselves against a breakout with our stop in place at $93.50. Watch List: DELL - As I mentioned on Friday in the Market Monitor, DELL is creeping closer to giving us a decent entry point. Ever since the company announced earnings last month, the excitement has been deflating out of the stock. That's precisely what we want to see so that we can but it on the cheap. Friday's session was not kind to the PC stock, as it lost nearly 3%, falling back to just above the 200-dma. This is exactly why we didn't want to rush into a position up near $28. My expectation is that DELL will drop back below the 200-dma and likely test the $26 area before catching a meaningful bounce. In my opinion, the closer the stock gets to the $25 level, the better the entry. It would require a print of $23 to break the string of higher lows on the PnF chart, so that is where we'll place our stop after entry. GD - How many different ways can I say "Uh-oh"? I do not like GD's drop last Friday. I do not like it, Sam I am. Seriously, I've kept talking about wanting a drop down to the $78 level and then a rebound. Well, Friday's 3% loss dropped GD below that level, and right to a major support level that has held for the past couple months. What's not to like? Well, it's the way in which price got there. We've now seen a couple of three-box reversals higher on the PnF chart, both of which have resulted in new Sell signals, each of which went lower than the one before. Not only that, but Friday's selling volume was the heaviest in the past 3 weeks. I took a fresh look at the price pattern of the past several months, and rather than seeing a neutral wedge forming over the past four months, I see the possibility that this is just a sideways consolidation pattern in preparation for a continuation of what came before. Well, what came before was a $30 plunge, and preserving that symmetry, would suggest a subsequent $30 plunge once the pattern breaks to the downside. I may be wrong, and this may turn out to be a good entry into the play, but I'm not willing to take that risk without seeing some more constructive price action first. Place GD on HOLD, pending future price action. DJX - Well, I was clearly in too much of a hurry to get this play on the list. Either that, or I waiting one week too long. In all seriousness, I think the timing of adding it was just about right and now we just have to wait and see whether the market will deliver to us the entry point we want. The DJX is getting awfully close to where I think it has to bounce (near $83.50) or else things are going to get very ugly for the bulls. The strength of that bounce will determine our success in this play. I'm now leaning towards the likelihood that the DJX will top out on the next rally near the $88 level and then proceed to give us a H&S top. If that does in fact come to fruition, we'll be looking at a decline down into the $76 area. That is the sort of move that will make all the waiting worthwhile. Accordingly, I'm lowering our entry target to $88 this weekend, and if filled, we'll more than likely start with a stop at $90.50, just above the early December high. Last week's forecast was for another leg up to get under way before the market tipped over big time (hopefully) after the first of the year. Well, we certainly didn't get any meaningful upside last week. Is next week going to be any different? Well, maybe. How's that for ambivalent? In actuality, I think we are due for a rebound and a pretty decent one at that. But I expect it will fall short of the highs posted just 2 short weeks ago, and that rollover should start the New Years rollover in earnest. Hey, I'm no Arch Crawford, but I get one right from time to time. I'm taking a week off from adding new plays this weekend, as the broad market picture is so muddled. I have my own view of what I expect, but right now I need to see some confirmation of that view. We have a fairly balanced Portfolio and Watch List, so I think we are well positioned heading into the end of the year. My earnest thanks to all those of you that sent me your comments about changes to the LEAPS column. For the most part, you told me to leave it like it is, so that's what I'm going to do. The only meaningful change requested was to do mid-week updates to the LEAPS plays, perhaps in the Market Monitor. Well, ask and you shall receive! I got the ball rolling on that effort on Friday, and we'll look to continue it from here on out. For those of you that tuned in, I hope you found my brief comments in the Market Monitor to be useful. My plan is to regularly update plays throughout the week as changing market conditions warrant. In addition, if I find something that looks good for a new LEAPS play during the week, the Market Monitor will provide a good forum to share that information with you. Of course, timing is everything. After getting off to a solid start in that forum on Friday, I'll be absent on Monday, as it is time to give my wife some much-needed undivided attention. Well, maybe that isn't an accurate description -- we're going to Vegas for a long weekend! I'll be back on Tuesday. Have a great weekend! 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 $ 5.60 +43.59% $25 '05 $ 30 ZIE-AF $ 6.10 $ 8.30 +36.07% $25 MO 11/13/02 '04 $ 40 LMO-AH $ 3.90 $ 5.20 +33.33% $37 '05 $ 40 ZMO-AH $ 4.80 $ 6.30 +31.25% $37 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $10.30 +19.77% $54 '05 $ 50 XFF-MJ $11.20 $14.80 +32.14% $54 BBH 12/02/02 '04 $ 85 KBB-MQ $12.10 $13.00 + 7.44% $93.50 '05 $ 80 XBB-MP $14.40 $14.60 + 1.39% $93.50 GM 12/02/02 '04 $ 35 LGM-MG $ 5.20 $ 6.80 +30.77% $40 '05 $ 30 ZGM-MF $ 5.50 $ 6.70 +21.82% $40 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 HOLD 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 $88 DEC-2003 $ 88 ZDJ-XJ DEC-2004 $ 88 YDJ-XJ New Portfolio Plays None New Watchlist Plays None Drops None ************** TRADERS CORNER ************** ************** TRADERS CORNER ************** Of Chickens and Eggs: Technical Analysis and Fundamentals The word "speculator" is derived from the latin speculare, meaning "to spy or to observe". There are countless types of speculators in the financial markets, and what distinguishes them tends to be their methodology- what is the object of their speculation? Well, we can distinguish between two broad categories- technical speculation and fundamental speculation. Technical traders watch the charts. Technical analysis ("TA") is premised on the assumption that everything is reflected in the charts. While the most rudimentary focus of TA is price, the possibilities are endless, and chartists have come a long way since W.D. Gann first drew his crisscrossing angles by hand projecting from high and low points on the graphs. We chart complex ratios and measure their rates of change with exponential moving averages and oscillators. The big boys and hedge funds hire applied mathematicians for a king's ransom and all the trims, to design "black box" models that don't sweat, get greedy, and only occasionally panic (Jim's "Attack of the Program Trades"). Going by memory, we've seen months this year when over 40% of all the trades executed on the NYSE were fired off by machines. Fundamentalists, on the other hand, focus on company and economic data as a means of determining valuation, and then seek to exploit divergences between actual price and idealized valuation. Their argument against TA is that a chart can't possibly predict the future, and "gaming the tape" is little more than gambling. They watch the news, they play "what if" scenario games, and they are the most interesting people with whom to chat at parties. This year has been revelatory for many traders, as investor focus was drawn to accounting scandals, countless revisions of government data, and the gap between GAAP and pro forma numbers. What's a trader to do? Is it fundamentals or technicals that ultimately drives price? The consensus in the mainstream media is that the market is a "discounting mechanism" that anticipates conditions 6 months out. I have difficulty rendering that model even remotely profitable, and in fact, tend to think the reverse - that the market is the driver of news in the short to medium term. The University of Michigan consumer confidence numbers are a very simplistic example. Ignoring the methodological flaw in attempting to gauge US consumer confidence from a telephone survey of a few hundred subjects, one must nevertheless conclude that a consumer whose retirement account has lost 5% of its value in the past 2 weeks will be less confident than one who's account has grown. Yet, this trailing indicator moves markets in the present, the instant of its release. The market is thus a complex feedback system, and the job of traders is to try to anticipate what the crowd will do. The very decisions of the crowd become part of the pricing mechanism that determines what the crowd will see and do next. The fact that the crowd is bidding a stock will attract additional bids, and the same when it offers a stock. Thus the hysterical buying and selling seen at significant tops and bottoms, and the understandable fear of bears to short overvalued, money-losing stocks such as YHOO and AMZN in their gogo-days (daze). Despite stratospheric valuations, the negative balance sheets, and an irritatingly exuberant "what me worry" culture, dotbomb companies marched ever higher, as traders relied on the "greater fool theory" and bidded the Nasdaq to record highs, day after day for week after week. I believe it is impossible to time the markets with any degree of success on a purely fundamental basis. When, for example, the weekly oscillators have bottomed and are pointed up, traders are often astounded (at least the dozens who emailed me during the October rally) by the "bad news is good" phenomenon. Quite simply, the markets want to go up, having been sold off too heavily, and run-of-the-mill bad news cannot overcome the "technical" pressure. The technical indicators are reproducing faithfully the minutiae of the crowd's behaviour, and, like a school of fish following each other in a simple pattern but seemingly random direction, one can nevertheless attempt to predict "turns" or significant changes of direction using these precise measuring tools. The particular news prevailing at those moments is clearly of secondary importance as the market "does its thing", where even days earlier similar news would have had a massive impact. Going beyond the "good news is bad / bad news is good" dilemma, another example of the inconsistencies to which fundamental analysis falls prey is found in the market's inconsistent scaling of stock valuations. Why is a valuation of 1000x future earnings tolerated in one market environment while a valuation of 10x will be sold off in another? The facile explanation of "future expectations and optimism" is awfully light to carry some of the astounding market capitalizations we've seen since Y2K. Simply put, the market cannot be understood by fundamental analysis on its own, or at least not readily, accurately and easily enough to be meaningful for individual traders such as we are. Technical analysis is therefore required. Why does it work so well where fundamental analysis fails? As noted above, it's the most accurate means of measuring the past and the present. It helps, though, that market technicians and the "black boxes" they devise tend to follow or at least take cognizance of the same types of indicators and measurements. While I believe in Fibonacci's Golden Sequence, one needn't be spiritual to use it, particularly because each and every trader is aware of it, if not actually watching the retracement levels. No wonder those lines, and all the other technical indicators we all follow work- they're self-fulfilling prophesies. More than this merely psychological explanation, however, I believe as well that history tends to repeat itself, as Gann said. Reversion to the mean is a principle that is implicit in most every tool of TA. TA is not a mechanism for telling the future, but rather the most accurate method by which we can view the past and the present. From this simple fact emerge some of our most valuable rules: Never anticipate a signal. Trade only what you see. Do not overfocus, and adopt a broad view. By being methodical in one's method of viewing the past and the present, one can begin to "remember" the future, and it is here that fundamental analysis comes into play. Going beyond merely technical indicators, in order to understand the longer term price movements and trends, I submit that the best way to model the market is as a liquidity meter. When money and/or credit are plentiful, we can expect higher prices. When excess liquidity gets channeled into particular sectors, we get bubbles. The market is simply too complex to reduce one's focus to fundamentals versus technicals, and the trader has no choice but to follow everything possible. It is here that one must be cognizant of money flows, and again, this is a technical issue, measured precisely on our charts. The holy grail of every trader is to anticipate future moves. It is this hunger which the media exploits in its constant barrage of leading and misleading messages. Without showering you with examples of bad advice from the financial media, I will only stress that it is not the message that the wise trader notes, but rather the fact of the message that is significant. It is not the that INTC was upgraded that I might find significant, but rather the timing of the upgrade- at what point on its chart the upgrade came. When you begin keeping track of upgrades and downgrades, it becomes apparent that there is a tendency to upgrade stocks that are topping out or rolling over- they rarely if ever get upgraded at the bottom. A wise trader will smell "distribution" when a toppy stock gets upgraded, then will follow the chart and the oscillator, and get ready to short the inevitable decline. As Joe Granville put it, News is of little or no value in playing the market game successfully. News is generally for suckers. It misleads more often than it guides. It creates mistimed fears, which provoke selling at the wrong time, and raises hopes, which encourages buying . . . at the wrong time. The reason why news has very little relationship to what the market is going to do is simply because the market is moving on tomorrow's news, and thus the current news is a stale factor to the market. I believe that statement to be an oversimplification. Obviously, an airplane colliding with a building is vital and timely market news. The market is moving on every input imaginable in the shorter time frames, but over time, if forced to select a single variable, one would have to conclude that liquidity is the key- when there is more of it, the market rises and when there is less, it falls. Should investors completely avoid fundamental analysis and news entirely? Many technicians do just that. While GE's financial media property, CNBC, spins the news with its relentlessly bullish bias (one of my favorite technicians refers to CNBC as the world's longest running infomercial), there is no room for spin on a chart, where the only talking is done by money. Nevertheless, I continue to follow the news, and my own view has evolved to treat fundamental analysis as an invaluable tool in identifying broad trends to inform my own TA. Without a broad understanding of the macroeconomic environment, a trader is left without the tools to anticipate the broad trends that eventually resolve themselves into trades. I find it very difficult to trade without some kind of a bias. In 1999 it was generally bullish, and in 2002 it's been generally bearish. Most importantly, however, it is fundamental analysis that should guide the technician to the specific sectors and issues within the market that are likely to be impacted by liquidity flows. Based on non-technical indicators such as Jim's declining "Parking lot index", the increasingly aggressive financing offers from auto makers and relentless advertisements for same, the incredible boom in auto and home purchases over the past year, and the multi-decade low interest rates, a technical trader will casting attention on homebuilders, automakers, retailers, and consumer credit lenders, for starters. It certainly beats watching the various market "heatmaps" to try to get a clear read. More than anything, however, it is essential that each trader be consistent in his or her methodology. The goal is to make money. If following the news works, don't stop. If ignoring it works, ditto. My own trading has improved significantly since I began attempting to understand global financial trends and to follow the news, but I've learned not to trade on it exclusively. And, of course, I wouldn't dream of entering a trade without knowing what the charts were saying across different timeframes. My view on technical analysis is that it is the trader's single most powerful tool. As for fundamental analysis, reader JB, with whom I've been lucky enough to be discussing these questions, puts it most eloquently: It brings up something which became painfully obvious to me as I studied for the CFA exam this year. The entire focus of the analytical community is almost worse than useless to the stock market as an investment. The CFA is fabulously armed to value companies as acquisitions, to value real estate transactions, etc. They dismiss technical analysis as ineffective sorcery. They insert hypotheticals, influenced by anticipation, twisted by hope, and leavened with ego. Extrapolate those out a few quarters and drunken dart throwers are their equals if any assumption collapses. As if the past three years aren't enough evidence to the contrary. As someone who has run companies, bought companies, started companies, I can say without equivocation, the analysts are data collectors, nothing more. They are so brilliant that manipulation of data to arrive at a conclusion is second nature. I recall one of the telecom equipment analysts dropping his valuation on a company by 50% in ONE MONTH. Why? Because business conditions changed. The analysts have NO concept of commercial behaviour, only financial. They don't seem to realize that sales in business doesn't tend to decrease smoothly in a sine wave. The phone just stops ringing one day. I do believe fundamental analysis particularly macro analysis to be of value in providing reason to trends or scenarios to be alert to. But analysts? They are articulate conduits of wealth transfer to their firms. If compensation was the sum of money made for the firm and lost by clients following their advice, I question whether they would have money enough to eat. ************** TRADERS CORNER ************** A Strangle For Midgets With Brass By Mike Parnos, Investing With Attitude A Short Strangle is one of the most dangerous plays that we will learn about at the Couch Potato Trading Institute. So put on your catcher’s mask, your chastity belt, your body armor and your deodorant and prepare yourself for the option wars. The Short Strangle is rated “R” for risky. It is a credit spread that consists of the sale of a put and a call with different strike prices, but the same expiration month. The objective is for the stock to finish, at expiration, between the sold strikes. The two options will then expire worthless, you’ll keep all the credit and live happily ever after. The Short Strangle is really the Iron Condor’s evil twin. Our old friend, the Iron Condor, is simply a Short Strangle that has protection in the form of long puts and calls purchased one strike further out-of-the-money respectively. Today’s column includes a checklist for the Short Strangle strategy. It will help you organize the information you accumulate as you research each potential Short Strangle trade. OI is arranging a direct download of the checklist from the OI website. Hopefully, there will be a link at the end of this article to take you there. If you have a problem getting the checklist, don’t hesitate to email me (mparnos@OptionInvestor.com) and I’ll be glad to send you the 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 Short Strangle Let’s look at an example. Keep in mind that this example is hypothetical and for educational purposes only. It is not intended as a recommendation. That is something you will need to evaluate on your own. IBM closed Friday at $80.00. It recently moved up to almost $90.00, but bounced back down, with the rest of the market. There is some degree of resistance at $70.00. For this example, we will use a 10-contract position. Putting On The Trade – This is the easy part. The only problem is that you must have the highest trading approval level from your brokerage firm to trade “uncovered” options. Brokerage firms usually assign this level very carefully to traders who have had extensive experience and who have an account with a substantial assets. Sell 10 contracts of the IBM Jan. 03 $70 puts @ $1.30 = $1,300 Sell 10 contracts of the IBM Jan. 03 $90 calls @ $.70 = $700 Total amount of credit taken in = $2,000 Your Exposure – Both the sold puts and calls are uncovered. The puts are exposed from the sold strike ($70) down to zero while the calls have unlimited exposure from the sold strike ($90) to the moon. Now that sounds a little melodramatic, but technically it’s true. That’s why brokerage firms are careful about handing out “uncovered” approval levels. Inexperienced traders are less likely to know how to make necessary adjustments when an “uncovered” option strike is threatened or violated. Many brokers will not allow any of their clients to sell “uncovered” options because they are afraid of lawsuits. There are countless horror stories about traders who lost six figures trading naked options. Then, they turned around and sued the brokerage firms who allowed them to trade. – and WON! Unbelievable! There are plenty of slip-and-fall-give-me-a-call attorneys who now specialize in stock market cases. Just as unbelievable are those giant cans of Crisco with heartbeats that are banding together to bring suits against fast food chains – blaming McDonalds for making them fat. These are probably the same blobs who can’t fit into an airline seat and are angry when the airline wants to charge them for two seats. Doesn’t ANYONE take responsibility for his/her own actions anymore? It could be a new game show on TV – Who Can We Blame? OK, I’ll get off of the soapbox (for awhile) and get back to the business of options. Maintenance If you are able to put on the Short Strangle trade, your brokerage firm will want to hold some money, or assets, in your account for their (and your) protection. The stock price is part of the equation, so the requirement will vary daily as the stock price moves. This is money you will need to leave in your brokerage account in the form of cash or other marginable securities. Here is the formula that is normally used: IBM at $80 The initial margin requirement for the transaction is 20% of the underlying stock plus the credit received, less the amount out of the money. 20% of the value of the underlying ($80) = $16.00 Add premium received from Jan. $70 put = $1.30 Total: $17.30 ($16.00 + $1.30) Subtract amount out-of-the-money = $10.00 Margin Requirement: $730 per contract For a 10 contract position: $730 x 10 contracts = $7,300 Adjustments When the stock is about to violate one of the sold strikes or an important support or resistance level, you have to be prepared to act. This is your first line of defense. You can (using the short call as an example): 1. Close out the short position by buying back the short call. 2. Roll the short call out to a later month at a higher strike, increasing the number of contracts to make up the deficit. 3. Close out the short call position and sell an additional number of puts to make up the deficit. 4. Buy an appropriate number of shares of stock to cover the short call. 5. Buy a deep in-the-money call to cover the short call. Well, there it is -- the Short Strangle. For all its glory, it’s risky, but if you have the approval level, and you find a stock with a nice wide trading range, you can make a nice monthly cash flow. Whatever you do, think it through. Know the strategy inside and out. Write me if you have any questions. I’ll do my best to answer them. But, whatever you decide, take responsibility for it – in good times and bad times. If you learn nothing else at the Couch Potato Trading Institute, be someone your kids could be proud of – it’s called Integrity 101. ___________________________________________________________ The CPTI Short Strangle Checklist Stock / Symbol: _________________ Last Trade: ______________ Current Bid: _____________ Current Ask: ________________ Put: (Month, Strike): ___________ Best Bid: ____________ Call: (Month, Strike): ___________ Best Bid: ____________ Total Credit From Sale of Put & Call: ___________________ Maintenance Req: 20% of Stock Value: __________________ Plus Credit Received: _(+)_______________ Less the Amount Out-Of-The-Money: _(-)_______________ Total: ________ x # of Contracts: ________ = ________________ Implied Volatility: __________________________ Historical Volatility: ________________________ Primary Support Level: ______________________ Secondary Support Level: ____________________ Primary Resistance Level: ____________________ Secondary Resistance Level: __________________ Trend Line Support: _________________________ Trend Line Resistance: _______________________ Upcoming News: (Earnings, Annual Meeting): _____________________ ___________________________________________________________ Average Monthly Move: ____________________ Keep It On The Watch List: _____ (Yes) _____ (No) Notes: ______________________________________________________ ____________________________________________________________ ____________________________________________________________ CPTI PORTFOLIO UPDATE – As Of Friday’s Close BBH Iron Condor – Currently trading at $87.66 We want BBH to finish the December option cycle anywhere between $80 and $95. We’re still looking good – still in mid-range. TTWO Short Strangle – Currently trading at $23.36. We want TTWO to finish the December option cycle anywhere between $22.50 and $35.00. TTWO has pulled back with the market. Out level of safety is less than $1. We have to be on alert and be prepared to short the stock at $22.50 if the downturn continues. IMCL Covered Call – Currently trading at $11.55. We want IMCL to finish the December option cycle over $10 so it will be called away. IMCL has pulled back from the $15 level, but we still have a $1.55 cushion with a week to go. QQQ ITM Strangle – Currently trading at $25.04. The QQQs finished near their lows on Friday. 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 upward move. CPTI students, sold their long calls, covered the cost of the strangle, and have profited (or are now profiting) handsomely 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: advertising@OptionInvestor.com
The Option Investor Newsletter Sunday 12-15-2002 Sunday 5 of 5 In Section Five: Covered Calls: Another Popular Strategy Using "Covered" Calls Naked Puts: The "Real" Risk In Selling Naked Puts Spreads/Straddles/Combos: The Hammer Falls! 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: Another Popular Strategy Using "Covered" Calls By Mark Wnetrzak One of our readers asked for an explanation of the strategy of using covered calls with LEAPS in long-term calendar spreads. Most new traders are unaware that one of the best and most popular strategies associated with LEAPS is the covered call (or calendar spread) with the LEAPS position. A bullish calendar spread (time spread) using calls consists of the purchase of a long-term option and the simultaneous sale of a call on the same underlying stock, with the same price, but with an expiration date in the near-term. First, experienced traders try to open calendar spreads when there is excess time value in the sold call or a discount on the LEAPS. That gives you a theoretical edge. At the same time, calendar spreads can be based more on technical indications than option pricing as long as the recent trend suggests a high probability of a profitable outcome. Of course, there are potential adjustments after you open the initial LEAPS with covered-calls position. If the stock price remains relatively unchanged, or moves up slightly, the play will likely profit. If the stock price rallies and the short-term position is "in-the-money" on the last day of the option expiration period, you will have to buy it back so that you don't have to exercise the long-term position -- that would defeat the whole purpose of the strategy. Hopefully, the stock won't climb too far above the sold strike because then you lose your leverage in the play (as both positions go deeply in-the-money. The only positive in that case is that the LEAPS are going up in value also and, on the last day of the expiration period, the sold calls will shrink down to parity (intrinsic value) so you may be ahead in the play when you buy them back. Then you can look for another rally to sell next month's calls. In fact, that's basically the goal of the strategy: selling the calls when they are overpriced and buying them back (if absolutely necessary) when they return to intrinsic value. As far as position management and adjustments, most novice traders prefer to wait until the last day of the strike period to close out the short option (if necessary) but that doesn't mean you can forego position management. Indeed, you may have to roll-up or roll-down if the stock price moves very far away from your sold option, just to keep the play profitable. Some investors also attempt to leg-in or out of each new position, selling and buying-back the sold calls as the issue cycles through short-term gyrations. Obviously, that's a personal decision and not really part of the basic "time-selling" strategy; a trading technique as opposed to spread technique. In addition, there is always the risk of early exercise in a calendar spread. The degree of risk depends on which options are bought and sold and the distance to the underlying stock price. The greater the time value in the sold option, the lower the probability of it being exercised. If it does occur, a trader can always fulfill the obligation by simply purchasing the underlying stock or offsetting the sold calls with the purchase of another series of options. The important issue is to be notified by the broker in a timely manner so that the appropriate action can be taken before the stock price increases substantially. For more information on this popular strategy, read the appropriate chapter (calendar/time spreads) in Larry McMillan's "Options as a Strategic Investment," available in the OIN bookstore. 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 Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield DNDN 5.72 5.65 DEC 5.00 1.00 0.28* 12.9% RSTO 5.48 6.07 DEC 5.00 1.05 0.57* 11.2% SIMG 5.44 5.48 DEC 5.00 1.10 0.66* 11.0% CIEN 5.58 5.87 DEC 5.00 1.00 0.42* 10.0% SEBL 8.30 7.69 DEC 7.50 1.05 0.25* 7.5% INHL 7.96 8.05 DEC 7.50 1.05 0.59* 7.4% IMCL 8.97 11.55 DEC 7.50 2.15 0.68* 7.2% MATK 22.07 23.37 DEC 20.00 3.30 1.23* 7.1% CRYP 5.57 5.22 DEC 5.00 0.80 0.23* 7.0% ISSX 24.48 22.30 DEC 22.50 3.50 1.32 6.8% V 13.96 15.65 DEC 12.50 2.35 0.89* 5.6% USG 6.25 7.02 DEC 5.00 1.60 0.35* 5.5% LAVA 11.59 10.10 DEC 10.00 1.95 0.36* 5.4% CTIC 8.60 7.57 DEC 7.50 1.50 0.40* 4.9% IDCC 15.20 15.20 DEC 12.50 3.30 0.60* 4.4% MDCO 14.33 15.16 DEC 10.00 4.90 0.57* 4.4% ALXN 17.53 15.30 DEC 15.00 2.95 0.42* 4.2% DCTM 18.13 16.11 DEC 15.00 3.80 0.67* 4.1% IDCC 14.74 15.20 DEC 12.50 2.90 0.66* 4.0% MATK 23.16 23.37 DEC 20.00 3.70 0.54* 4.0% BRCM 15.45 16.23 DEC 12.50 3.50 0.55* 4.0% SEE 18.26 34.75 DEC 15.00 3.90 0.64* 3.9% MVSN 18.68 16.92 DEC 17.50 1.85 0.09 0.8% CMOS 11.11 9.50 DEC 10.00 1.65 0.04 0.5% DCTM 19.90 16.11 DEC 17.50 3.10 -0.69 0.0% FLEX 11.01 9.08 DEC 10.00 1.40 -0.53 0.0% MLNM 11.19 8.91 DEC 10.00 1.55 -0.73 0.0% OSUR 7.97 5.97 DEC 7.50 1.45 -0.55 0.0% TXN 19.22 16.70 DEC 17.50 2.40 -0.12 0.0% ELN 2.90 2.69 JAN 2.50 0.65 0.25* 8.0% VISG 5.72 5.14 JAN 5.00 1.05 0.33* 5.1% IMCL 13.50 11.55 JAN 10.00 4.10 0.60* 4.6% * = Stock price is above the sold striking price. Comments: The major averages continue to falter and any hope for a year-end rally has begun to diminish. With Friday's bearish drop into the close, the DOW, SP-500, and NASDAQ have now closed below their 50- day moving averages. Shares of Avigen (NASDAQ:AVGN) sold off this week after news that its treatment for hemophilia was effective for the first time in a person, but there were puzzling side effects and the data is still early-stage. The technical outlook changed drastically and we will show the position closed, though an entry point was unlikely given the reaction to the news. With one week left until the December expiration, time to decide if you really want to own any issues that are acting weaker than expected. It just depends on your long-term outlook on the market, sector and stock. With the increasing bearish momentum and geo-political environment, many of the above candidates may qualify for an early exit/adjustment watch list. Positions Closed: BallardPower Systems (NASDAQ:BLDP), J.D. Edwards (NASDAQ:JDEC), Avigen (NASDAQ:AVGN). 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 AES 3.25 JAN 2.50 AES AZ 1.05 7007 2.20 35 11.9% ALXN 15.30 JAN 12.50 XQN AV 3.40 0 11.90 35 4.4% BMRN 7.74 JAN 7.50 NUR AU 1.05 116 6.69 35 10.5% MEE 10.65 JAN 10.00 MEE AB 1.25 1083 9.40 35 5.5% MMR 5.20 JAN 5.00 MMR AA 0.60 20 4.60 35 7.6% MOGN 8.30 JAN 7.50 QOG AU 1.15 176 7.15 35 4.3% ZIXI 5.51 JAN 5.00 HQU AA 0.90 519 4.61 35 7.4% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AES 3.25 JAN 2.50 AES AZ 1.05 7007 2.20 35 11.9% BMRN 7.74 JAN 7.50 NUR AU 1.05 116 6.69 35 10.5% MMR 5.20 JAN 5.00 MMR AA 0.60 20 4.60 35 7.6% ZIXI 5.51 JAN 5.00 HQU AA 0.90 519 4.61 35 7.4% MEE 10.65 JAN 10.00 MEE AB 1.25 1083 9.40 35 5.5% ALXN 15.30 JAN 12.50 XQN AV 3.40 0 11.90 35 4.4% MOGN 8.30 JAN 7.50 QOG AU 1.15 176 7.15 35 4.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AES - AES Corp. $3.25 *** Another United Airlines...Not! *** The AES Corp. (NYSE:AES) is a global power company comprised of four lines of business. The contract generation segment includes generating plants that have entered into contracts with initial durations of five years or greater, accounting for at least 75% of the company's estimated revenue stream. The competitive supply segment includes both wholesale and retail sales of electricity directly to end users such as commercial, industrial, governmental and residential customers. The utility segment is characterized by distribution businesses of significant size that often combine generation, transmission and distribution capabilities, and are subject to extensive local, state and national regulation. The growth distribution segment includes distribution facilities facing challenges relating to operational difficulties that are located in emerging markets and offer significant potential for improved financial and operational performance. AES has rallied while the company worked to restructure its debt and avert a bankruptcy filing. The refinancing, finalized this week, will allow AES to push off most of its maturing debt until November 2004. With the threat of bankruptcy delayed a couple years, this position offers bottom-fishers a favorable risk-reward scenario. JAN 2.50 AES AZ LB=1.05 OI=7007 CB=2.20 DE=35 TY=11.9% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=AES ***** ALXN – Alexion $15.30 *** New Drug Speculation! *** Alexion Pharmaceuticals (NASDAQ:ALXN) develops pharmaceutical products for the treatment of heart disease, inflammation, cancer and diseases of the immune system. The company's two lead product candidates are genetically altered antibodies that target specific diseases that arise when the human immune system induces undesired 1inflammation in the human body. Alexion's product candidates are designed to block components of the human immune system that cause undesired inflammation while allowing beneficial components of the immune system to remain functional. ALXN shares rallied in Nov. after the company said its experimental drug pexelizumab failed to achieve its primary goal in two clinical trials of heart-attack patients, but showed much-improved survival rates in one of the studies. Alexion said it was encouraged by the "robust" reduction of mortality with patients who received angioplasties and that it would discuss with U.S. regulators the appropriate development of the medicine. This position offers reasonable speculation in ALXN with a relatively low-risk cost basis at technical support. JAN 12.50 XQN AV LB=3.40 OI=0 CB=11.90 DE=35 TY=4.4% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=ALXN ***** BMRN – Biomarin $7.74 *** New Drug Speculation: Part II *** Biomarin Pharmaceutical (NASDAQ:BMRN) develops enzyme therapies to treat serious, life-threatening diseases and conditions. The company's lead product candidate Aldurazyme, is being developed for the treatment of Mucopolysaccharidosis I (MPS I) disease. The company is developing its 2nd product candidate, Neutralase, for reversal of anticoagulation by heparin in patients undergoing Coronary Artery Bypass Graft (CABG) surgery and angioplasty. In addition to Aldurazyme and Neutralase, Biomarin is developing other enzyme-based therapeutics for the treatment of a variety of diseases and conditions. Investors have been grabbing shares of Biomarin ahead of a January 15 FDA review of BioMarin's and Genzyme Corp.'s (NASDAQ:GENZ) biologics license application for Aldurazyme. We simply favor the bullish, 4-month rally which has moved the stock above its 150-dma, suggesting further upside potential. Favorable new-drug speculation with a cost basis near technical support. JAN 7.50 NUR AU LB=1.05 OI=116 CB=6.69 DE=35 TY=10.5% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=BMRN ***** MEE - Massey Energy $10.65 *** On The Move! *** Massey Energy (NYSE:MEE) a coal company in the U.S., produces, processes and sells bituminous, low sulfur coal of steam and metallurgical grades through its 18 processing and shipping centers, called resource groups, many of which receive coal from multiple coal mines. Massey operates 37 underground mines and 14 surface mines in West Virginia, Kentucky and Virginia. Its steam coal is primarily purchased by utilities and industrial clients as fuel for power plants. Its metallurgical coal is used primarily to make coke for use in the manufacture of steel. The tape shows a stock breaking out on heavy volume even though a Massey subsidiary is in the midst of a trial in which it is accused by of knowingly locating a facility up wind of Sylvester town residents. Regardless of the previous slump in share value, Massey is one of the top companies in its industry and among many institutional investors, it is also one of the core holdings. The current technical outlook is recovering and this position offers an excellent reward potential at the risk of owning this industry- leading issue at a favorable cost basis. JAN 10.00 MEE AB LB=1.25 OI=1083 CB=9.40 DE=35 TY=5.5% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=MEE ***** MMR – McMoRan $5.20 *** Well Discovery = Rally Mode *** McMoRan Exploration (NYSE:MMR) is engaged in the exploration, development and production of oil and gas offshore in the Gulf of Mexico and onshore in the Gulf Coast region. The company has rights to explore on over 400,000 gross acres, which is one of the largest exploration acreages held by any independent company in the Gulf of Mexico. In November, shares of McMoRan rallied sharply after it said it found hydrocarbons at an exploratory well in the Gulf of Mexico. We simply favor the bullish break-out on increasing volume and the current bullish momentum in the Oil and Gas industry. This position offers excellent reward potential at the risk of owning MMR stock. JAN 5.00 MMR AA LB=0.60 OI=20 CB=4.60 DE=35 TY=7.6% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=MMR ***** MOGN - MGI Pharma $8.30 *** New Drug Speculation: Part III *** MGI Pharma (NASDAQ:MOGN) is an oncology-focused pharmaceutical company that acquires, develops and commercializes proprietary pharmaceutical products that meet patient needs. The company's current product candidates are at various stages of development with an emphasis on advanced stages of development, and are intended to have diverse roles in treating cancer patients. Of the company's product candidates, two are in Phase III, one in Phase II and two in preclinical development programs. Of these programs, one is with a supportive care product candidate (i.e., a product candidate that may treat the symptoms associated with chemotherapy), two are with cytotoxic product candidates (i.e., product candidates that may cause cancer cells to die), and two are with cytostatic product candidates (i.e., product candidates that may slow or stop the growth of cancer cells). In November, MGI Pharma filed a new drug application with the FDA, seeking marketing approval for palonosetron, a treatment for chemotherapy- induced nausea and vomiting. Technically, the stock has been in a stage I base for 8 months with support near our cost basis. Investors who retain a bullish outlook on the company and its drug pipeline can use this position to obtain a relatively low risk entry point in the issue. JAN 7.50 QOG AU LB=1.15 OI=176 CB=7.15 DE=35 TY=4.3% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=MOGN ***** ZIXI – Zix $5.51 *** Free Of Debt *** Zix Corp. (NASDAQ:ZIXI), formerly known as ZixIt, is a global provider of secure content delivery and management solutions and services that enable enterprises to enhance their current e-mail networks and enterprise applications to securely send and receive electronic communications. The company has four primary product offerings: ZixVPM (virtual private messenger), ZixMail, ZixAuditor and ZixBlast. On December 4, Zix announced that $8 million in convertible notes issued as part of the $16 million in funds raised by the company in September 2002 has been fully converted into shares of the company's common stock. With this conversion, all debt has now been eliminated from the company's balance sheet, and all associated restrictions on the company's cash balances have been removed. Investors apparently are please with this news as the stock has rallied above the October high on heavy volume. The stock appears to be ending a multi-year downtrend which suggests a change of character. Bottom-fishers can speculate on the near-term performance of the issue with this conservative position. JAN 5.00 HQU AA LB=0.90 OI=519 CB=4.61 DE=35 TY=7.4% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=ZIXI ***** ***************** 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 DNDN 5.65 JAN 5.00 UKO AA 1.20 11 4.45 35 10.7% ASIA 5.49 JAN 5.00 EUJ AA 0.95 86 4.54 35 8.8% OVTI 17.04 JAN 15.00 UCM AC 3.10 47 13.94 35 6.6% MEDI 26.64 JAN 22.50 MEQ AX 5.70 200 20.94 35 6.5% XMSR 3.23 JAN 2.50 QSY AZ 0.90 4203 2.33 35 6.3% CIEN 5.87 JAN 5.00 EUQ AA 1.15 18931 4.72 35 5.2% BCGI 13.44 JAN 12.50 QGB AV 1.55 2 11.89 35 4.5% AMZN 22.18 JAN 20.00 ZQN AD 3.10 17400 19.08 35 4.2% IGEN 41.10 JAN 35.00 GQ AG 7.70 722 33.40 35 4.2% GENZ 32.28 JAN 27.50 GZQ AQ 6.00 3379 26.28 35 4.0% ***************** NAKED PUT SECTION ***************** Options 101: The "Real" Risk In Selling Naked Puts By Ray Cummins One of our readers suggested that we explain the potential risk in writing uncovered options. This week, I participated in a very interesting discussion with one of our readers. The person I spoke with is successful both as a business owner and as a trader, and the size of his account lends substantial credence to his views. At issue was the use of margin in calculating potential yield in "uncovered" option positions, but the more important ideal that emerged (from the ongoing conversation) was the desire for new investors to have a clear and unambiguous understanding of the real risks involved in selling naked puts. In simple terms, the potential loss in this strategy is similar to owning an equivalent number of shares (with a cost basis near the sold strike price) in the underlying. Stock ownership, while not necessarily a "bad" thing, can be disadvantageous because as recent events have shown, a stock's value can fall substantially (even to zero). Recall that when you write (sell) an option, you assume the obligation to buy the underlying security at a specific price in return for a premium. A successful outcome occurs when the stock remains above the strike price of the sold put. If the price of the underlying stock declines and the put is exercised, the cost basis of the stock will be the exercise price less any premium received for the sale of the option. In addition, this "assignment" can occur prior to option expiration, thus a put writer must be prepared to buy the underlying stock at any time. With that in mind, a put writer must always be "covered" by portfolio capital (or other collateral) equal to the exercise value of the put. But, and this fact has led to the demise of many investors, the broker will reduce the amount of portfolio collateral necessary to open the position if you agree to the use of "margin." Margin is an integral part of the financial world and when used correctly, it can substantially increase the potential profits in specific strategies including the sale of stock (and stock index) options. From a trader's viewpoint, the margin requirement is simply a deposit that must be provided to guarantee that he will cover any written options in the event they are exercised and it can be vastly different than that which is used with stocks. The problem with using reduced collateral requirements is the minimum equity levels are woefully inappropriate for the retail investor (they were originally designed for institutional traders) and the end result is many novice participants fall victim to the "margin trap" because they do not comprehend the potential downside risk involved in the sale of uncovered options. To understand this problem more clearly, traders must be aware of the fundamentals of margin and its two major categories: Initial Margin and Maintenance Margin. INITIAL MARGIN The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest, or in the case of cash-settled options, to pay the cash settlement amount, if assigned through an exercise. The minimum margin requirements are imposed by the Board of Governors of the Federal Reserve, the options markets, and other self-regulatory organizations, however higher margin requirements may be imposed either generally or in individual cases by various brokerage firms. The most widely used margin requirements are based on the regulations at the Chicago Board Options Exchange: Writers of uncovered puts or calls must deposit and maintain 100% of the option proceeds* plus 20% of the aggregate contract value (current equity price x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use the option's market value instead of the option's proceeds.) (http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf) MAINTENANCE MARGIN The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. In order to highlight the potential downside inherent in selling uncovered options, and to allow a suitable risk/reward comparison in similar strategies, a new data field (Simple Yield) has been added to the position specifics for the weekly candidates. Also, there will be additional information concerning margin/collateral requirements in the Naked Puts section on a permanent basis. More on this subject next week... 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 Option Price Gain Max Simple Symbol Picked Price Series Sold /Loss Yield Yield HAL 21.37 19.75 DEC 17.50 0.45 0.45* 12.7% 3.8% HAL 20.19 19.75 DEC 15.00 0.25 0.25* 12.7% 3.7% PHTN 32.32 28.88 DEC 27.50 0.50 0.50* 12.6% 4.0% PPD 28.40 27.20 DEC 22.50 0.30 0.30* 10.9% 2.9% AFCO 19.52 18.70 DEC 17.50 0.30 0.30* 10.7% 3.8% IGEN 42.08 41.10 DEC 35.00 0.50 0.50* 10.6% 3.1% SCIO 33.72 32.74 DEC 30.00 0.50 0.50* 10.6% 3.7% MATK 22.07 23.37 DEC 17.50 0.45 0.45* 10.1% 2.9% NWRE 20.19 16.82 DEC 15.00 0.30 0.30* 10.0% 3.0% IMCL 15.04 11.55 DEC 10.00 0.30 0.30* 9.8% 3.4% NWRE 17.68 16.82 DEC 12.50 0.55 0.55* 9.7% 3.3% BBY 26.60 25.80 DEC 22.50 0.30 0.30* 9.5% 2.9% ESIO 22.99 21.44 DEC 17.50 0.55 0.55* 9.3% 2.8% HAL 18.85 19.75 DEC 15.00 0.35 0.35* 9.2% 2.6% ALXN 17.55 15.30 DEC 12.50 0.30 0.30* 8.6% 2.7% IMCL 11.77 11.55 DEC 7.50 0.25 0.25* 8.4% 3.0% MSTR 18.16 15.75 DEC 12.50 0.30 0.30* 8.3% 2.7% NEM 26.77 29.00 DEC 25.00 0.35 0.35* 8.2% 3.1% BBY 27.68 25.80 DEC 22.50 0.35 0.35* 8.1% 2.3% ISSX 22.19 22.30 DEC 17.50 0.45 0.45* 8.0% 2.3% BSTE 31.02 31.41 DEC 22.50 0.75 0.75* 7.8% 2.5% PHTN 35.25 28.88 DEC 27.50 0.40 0.40* 7.8% 2.1% HAL 17.85 19.75 DEC 12.50 0.35 0.35* 7.8% 2.5% PPD 28.65 27.20 DEC 22.50 0.30 0.30* 7.2% 2.0% CYMI 33.43 32.95 DEC 25.00 0.60 0.60* 7.2% 2.1% PHTN 28.50 28.88 DEC 22.50 0.50 0.50* 7.0% 2.0% GNSS 17.17 14.61 DEC 12.50 0.30 0.30* 7.0% 2.1% PLMD 30.31 31.65 DEC 22.50 0.60 0.60* 6.5% 2.0% ESIO 24.50 21.44 DEC 17.50 0.30 0.30* 6.3% 1.9% FAST 38.25 37.83 DEC 35.00 0.35 0.35* 6.1% 2.2% KOSP 19.13 19.87 DEC 15.00 0.35 0.35* 6.1% 1.7% SEE 21.33 34.75 DEC 15.00 0.25 0.25* 6.0% 1.8% RIMM 16.58 13.97 DEC 12.50 0.30 0.30* 6.0% 1.8% NPSP 28.24 27.22 DEC 20.00 0.50 0.50* 5.9% 1.9% RINO 19.40 17.45 DEC 17.50 0.30 0.25 5.9% 2.1% POSS 14.20 14.25 DEC 12.50 0.35 0.35* 5.9% 2.1% IGEN 38.65 41.10 DEC 30.00 0.55 0.55* 5.8% 1.6% ESIO 21.15 21.44 DEC 15.00 0.35 0.35* 5.5% 1.7% MEDI 28.07 26.64 DEC 20.00 0.30 0.30* 5.5% 1.7% AMZN 22.21 22.18 DEC 17.50 0.30 0.30* 5.5% 1.5% JEC 36.31 36.12 DEC 35.00 0.50 0.50* 5.3% 2.1% PPD 27.08 27.20 DEC 20.00 0.35 0.35* 5.3% 1.5% GP 20.62 15.97 DEC 17.50 0.45 -1.08 0.0% 0.0% * = Stock price is above the sold striking price. Comments: The apparent optimism among investors did little to support the market Friday as stocks fell precipitously after a report that the PPI endured its largest decline in six months. The "deflation" mongers were quick to point-out the deficiency and the new data simply added to the market's woes. Among the other negatives were North Korea's decision to reactivate a nuclear power-plant, worries about Iran's nuclear capabilities, and a report that extremists linked to al Qaeda received a chemical weapon in Iraq. All these events have combined to make the environment unfavorable and there is little reason for a change of character in the coming weeks. With that in mind, investors should monitor closely any issues with less than outstanding technical indications and make timely exits (or adjustments) in questionable positions. The sold put in Georgia-Pacific (NYSE:GP) has been closed to limit losses. Other candidates for early exit include: Blue Rhino (NASDAQ:RINO), Research In Motion (NASDAQ:RIMM), Neoware (NASDAQ:NWRE), Photon Dynamics (NASDAQ:PHTN), ImClone (NASDAQ:IMCL), Genesis Microchip (NASDAQ:GNSS) and Applied Films (NASDAQ:AFCO). Positions Closed: Georgia-Pacific (NYSE:GP) WARNING: THE RISK IN SELLING NAKED PUTS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading STOPS on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" STOP at a price that is no more than twice the original premium received from the sold option. MONTHLY YIELD: MAXIMUM AND SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, and it reflects the maximum potential loss in the position. NEW CANDIDATES ***** Sequenced by Company ***** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield AU 33.99 JAN 30.00 AU MF 0.65 669 29.35 35 5.5% 1.9% BSTE 31.41 JAN 22.50 BQS MX 0.45 57 22.05 35 5.8% 1.8% GFI 14.68 JAN 12.50 GFI MV 0.35 1463 12.15 35 7.5% 2.5% GG 12.62 JAN 11.25 GG MT 0.40 590 10.85 35 8.5% 3.2% IGEN 41.10 JAN 30.00 GQ MF 0.55 522 29.45 35 5.5% 1.6% MATK 23.37 JAN 17.50 KQT MW 0.35 10 17.15 35 6.1% 1.8% OVER 28.99 JAN 22.50 GUO MX 0.40 23 22.10 35 5.6% 1.6% Sequenced by Maximum Yield (monthly basis - using margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield GG 12.62 JAN 11.25 GG MT 0.40 590 10.85 35 8.5% 3.2% GFI 14.68 JAN 12.50 GFI MV 0.35 1463 12.15 35 7.5% 2.5% MATK 23.37 JAN 17.50 KQT MW 0.35 10 17.15 35 6.1% 1.8% BSTE 31.41 JAN 22.50 BQS MX 0.45 57 22.05 35 5.8% 1.8% OVER 28.99 JAN 22.50 GUO MX 0.40 23 22.10 35 5.6% 1.6% AU 33.99 JAN 30.00 AU MF 0.65 669 29.35 35 5.5% 1.9% IGEN 41.10 JAN 30.00 GQ MF 0.55 522 29.45 35 5.5% 1.6% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MY-Maximum Yield (monthly basis - using margin), SY-Simple Yield (monthly basis - without margin). ***** AU - AngloGold $33.99 *** Hot Commodity! *** AngloGold Limited (NYSE:AU) conducts gold mining operations in Africa, North America, South America and Australia. The firm owns or has interests in 21 operations around the world. In 2001, AngloGold produced approximately six million ounces of gold. AngloGold's production base spans four continents, with its mixture of underground and open-pit operations and interests in Argentina, Australia, Brazil, Mali, South Africa, Tanzania and the United States of America. The firm's global exploration programs encompass 10 countries on four continents. Gold is a "hot" commodity right now and traders who think the trend will continue should consider this position. JAN 30.00 AU MF LB=0.65 OI=669 CB=29.35 DE=35 MY=5.5% SY=1.9% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=AU ***** BSTE - Biosite $31.41 *** Premium Selling! *** A leader in the drive to advance diagnosis, Biosite (NASDAQ:BSTE) is a unique research-based company dedicated to the discovery and development of novel protein-based diagnostic tests that improve a doctor's ability to diagnose debilitating and life-threatening diseases. The firm combines integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes. Biosite's "Triage" rapid diagnostic tests are used in approximately 50 percent of U.S. hospitals and in approximately 40 international markets. In October, Biosite reported strong growth for the third quarter of 2002 and projected continuing growth in fiscal year 2003. The company said that it expects revenues in 2003 to be 35 to 40 percent higher than in 2002, with the possibility for upside from new products and new markets that are currently under development. But, the real story with BSTE is told by the option premiums and the inflated prices suggest there is potential for extreme volatility. Speculative traders can profit from continued lateral activity in the issue with this position. JAN 22.50 BQS MX LB=0.45 OI=57 CB=22.05 DE=35 MY=5.8% SY=1.8% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=BSTE ***** GFI - Gold Fields $14.68 *** Market Slump = Gold Rally! *** Gold Fields Limited (NYSE:GFI) is an independent precious-metals company that primarily engages in exploration and mining. Gold Fields produces approximately 4.7 million ounces of gold annually. The company has proven and probable reserves of approximately 84.5 million ounces and resources of approximately 150.7 million ounces in South Africa and Ghana. Gold Fields is focused on international growth through development of precious metals mining projects in Australasia, North and South America, Europe and Africa. The firm also has a 51% stake in an advanced stage exploration project, the Arctic Platinum Partnership, in Finland. When the broad market is in a primary downtrend, gold stocks generally perform well and the current technical indications suggest continued bullish activity in the Precious Metals group. JAN 12.50 GFI MV LB=0.35 OI=1463 CB=12.15 DE=35 MY=7.5% SY=2.5% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=GFI ***** GG - Goldcorp $12.62 *** Good As Gold! *** 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. This company is one of our favorites in the gold sector and the recent upside trend in gold prices bodes well for the entire industry in the near-term. JAN 11.25 GG MT LB=0.40 OI=590 CB=10.85 DE=35 MY=8.5% SY=3.2% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=GG ***** IGEN - IGEN International $41.10 *** More Premium Selling! *** 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?), possibly with Roche Diagnostics, which markets products based on IGEN's ORIGEN technology. Aggressive traders can profit from continued lateral activity in the stock with this speculative position. JAN 30.00 GQ MF LB=0.55 OI=522 CB=29.45 DE=35 MY=5.5% SY=1.6% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=IGEN ***** MATK - Martek Biosciences $23.37 *** A Big Day! *** Martek Biosciences )NASDAQ:MATK) develops and sells products from microalgae. Microalgae are microplants. The company is engaged in the commercial development of microalgae into a portfolio of high value products and new product candidates consisting of Nutritional Products, Advanced Detection Systems and Other Products, primarily Algal Genomics. Their nutritional products include nutritional oils for infant formula, dietary supplementation and other products. Advanced Detection Systems products include fluorescent dyes from various algae for use in scientific applications for detection of certain biological processes. Martek has been in the news since announcing that Abbot Labs would produce an infant formula supplemented with Martek's DHA and ARA oils. On Friday, its shares soared after a favorable Q4 report and the near-term outlook is definitely bullish. Investors who are interested in a unique biotechnology company should consider this position. JAN 17.50 KQT MW LB=0.35 OI=10 CB=17.15 DE=35 MY=6.1% SY=1.8% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=MATK ***** OVER - Overture Services $28.99 *** New CNN Contract! *** Overture Services (NASDAQ:OVER) is engaged in the provision of pay-for-performance search services on the Internet. Overture operates an online marketplace that introduces consumers and businesses that search the Internet to advertisers that provide products, services and information. Advertisers participating in the company's marketplace include retail merchants, wholesale and service businesses and manufacturers. Overture facilitates these introductions through its search service, which enables advertisers to bid in an ongoing auction for priority placement in the company's search results after editorial approval. The company's marketplace offers consumers and businesses quick, easy and relevant search results for products, services and information, while providing advertisers with a cost-effective way to target them. CNN, the 24-hour news network owned by AOL Time Warner, recently signed a three-year deal with Overture to use the company's commercial online search listings. Also, S&P announced that OVER has been added to the S&P Mid-Cap 400 Index. Traders who think the stock will continue to move higher in the coming weeks can speculate on that outcome in a conservative manner with this position. JAN 22.50 GUO MX LB=0.40 OI=23 CB=22.10 DE=35 MY=5.6% SY=1.6% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=OVER ***** ***************** 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 Maximum Yield (monthly basis – using margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield WMB 2.82 JAN 2.50 WMB MZ 0.25 6868 2.25 35 20.5% 9.7% VNT 14.18 JAN 12.50 VNT MV 0.85 172 11.65 35 15.3% 6.3% SWKS 9.79 JAN 7.50 GAK MU 0.35 284 7.15 35 13.2% 4.3% BRCM 16.23 JAN 12.50 RCQ MV 0.45 1327 12.05 35 10.6% 3.2% ISSX 22.30 JAN 17.50 ISU MW 0.55 522 16.95 35 9.5% 2.8% VRTY 13.85 JAN 12.50 YQV MV 0.50 65 12.00 35 9.3% 3.6% CNA 25.79 JAN 22.50 CNA MX 0.80 130 21.70 35 8.9% 3.2% REGN 20.54 JAN 17.50 RQP MW 0.50 9 17.00 35 7.7% 2.6% ESPD 17.00 JAN 15.00 ENU MC 0.40 4 14.60 35 6.7% 2.4% MERQ 30.31 JAN 22.50 RQB MX 0.50 791 22.00 35 6.6% 2.0% IVGN 31.51 JAN 27.50 IUV MY 0.55 1725 26.95 35 5.2% 1.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Hammer Falls! By Ray Cummins U.S. equities plunged Friday amid renewed concerns about corporate earnings, the flagging dollar, and the potential for terrorism. The Dow Jones Industrials slid 104 points to 8,433 on weakness in Home Depot (NYSE:HD), United Technologies (NYSE:UTX) and Honeywell (NYSE:HON). The NASDAQ Composite dropped 36 points to 1,362 with bellwethers such as Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) leading the sell-off. The broader S&P 500-stock index declined 12 points to 889 as almost every market segment enduring some selling pressure. Only a few groups such as gold, oil-related and utility were positive. Market breadth was shoddy as declining issues more than doubled advancers on both the NYSE and the NASDAQ. Trading volume remained muted with 1.2 billion shares changing hands on the Big Board while 1.4 billion shares traded on the NASDAQ. The bond market flourished as traders sought calmer waters. The yield on the 10-year note finished strong at 4.06%. TrimTabs estimated that all equity funds had inflows of $4.8 billion during the past week, compared with outflows of $3.4 billion during the prior week. Bond funds had inflows of $2.0 billion, for the second consecutive week. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status BR 42.01 42.50 DEC 35 37 0.30 37.20 $0.30 Open EBAY 64.79 67.41 DEC 50 55 0.55 54.45 $0.55 Open IGEN 36.49 41.10 DEC 25 30 0.65 29.35 $0.65 Open SLM 102.94 101.42 DEC 85 90 0.65 89.35 $0.65 Open DE 49.00 45.55 DEC 40 45 0.65 44.35 $0.65 Open INTU 52.91 46.60 DEC 40 45 0.50 44.50 $0.50 Open LLY 62.24 64.47 DEC 50 55 0.55 54.45 $0.55 Open IGT 77.06 73.12 DEC 65 70 0.55 69.45 $0.55 Open KSS 66.90 59.81 DEC 55 60 0.55 59.45 $0.36 Closed PIXR 55.67 60.18 DEC 45 50 0.50 49.50 $0.50 Open AZO 85.32 68.51 DEC 70 75 0.45 74.55 ($1.65) Closed * FPL 59.87 59.65 DEC 50 55 0.55 54.45 $0.55 Open UOPX 36.65 35.27 DEC 30 33 0.45 33.30 $0.45 Open ABK 62.51 58.24 DEC 50 55 0.40 54.60 $0.40 Open AGN 58.79 58.01 DEC 50 55 0.55 54.45 $0.55 Open RE 57.90 54.52 DEC 50 55 0.55 54.45 $0.07 Closed APC 49.59 49.92 JAN 40 45 0.55 44.45 $0.55 Open VLO 36.39 35.16 JAN 30 32 0.30 32.20 $0.30 Open LP = Long Put SP = Short Put C/B = Cost Basis G/L = Gain/Loss Thursday's sell-off in Autozone (NYSE:AZO) ousted us from the bullish position with a small loss ($1.65) but it appears the exit was timely as traders continued to dump the issue during Friday's session. Surprisingly, all of the selling came in the wake of a favorable earnings report. Kohls' (NYSE:KSS) was a victim of Friday's broad retreat as well and the finish below the sold strike is our exit signal in the position. A similar situation exists with Everest RE Group (NYSE:RE), thus we will show the play closed in the interest of capital preservation. CALL CREDIT SPREADS ******************* Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status ABC 72.45 57.16 DEC 85 80 0.65 80.65 $0.65 Open MCO 45.12 41.37 DEC 55 50 0.40 50.40 $0.40 Open WLP 74.04 70.69 DEC 90 85 0.60 85.60 $0.60 Open UNH 86.83 81.92 DEC 105 100 0.55 100.55 $0.55 Open DNA 35.46 34.02 DEC 45 40 0.60 40.60 $0.60 Open DP 40.40 36.19 DEC 50 45 0.40 45.40 $0.40 Open LXK 63.75 61.93 DEC 75 70 0.60 70.60 $0.60 Open IDPH 39.27 33.43 DEC 45 40 0.45 40.45 $0.45 Open UHS 44.85 44.63 DEC 55 50 0.30 50.30 $0.30 Open AAP 51.55 48.22 DEC 60 55 0.50 55.50 $0.50 Open ACDO 35.19 36.30 DEC 43 40 0.35 40.35 $0.35 Open JCI 81.79 78.63 JAN 90 85 0.20 85.20 $0.20 Open LEH 56.72 54.41 JAN 65 60 0.25 60.25 $0.25 Open LC = Long Call SC = Short Call C/B = Cost Basis G/L = Gain/Loss 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. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status ABT 45.89 40.48 DEC 50 40 0.10 0.10 Closed COX 30.25 29.45 DEC 35 25 0.10 0.30 Open OMC 66.32 66.91 DEC 75 55 0.15 0.45 Open SCIO 32.84 32.74 JAN 40 25 0.00 0.25 Open CY 8.64 6.01 JAN 10 7 0.10 0.20 Closed GG 11.15 12.62 JAN 12 10 0.10 0.80 Open? PXD 26.11 25.87 MAR 30 23 0.10 0.20 Open All of the speculative small-cap positions were closed last week as the market began to retreat from its recent rally. The Nextel (NASDAQ:NXTL) position 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. Cypress Semiconductor (NYSE:CY) faded quickly as technology stocks slumped but Scios (NASDAQ:SCIO) has achieved a small profit. The new position in Goldcorp (NYSE:GG) has been a standout and Pioneer Natural Resources (NYSE:PXD) has held up well despite the market-wide declines. Tuesday's drop below a recent support area by Abbott Labs (NYSE:ABT) signaled our exit in that position. CALENDAR SPREADS **************** Stock Pick Last Long Short Initial Max. Play Symbol Price Price Option Option Debit Value Status HNT 25.75 26.72 JAN-30C DEC-30C 0.60 0.60 Open WSM 24.53 28.25 FEB-30C DEC-30C 0.80 1.55 Open GISX 20.21 17.84 FEB-22C DEC-22C 0.95 0.75 Open? Positions in United Airlines (NYSE:UAL) and The Sharper Image (NASDAQ:SHRP) have been closed to limit losses. Global Imaging Systems (NASDAQ:GISX) is moving towards the lower end of its trading range and the issue will likely reach a "key" moment in the coming week. SHORT-PUT COMBOS **************** Stock Pick Last Short Long Initial Max. Play Symbol Price Price Option Option Credit Gain Status AES 2.92 3.25 J04-7.5P J03-2.5P 4.50 0.25 Open IMCL 7.77 11.55 J04-15P JO3-5P 8.00 2.25 Closed ImClone (NASDAQ:IMCL) has performed well with a profit of up to $2.25 in the speculative play. AES Corporation (NYSE:AES) has finally begun to rebound with the issue testing $4 in Friday's session and we will remain in the position unless the trend turns bearish. CREDIT STRANGLES **************** Stock Pick Last Exp. Short Short Initial Current Play Symbol Price Price Month Call Put Credit Debit Status ERTS 64.13 66.02 DEC 70 55 2.40 0.95 Closed SLAB 25.16 22.11 DEC 30 20 1.00 0.65 Open MEDI 26.21 26.64 DEC 30 20 1.45 1.40 Open The recent sell-off in Electronic Arts (NASDAQ:ERTS) forced us to exit the position early for a small profit. The new position in Medimmune (NASDAQ:MEDI) will be closed next week, prior to the FDA advisory panel meeting for the firm's new nasal spray flu vaccine. The Medicine Company (NASDAQ:MDCO) position, although profitable, was not initiated due to a significant "pre-open" announcement on 11/18/02. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max. Play Symbol Price Price Month Call Put Debit Value Status GENZ 34.43 32.28 JAN 35 35 6.15 6.00 Open L 9.95 9.28 JAN 10 10 1.35 1.20 Open XLNX 22.06 20.37 JAN 22 22 2.30 2.25 Open All three of our new straddle positions were active early Monday morning, thus the initial debits were adjusted. The short-term position in Xilinx (NASDAQ:XLNX) has quickly reached the downside break-even point in the bearish portion of the play. Questions & comments on spreads/combos to ray@OptionInvestor.com ************* 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. ***************** SPECULATION PLAYS ***************** These positions are based on recent increased activity in the stock and underlying options. All of these plays offer favorable risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ***** EDS - Electronic Data Systems $19.64 ** Is The Recovery Real? ** Electronic Data Systems Corporation (NYSE:EDS) is a provider of strategy, implementation and hosting services and solutions for clients managing the digital economy. The company's end-to-end portfolio of services integrates its five lines of business, Information Solutions, Business Process Management, E Solutions, A.T. Kearney and Product Lifecycle Management Solutions. The company's eight Global Industry Groups, Communications, Energy, Financial, Government, Healthcare, Manufacturing, Retail and Transportation, work with each of the firm's lines of business and client executive teams. This speculative short-put combination utilizes Jim Brown's (OIN Founder/Chief Editor) popular technique of writing "in-the-money" Puts to profit from upward movement in the underlying issue. A near-term Put is also purchased to limit downside risk in the position, if the recovery does not begin in the next few months. More information on this unique strategy can be found at: http://members.OptionInvestor.com/archive/editorplays/2001/042201_1.asp PLAY (very speculative - bullish/short-put combination): SELL PUT JAN04-25.00 LED-ME OI=1782 B=$8.00 BUY PUT MAR03-17.50 EDS-OT OI=1670 A=$1.65 INITIAL NET CREDIT TARGET=$6.50-$6.60 TARGET PROFIT=$2.25-??? Note: There is a collateral requirement for the sold (short) Put, whether it is partially covered in the initial spread or exists "naked" when the long option expires. Please review the terms of the collateral requirements with your broker. http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=EDS ************** 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. ***** ASA - ASA Limited $39.30 *** Gold = Broad Market Hedge! *** ASA Limited is a closed-end investment company. The company was organized to provide investors with a vehicle to invest in a portfolio consisting primarily of stocks of companies conducting, as a major portion of their business, gold mining and related activities in South Africa. The company is permitted to invest up to 20% of the value of its assets outside of South Africa and may also invest up to 25% of the value of its assets in gold or gold certificates. PLAY (conservative - bullish/credit spread): BUY PUT JAN-32.50 ASA-MZ OI=66 A=$0.35 SELL PUT JAN-35.00 ASA-MG OI=298 B=$0.75 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(monthly)=18% B/E=$34.60 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=79% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=ASA ***** FNM - Federal National Mortgage $66.61 *** Bottom-Fishing! *** Federal National Mortgage Association (NYSE:FNM), commonly known as Fannie Mae, is a company that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. Fannie Mae does not directly lend money to homebuyers, but works with lenders to ensure that there is no shortage of funds available for mortgage loans. The method in which Fannie Mae accomplishes this is by purchasing mortgages from a variety of institutions that make up the primary mortgage market. Primary market lenders include mortgage companies, savings and loans, commercial banks, credit unions and state and local housing finance agencies. These are the businesses where the mortgages are originated and the funds are loaned directly to the borrower. Fannie Mae then purchases the mortgage, thus allowing the primary market lender to replenish their funds and lend more money to homebuyers. PLAY (conservative - bullish/credit spread): BUY PUT JAN-55.00 FNM-MK OI=7464 A=$0.45 SELL PUT JAN-60.00 FNM-ML OI=41584 B=$0.85 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$59.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=85% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=FNM ***** NBR - Nabors Industries $37.75 *** Bullish Oil Driller! *** Nabors Industries (NYSE:NBR) is a land drilling contractor, with over 550 land drilling rigs. The company conducts oil, gas and geothermal land drilling operations in the lower 48 states, Alaska and Canada, and internationally, primarily in South and Central America, the Middle East and Africa. Nabors also is a land well-servicing and workover contractor in the United States. The company owns 745 land workover and well-servicing rigs, in the southwestern and western United States, and 40 well-servicing and workover rigs in certain international markets. Nabors also provides offshore platform workover and drilling rigs. Nabors markets 42 platform, 16 jackup and three barge rigs in the Gulf of Mexico and international markets. These rigs provide well servicing, workover and drilling services. The company also owns and operates a net of nine rigs through an international joint venture in Saudi Arabia. PLAY (very conservative - bullish/credit spread): BUY PUT JAN-30.00 NBR-MF OI=3331 A=$0.40 SELL PUT JAN-32.50 NBR-MZ OI=2191 B=$0.60 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$32.25 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=85% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=NBR ***** GS - Goldman Sachs $73.10 *** Bearish Brokerage *** The Goldman Sachs Group (NYSE:GS) is a global investment banking and securities firm that provides a range of services worldwide to a substantial and diversified client base. The firm operates offices in over 20 countries with activities are divided into two primary segments: Global Capital Markets, and Asset Management and Securities Services. The Global Capital Markets segment, which represented 64% of the firm's 2001 net revenues, consists of Investment Banking, and Trading and Principal Investments. Goldman's Asset Management segment offers investment strategies and advice across all major asset classes: global equity; fixed income, including money market instruments; currency, as well as alternative investment products. The firm's Securities Services activities include brokerage, financing services and securities lending. PLAY (conservative - bearish/credit spread): BUY CALL JAN-85 GS-AQ OI=17661 A=$0.30 SELL CALL JAN-80 GS-AP OI=416182 B=$0.85 INITIAL NET CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$80.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=80% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=GS ***** LXK - Lexmark Intl. $61.93 *** Lateral Consolidation! *** Lexmark International (NYSE:LXK) is a developer, manufacturer and supplier of printing solutions, including laser and inkjet printers, multifunction products and associated supplies and services for offices and homes. The company also markets dot matrix printers for printing single and multi-part forms for business users and develops, manufactures and markets a broad line of other office imaging products. PLAY (conservative - bearish/credit spread): BUY CALL JAN-75 LXK-AO OI=1186 A=$0.30 SELL CALL JAN-70 LXK-AN OI=883 B=$0.85 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$70.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=82% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=LXK ***** MMM - 3M Corporation $121.77 *** An Old Favorite! *** 3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an integrated enterprise characterized by intercompany cooperation in research, manufacturing and sale of products. 3M's business has developed from its research and technology in coating and bonding for coated abrasives, the company's original product. Coating and bonding is the process of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper (repositionable notes). The company conducts business through six operating segments: Industrial Markets; Transportation, Graphics and Safety Markets; Health Care Markets; Consumer and Office Markets; Electro and Communications Markets, and Specialty Material Markets. PLAY (moderately aggressive - bearish/credit spread): BUY CALL JAN-135 MMM-AG OI=3289 A=$0.55 SELL CALL JAN-130 MMM-AF OI=6371 B=$1.30 INITIAL NET CREDIT TARGET=$0.75-$0.85 POTENTIAL PROFIT(max)=17% B/E=$130.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=80% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=MMM ************* DEBIT SPREADS ************* These candidates offer a risk/reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** WMT - Wal-Mart $50.54 *** Slumping Retail Giant *** With annual sales of $218 billion, Wal-Mart Stores (NYSE:WMT) operates more than 2,800 discount stores, Super-Centers and Neighborhood Markets, and more than 515 SAM'S CLUBS in the U.S. Internationally, the firm operates over 1,200 units and employs 1.3 million associates worldwide. Last year, Wal-Mart associates raised and contributed $196 million to support communities and local non-profit organizations. FORTUNE magazine recently named Wal-Mart the third "most admired" company in America and one of the 100 best companies to work for in the U.S. According to a recent study, Americans say Wal-Mart is the company they think of first in supporting local causes and issues, and that is one of the main reasons people shop at Wal-Mart. PLAY (conservative - bearish/debit spread): BUY PUT JAN-60 WMT-ML OI=7968 A=$9.70 SELL PUT JAN-55 WMT-MK OI=17463 B=$5.10 INITIAL NET-DEBIT TARGET=$4.40-$4.50 POTENTIAL PROFIT(max)=11% B/E=$55.50 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=81% http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=WMT ******************* 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. ***** IMN - Imation $35.00 *** Rolling Over? *** Imation (NYSE:IMN) is a global company widely recognized as a leader in development, manufacture and sale of removable magnetic and optical data storage recording media. Their product line is one of the broadest in the industry with removable media products for the enterprise data center, the network environment, and the consumer. Imation's data storage roots extend back 50 years to the introduction of the first magnetic data storage tape and the company continues to meet customer needs for reliable, efficient removable media to store, back up, and move digital information. Imation's technology expertise spans several critical areas, from competitive high-quality tape coating to advanced capability in servo-writing, media packaging, cartridge design and fabrication, optical thin film coating and material science. PLAY (very aggressive - bearish/synthetic position): BUY PUT APR-30.00 IMN-PF OI=60 A=$1.95 SELL CALL APR-40.00 IMN-DH OI=265 B=$1.70 INITIAL NET CREDIT TARGET=$0.00-$0.25 TARGET PROFIT=$0.75-$1.25 Note: Using options, the position is similar to being short the stock. The initial margin/collateral requirement for the sold call is approximately $1,075 per contract. http://www.OptionInvestor.com/charts/dec02/charts.asp?symbol=IMN ***** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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