The Option Investor Newsletter Sunday 12-22-2002 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: Lott Trots, Frist First. Futures Market: Gauging Least Resistance Index Trader Wrap: Santa Claus and the January “effect” Editor’s Plays: Current Events Market Sentiment: Holiday Cheer Ask the Analyst: Point and figure buy signals Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Jingle Bell Rock Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 12-20 WE 12-15 WE 12-06 WE 11-29 DOW 8512.01 + 78.16 8433.85 -211.92 8645.77 -250.32 + 91.25 Nasdaq 1363.05 + 0.63 1362.42 - 60.02 1422.44 - 56.30 + 10.05 S&P-100 455.46 + 3.65 451.81 - 12.61 464.42 - 14.43 + 3.82 S&P-500 895.76 + 6.28 889.48 - 22.75 912.23 - 24.08 + 5.76 W5000 8475.23 + 48.97 8426.26 -202.90 8629.16 -217.52 + 63.55 RUT 386.88 - 1.10 387.98 - 8.74 396.72 - 9.64 + 6.36 TRAN 2324.22 + 5.75 2318.47 - 70.34 2388.81 + 28.19 + 46.64 VIX 31.47 - 0.65 32.12 - 0.56 32.68 + 1.60 + 4.35 VXN 48.51 - 2.41 50.92 - 1.36 52.28 + 2.80 + 2.00 TRIN 0.66 1.34 1.11 1.04 Put/Call 0.88 0.87 0.91 0.62 ****************************************************************** Lott Trots, Frist First. by Jim Brown Senator Trent Lott finally bowed to pressure and said he will step down as Senate Majority Leader. Tennessee Senator Bill Frist is now first in line to take over the post. What does this have to do with the markets? Nothing really but it is one more distraction out of the way as we move into the normally bullish holiday period. Dow Chart – Daily Nasdaq Chart – Daily Friday began with a bang on several counts. The final Q3 GDP came in at +4.0% growth as expected and helped to allay fears that the economy had slipped at the end of the quarter. The top line number was strong and there was plenty to worry about internally but the markets ignored the news. Auto sales have dropped significantly from the 3Q levels. Retails sales are coming in at the low end of estimates. Inventories are being allowed to deplete due to lack of orders in the pipeline. Even mortgage rates have started to bounce off their lows as the expectation of future rate hikes grows. The rising unemployment indicates that the rate of consumer spending in the 1Q should slow. Despite the negative internals the outlook is still positive and no change in the headline number eased many traders minds. Greenspan provided an upbeat view of the economy Thursday night and said the economy was working its way through the soft patch and would eventually emerge stronger for the long term. He emphasized that inflation, a decades old monster, was under control and would remain under control and he squashed fears that deflation could be in our future. He said the Fed was watching for approaching signs of D-monster and would take prompt and decisive action if conditions changed. He commented that since the bursting of stock market bubbles caused such serious economic problems that maybe they should be prevented in advance. What? He went on to prove why that idea would not work and stressed that the passage of time required to erode the traumatic memories was deterrence enough. He tried to diffuse the idea that the Fed had collapsed the bubble by raising rates and stressed it fell from a lack of emerging profits instead. New technology burst onto the scene filled with promise of a new era but that new era actually leveled the playing field for everyone and massive profits never appeared for most companies. Overall it was seen as a bullish speech and the markets celebrated his outlook at the open on Friday. The first quadruple witching event coupled with an NDX and S&P rebalancing went off pretty smoothly. It appears most positions were squared earlier in the week and the bounce off 8350 at the open did not really trigger that much short covering. Surprisingly the stocks being deleted from the NDX tended to rise on Friday while the stocks being added have mostly been trending down this week. It appears the speculators who bought/sold the NDX stocks or options on them got caught holding the bag when the index funds failed to show up on time. The index changes actually take place at the opening of trading on Monday and index funds generally have three days on either side of Monday to dump the old ones and add the new ones. With the quadruple witching Friday it appears many funds have opted to wait till next week to shuffle the deck. The big news for Friday was not the rebalancing of stocks but the rebalancing of funds from the major brokerages and into the pockets of regulators with a $1.4 billion settlement. Considering over $7.5 trillion in stock market value went up in smoke while these brokers were touting stocks in the press and trashing them internally it looks like a bargain. That equates to about $1 in penalty for every $5,357 dollars lost. This is far from over and there are thousands of shareholder suits that will extract billions more from the banks in the near future. Don't worry about the banks having enough money to pay the fine. Citigroup for instance averaged $65 million profit for every business day in the third quarter. The real blow will come from the class action law suits which could run in the tens of billions in settlements. Jack Grubman agreed to a fine of $15 million and a lifetime ban on working in the US securities industry for his role in the scandal. Guess he will have to sell his WCOM stock to pay the fine. Surely he owns millions of shares of the companies he recommended, right? He bragged he was close friends with CEO Bernie Ebbers. He can probably get a loan from him as soon as Ebbers repays the $1 billion he owes WCOM. He could probably apply as a high profile securities analyst for some foreign power. I hear Saddam has an opening coming up and their communications sector will be exploding soon. The semiconductor sector shook off the flat book-to-bill numbers and the seven semi stocks being dropped from the NDX and closed slightly positive for the day at 297. This was significantly below the recent resistance at 330 but it appears to be holding at a higher low despite negative news. Could it be that semis are about to find a new life? If the Nasdaq is going to have any chance next week it will require the semis to participate. The Nasdaq comp rallied to close right at the 38% retracement level at 1367 and the 50 DMA at 1369. Now that the stocks leaving the NDX are gone and can no longer impact the index we have a better chance of breaking through that resistance on Monday. As I stated several times in the last three weeks I think any holiday rally will fail in the 1415-1425 range on the Nasdaq. That gives us a narrow range to trade in the holiday shortened week. The Dow took the news that Boeing was dropping its high speed jet in stride and the stock helped power the +146 point gain. Only five Dow stocks ended the day negative, MSFT, KO, HD, HON and HPQ. MMM led the charge on the improvement in the ECRI Weekly Leading Index and the bullish comments from Greenspan. After two negative weeks the Dow bounce put it back into positive territory for the week. Once there it ran into strong resistance at the 50 DMA at 8512. Once over that 8512 level the Dow is in a little better shape than the Nasdaq but has strong resistance just over 8600 and then 8750-8850 range. Despite the historical trend for a holiday rally there may not be much upside in our future. I am still looking for the rally but I am also expecting a post holiday sell off as well. The economy may be improving slowly but until more indications appear the gains from the October lows are still at risk. If you are following my suggestions for the week you should be long from 8350-8450 and looking for 8750 as an exit after the holiday. Enter Very Passively, Exit Very Aggressively! Jim Brown "If you can count your money, you don't have a billion dollars." J. Paul Getty ********************** Annual Renewal Special ********************** The annual renewal special is off to a rousing start. The renewals are pouring in and choice of the varied bonus options gives everyone something to cheer about. We added the FOMC meeting dates to the mouse pads 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. The deadline for taking advantage of this special is Jan-13th. Click here for the full details: https://secure.sungrp.com/03renewal/ ************** FUTURES MARKET ************** Gauging Least Resistance By John Seckinger jseckinger@OptionInvestor.com It appears to be the market’s job to settle on defined pivotal levels. Well, it is our job to look beyond the “noise” and get a true sense of least resistance while taking risk into consideration. Friday, December 20th at 4:15 P.M. Contract Net Change High Low Volume YM03H 8535.00 +180.00 8545.00 8365.00 15,665 NQ03H 1023.50 +11.00 1027.00 1011.00 167,615 ES03H 896.75 +1.35 897.25 884.25 361,823 ES03H = E-mini SP500 futures YM03H = E-mini Dow $5 futures NQ03H = E-mini NDX 100 futures Note: The 03H suffix stands for 2003, March, and will change as the exchanges shift the contract month. The contract months are March, June, September, and December. The volume stats are from Q-charts. Fundamental News: Federal Reserve Chairman Alan Greenspan told the Economic Club of New York Thursday night that the US economy is emerging from its "soft patch". Mr. Greenspan also said that he thought geopolitical uncertainty easing could help business spending. In other news, St. Louis Fed Pres Poole s noted that deflation is unlikely and that consumer spending is expected to be 3% in 2003. In other news, Senator Trent Lott said he will not remain majority leader, since stepping down is "in the interest of pursuing the best possible agenda for the future of our country." Additionally, a WSJ report said OPEC may not be able to make up for lost supply due to problems in Iraq & the strike in Venezuela. Feb Crude Oil rose fractionally to 30.35 during trading on Friday. In economic news, the final revision of Q3 GDP remained unchanged at 4.0%, which was in line with the consensus estimate. Looking at specific sectors, brokerage stocks rose after the nation's biggest financial institutions agreed to pay $1.4 billion in fines in an effort to overhaul research departments. Technical News: The Utility Index (UTY) finished near its best levels of the week at 258.78, and will now confront solid resistance at 260. If 260 is broken, look for this area act as solid support. A rise in the UTY should help equities in general. The Sox index closed well below its 320 intermediate pivot level, and even softened under 300 as the weekend approached. On a daily chart, the Sox did perform a higher high and higher low from Thursday, but still looking somewhat weak going forward. A move under 295 should pressure the index. A rally above 320 would be viewed as bullish. The 30-year (ZB03H), on the other hand, closed at 110’31 and right on a bearish trend line that dates back to the beginning of October. With that said, direction is hard to gauge; however, look for a move to 111’16 in order to confirm a bullish move in bonds. This would be bearish for stocks. A move in bonds under 110 would take sentiment to more neutral levels. ================================================================= The December Mini-sized Dow Contract (YM03H) It should not be a surprise that the Dow came back and closed almost exactly on the intermediate pivotal level of 8515. It is almost the market’s job to make traders re-think the current environment. The Dow, as profiled, bounced above the 38.2% retracement area and was at the bottom of the Bollinger Bands heading into Friday’s session. Closing under 8400 did give the impression of further weakness, but a trader’s job is to gauge risk and use what the market gives him (or her). The thought of a bounce clearly existed, and we now have a solid range in the from 8625 to the 38.2% retracement level, closing on Friday about as neutral as it could. When gauging the importance of this 8515 level, it comes down to TIME. How long has the contract consolidated around this 8515 area? In my experience, I would say long enough. Therefore, if the 22 PMA (8559) is taken out to the upside, bids should continue to enter the market in the form of short covering and longs afraid to miss the move higher. From the 9000 area, the Dow traded “inefficiently” down to 8502 on December 6th. This is the first step in the “b” distribution. The chart below then shows how the bottom consolidation pattern formed from 8625 to near 8400. Then we had a break lower from near 8515 (always starts from near the pivot) and gave the impression of another wave lower. However, now that prices are almost right back at the 8515 pivot, shorts from near 8515 have to be extremely worried about a major trap taking place. It is very nice that the pivot in the YM is just under current prices, because weakness lower without testing the pivot is a good sign that a trap will not develop and bears still have full control. To me, this is as pivotal as when the Dow traded above 9000. Chart of Dow Jones, Daily The Pivot in the YM contract was 8386 heading into Friday. The low was 8365 and the high 8535. Therefore, as a trader, it was not long before sentiment shifted short-term bullish and things were looked at from the long side. As noted in the monitor, it was continually bullish that after the first five minutes the biggest pullback didn’t even test the 50% retracement of the range during the first five minutes. This showed underpinning bids and increased the odds of a move in the Dow towards 8515. Remember the 22 Weekly Moving Average (8620) profiled about a week ago. Well, the YM did move explosively off that area, and we now have a chance to come back and test this area once again. That would be a near term objective for bulls, possible if the YM can get above 8580 (correlate to Dow at its 22 DMA). If the YM contract starts to weaken, look for support at 8418.50; however, expect look for 8418.50 to become good resistance once 8390 is taken out. Chart of YM03H, 60-minute YM03H Support Resistance Pivot 8418.50 8598.50 8481.75 8301.75 8661.75 Bold signifies levels based on Pivot Analysis (Globex included). The December E-mini Nasdaq 100 Contract (NQ03H) One of the big questions within the Nasdaq-100 Index is the rebalancing of 15 stocks taking place over the weekend. For a list of these names, please see the link below (note how Jeff used the expression “John Seckinger Pivot” in one of his charts). http://members.OptionInvestor.com/intraday/inupd_12202002_452.asp There appears to be a discrepancy in least resistance between the NDX and the NQ03H contract. The NDX closed under 1019 and failed to test its 50 PMA (exp) at 1025 as the Dow rallied. The NQ contract, however, bid after the cash market closed and gave a different look. As far as the NDX is concerned, look to use the 50 PMA area (will most likely fall towards 1019) as a pivotal area during trading on Monday. If the contract rises above, expect a move to resistance at 1036 – which lines up nicely with the 200 PMA. On the other hand, a drop below the 995 area should have bears looking to initiate positions and once again expecting a move to 973. Remember, think “sell resistance, buy support”. If the NDX tries to rally and the oscillators look overbought or signal a bearish divergence, look to sell resistance and then get a solid entry as the index rolls. Then look to add around 995 (get stops out of the way just under 1000). Chart of NDX, 60 Minute The NQ03H contract moved higher after the NYSE exchange closed, propelling the contract to the 200 PMA and above the 38.2% retracement area shown below. Going forward, the pivot is at 120.50 and looks very appropriate. Also nice is how both resistance levels line up with the retracement areas from the recent cycle lower. Notice how the 61.8% level worked perfectly during the rebound from the first low. If the contract does fall under the pivot and give a sell signal, the 1014 support area should line up with the rising blue trend line. If weakness continues and the next support level is tested at 1004, I would move a stop down to 1011 to protect profits. Until the pivot is penetrated, the contract has a slightly bullish look. Chart of NQ03H, 10 Minute NQ03H Support Resistance Pivot 1014.00 1030.00 1020.50 1004.50 1036.50 Bold signifies levels based on Pivot Analysis (Globex included). The December E-mini S&P 500 Contract (ES03H) The SPX contract once again bounced higher from the intersection of the two trend lines (green and blue), and this rebound managed launched the contract above both bullish trend lines. Even though the contract failed to close above 900 (analogous to the Dow at 8515), the contract has to be given credit with its close above 893.00 (blue trend line). Going forward, look a move higher once above 901 and use 910 as a short-term objective. If the move there is explosive, most likely the contract will pullback slightly and then breakout to 915. If 893 fails, look for that level to become resistance and pressure the contract back down to 883. Chart of S&P 500 Index, 120-minute The ES03H contract is currently equidistant from the 911 to 880, and still rests below the neckline of the H&S formation profiled a few days prior. Going forward, the 901.25 resistance level is above the 200 PMA and should quickly become support if penetrated early in the session. If 888.25 is broken early on, look for that level to act as resistance and get longs to rethink Friday’s move. An interesting bullish move would be if the contract can get above 911 and most likely take out stops that have been there for a few days now. That would certainly be a nice step in a huge change in sentiment. As the session on Monday progresses, use the MACD oscillator as an indicator of whether or not the market is in the process of forming a bearish or bullish divergence. Example: A move below the 879 relative low in price; however, the MACD fails to take out its relative low. By definition, a bullish divergence and longs will most likely step in. Chart of ES03H, 30-minute ES03H Support Resistance Pivot 888.25 901.25 892.75 879.75 905.75 Bold signifies levels based on Pivot Analysis (Globex included). Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ********************** 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/ ******************** INDEX TRADER SUMMARY ******************** Santa Claus and the January “effect” By Leigh Stevens lstevens@OptionInvestor.com BOTTOM LINE – While the “Santa Claus” rally might be happening and the “January effect” is a tendency for stocks to lift during the first part of the New Year, there is no “confirmation” of a bullish trend until or unless the summer highs in the indexes are exceeded. On the bearish side, the S&P and Nasdaq indices are trading under their key 50-day moving averages (the Dow just eked above it on Friday) showing fading upside momentum. A bearish breakdown is indicated if SPX (S&P 500) closes below 876, OEX (S&P 100) under 448, COMPX (Nasdaq Composite) 1319 and NDX (Nasdaq 100) closing under 981. TRADING ACTIVITY – For the week, the Dow broke its losing streak and close up 1% (79 points, to 8512) from the prior week – the S&P 500 also was slightly higher on the week by 6 points to 895 or +0.6%. The Nasdaq (COMPX) was up only 1 point, to 1363 – but it did also break its recent fall. Next week is a shorted one of course, with the market closing early on Tuesday, the day before the Christmas day holiday, when it is closed all day. Stocks rebounded strongly on Friday after a settlement was announced involving collective fines of close to a billion dollars from the major Wall Street “full-service” brokerage companies; e.g., Merrill Lynch, Salomon Smith Barney (Citigroup), Credit Swiss First Boston, Goldman Sachs, and Morgan Stanley. They will also separate their research and investment banking activities – this, by buying research from independent companies. The long standing so-called “Chinese Wall” separating investment banking from the research arms didn’t keep out the Mongol hordes any better than the one in ancient China. The actual “cost” to the firms was more than a billion if you also count $450 million to fund independent stock research over the next 5 years and 85 million on investor education – of course, these same firms would be otherwise spending the money on their in-house research, so don’t take the 1.4 billion figure at face value. Knight in shining armor Elliott Spitzer (NY Attorney General), who forced the barons of Wall Street to cough up the dough - and give up the possibility of lucrative investment banking fees by touting stocks to the Main Street little guy/gal investors – also gained a ban on allocation of IPO shares to insiders at public companies (called “spinning”). You know – those same hot IPO shares that YOU could NEVER get from your “full-service” broker! By the way, YOU don’t get the 900+ million, as it will be split between the Feds and the States. By the way, for those of us who kind of like to see the same barons of Wall Street led away in handcuffs, part of the deal was no prosecution of the brokerage execs – Sandy Weill (CEO of Citigroup) was one of my favorite choices for this treatment but there will not be any more charges against him. Of course, Sandy and I go way back as I worked for Shearson Hayden Stone (& Weill) back when he was only ambitious and not yet obscenely rich. The Dow Industrial average benefited the most from this news. And, Friday was the advent of “quadruple witching” – wasn’t 3 witches enough!? – as, besides the usual culprits of activity related to expiring stock and index options and index futures, for the first time there were single-stock futures expiring. Hey, haven’t we had enough derivatives and the futures guys getting into the stock playpen! Guess not. In addition of course, we had the S&P 500 and the Nasdaq 100 adjusting their makeup on Friday. OUT WITH THE OLD, IN WITH THE NEW – Repeating from last week – OUT of the NDX is: 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). IN is: Expeditors International of Washington (EXPD); Ross Stores (ROST) Dentsply International Inc. (XRAY); Lamar Advertising (LAMR); Whole Foods Market (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). The re-balancing took place on this past Friday, not the week before as I indicated in my 12/15 weekly commentary. I was thinking of the fund manager portfolio buying and selling that has started as soon as the as the Nasdaq had announced the new lineup. Actually, there is a tendency to guess the new stocks and buy AHEAD of the announcement. Definitely, fund managers buy ahead of the actual day of rebalancing as they know that there will be a lot of last minute buying that will tend to put prices up. Global tensions heated up again by Friday, as Secretary of State Powell summarized the critical U.N. chief weapon inspector’s findings (related to Iraqi documents on its Weapons of Mass Destruction) as a “material breach” by Iraq. This phrase of course is by now famous as a definite statement that Iraq is NOT doing what the U.N. Security Council says it must do – declare its WMD and then destroy them. And, by inference leads to the U.S. armed forces going in and doing the same by force. Advancers led decliners by 2 to 1 on the NYSE on Friday – in the Nasdaq, 1890 issues advanced versus 1428 decliners. Bond prices lost an 1/8th on Friday, as a $1,000 10-year note was fetching about a $1.25 less than the day before. The dollar was mixed – the Euro continues to trade over $1.02 but fell slightly (from 1.0275 to 1.0265). COMING UP (NEXT WEEK) – Consumer, housing data and some more info on durable goods orders are on tap. On Monday we’re due to get personal income and spending data – expectations are that the consumer is holding up well thank you. Tuesday brings Durable goods orders and Thursday is initial jobless claims per usual. Jobless claims are going to be an influence as it reflects current conditions. No major earnings announcements as you would expect. As widely noted, only a scant percentage of past Decembers in the last 50 years have been down months – hence the term of a “Santa Claus” rally for this month. The dollar doesn’t take a break for Christmas although trader slows way down. Likewise, gold and oil trading, but these will be watched closely. The two biggest risks are war in the Middle East and a possible terrorist attack, but the investor confidence, and (Corporate) earnings have stabilized and are growing again. The market might be able to take off if the war issue was resolved. Durable goods orders (minus depressed aircraft orders) are expected to show a positive upward track. New home sales are reported Friday and are not expected to ease much if any from their strong 2002 pace. HARBINGER OF DOOM: Gold prices hit new 5-year highs last week and I am keeping an eye on bullion prices - a move above $350 per oz. in gold (Fri close: 341), particularly on a weekly closing basis, is a bearish indicator for equities prices in my opinion. The wild talk from the gold bulls on how high it will go THIS time is however also suggesting to keep the periodic outbreaks of gold fever in some perspective – been down that road before and it came and went. The PHLX Gold & Silver Index (XAU.X) above 80 (weekly close: 74.29) at its current down trendline would be also a bearish indicator for the financial assets, although XAU would not “technically” be in a bullish trend until the Index clears its prior weekly closing high at 86. MY INDEX OUTLOOKS - S&P 100 Index (OEX) – Daily and Hourly charts: The rally has defined a down trendline that is the technical aspect to watch – that and the 50-day moving average which comes in at the same place around 457 currently. A close above this line is needed to renew some upside momentum – in that case, next resistance comes in at 470, where I would look at selling any rally failure to this area. Key OEX downside support is at the prior swing low at 445 – if this level is penetrated to the downside, my next lower objective is to 430. If short by participation in puts, I would stay with them, with stop protection just above 457-460, given the oversold condition near term and the seasonal tendency to rally. DJ Industrial Index (INDU) Daily: Most of my downside objectives in terms of the Dow has been met, with last week’s move to near 8300. My trading parameters for DJX is to play puts in the 8600-8630 area and calls around 8300 as I suspect that this will be the range for a while longer. A move above 8630 would suggest exiting puts however as it would suggest upside potential back up to the 8775-8800 area. NASDAQ COMPOSITE (COMPX) Daily chart – The chart remains in a bearish pattern and a move possible to support in the 1300-1320 area. A close above 1400 would cause me to exit puts or an intraday move above 1450. QQQ Daily/Hourly charts: The Q’s remain in a bearish pattern as well. There has been substantial selling and resistance when the stock has gotten up into the 26.30 – 26.70 zone and this is what I am keying off from in terms of resistance – above here I want to cover shorts and exit puts. Absent that, look for a continued drift lower toward support which looks to be in the 24 area, which is my downside profit objective and a place where I will be want to see if there is a play on the long side (with stop protection at 23.30) – assuming QQQ stabilizes on a move down to this area and volume picks up on a rebound. HAVE A HAPPY HOLIDAY !! ************************************************************** 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/ ************************************************************** ************** Editor's Plays ************** Current Events I don't know if it was just the mixed up market or me but I had a hard time finding anything I was really excited about to profile this weekend. Many of the bullish stocks have rebounded to close resistance but are not showing any material signs of breaking out. Many bearish stocks rallied on Friday to resistance but with a potentially bullish period over the next week I am not that excited about going short without a good story. The market is in trouble. The lack of a ramp into the holiday week is disturbing. The dead stop on Friday at 8512 (50 DMA) was unlike a pre-holiday bounce. With strong resistance at 8625 and again at 8750-8800 there is only a slim chance we can post any major gains. Anything is possible, as we have seen a couple times in the last couple weeks. Any good news can supply the spark and retail traders are ready to believe anything. The main challenge is to try and trade the expected bounce without being hung out to dry by the also expected drop once the week is over. I pass, thank you. Instead of trying to focus on speculative plays for next week I picked one long term short and one event driven long. Goldman Sachs $71.69 Short With the government case over and a huge admission of guilt and whopper fine the class action lawsuits just got a mega dose of vitamins. They will have access to the documents that convicted the brokers and even where there was no "admission of guilt" the size of the fine will make juries think otherwise. Goldman is the highest priced stock of the major brokerages. As the news shifts to the shareholder suits the settlement numbers are going to start climbing with every news report. Goldman has support at $70. Once that support fails the bottom could fall out of the price as funds begin dumping the wounded overboard. GS rallied off Thursday's test of $70 on Friday's news. It was not convincing. GS also has strong resistance at $74. If it rallies on a positive market next week then $74 is likely to be the top. If GS shows no strength next week I would look to short or buy puts on GS with a break under $70. If it rallies with the market to $74 I would be looking to short/put GS at $74 and thankful for a better entry point. Either way my target is $60. Because this could take sometime I would suggest April or July options and they are not going to be cheap. Buying deep in the money reduces the time premium but risks more cash. APR-$65 GS-PM $3.80 APR-$70 GS-PN $5.30 APR-$75 GS-PO $7.60 APR-$80 GS-PP $11.10 ($8.31 ITM) JUL-$65 GS-SM $5.80 JUL-$70 GS-SN $7.70 JUL-$75 GS-SO $9.80 JUL-$80 GS-SP $13.10 ($8.31 ITM) Obviously the longer-term options are safer and will increase in value quicker once a drop begins. They will also bleed less if we get a bounce next week. The strategy for me would be to hope for a bounce to $74 and then buy the APR/JUL $80 put. This may not be the strategy everyone else would use. I know the majority of traders will buy the APR-$70 put on a bounce to $74. There is nothing wrong with that. It just leaves you exposed to lots of premium bleed if GS hovers between support at $70 and resistance at $74 for several weeks. Once a strong move develops the premium on the OTM option will rapidly escalate as the stock drops below $70. The percentage gain will be larger than the deep ITM option but the dollars gained should be less. Since this is a teaching section I am going to profile all the options and prices as the weeks progress and you can then decide how you want to play your options in the future. I will use $74 and $70 as the trigger points for the play with a stop loss of $81 on the $74 trigger and a stop of $76 on the $70 trigger. We will go with whichever trigger is touched first. ******************************** Forrest Labs $98.70 Call 2:1 Split Jan-9th FRX is a simple split run call play. It has been a long time since we have had any decent split runs. FRX has a bullish wedge with a top at $99.00 and a breakout could cause some short covering. Using the current upslope the target would be $104 by the 9th. With any positive market and some short covering it could be higher. For those who are unfamiliar with split plays the trick at this point is to close the play BEFORE the split. Once the split occurs many traders will sell their new stock and this causes a negative reaction. Funds with limits on the number of shares they own will be forced to sell the excess shares as well. The 9th is on a Thursday, which means I would be a seller on Tuesday or Wednesday at the latest. DO NOT hold over. I have seen numerous stocks drop several dollars at the open after a split. Since you are selling before January expiration there is no need to buy longer term options. If you want to invest the extra money and take on the risk of an unexpected event either in the stock or the market then the longer options are worthwhile because there will not be any premium decay in the first week of January like there will be with January options. The premiums will hold up longer but be sure to close before the split. Just because you have Feb/May options does not prevent the stock from dropping. Set your profit target at 50% on the JAN call, 30% on the FEB. Jan-$95 Call FHA-AS $6.40 Feb-$95 Call FHA-BS $8.60 Play updates: XRAY Jan-$40 Call Traders thinking about the XRAY call play from last Sunday got a gift on Monday with a gap down to $35.50 at the open. The Jan-$40 call dropped to $.25 cents at the open and traded in that range for about 90 min. The stock rebounded by Friday on NDX buying to touch $38 again at the close. With four days of NDX buying still ahead there is a good possibility that $40 level will be broken for a strong win. Those that sold naked puts are much better off as the Jan-$45 put, which was suggested, traded in the $9.10-$9.20 range until 11:00. That put closed on Friday at $7.30 for nearly a $2 gain and the play is far from over. PTEN - Patterson Energy Unfortunately the PTEN call play did not do as well. The stock gapped up as expected to $33 but then sold off on Wednesday as traders took profits from the strong gains from the Nov drop. It rallied back to $32 by the close on Friday but is looking like a breakeven at best if the NDX buyers do not appear in volume next week. The call opened at $1.00 on Monday and closed at 50 cents on Friday. DJX Laddered call The laddered call play should have filled two more increments at 84.00 and 83.50 and came very close to the last trigger at 83.00. The entry at 84.00 should have filled for around 50 cents and the entry at 83.50 should have filled at 45 cents. This makes our total for 40 contracts look like this: 10 @ $86.00 for $1.30 10 @ $85.00 for $1.10 10 @ $84.00 for $0.50 10 @ $83.50 for $0.45 Total $3.35 or .8375 average We are slightly underwater with the option closing at 50x65 on Friday. At this point I do not have high hopes for the trade. Initially I thought we would get the sell off earlier in the cycle and ramp up for the potential holiday rally a little sooner. Now we are faced with the Dow stuck at 8512, decent resistance at 8625 and strong resistance at 8750-8800. Getting back over 8800 is going to take a strong change in sentiment and a really good triple digit day. There have been numerous strong days during the holidays in the past and we really need one to pull us out of this hole. Breakeven should occur around 8600 so getting out should not be a problem. Making a large profit is a different task. We really need the Dow to hit that 8800 level and hit it in the next four days to have a chance for a double. At this point I would set a profit stop at $1.25 or $1.50 depending on what Monday brings and hope for a big one day spike. See the editors plays from Sunday Dec-8th for a full description of this play and the update on 12/15. 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 **************** Holiday Cheer by Steven Price Now that investors have digested the Iraq news, we may finally be back on track for a Christmas rally. Over the last 34 years, we have seen an average gain of over 10% in the Dow from the November/December low, to the December/January high. Thursday's drop took us down to within 30 points of the November low and today's big bounce made up for that drop and more. Interestingly, the rally found resistance at the 50 day moving averages in the Dow, SPX and OEX. That 50-dma is rising and a move above that level would seem to confirm the rally. That average in the various indices is Dow 8512.90 (close of 8512.01), SPX 899.27 (high of 897.79), OEX 457.90 (high 456.71). It is probably not a coincidence that the rallies stopped at that level. If we get a continued move over those averages heading into a traditionally bullish week, along with some support, we can probably expect the "Santa Claus" rally to continue into the end of the year. There are a couple of red flags traders need to be aware of, however. First is the descending trend line in the Dow that closely coincides with its 50-dma. That trend line is taken from the recent high just over 9000 on December 2 and extends through the high of 8638 on December 17. It neatly reaches today's high and can be used to gauge the action on a pullback and then continued rally after the big gain today, as the 50-dma changes value in the next few days. Second is the Nasdaq Composite, which also failed its 50-dma, as well as its 38.2% Fib retracement level of the recent rally from October to December. That retracement level had provided support prior to Thursday's breakdown and today's rebound stopped short by a couple of points. The retracement sits at 1363.05, versus today's close of 1361.51. Contributing to the Nasdaq failure was the non- participation in today's rally by the chip stocks. The Semiconductor Index (SOX) barely moved, staying beneath 300 with a finish of 297 (+0.96). The SOX did trade as high as 305 intraday, but was unable to hold that gain. There is an awful lot of resistance just above for these stocks, with additional speed bumps at 307, 310 and 330. Any continued rally in the broader markets will have to weave its way through these resistance levels in an index that has been a market leader in recent months. Another warning sign is that the bond market did not see selling. Usually in a significant equity rally, cash shifts from bonds to stocks. While we saw some selling of the 5-year note today, we also saw buying of 30-year and 10-year notes. The 10s and 30s are both still rising and approaching resistance at 114 and 112, respectively. A move over these levels would correspond loosely to a move below 8300 in the Dow and could signal another leg lower if today's bounce turns out to be just that, and not the beginning of a big run. The fact that the dollar ended the day slightly lower is also a bearish signal that calls the rally into question. A number of investment banks finally settled conflict of interest charges by New York Attorney General Eliot Spitzer. The total amount of the settlement was $1.4 billion with the biggest contributor being Citigroup's Salomon Smith Barney unit, which will pony up $325 million. The settlement includes the separation of research analysts from investment banking, a ban on awarding shares in initial public offerings to executives who are in a position to influence investment banking decisions, and an obligation to furnish independent research to investors. The settlement sent the banks higher with the bank indices (BKX +2.39% BIX +1.85%) and Broker Dealer Index (XBD +2.32%) all leading the charge in the Dow. Spitzer has certainly made a difference in the way Wall Street does business, as I'm sure he'll remind us in whatever political campaign he undertakes next. I think the last prosecutor to spend this much time in front of the TV cameras was Marcia Clark. The 34 year trends of the Santa Claus rally is hard to argue with, but even if we continue higher for the next several days, traders need to be aware of the other factors weighing against a continuing rally. The fact that the bullish percentages have reversed down in the Dow, OEX, SPX and NDX are also painting an overall bearish picture. Bulls can certainly feel confident that history is on their side in the short term, but be sure to keep tight stops and be ready to jump ship on a rollover below recent support. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8511 Moving Averages: (Simple) 10-dma: 8509 50-dma: 8513 200-dma: 8367 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 895 Moving Averages: (Simple) 10-dma: 897 50-dma: 899 200-dma: 966 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1013 Moving Averages: (Simple) 10-dma: 1024 50-dma: 1023 200-dma: 1092 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The Semiconductor Index has been relatively stable the last two days, hovering around the 300 level. This is significant for a couple of reasons. First, it barely moved on a big down day after the news hit on Thursday that the U.S. would declare Iraq in violation of its agreement with the U.N. On Friday, we got a big snap back rally and once again the SOX did virtually nothing. This index has been a market leader for the past year and Thursday's lack of movement was an indication that the market collapse was oversold. It would seem then that today's lack of movement would indicate that the bounce was overzealous as well. Until the SOX breaks through resistance at 300, 310, and 330, it will be tough to get a continued broad market rally. While some analysts may attribute the lack of a rally to mediocre book-to-bill numbers yesterday, if these numbers were really behind the lackluster performance then we should have seen a bigger drop on Thursday when the numbers were released. What we are probably seeing is simply a market that would have seen little activity if not for the Iraq news. 52-week High: 657 52-week Low : 214 Current : 297 Moving Averages: (Simple) 10-dma: 312 50-dma: 311 200-dma: 390 ----------------------------------------------------------------- Market Volatility Today's rally sent the VIX plummeting almost 9% ahead of the holiday week. Traders were unwilling to hold onto long premium ahead of a week that promises to see low volume and little option order flow to trade out of time decay if necessary. If the sell- off had continued, traders would likely have kept the put bids high, but with the scare of a big drop fading on today's rally, it was like a game of musical chairs, with no one wanting to be the highest bid on the board. The VXN was not nearly as reactive, as the tech rally was far weaker, indicating remaining weakness in the sector. CBOE Market Volatility Index (VIX) = 31.47 –3.08 Nasdaq-100 Volatility Index (VXN) = 48.51 –0.96 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.88 623,736 551,172 Equity Only 0.70 519,857 353,278 OEX 1.03 38,838 40,145 QQQ 1.70 32,927 56,062 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 49 - 0 Bull Confirmed NASDAQ-100 62 - 0 Bear Alert Dow Indust. 56 - 1 Bear Alert S&P 500 59 - 1 Bull Correction S&P 100 57 - 1 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 1.31 10-Day Arms Index 1.32 21-Day Arms Index 1.29 55-Day Arms Index 1.14 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 1926 920 NASDAQ 1853 1398 New Highs New Lows NYSE 73 48 NASDAQ 69 77 Volume (in millions) NYSE 2022 NASDAQ 1928 ----------------------------------------------------------------- Commitments Of Traders Report: 12/17/02 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 significantly to both long and short positions, however added 7,000 more short contracts. Small traders took a similar approach in adding to both sides, but came out decidedly longer, by about 13,000 contracts. Commercials Long Short Net % Of OI 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%) 12/17/02 465,361 528,896 (63,535) (6.4%) 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 11/26/02 155,975 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% 12/17/02 194,740 90,803 103,937 36.4% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials reduced the net short position by about 5,000 contracts, while small traders left positions relatively unchanged, with a net reduction in the long position of about 800 contracts. Commercials Long Short Net % of OI 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%) 12/17/02 51,999 54,383 ( 2,384) ( 2.2%) 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 11/26/02 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% 12/17/02 23,027 18,027 5,000 12.2% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials added to both sides of the position in approximately equal numbers, while small traders cut down on the short position by about 400 contracts. Commercials Long Short Net % of OI 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% 12/17/02 23,782 20,605 3,177 7.2% 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 11/26/02 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%) 12/17/02 5,498 9,045 (3,547) (24.4%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************************************************** 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/ ************************************************************** *************** ASK THE ANALYST *************** Point and figure buy signals Can you explain what typically happens after a stock hits a double-top breakout? For example, does this typically trigger short covering, causing a rise in price? I'm curious if your expertise on PnF charts has given you any insight as to how things usually progress after this supply/demand change takes place. This is a great question and something that bar chartists will look to try and understand. The subscriber's mentioning of "short covering" is very much a part of the supply/demand equation for higher stock price action and something that a bullish trader/investor will look for in order to provide that extra "umph" in addition to bullish buying on a breakout move to the upside. It's one thing to have bullish buying moving a stock's price higher, but better yet to get bearish traders also buying the stock as they look to cover positions as they either lock in gains or cut losses on higher price action. I view the "double-top" buy signal as the "least powerful" types of point and figure buy signals. This is a very general comment, but Professor Davis' study of probabilities under "bull market" conditions shows the double top buy signal being profitable 80.3% of the time, for an average gain of 38.7% in approximately 11.5 months on average. Compare that to the "more powerful" triple-top, which Professor Davis' study showed as being profitable 87.9% of the time with an average gain of 28.7% in just 6.8 months. "Now wait a minute!" you say. The double top buy signal seems more powerful on a percentage gain basis compared to the triple top. This is true. But I also believe that time is a factor and we all know that "time is money." A trader/investor looking at double-top buy signals must also "understand" or recognize what type of PATTERN that double top buy signal is coming from. You see, there's the plain old "double top buy signal" and there's the double-top buy signal at could come from the "bearish signal reversed," or the "bullish triangle" PATTERNS. You will see the words PATTERN in uppercase as to emphasize importance. This is perhaps where the subscribers mentioning of SHORT COVERING and its impact on supply/demand can drive price action. While PATTERN is important when looking at double-top buy signals, MARKET CONDITION as depicted by the bullish % is also important. Lets try and understand these dynamics, and look at a point and figure chart of Intl. Business Machines (NYSE:IBM) $79.79 +1.43%. We'll find several double-top buy signals, but we will also review the very important bullish % chart that tells us about MARKET CONDITION and addresses risk (who has the risk, bulls or bears) and then follow IBM as it generates other double-top buy signals on an impressive run higher. What I'm hoping traders AND investors begin to understand is that there a "buy signals" and there are BUY signals. Intl. Business Machines (IBM) - $1 box Let's start to in the center of the chart (left to right) where we see some rather alarming distribution or selling in IBM from the $82 level down to $72, then a rebound back up to $77, then a reversal back lower with a sell signal at $71 and a break of trend at $70. Imagine YOU shorted the stock on that breakdown. Boom! IBM fell to $60. Then see the series of small $4 rallies that found selling to new lows. Imagine the number of bearish traders smiling on every rally, shorting the stock and seeing it fall to a new low. The pattern repeats and bears begin getting more confident and aggressive with their shorting on each rally as it becomes an "easy money trade." That PATTERN of lower highs and lower lows and repeated over at least 7 columns was nothing at the time. It was simply thought of as a longer distribution of stock and took place into October. Can you perhaps "feel" the complacency and confidence building by bears as they short each rally with success to new lows? And then... it happened! Boom! A quick and sudden reversal higher and a "double-top buy signal" (column of X exceeded a previous column of X). It's not just the "double-top" buy signal that created the eventual long column of X from the bottom, but the double-top buy signal from the PATTERN called the "bearish signal reversed." Bearish signal reversed. It "sounds" just like what it does. Bears are having a hay day, shorting each rally to a new low and all of a sudden, the stock trades a level it wasn't supposed to and a bear has to make a decision has he/she becomes "surprised." Short covering combined with bull's buying create somewhat of a "powder keg" explosion as we get somewhat of a double-demand scenario from bulls buying and bears covering. We'll look at a bar chart too but it's the bearish signal reversed PATTERN that may have made the double-top buy signal at $63 a little more "important" than a normal double-top buy signal. After the first double-top buy signal at $63 from the bearish signal reversed PATTER, we see at points (aa), (bb) and (cc) three more double-top buy signals. Here's something I think is important to observe. Look at the pullbacks (O's) after each column of X is built. The pullback just prior to (aa) was 3-boxes and came right to the $65 level, which was suspiciously right where a rally from $60 to $64 was sold lower. An observation here would be that every short below that level was now starting to question things. We'll "know" why when we look at the bullish % charts and figure out who had the risk in October. Also observe the 3-box pullback just prior to another double-top buy signal at point (bb). Hmmmm.... that pullback seems to match the pullback in early September (red 9), but didn't come close to pulling back to the previous buy signal at (aa). Maybe there's still bullishness building. Maybe some shorts from $79-$72 are questioning things. Then at point (bb) IBM generates another double-top buy signal at $76 and another nice moves to $83 unfolds. This time, the reversal is a little more than 3-boxes and the pullback gets a little closer to the (bb) double-top buy signal. No worries. The stock has made a nice move and probably some profits being taken by some crazy institutional bulls that took some pain from $65 to $55 when the bullish % was low and risk was low for bullish accumulation. Hey, institutions can take that kind of heat, but most of us individual trader don't and really don't have to anyway. We wait for the bullish % charts to reverse up or the stock to give us some type of "buy signal." Then at $84, IBM gives another double-top buy signal at (cc). Another nice move to $89 takes place before a 10-box reversal. What? A $10 box reversal! Why so much? The first two were 3- box, the next was 6-box and the last one a 10-box? What's up with that? Risk... It's all about risk. I'll admit, it would have been tough to take on a full position in IBM at its first double-top buy signal at $65 as my risk to a sell signal was $54 right? All I had going for me was Professor Davis' study, the Dow Industrials Bullish % ($BPINDU) had also reversed up into "bull alert" status. But risking $9 to make what? I did not yet really have a feel for a bullish price objective, other than Professor Davis' study that had the bearish signal reversed being profitable 92% of the time for an average gain of 23.2% in 2.5 months. What!!!!! 92% probability of a 23.2% gain in 2.5 months? OK, put me down for 1/4 or 1/2 position at $65. But what about risk at $69, point (aa) and that double top buy signal? Now what's my risk to a sell signal? At $69, I'm risking $5, I've got the PATTERN of the bearish signal reversed on my side, I've also got a bullish vertical count of $95, and the bullish % continues to build as more stocks are finding reversing point and figure buy signals. Heck, risk $5 to potentially make a target of $95? Better put me down for another 1/4 or 1/2 position, as risk/reward is $5/$26 from $69. But what about risk at $76. At the double-top buy signal of $76, point (bb) risk to a sell signal at $71 is risking $5 to potentially make $19. That fits my written business plan risk/reward profile. Heck, better put me down for another 1/4 position, this bugger might just make it to $95. (What's a bear thinking at this point?) But what about risk at $84, point (cc) and that double-top buy signal? My risk to a sell signal is $8 and my potential reward to $95 is $11. Ooops! If my stated business plan says "you should only trade in stocks that have better than 1:2 risk/reward, then I've got to think about buying IBM at the double top at $84. Ah, what the heck. Maybe I've got 3/4 of a position, it is all profitable and this thing might just get to $95. Put me down for another 1/4, making me full position, and stop at $76. I'm not trying to "dodge" the question about double-tops and "does it typically trigger short covering" in the subscriber's question, but hopefully you see that the answer really is "it depends" on the bullish % (first and foremost) and where the double-top buy signal(s) are generated, and even risk/reward analysis. It's not just YOU that makes an assessment of risk/reward, the MARKET does it every second of every hour of every day as it gathers information. The bullish vertical counts and pattern probability gains from Professor Davis' study are ONLY to be used for risk/reward analysis. The bullish counts and pattern probabilities are NOT set in stone. But as we worked through the chart of IBM, what do you sense? Could it be that the MARKET perceives a less favorable risk/reward developing as price rises? Is it IBM or is it the higher levels of risk that the bullish % charts have been alerting us to in recent weeks that may have bulls a little less eager to buy IBM at $84? If you're long IBM a full position with cost basis of 1/4 positions at $63, $69, $76 and $84, where's your stop? Conclusion: There is no "set rule of thumb" to double-top buy signals. Yes, there is undoubtedly short covering by aggressive bears that will try and pick a top and use the stop just above bearish entry point at the double-top buy signal as their stopping point. I could imagine a bearish shorting IBM after the big move up from the bottom thinking it might retrace half that move and have the bear placing a stop at $69. Right now I can envision a bear shorting IBM at $79, with a stop at $83, which would be a double-top buy signal. But the bullish % tell us that BEARS had a greater amount of risk in their shorting back in mid-October at $65, than they may have now at $79 with the Dow Industrials Bullish % ($BPINDU) in "bear alert" status. So my thinking on this subject is that while another double-top buy signal at $83 in IBM might trigger some short covering and could very well see a test of the highs, I also need to understand the different level of RISK or condition the Dow Industrials are in as depicted by the bullish %. It doesn't hurt to understand the OEX and SPX bullish % either as IBM is a component of those bullish % too. You can look at a free bullish % chart at www.stockcharts.com for the Dow ($BPINDU), the S&P 100 ($BPOEX) and S&P 500 ($BPSPX) and make a tie to the "read A", "read B" and even the "red C" on IBM's point and figure chart. Why would IBM suddenly reverse from $89 to a low of $79? What was the potential reward to $95, when IBM traded $89? At $89, what was the risk to a sell signal? What was the Dow Industrial Bullish % ($BPINDU) reading at its "red C" in early December? Was it above the "overbought" 70% level and higher risk environment for bulls? Let's quickly look at the bar chart of IBM. Hopefully a bar chartist will see how the combination of the point and figure observations may have been used, and perhaps BE used in the future. Intl. Business Machines (IBM) - Daily Intervals Wow! I'm convinced I need about 20-sets of eyeballs to see all the different p/f charts and bar charts. We can certainly see where bears where having success shorting IBM down the chain into early October. Then... Boom! The gap higher. We can picture the face of a bear that's been eating a bunch of berries for weeks, suddenly have his eyes pop open as if to say, "Oh shoot! The bearish signal reversed pattern." While bulls might have been looking for IBM to backfill the gap higher, we can only imagine what a bearish trader was doing can't we? Bears had 1 day after the gap higher to get things covered didn't they? Then Boom! Another gap higher. That bear's eyes got a little bigger at $68.42 didn't they? Hmmm... interesting that the stock found resistance near 50% retracement. Good short to fill that gap huh? Then the decline to $65.02, almost pegged the close right on 38.2% retracement. While IBM is traded through a specialist, are you thinking like a market maker? (See December 01 Ask the Analyst) http://www.OptionInvestor.com/ask/ask_120102_1.asp Well... to tell you the truth, about 80% of the information discussed tonight, I observed tonight for the first time! I didn't plan much of this. All I was really looking for was a chart that had several "double-top buy signals" in it. But if you've got a friend that owns some IBM or trades the market, now what do we begin to think about the future? This week, the Dow Industrials broke the 8,400 level and broke bullish support trend and triggered a spread-triple-bottom didn't it? Then on Friday, we get what I felt was an option expiration related rally. BUUUUUUT! What if IBM is going to eventually trade its bullish vertical count of $95? I could see that taking place with the proverbial "Santa Clause Rally" couldn't you? On the flip side of things, if the Dow is going to "crater" and is now in a correction mode and ready to go lower, what might happen to IBM? Where's that double-bottom sell signal at in IBM's p/f chart? $78 right? Where's our current "market maker" support if we're trading like a market maker? $77.34 right? Where's my "next level of resistance" that a specialist, with NO order flow might look to short IBM if he/she senses no order flow and needs to be getting short? $82.85 right? Where would IBM give yet another "double-top buy signal" at? $83 right. Do you see the correlation between the bar chart above and the point and figure chart? On Thursday, I talked about a potential bearish trade "at the market" in IBM puts as the Dow was breaking support. I'm getting the feeling here that I may have been a little early and should have waited for $78. This week, IBM becomes my KEY stock to be following, and may well be "the stock" that gives us confirmation to one of two scenarios. Is a decline in the Dow still in play? Was Friday's rebound simply due to option expiration? IBM traded $80 and that was it. A break above $83 does have the scenario of "Santa Claus" rally coming into play doesn't it? Alarms set on IBM at $78 and $83. With the bullish % still high, a bull is hesitant, but might look to play the break higher as a bear like me that is short the stock looks to close out. Do you see the POTENTIAL head/shoulder top on IBM? Left shoulder at $83, head at $88, and right shoulder maybe not quite put in yet? Wow! This has my juices flowing and to tell the truth, I never really "realized" what was at play until I walked through all of the above. And to think all of this started with a little ol "double-top buy signal" at $63. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of December 23rd ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- AM American Greetings Co Mon, Dec 23 Before Market Open 0.61 ------------------------- TUESDAY ------------------------------ None ----------------------- WEDNESDAY ----------------------------- None ------------------------- THURSDAY ----------------------------- None ------------------------- FRIDAY ------------------------------- WACLY Wacoal Corporation Fri, Dec 27 Time Not Supplied N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable MUR Murphy Oil 2:1 Dec. 30th Dec. 31st IBCP Independent Bank Corp. 3:2 Dec. 31st Jan. 2nd CLBK Commercial Bancshares 5:4 Jan. 3rd Jan. 4th -------------------------- Economic Reports This Week -------------------------- Is the traditional Santa Claus rally upon us? The last two weeks of the year are a historically bullish phase for the markets. There is very little economic and earnings activity and most major players are home for the holidays. Check for the Personal Income/Spending numbers on Monday. Consumer Sentiment and New Home Sales come out on Friday. ============================================================== -For- Monday, 12/23/02 ---------------- Personal Income (BB) Nov Forecast: 0.2% Previous: 0.1% Personal Spending (BB) Nov Forecast: 0.4% Previous: 0.4% Tuesday, 12/24/02 ----------------- Durable Orders (BB) Nov Forecast: 0.9% Previous: 2.4% Wednesday, 12/25/02 ------------------- None Thursday, 12/26/02 ------------------ Initial Claims (BB) 12/21 Forecast: 400K Previous: 433K Friday, 12/27/02 ---------------- Mich Sentiment-Rev. (DM)Dec Forecast: 86.5 Previous: 87.0 New Home Sales (DM) Nov Forecast: 1000K Previous: 1007K Help-Wanted Index (DM) Nov Forecast: N/A Previous: 40 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************************************************** 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/ ************************************************************** ********************* SWING TRADE GAME PLAN ********************* Jingle Bell Rock While the numbers I quoted in last night's Swing Wrap suggest a remarkably consistent "Santa Claus" rally over the past 34 years, there were some red flags today that traders need to take into consideration. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 12-22-2002 Sunday 2 of 5 In Section Two: Stock Pick: A Second Chance Daily Results Call Play of the Day: ACS Put Play of the Day: AIG Dropped Calls: None Dropped Puts: MMM, DLX ************************************************************** 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/ ************************************************************** ********** Stock Pick ********** A Second Chance PSFT - $19.01 Strategy: Long stock with put insurance The Information Technology arena has been out of favor for so long that there are actually some attractive values available, if you know where to look. PSFT designs, develops, markets and supports a family of enterprise application software products for use throughout large and medium-sized applications. Yawn! When you think PSFT, think ORCL and SEBL, as those are the company’s primary competitors. Think the above paragraph sounds or looks familiar? What’s that old clichi? “Dij` Vu all over again?” No, you’re not reliving the past nor has a previous article been posted into our stock plays section. If you missed the opportunity to consider PSFT in early October, we’re giving you another chance. We first profiled PSFT on October 3rd, when the software company was trading at $12.42, just two days after making a new 52-week low. Since that time, PSFT challenged the $22 level, and has spent most of the month of December consolidating between $16 and $19. Investors that pulled the trigger on PSFT in October hopefully have enjoyed the fruits of their labor. There are several factors influencing our renewed our interest in the software company. PeopleSoft reported better that expected quarterly results in October, beating analyst’s estimates by $0.02. Although revenues fell, they also came in better than expected. The exciting aspect at that time, sparking the move to higher prices, was the company’s comments. While PSFT President and CEO, Craig Conway, prefaced his remarks with “it is still very challenging to make predictions”, he did boast “PeopleSoft continues to deliver strong financial results at a time when many companies are struggling.” Currently several software analysts are looking for 2003 to be the year of suites, the integrated software packages designed to run all aspects of customers’ business. Some suggest the quality of PSFT’s products has improved enough to win over customers that in the past have bought five or six separate applications and had to hire consultants to integrate them. Earlier this month, Conway said in an interview that while many companies aren’t planning to increase computer-related spending next year, he intends to grow PeopleSoft by taking business from rivals. It seems his strategy could very well be working. The CEO also said that the company is getting “tremendous traction” in Europe, which is traditionally SAP’s turf. The software industry has seen its share of hard times this year, however investor confidence seems to have strengthened in recent weeks. Oracle (ORCL) did its part to help prop up the sector, reporting quarterly results Wednesday after the close. The software giant beat its own cautious estimates, and said they believe the worst is over and that they would return to growth. Thursday, shares of PSFT rose 3% on nearly twice the normal volume, in response to the ORCL news. PSFT is scheduled to bare its financial soul, and announce its current quarterly results on January 23. Estimates call for a profit of $0.14 per share. Let’s look at the chart for some technical guidance on our new play. In the third week of November PSFT stuck its head above its 200-dma, closing at $21.03. As the stock pulled back and consolidated near the $17 area traders were ready to click their buy buttons once again. The 50-dma provided support during the consolidation these past two weeks and is sitting at $18.24. PSFT has set up to do battle with its 200-dma once again, which as of Friday’s close was pegged at $19.61. A move through $20, supported by strong volume, could supply our play with the momentum needed to move substantially higher in coming months. While our chart below doesn’t show it, there is an $8 gap between $28 and $35 from back in early April when the company issued an earnings warning. Most technicians would agree that while it may take months and sometimes even years, gaps in charts usually do get filled. Your approach to our new play may vary depending on your comfort level. Some may prefer to enter our new play at current levels, while others may choose to see if PSFT can garner the momentum to move through resistance with better than average volume. Option 1. Purchase PSFT stock at the current level and purchase one July $15 or $17.50 Put(PQO-SW) for every 100 shares of stock purchased. If the stock is under $17.50 by July 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, remember 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 $10.80 and $12.20 respectively. For those that want added protection, the purchase of one July $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 PSFT stock at the current level and wait for the stock to move higher. Once you feel PSFT has reached a point of consolidation or are expecting a pullback, buy one $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-$22 level. Option 4. Purchase stock or a LEAP Call without protection and close out the position if it PSFT falls below support between $15.00 and $17.00. PeopleSoft, Inc. (PSFT) Daily Chart *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week ACS 51.86 0.40 0.65 0.05 0.91 3.54 New, breakout BEAS 12.15 0.33 0.69 0.27 –0.28 1.60 New, Buy signal BSX 44.18 1.38 -0.33 0.97 0.45 2.43 Trending higher CTXS 13.00 0.62 0.49 -0.24 0.26 0.82 Support at $13 TRMS 44.32 -0.20 1.43 -1.38 2.49 4.20 Nice start PUTS AIG 59.07 2.05 -0.73 -1.54 –0.95 –0.18 Failed bounce COST 27.88 0.13 -0.97 -0.17 0.06 –0.67 Weak rebound DLX 41.70 0.19 -0.09 -0.45 –0.31 1.00 Drop, Support MMM 124.13 1.74 -2.15 0.11 –0.56 2.22 Drop, Stopped RKY 60.86 -0.40 -1.15 0.31 0.17 –1.04 Down week ROOM 59.45 2.59 -1.33 -0.20 –2.20 –0.45 Under $60 ************************************************************** 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/ ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* ACS – Affiliated Computer Services, Inc. $51.86 (+3.63 last week) See details in play list Put Play of the Day: ******************** AIG - American International Group - $59.00 -1.09 (-1.49 for the week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ MMM $124.13 (+2.36) As we mentioned on Thursday, MMM looked a bit suspicious due to the fact that it didn't break below $120. We tightened up the stop to $122.50 to protect against the possibility of a strong bounce, and it's a good thing we did. The broad market bounced and after a bit of hemming an hawing around our stop level, MMM blew through it midday and churned higher right up to the closing bell. Any open positions should have been stopped out today. With the likelihood that the markets continue to drift higher through the holidays, we're dropping the play tonight. --- DLX $41.70 +1.61 (+0.70 for the week) While a gain of only $0.70 for the week would not normally justify the dropping of a put play, Deluxe seems to have gotten a bounce from a level it has had a very tough time breaking down through. It has flirted with $40 the last several days and we mentioned on the Market Monitor that traders who had entered at our alternative entry point on the failed rebound at the 200-dma near $44 might want to take profits when it was sitting just above $40. Bears will suggest that today's bounce is similar to the last failed rally that provided an excellent short entry. The stock has moved slowly, however, and with its hold above $40, we will simply let the play go and look elsewhere. *********** 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. ************************************************************** 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/ ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 12-22-2002 Sunday 3 of 5 In Section Three: New Calls: ACS, BEAS Current Calls: CTXS, TRMS, BSX New Puts: None ************************************************************** 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/ ************************************************************** ************** NEW CALL PLAYS ************** ACS – Affiliated Computer Services, Inc. $51.86 (+3.63 last week) Company Summary: ACS is a global Fortune 1000 company that delivers comprehensive business process outsourcing and information technology outsourcing solutions, as well as system integration services, to both commercial and federal government clients. Why We Like It: While traders may be backing off on their activity around the holidays, that doesn't mean that corporate America isn't still busy inking beneficial and profitable deals. Given the recent weakness in the markets, new contracts and signs of business growth are the kind of thing that will really get investors' attention. That was certainly the case with shares of ACS over the past couple days. News broke yesterday morning that the company had inked a 10-year Human Resources contract with Motorola, which prompted Soundview to initiate coverage of the stock with an Outperform rating. Those two factors galvanized the bulls and they pushed the stock up through the $50 level on Thursday, testing resistance, but not breaking through it. With a positive market on Friday and the good feelings from yesterday's positive press, the bulls got serious and continued their buying spree. By the end of the week, ACS came to rest just shy of the $52 level, having solidly broken above the $50-51 resistance level that had held the stock in check since the breakdown in late June. Pushing through resistance was enough to extend the current column of X's far enough to generate a fresh PnF Buy signal, and the length of that column now has the bulls working with a vertical count up to $76. With the stock's all-time high of $57, that certainly gives some room to run to the upside. But first, the bulls are going to have to work through resistance staggered throughout the $52-57 area. Given the strong move over the past 2 days and looming overhead resistance, a bit of a pullback seems in order to give us a solid entry into the play. Look to initiate new positions on a dip and rebound from the vicinity of $50, possibly near the top of Friday's gap at $50.50. ACS has built a pretty good base of support near $48 over the past few weeks, which is further supported by the 200-dma at $48.40. If the current move is the beginning of something larger, than that level shouldn't be violated on any near-term pullback. Set stops initially at $48. BUY CALL JAN-50*ACS-AJ OI=1978 at $3.70 SL=0.50 BUY CALL JAN-55 ACS-AK OI=1824 at $1.20 SL=0.00 BUY CALL FEB-50 ACS-DJ OI=1158 at $7.00 SL=5.00 BUY CALL FEB-55 ACS-DK OI=1196 at $4.20 SL=2.50 Average Daily Volume = 1.83 mln --- BEAS – BEA Systems $12.15 (+1.95 last week) Company Summary: As a provider of e-commerce infrastructure software, BEAS helps companies of all sizes extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. The company's products have been adopted in a wide variety of industries, including commercial and investment banking, securities trading, telecommunications, airlines, retail, manufacturing and government. BEAS' products serve as a platform or integration tool for applications such as billing, customer service, electronic funds transfers, ATM networks, Internet sales, supply chain management, and hotel, airline and rental car reservations. Why We Like It: Traders looking to capitalize on bullish moves want to have as many factors in their favor as possible, especially in an uncertain market environment like we've seen over the last few weeks. A breakout above significant highs is good, but when it comes on huge volume, that's a nice bonus. BEAS had a great run from the October lows, moving from below $5 to above $11 in the space of about 6 weeks. That's nothing special, as a lot of Technology stocks can lay claim to that sort of performance. Where BEAS distances itself from the crowd though is in the shallowness of its pullback and the subsequent price action over the past two weeks. The stock drifted down to the $9 level, rebounded from the 200-dma and as of Friday's close, is up 33% from its December 9th close. Throughout the rally of the past 2 weeks, volume has been expanding, and the stock broke out above its late-November highs on Friday, with volume 2.5 times the ADV. In other words, serious, give it to me now, buying. The PnF chart is a thing of beauty as well, with the initial Buy signal off the October lows generating a price target of $20, which is still very much in play. Friday's breakout confirmed the bullish strength with another PnF Buy signal. Friday's breakout also pushed On Balance Volume to its highest level since January, confirming that we've got serious buying in progress. There's one more bullish factor at work as well, as we got the bullish cross of the 50-dma ($9.11) over the 200-dma ($9.05). This is the first time the 50-dma has been above the 200-dma since February 2001. Clearly, BEAS is under accumulation, but that doesn't mean its going to go straight up the charts. In fact, with solid resistance at $12.50-13.00 and then again at $15, there will definitely be some bumps in the carpet on the way to that $20 target. With light volume likely to be the rule next week, we're looking for a pullback near $11.50 or even $11 to provide for a more palatable entry point into the play. Momentum traders can certainly chase the stock higher, but it would seem prudent to only do so on a decisive move above $13 on continued heavy buying volume. To give BEAS room to move in the near-term, we're initially setting our stop at $10, just below the intraday lows following the gap up on December 12th. BUY CALL JAN-10*BUC-AB OI=18726 at $2.35 SL=1.25 BUY CALL JAN-12 BUC-AV OI= 4161 at $0.90 SL=0.50 BUY CALL MAR-12 BUC-CV OI= 1197 at $1.70 SL=0.75 BUY CALL MAR-15 BUC-CC OI= 763 at $0.95 SL=0.50 Average Daily Volume = 10.4 mln ************************************************************** 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/ ************************************************************** ****************** CURRENT CALL PLAYS ****************** CTXS – Citrix Systems $13.00 (+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: As expiration week ended on a positive note, CTXS drifted back down to the $13 level at the close. While it may sound like a bit of a broken record, that put the stock right at the lower edge of its ascending channel -- again. Sure there was the intraday volatility to contend with, and it was interesting to see the intraday high right at the $13.50 level, which had been an important inflection point throughout the week. The net result was that the stock gained just under a dollar on the week, continually supported by that ascending channel. Looking at support levels, throughout the week, CTXS found support just below $13 on several occasions, and we're looking for this level to continue to find buyers next week. Additionally, the 10-dma has flattened out at $12.72, and it should help to support the stock on any mild dips. We want to continue to initiate new positions on rebounds from the $12.75-13.00 area and shy away from buying strength until we see a sustained rally through the $13.50 level. Keep stops in place at $12.50. BUY CALL JAN-12*XSQ-AV OI=1712 at $1.45 SL=0.75 BUY CALL JAN-15 XSQ-AC OI=1619 at $0.45 SL=0.25 BUY CALL MAR-12 XSQ-CV OI=1168 at $2.25 SL=1.00 BUY CALL MAR-15 XSQ-CC OI= 589 at $1.20 SL=0.50 Average Daily Volume = 3.88 mln --- TRMS – Trimeris, Inc. $44.32 (+3.98 last week) Company Summary: Trimeris is a biopharmaceutical company engaged in the discovery and development of a class of antiviral therapeutics called viral fusion inhibitors (Fis). The company's most advanced product candidates, T-20 and T-1249, are for the treatment of human immunodeficiency virus (HIV), type I. T-20 is a first-generation FI that prevents HIV from entering and infecting cells, while T-1249 is a rationally designed second-generation FI in an earlier stage of development. Using its proprietary viral fusion platform technology, TRMS has identified and filed patent applications disclosing numerous discrete peptide sequences that appear to inhibit fusion for several viruses. Why We Like It: The wild gyrations seen in TRMS on Thursday do seem to have washed out the weak hands, both long and short, as the stock continued its upward march on Friday. Beginning the day with an upward spurt, the stock then consolidated near the $43 level until midday and then began clicking off a series of higher lows and higher highs, that brought it up above $44 by the closing bell. Certainly part of the bullish action was due to the strength in the broad market, and a 1.7% gain in the BTK sector certainly didn't hurt. But the real story appears to be that the market had fully discounted the manufacturing problems the company admitted to late on Wednesday. Now that the news is out, the stock is working its way back to where it was before those rumors first surfaced at the beginning of the month. One important development on Friday was that TRMS managed to close back over the 20-dma ($44.05) for the first time since early November. That would seem to indicate there is some conviction to this rebound, rather than it being just an oversold bounce. With all of the oscillators turning upwards, it certainly looks like the bulls are back in charge. We now have intraday support at $42 and $43 and an intraday dip and bounce from either of these levels should serve well for initiating new positions. Momentum traders are getting close to a decent entry point as well, and a rally through the $45 level (intraday resistance since the drop in early December) can be used as the entry trigger. Any retracement in price should not take out the $41 support level at this point, so we are raising our stop to $41 this weekend. BUY CALL JAN-45 RQM-AI OI=1009 at $1.85 SL=1.00 BUY CALL JAN-50*RQM-AJ OI=1297 at $0.55 SL=0.25 BUY CALL APR-45 RQM-DI OI= 510 at $5.10 SL=3.00 BUY CALL APR-50 RQM-DJ OI= 946 at $3.10 SL=1.50 Average Daily Volume = 652 K --- BSX - Boston Scientific - 43.70 +0.45 (+1.95 for the week) Company Description: Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices whose products are used in a broad range of interventional medical specialties. (source: company press release) Why We Like It: Friday's morning's news that one of Boston Scientific's rivals had received FDA approval for a competing tumor treatment fell on deaf ears. BSX joined the broader market in an early rally and traded in positive territory for most of the session. Shares reached our entry trigger at $44.01 shortly after 12:30 EST. The stock's 1.0% gain mirrored the action in the DRG.X pharmaceutical index. Now that BSX has broken to fresh multi-year highs, we think odds are good that shares will continue to move higher in the ascending regression channel. New entries can be targeted on a move above $44.25, but keep in mind that the top of the channel (currently near $45.50) may provide some overhead resistance. A move above this level would be a decidedly bullish development. Our stop for this play is set at $40.99. Very conservative traders could use a stop just below $42.00. BUY CALL JAN-40*BSX-AH OI=4517 at $5.10 SL=2.55 BUY CALL JAN-42.50 BSX-AV OI=952 at $3.20 SL=1.60 BUY CALL FEB-40 BSX-BH OI=1287 at $6.00 SL=3.00 BUY CALL FEB-42.50 BSX-AV OI=624 at $4.30 SL=2.15 Average Daily Volume = 2.59 mil ************* NEW PUT PLAYS ************* None ************************************************************** 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/ ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 12-22-2002 Sunday 4 of 5 In Section Four: Current Put Plays: RKY, ROOM, COST, AIG Leaps: Santa Claus Is Coming To Town Traders Corner: On A Roll – As Smooth As Mayo – As Sweet As Honey – Or Should I Say “Money”? ************************************************************** 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/ ************************************************************** ***************** CURRENT PUT PLAYS ***************** RKY – Adolph Coors Company $60.86 (-0.63 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: After consistently drifting lower throughout the past couple weeks, RKY seems to be finding some support. While some of that support could have come from the artificiality of options expiration, we also know that the $59-60 level is important from a support level, due both to historical support levels, as well as the PnF bullish support line at $59. The price action was actually pretty weak throughout the day on Friday, and we actually saw a low trade of $60.01 before the rebound got underway. That rebound really got going in the final 30 minutes, driving the stock up to $60.86 by the closing bell. The important takeaway from the past few days trading is that the $61 level is growing in strength as resistance, and it is going to take some significant buying interest to penetrate it. With volume likely to be light next week, there probably won't be enough buyers to get the job done. If RKY does get through that resistance there is more waiting near $62, which is where we would prefer to initiate new positions on a rally failure. Note that our stop is now at $62.25, as a close above that level would confirm a trend change in the making. Remember, with the $59-60 support level just below, that momentum traders will need to see a breakdown under $59 before chasing price weakness lower. BUY PUT JAN-65 RKY-MM OI=176 at $4.90 SL=3.00 BUY PUT JAN-60*RKY-ML OI=218 at $2.00 SL=1.00 Average Daily Volume = 402 K --- ROOM – Hotels.com $59.45 (+0.00 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: The significant price action in ROOM last week can be summed up quite succinctly -- rollover at resistance, followed by a breakdown and then resistance coming into play at a lower level. Sounds like an ideal put play, doesn't it? Early in the week, ROOM tested our nerves by probing above the $63 resistance level before rolling over with conviction and then breaking below $58 on Thursday. With the positive market bias on Friday, we got a decent rebound off the lows, but it was interesting that the stock couldn't push through the $60 level. It wasn't so long ago that this level provided support, and the fact that it is now creating resistance adds credence to the idea that the bulls are losing their conviction. The PnF chart shows us that supply is very much in control once again, with the confirmation of another double-bottom Sell signal on Thursday. Even if a positive market helps the stock to scale the $60 level on light volume next week, ROOM has even stronger resistance now in the $61-62 area. A rebound and subsequent rally failure in that area would give us a solid lower high that we could use for initiating new positions. On the downside, we really need a volume-backed move below $57.50 to motivate us to initiate momentum-based entries. Keep stops in place at $63 until we get that breakdown. BUY PUT JAN-60*URD-ML OI=2341 at $4.30 SL=2.75 BUY PUT JAN-55 URD-MK OI=1982 at $2.40 SL=1.25 Average Daily Volume = 888 K --- COST - Costco Wholesale Corp - $27.71 -0.97 (-0.81 for the week) Company Description: Costco Wholesale Corporation operates an international chain of membership warehouses, mainly under the "Costco Wholesale" name, that carry quality, brand name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. The warehouses are designed to help small-to- medium-sized businesses reduce costs in purchasing for resale and for everyday business use. Individuals belonging to certain qualified groups are also able to purchase for their personal needs. (source: company website) Why We Like It: A small gain in the RLX.X retail index helped to lift COST off its multi-year lows on Friday. Shares finished in the green by 1.1% but weren't able to move above short-term resistance at $28.20. Bulls will point out that the oscillators are beginning to move higher from oversold levels. However, a small retracement of the recent sell-off might simply give the bears another entry point. With the point-and-figure chart showing a triple-bottom sell signal, we don't expect that COST will be able to plow through congestion in the $29-$30 area. While speculative entries could be targeted on a rollover from this region, the most prudent strategy for entering new positions would entail waiting for a move under the relative low of $27.20. Our stop remains set at $30.00; conservative traders may want to use a stop slightly above Monday's high of $28.99. BUY PUT JAN 32.50 PRQ-MZ OI=1119 at $5.00 SL=2.50 BUY PUT JAN 30 PRQ-MF OI=4975 at $2.85 SL=1.40 Average Daily Volume = 5.82 mil --- 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: AIG rose in tandem with the Dow Jones on Friday and gained 1.6%. In last night's update we suggested that traders looking to add short positions might want to wait for a rollover from $60.00. Well, the bulls couldn't even push AIG above $59.50. Although volume was quite brisk at 9 million shares, the stock wasn't able to move over Thursday's high. This completed a perfect streak of lower highs for the week. The recent downtrend is still intact and a small rebound off of the relative lows isn't enough to alter our bearish expectations for AIG. Those looking for new entries can continue to watch for a failed rally at $60.00. We'll be looking for this level to provide resistance if shares continue higher on Monday. Our stop-loss is located at $62.00. Slightly more aggressive traders may want to force AIG to trade above the 50-dma at $63.19 before being stopped out. BUY PUT JAN-60 AIG-ML OI=21815 at $2.95 SL=1.50 BUY PUT FEB-60 AIG-NL OI= 2792 at $4.20 SL=2.10 Average Daily Volume = 6.44 mln ************************************************************** 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/ ************************************************************** ***** LEAPS ***** Santa Claus Is Coming To Town By Mark Phillips mphillips@OptionInvestor.com Just when most investors had accepted the "fact" that Santa Claus wasn't going to pay a visit to Wall Street this year, the markets turned on a dime Friday, giving us a very nice one-day rebound. We don't want to read too much into Friday's rally, especially since part of the action could have been due to expiration shenanigans. But I must say I was encouraged that the bears couldn't break the 8300 support level on the DOW. Major support for the OEX is in the $440-445 area, so I don't think it is any coincidence that the intraday low on Thursday was $446.81. I certainly don't expect new recent highs in the market over the next two weeks, especially not with the light volume expected around the holidays. But at the same time, I am looking for a gradual rise into the end of the year. Apparently I'm not the only one with such aspirations, as the VIX plunged nearly 9% on Friday, closing out the week at 31.47 -- back under the 200-dma (31.98). All of the fear that crept into the market on Thursday was drained out on Friday. Again, a big part of the gyrations over the past 2 days is probably expiration related, but I like what I see from a bullish standpoint. Did you notice that the VIX reversed near the 35 level, being capped by the 50-dma? Isn't it interesting that the 35-36 area is clearly acting as resistance? Which way we break from here is unknown to me, but I'm betting on the downside over the near term. That should bode well for broad market action through the end of the year, although there are a couple of issues that we need to be aware of. First, the dollar continues to look sick, and that is keeping money flowing into bonds, even with the bullish equity action on Friday. If investors liked the prospects for the equity markets for more than a quick trade, then money should be coming out of bonds, not going into them. The other warning sign that caught my attention was the action of the major indices around their respective 50-dmas. The DOW, SPX, OEX and NDX all finished below their 50-dmas on Friday -- this, after a strong rebound off of Thursday's lows. If these market averages can't get through their 50-dmas, then any hopes for a Santa Claus rally will dim rapidly. Lest you think I'm just bearish for the long-term, think again. We now have a perfectly balanced Portfolio and Watch List. Three calls and three puts in the Portfolio and two calls and two puts on the Watch List. Regardless of which direction the broad market moves, we should be in a good position to benefit from that movement. So without further ado, let's see what's shaking with the plays. Portfolio: LEN - Everything appeared like it was going according to the script last week, with LEN once again rolling over at resistance, this time near the $53 level and the 50-dma. Then Friday's rally appeared, breaking through that resistance and LEN closed at its highest point since early November. Uh-oh! But all hope is not yet lost. I found it encouraging, that the stock was unable to move above the $54 level, even on an intraday basis. Recall that a print at $54 will generate a PnF Buy signal, and there just wasn't enough buying interest to get the job done on Friday. It could happen next week, but with the light holiday volume, I think LEN ought to start drifting lower again. Regardless of what I think, the stock will trade as it sees fit, so keep those stops set at $54. A trade above there will clearly remove a big part of the bearish bias in the stock over the near term and we'll want to preserve our gains and move to the sidelines for now. NEM - See why I've been talking about not chasing NEM higher after last week's big breakout. We've still had some very bullish action in the trade of the physical metal, but both the XAU index and NEM appear to be consolidating those recent gains. It was interesting to see NEM actually trade as low as $27.60 on Friday before rebounding throughout the remainder of the day. There's still a huge short position in Gold and it's going to take some time to work that off. But make no mistake, the long-term trend is bullish and I think we have a solid position in NEM. Those still looking to initiate a position or add to existing positions will want to use a drop back into the $27 area (the site of the 200-dma and the top of the bullish wedge) to initiate new positions. Even a dip near the $26 level looks good, so long as Gold futures (GC03G) hold above the $325-330 area, the site of its recent breakout. Keep stops set at $25. MO - You didn't think MO was just going to plow through all of that resistance without a fight, did you? The action in MO has actually been very encouraging to me over the past few weeks, as it appears to be solidifying its advance over the $40 level. Note that the descending trendline (now at $42) put a cap on the most recent upward move, but there hasn't been much selling following that rejection. Look for more sideways movement and possibly even a brief dip below $40 before MO takes another serious run at resistance. Once above $42, we'll be able to tighten our stop up a little to guarantee we can't lose on the position. In the meantime, we need to remain patient, as the stock continually improves, albeit in a slow and steady fashion. GM - Following the early December drop, there has been little further evidence about the health of the automotive market to drive the stock either higher or lower. So GM has continued to drift lower, although continuing to find support at the 50-dma. This level provided support once again on Friday, and if Santa Claus is going to pay a visit to Broad and Wall this year, it looks like GM could make another attempt to push up towards the $40 level, the site of our stop. There is significant support in the $34-36 level, and it is going to take some significant negativity (like a breakdown in the broad market) to penetrate down into the low-$30s. Given the action in the broad market on Friday, it appears that is unlikely ahead of the holidays. But so long as our stop isn't violated, odds favor that breakdown occurring early in the new year. Another rally failure below $40 can be used for initiating new positions, so long as the DOW is unable to challenge its recent highs. BBH - We could almost get away with no update on our BBH play this week, as there were no significant developments. The consolidation continues, with the intraday highs being capped by the declining 200-dma (now at $90.38) and support being provided by the rising 50-dma (currently $87.81). This ever narrowing range is bound to break, and quite possibly this week. Given the extended nature of the weekly oscillators, which are starting to show the first hints of weakness, I still expect the break to be to the downside. In the meantime, we watch and wait, with our stop at $93.50. I still like new entries on failed rallies below the $91 level. Confirmation of our bearish bias will come with the breakdown under first the 50-dma and then the $85 support level that has been supporting the stock since the middle of October. DELL - New entry this week. See below for details. Watch List: GD - I'm definitely losing my appetite for this play, but I'm not quite ready to pull the plug. Price action continues to coil in the $77-80 area, and I'd prefer to see which way it breaks before making a decision. A break below $76, and it will be gone from the list for sure. My rationale for keeping it around is expectation that it is basing for a renewed upward move, but as I discussed last week, the recent consolidation could be just marking the halfway point of the downward move that began in July. If that's the case, then we could be looking at an eventual breakdown towards the $50 level. Clearly, we don't want to be involved on the bullish side if that chain of events play out. So we'll keep GD on the Watch List, but on HOLD. Look for updates intra-week in the Market Monitor. DJX - Now that's what I wanted to see. The DJX finally found support late last week near the $83 level, and Friday's rebound certainly hints that the Santa Claus rally has arrived. Ideally, some bullish action in the next couple weeks will have the DJX pushing up towards the $88 level, our ideal entry level. A rally failure near there would be nice because it will keep the possibility of a Head & Shoulders top in play. If that pattern does play out, we'll likely be targeting the $76 level on the downside, which would make for a very nice start to the new year. But that speculation is clearly putting the cart before the horse. First we need to get an entry into the play. The weakening market internals (declining bullish percent), as well as other technicals certainly indicate that the next substantial move is going to be down and I intend to be onboard. Beyond what I covered above, I really don't have any bold prognostications for the next couple weeks. Starting on Monday, I expect volume to be increasingly light until January 2nd. With light volume, price action could move violently or just drift into the end of the year. Regardless of how it plays out though, it will be hard to attach much significance to the price action without the conviction of volume. Since we've got a lot of data below on new plays, I went rather light on the market commentary this week. Part of that was driven by time constraints, but there's also the fact that I don't think there is a lot to read into the current market action until we get past the holidays when we ought to see normal trading volume return. My recommendation is to tread lightly around the holidays. Whether you observe them or not, you need to be cognizant of the impact they have on trading activity this time of the year. I've talked recently about using certain periods to step away from the markets and recharge your batteries. The next two weeks is certainly one of them. Enjoy yourself and your family. I know I will! (My family, that is...GRIN) Happy Holidays! 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 $ 5.20 +33.33% $25 '05 $ 30 ZIE-AF $ 6.10 $ 8.00 +31.15% $25 MO 11/13/02 '04 $ 40 LMO-AH $ 3.90 $ 5.30 +35.90% $37 '05 $ 40 ZMO-AH $ 4.80 $ 6.40 +33.33% $37 DELL 12/19/02 '04 $ 30 LDE-AF $ 3.70 $ 4.20 +13.51% $23 '05 $ 30 ZDE-AF $6.10 $ 6.60 + 8.20% $23 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $ 8.80 + 2.33% $54 '05 $ 50 XFF-MJ $11.20 $13.50 +20.54% $54 BBH 12/02/02 '04 $ 85 KBB-MQ $12.10 $12.40 + 2.48% $93.50 '05 $ 80 XBB-MP $14.40 $14.70 + 2.08% $93.50 GM 12/02/02 '04 $ 35 LGM-MG $ 5.20 $ 6.50 +25.00% $40 '05 $ 30 ZGM-MF $ 5.50 $ 6.40 +20.00% $40 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: 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 BEAS 12/22/02 $10-11 JAN-2004 $ 12 LZP-AV CC JAN-2004 $ 10 LZP-AB JAN-2005 $ 12 ZWP-AV CC JAN-2005 $ 10 ZWP-AB PUTS: DJX 12/08/02 $88 DEC-2003 $ 84 ZDJ-XF DEC-2004 $ 84 YDJ-XF GS 12/22/02 $74-75 JAN-2004 $ 70 KGS-MN JAN-2005 $ 70 ZSD-MN New Portfolio Plays DELL - Dell Computer $26.81 **Call Play** While I was hoping for a dip into the $25-26 range to give us a better entry, the price action late last week was just too good to pass up. With the broad markets threatening to break down in the middle of the week, DELL stubbornly held onto the 200-dma as support. I had intended to make s post in the Market Monitor late on Thursday, but apparently that task fell through the cracks, and I didn't get it posted until discovering my omission in the middle of the day on Friday. We've discussed the technicals on DELL at great length already, but here's the quick recap. The PnF chart is bullish with a price target of $41. After drifting lower for the past few weeks, the price is getting awfully close to the bullish support line at $25, which should provide strong support. Note that $25 is also the site of the ascending support line on the candle chart as well. So long as DELL doesn't break below $25 or break out above $30, it remains in the bullish triangle formation that has been forming since the lows in September of last year. This is a long-term pattern, which lends it more significance. Should the pattern resolve itself normally, we should see a solid breakout to the upside probably in the second quarter of next year. We're trying to enter near the bottom of the current range in advance of the expected breakout. More cautious traders can wait for an entry near $25, as I certainly wouldn't rule out that possibility in conjunction with an early January market dip following the expected Santa Claus rally over the next couple weeks. In other words, don't be in a hurry to chase the stock higher. If you can get an entry between $26-27, then that still looks good. Otherwise wait for the next dip. It would take a trade at $23 to invalidate the current bullish signal on the PnF chart, so that is where we are initially placing our stop. BUY LEAP JAN-2004 $30 LDE-AF $3.70 BUY LEAP JAN-2005 $30 ZDE-AF $6.10 New Watchlist Plays BEAS - BEA Systems $12.15 **Call Play** It isn't often that a stock finds its way onto both the Call list and the LEAPS Watch List on the same day. To be entirely honest, I can't take credit for this play -- it wasn't my idea. In writing up the BEAS play for the regular OI Call section, I was struck by how many factors were lining up in favor of an extended bullish move in the stock. BEAS is an applications software company with annual revenues just south of $1 billion and annual profits of a mere $60 million. But these are real profits and that is a rarity in the Technology world. For a full description of all the factors I really like, read the BEAS play writeup in the Calls section this weekend. I just want to hit the high points. The PnF chart is very bullish and currently has a vertical count of $20. The 50-dma just crossed up through the 200-dma on Friday, as the stock broke out above the $12 level on huge volume. That is a clear sign of a stock under accumulation, and that fact is borne out by the OBV (On Balance Volume) moving to its highest level since last January. There were some comments on the message boards about rumors that the stock is a buyout candidate. Personally, I don't care. Rumors are just that. I trust the charts, and they tell me that there is some serious accumulation under way. But that doesn't mean we want to leap (pun intended) into new positions first thing on Monday. A Santa Claus rally could give the stock a continued boost through the end of the year, but then I'll look for some profit taking across the market to drag BEAS down to give us a much more attractive entry. We've recently seen some mild support building near the $11 level, and then there is stronger support near $10, the bottom of the gap up just over a week ago. I like long-term entries as close to the bottom of that $10-11 range as we can get them, and we can manage the position with a tight stop at $9, just below the site of the 50-dma/200-dma crossover. BUY LEAP JAN-2004 $12 LZP-AV BUY LEAP JAN-2004 $10 LZP-AB **Covered Call** BUY LEAP JAN-2005 $12 ZWP-AV BUY LEAP JAN-2005 $10 ZWP-AB **Covered Call** GS - Goldman Sachs $71.86 **Put Play** Look out below! Ok, maybe not yet, but soon. If you thought that the settlement between US regulators and the Brokerage industry was the end of that industry's woes, think again. This is just the tip of the iceberg, as all of the documents and evidence will now be fodder for the dozens, or maybe even hundreds of class-action lawsuits. The judgments that are likely to come out of that process will make last week's $1.4 billion settlement look like pocket change. Everybody knows that I've liked the short side in GS for quite some time, and with last week's legal settlement out of the way, I like it even better. GS had been laboring under a strong descending trendline from the highs in January until finally managing to break out a month ago. Well, it looks like that breakout has failed and in a big way. After falling back under that trendline earlier this month, the stock battled its way to just above it before falling hard on Thursday. That big drop down to the $70 level violated both the trendline and the 50-dma (currently $74.04), and I would expect to see strong resistance at that level going forward. The PnF chart bears out weakness in the stock, with the recent Sell signal giving us a tentative bearish price target of $61. But I don't expect the selloff to commence just yet. It's time for Santa Claus to come to town, and I would expect the seasonal bullishness of the next 2 weeks to lend a bid to GS, along with the rest of the Financial stocks. The ideal entry into the play will come from a rally failure in the $74-75 area, which ought to coincide with our DJX play giving us an entry near the $88 level. The November rally in GS topped out near the $80 level, so that is where we'll initially look to place our stop after entry. That's a little wider than I normally would prefer, but I want to give GS room to move before the big breakdown, without stopping us out. BUY LEAP JAN-2004 $70 KGS-MN BUY LEAP JAN-2005 $70 ZSD-MN Drops None ************** TRADERS CORNER ************** On A Roll – As Smooth As Mayo – As Sweet As Honey – Or Should I Say “Money”? By Mike Parnos, Investing With Attitude “In some circles, people have come to sneer at success if it costs hard work, training and sacrifice,” – Knute Rockne. At the Couch Potato Trading Institute we firmly believe in training. Education is what this column is all about. But we have to draw the line somewhere. “Hard work and sacrifice” don’t appear in the CPTI bylaws. They may be valuable in football, but not in trading. If you want to get tackled, just stand in the path between my refrigerator and me during a commercial. When you wake up you’ll think you insulted Warren Sapp’s mama. What we do have in common with Knute Rockne is that we don’t like losing. So we don’t. Or, at least, haven’t so far. _____________________________________________________________ Four weeks ago we initiated three new positions in the CPTI Portfolio. Three of the positions were scheduled to expire at December expiration while a fourth is a December QQQ play we established in October. December expiration has come and gone. However, the money has come and stayed! How sweet it is -- when you have a plan and it works! The Breakdown 1. BBH Iron Condor – Closed at $89.32. We wanted BBH to finish between $80 and $95 at December expiration. Our risk was $3,400. We took in a credit of $1,600 on a ten-contract position. That was so much fun we might just do it again. It’s becoming a habit. 2. TTWO Short Strangle – Closed at $22.40. We wanted it to finish between $22.50 and $35 at December expiration. Our risk was technically unlimited because the positions were uncovered, but about $4,400 was held as maintenance for the positions. We took in a credit of $1,050 on a ten-contract position. On Wednesday, the short strike ($22.50) was violated. We shorted shares at $22.50 and repurchased them as TTWO bounced back over $22.50. Thursday, TTWO twice broke below $22.50 and we repeated the process. Thus far, we’ve accumulated three round trip commissions and $150 of slippage for a total additional cost of $210. Early Friday morning, we took advantage of an opportunity to buy our short call back for a nickel. So, we incurred a total of $260 in additional costs. We still made $790 on a risk of about $4,400. 3. IMCL ITM Covered Call – Closed at $11.81. This was not a typical CPTI trade, but it provided us a nice cushion. We bought the stock at $11.76 and sold the December 10 call at $2.60. We used a 1500 share position and, when all was said and done, we kept $1,260. The stock was called away. Another winner for the good guys. 4. QQQ ITM Strangle – Closed at $25.32. The close doesn’t really matter because we were out of this two-month position over a week ago. In order to figure out the profits, we’re going to make a few assumptions because there were a number of variables. With the QQQs trading at $24.62 back at October expiration, we bought the December $23c/$25p or $24c/$26p strangle, depending on whether the trader was bullish or bearish. To make a long story a little shorter, we got our anticipated move up – all the way up to about $28.75. Our long calls paid for our puts and yielded some profits as well. When the QQQs reversed, we took in an average of $1.00 on the long puts and the profits from the long calls. What I’m trying to say is – the damn thing worked like a charm and we made about $1,000 on a risk of $2.40. Chalk up some more nice profits. It’s Adding Up Nicely The total amount of premium we collected, and kept, from the four positions was $4,650 (less commissions) – and we never missed an episode of Fear Factor, Leave It To Beaver, or Family Feud. Will this continue to happen every month? It’s unlikely. We may have months of less profit. We may even have losing months, but not many. Why not? If we put on reasonable trades with defined risks and we know how to make the necessary adjustments, only truly bizarre market activity will get in our way. ____________________________________________________________ So What Have You Done For Me Lately? CPTI students, who followed the plan, made $4,500 in November and $4,650 in December for a total of $9,160. They’re never satisfied – and they shouldn’t be. Hide that $9,160 under the mattress for a rainy day (the rain will come – count on it). Like last month, we’ll start with a $50,000 trading account. We will continue to go on the assumption that you have other marginable securities in your account that will enable you to make necessary adjustments on our newly established positions. Now, let’s see what we can do to bring in some green to start off the New Year right. There will be a few familiar faces in these new December positions. The stories are still good. The integrity of the ranges is still valid. There’s a school of thought that suggests that the longer a stock trades within a range, the more likely it is that it will break out of the range. Maybe so, but I’m one of those “show me” guys – in trading too! So, I figure “if it ain’t broke, we won’t fix it.” _____________________________________________________________ Position #1: Iron Condor – Third Time’s A Charm! An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The objective is that the underlying, at expiration, finish anywhere within the spread. Since it worked so well the last two months, we’ll use BBH (Biotech Index) again. Friday it closed at $89.32. The support at $80 once again seems strong enough and resistance at $95 should give BBH enough room (15 points) to bounce around for the next four weeks. So we will: Sell 10 contracts of the BBH Jan. $80 puts (BBHMP) @ $1.25 Buy 10 contracts of the BBH Jan. $75 puts (BBHMO) @ $ .70 Sell 10 contracts of the BBH Jan. $95 calls (BBHAS) @ $ 1.75 Buy 10 contracts of the BBH Jan. $100 calls (BBHAT) @ $.80 The credit for our bull put spread is $.55 and for the bear call spread is $.95. Total credit (and potential profit) for the position is $1.50. Risk is $3.50 ($5.00 - $1.50). Total margin requirement is $10,000 ($5,000 for each credit spread). The potential return on risk is 42%. ______________________________________________________________ Position #2: XAU Calendar Spread A Calendar Spread, using calls, is a neutral to bullish strategy. In this instance, however, a calendar spread on the Gold/Silver index is actually a neutral to bearish market strategy because Gold usually trades opposite the market. XAU is trading at $74.88. There is resistance at $80. As the market continues to falter, it’s likely that the XAU will move up slowly. As XAU increases in value, we will sell calls each month to reduce our cost basis and, eventually, put bucks in our pocket. We will: Buy 10 contracts of XAU June $80 call (XAUFP) @ $7.20 Sell 10 contracts of XAU January $80 call (XAUAP) @ $2.20 The out of pocket cost for this trade is $5.00 ($7.20 - $2.20). Think about it. There are five more option cycles before June. If we get $2.20 each month for the next five months, we’ll have taken in $11. Plus, there will likely still be value in the June call. This will take a little time to develop, but we’re in no hurry. There is no maintenance requirement for this calendar spread because it is a long position. If all goes well, there will be a pot of gold at the end of the rainbow. ______________________________________________________________ Position #3: QQQ ITM Strangle -With A Twist This is a strategy we touched on this summer and it seems like a good time to put it to work. ISt’s a neutral strategy consisting of two calendar spreads working together. For the long options, we’ll be using LEAPS. The short options will be sold two months out. We’ll make money, and reduce our cost basis, every time we sell the short options. Next Sunday I’ll go into much greater detail on this long term strangle. I’ll also include one of our checklists. With the QQQs trading at $25.32, we will: Buy 10 contracts of the Jan. 05 QQQ $21 call (ZWQAT) @ $8.20 Buy 10 contracts of the Jan. 05 QQQ $29 put (ZWQMC) @ $7.00 Sell 10 contracts of the Feb. 03 QQQ $29 call (QAVBC) @ $.50 Sell 10 contracts of the Feb. 03 QQQ $21 put (QAVNT) @ $.45 We will take $15.20 out of our pocket to buy the LEAPS. However, there is an intrinsic value of $8.00 that will never be at risk. That leaves only $7.20 at risk. We have two years to sell near term calls against these LEAPS. Our first near term sale is for a total of $.95. That’s a 13% return on the $7.20 risk. We don’t particularly care if the QQQs go up or down. We’ll make our money either way. _____________________________________________________________ Next Sunday Don’t forget that next Sunday we will dissect this Long Term ITM Strangle strategy. Plus, we may also add another position to the CPTI portfolio. By The Way We’ve been doing really well with the CPTI portfolio. I believe we’ve just scratched the surface. Jim has a special offer on new subscriptions and renewals. Take advantage of it. I don’t want to lose any of my CPTI students and there’s always room for more. _____________________________________________________________ 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 ************************************************************** 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/ ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 12-22-2002 Sunday 5 of 5 In Section Five: Covered Calls: Q&A With The Editor Naked Puts: More Q&A With The Naked-Puts Editor Spreads/Straddles/Combos: A Last-Minute Christmas Present! Updated In The Site Tonight: Market Watch Market Posture ************************************************************** 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/ ************************************************************** ************* COVERED CALLS ************* Trading Basics: Q&A With The Editor By Mark Wnetrzak This week's narrative focuses on position adjustments with covered-calls. Attn: Covered-Calls Editor Subject: Need Help with Strategy Mark, I am using your "in the money" covered call strategy with some success. My question is: If, and when, a stock moves down through the short strike, can we simply short shares of the stock to cover the stock. When the stock returns back above the short strike, we simply buy the stock to cover our short shares. You may incur a few commissions and a little slippage, but it's the best way to cover your positions. I understand this concept but how do I set the limits. With a stock swinging $2 in a day, do I set the short sell right under my strike price, or a few cents under, or at break-even point. It gets to be a lot of monitoring with the gyrations. This goes for covered calls sold "in the money" too. If the stock drops to the strike price do I sell short and run the risk of it moving back over the strike price, get out of the position altogether (usually at a loss, since I now have to buy the call back), or sell at the breakeven point? I'm having trouble setting this aspect of the strategy in my plans. MD Hello MD, It sounds like you're mixing strategies. Selling stock short is a method to cover a "naked put," and as you mentioned, slippage can be a problem, especially if the stock moves through the sold strike several times. When a trader writes (sells) a call on stock he or she already owns, the position is "covered," hence the name: covered call. If the stock price is above the sold strike price at expiration, the option will be exercised and the stock will be "called" away. If the stock price is below the sold strike-price at expiration, the sold call will expire worthless and the trader will keep the stock (as well as the premium received from the sold call). As for exiting covered-call positions, there are many stop-loss signals an investor can employ: a specific percentage of one's overall portfolio value or a fixed dollar amount; a technical violation of a moving average or trend-line, etc. Once you have decided to close a covered-call position, you simply buy back the calls (at the "ask") and then sell the stock (at the "bid"). A "net" order can also be used in closing a covered-write to ensure an efficient exit. In this case, you place an order with your broker to "sell" the stock and "buy to close" the calls for a net (credit) amount that is reasonably close to parity. For example, if you bought XYZ stock at $13.88 and sold XYZ-$12.50 calls for $2.00, your cost basis (or break-even point) would be $11.88 (not including commissions). Several days later, the stock breaks down technically and when it hits $11.50 on a closing basis, you decide to close the position to preserve trading capital. The next day, you buy back the calls for about $0.45 and then sell the stock at $11.45, incurring a loss of $0.88. The math: 11.88 - 11.45 = 0.43 + 0.45 = 0.88 (not including cost of commissions). There are several methods to adjust a covered-write: you could roll up (a bullish adjustment), roll forward, roll down, or even use a combination of the ratio call-spread. Generally, if you are defensive and trying to lower your cost basis in a covered-call position, you would roll down and/or forward. If this is done before expiration, you would need to buy back your current "sold" calls. To roll down, you sell a lower strike call and to roll forward, you move forward in time. An investor who is bullish in the long-term will do this to protect against short-term weakness, but ultimately expects the stock to recover. Usually, you will have to move forward several months (or use LEAPS) in order to obtain a credit in the new position. Sometimes, the best result that can be accomplished is to lock-in a loss, which would still be less than the current loss, providing the stock doesn't drop further. Using the above example: after buying back the sold calls, your new cost basis (11.88 + 0.45) is $12.33. You check the news and realize the stock fell because of a short-term problem. You feel the stock may drop to around $10.00 but ultimately will recover. You decide to roll down and forward to the XYZ MAR-$10.00 strike, which is selling for $3.15. The adjusted position offers a new cost basis of $9.18 (12.33 - 3.15 not including commissions), which allows for further downside protection while also offering a reasonable return at the "expense" of tying up your capital for a longer period of time. The link below leads to a previous narrative on a the "ratio call spread" method used to adjust a covered call position: http://members.OptionInvestor.com/coveredcalls/050502_1.asp Again, the ability to manage losses is paramount to a successful portfolio. Many professionals to use technical analysis identify areas of support or resistance, which assists in applying exit or adjustment points. The book: "Secrets for Profiting in Bull and Bear Markets" by Stan Weinstein, provides a basic explanation of the use of technical analysis in evaluating stocks. In addition, the OIN bookstore offers several other technical analysis books and Larry McMillan's book, "Options as a Strategic Investment" includes some excellent information on covered-calls. The book is a great resource, covering all aspects of the "covered write" strategy and it is available in the OIN bookstore. McMillan also covers in detail the strategy of selling call options on long-term portfolio holdings. Hope this helps, Mark W. mark@OptionInvestor.com SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield SIMG 5.44 5.52 DEC 5.00 1.10 0.66* 11.0% CIEN 5.58 5.33 DEC 5.00 1.00 0.42* 10.0% DNDN 5.72 4.89 DEC 5.00 1.00 0.17 7.8% SEBL 8.30 7.57 DEC 7.50 1.05 0.25* 7.5% INHL 7.96 8.52 DEC 7.50 1.05 0.59* 7.4% IMCL 8.97 11.91 DEC 7.50 2.15 0.68* 7.2% MATK 22.07 24.94 DEC 20.00 3.30 1.23* 7.1% V 13.96 16.39 DEC 12.50 2.35 0.89* 5.6% USG 6.25 7.73 DEC 5.00 1.60 0.35* 5.5% CTIC 8.60 7.59 DEC 7.50 1.50 0.40* 4.9% IDCC 15.20 15.50 DEC 12.50 3.30 0.60* 4.4% MDCO 14.33 16.02 DEC 10.00 4.90 0.57* 4.4% ALXN 17.53 14.99 DEC 15.00 2.95 0.41 4.1% DCTM 18.13 16.55 DEC 15.00 3.80 0.67* 4.1% IDCC 14.74 15.50 DEC 12.50 2.90 0.66* 4.0% MATK 23.16 24.94 DEC 20.00 3.70 0.54* 4.0% BRCM 15.45 15.84 DEC 12.50 3.50 0.55* 4.0% SEE 18.26 38.00 DEC 15.00 3.90 0.64* 3.9% CRYP 5.57 4.82 DEC 5.00 0.80 0.05 1.5% MVSN 18.68 16.80 DEC 17.50 1.85 -0.03 0.0% RSTO 5.48 4.38 DEC 5.00 1.05 -0.05 0.0% CMOS 11.11 9.21 DEC 10.00 1.65 -0.25 0.0% DCTM 19.90 16.55 DEC 17.50 3.10 -0.25 0.0% LAVA 11.59 9.39 DEC 10.00 1.95 -0.25 0.0% OSUR 7.97 6.14 DEC 7.50 1.45 -0.38 0.0% MLNM 11.19 8.73 DEC 10.00 1.55 -0.91 0.0% FLEX 11.01 8.60 DEC 10.00 1.40 -1.01 0.0% TXN 19.22 15.74 DEC 17.50 2.40 -1.08 0.0% ISSX 24.48 19.43 DEC 22.50 3.50 -1.55 0.0% AES 3.25 3.10 JAN 2.50 1.05 0.30* 11.9% ELN 2.90 2.52 JAN 2.50 0.65 0.25* 8.0% BMRN 7.74 7.30 JAN 7.50 1.05 0.61 7.9% MEE 10.65 10.09 JAN 10.00 1.25 0.60* 5.5% IMCL 13.50 11.91 JAN 10.00 4.10 0.60* 4.6% ALXN 15.30 14.99 JAN 12.50 3.40 0.60* 4.4% MOGN 8.30 8.11 JAN 7.50 1.15 0.35* 4.3% MMR 5.20 4.80 JAN 5.00 0.60 0.20 3.8% ZIXI 5.51 4.66 JAN 5.00 0.90 0.05 0.9% VISG 5.72 4.49 JAN 5.00 1.05 -0.18 0.0% * = Stock price is above the sold striking price. Comments: Well, Christmas is almost here so I must ask: Where is the Santa Claus Rally? Maybe it will arrive next week -- if Friday is any indication -- and not a moment too soon. Time to re-evaluate your long-term outlook on stocks you may own after the December options expiration. Several of the above December positions remain above their 150-dmas but: (1) Are they holding at support and (2) Have they pulled back farther than expected. For Example, Restoration Hardware (NASDAQ:RSTO) has broken a trend-line from the August low to the November low, which suggests a bearish future. As for the January positions, BioMarin Pharma (NASDAQ:BMRN) is now testing a "confirmed" trend-line (AUG to NOV lows) and should be monitored closely. A few other stocks are testing support (or could trend lower towards support) and should be watched closely as we move into next week. On a side note, I will be joining the Market Monitor this week... 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 AVID 22.03 JAN 20.00 AQI AD 2.75 29 19.28 28 4.1% BEAS 12.15 JAN 10.00 BUC AB 2.60 18726 9.55 28 5.1% EYE 10.27 JAN 10.00 EYE AB 0.70 132 9.57 28 4.9% LVLT 5.13 JAN 5.00 HGY AA 0.50 14125 4.63 28 8.7% LWSN 5.26 JAN 5.00 QPA AA 0.55 20 4.71 28 6.7% SEPR 9.48 JAN 7.50 ERQ AU 2.35 2488 7.13 28 5.6% XMSR 3.00 JAN 2.50 QSY AZ 0.80 4252 2.20 28 14.8% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield XMSR 3.00 JAN 2.50 QSY AZ 0.80 4252 2.20 28 14.8% LVLT 5.13 JAN 5.00 HGY AA 0.50 14125 4.63 28 8.7% LWSN 5.26 JAN 5.00 QPA AA 0.55 20 4.71 28 6.7% SEPR 9.48 JAN 7.50 ERQ AU 2.35 2488 7.13 28 5.6% BEAS 12.15 JAN 10.00 BUC AB 2.60 18726 9.55 28 5.1% EYE 10.27 JAN 10.00 EYE AB 0.70 132 9.57 28 4.9% AVID 22.03 JAN 20.00 AQI AD 2.75 29 19.28 28 4.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AVID - Avid Technology $22.03 *** Stage II Rally *** Avid (NASDAQ:AVID) develops, markets, sells and supports a wide range of software, and hardware and software systems, for digital media production, management and distribution. Avid Technology participates in two principal markets transitioning from well- established analog content-creation processes to digital content- creation tools. The company's products, which are categorized into the two principal markets in which they are sold, are used worldwide in production and post-production facilities, film studios, network, affiliate, independent and cable television stations, recording studios, advertising agencies, government and educational institutions, corporate communication departments, and by game developers and Internet professionals. A contract win this week sparked a rally which moved shares of Avid to a new two-year high. The recent price history of Avid Technology reveals one of the better charts we've seen in the broader-market groups and investors who want to diversify their portfolio should consider this position. JAN 20.00 AQI AD LB=2.75 OI=29 CB=19.28 DE=28 TY=4.1% ***** BEAS - BEA Systems $12.15 *** On The Move! *** BEA Systems (NASDAQ:BEAS) is an application infrastructure software provider. The company's WebLogic Enterprise Platform delivers a scalable software infrastructure designed to bring new services to market quickly, to lower operational costs by automating processes and to automate relationships with suppliers and distributors. BEA's WebLogic Enterprise Platform includes BEA WebLogic Server, a standards-based application server that serves as a platform for deployment of enterprise scale applications and Web services; BEA WebLogic Integration, a standards-based platform for workflow, application integration, Web services and B2B integration; BEA WebLogic Portal, a sophisticated rules-based infrastructure for rich user interfaces to a wide variety of enterprise data, and BEA WebLogic Workshop, a rich framework for development and deployment of Web services and Java-based applications. This week, BEA's CEO said he expects the company to meet its fourth-quarter earnings target of eight cents per share. There is also some speculation that BEA Systems could buy Borland Software (NASDAQ:BORL) in response to International Business Machines' (NYSE:IBM) buyout of Rational Software (NASDAQ:RATL). In any case, BEA is in "rally mode" and the heavy-volume buying suggests further upside potential. JAN 10.00 BUC AB LB=2.60 OI=18726 CB=9.55 DE=28 TY=5.1% ***** EYE - VISX $10.27 *** Bracing For A Rally? *** VISX (NYSE:EYE) is engaged in the development of proprietary technologies and systems for laser vision correction (LVC). LVC relies on a computerized laser to treat nearsightedness, farsightedness and astigmatism with the goal of eliminating or reducing reliance on eyeglasses and contact lenses. EYE's VISX Excimer Laser System (the VISX System) ablates or removes submicron layers of tissue from the surface of the cornea to reshape the eye, thereby improving vision. The VISX System also treats certain types of corneal pathologies in an outpatient procedure known as PhotoTherapeutic Keratectomy. The company's significant customers include Laser Vision Centers, Inc. and TLC Laser Eye Centers, Inc. VISX has been in a Stage I base for 6 months and the recent move above its 150-dma is bullish. This position offers a method to participate in the future movement of the issue with a cost basis closer to technical support. JAN 10.00 EYE AB LB=0.70 OI=132 CB=9.57 DE=28 TY=4.9% ***** LVLT - Level 3 $5.13 *** Will The Trend Be Our Friend? *** Level 3 Communications (NASDAQ:LVLT) and its subsidiaries engage in the communications, information services and coal mining businesses through ownership of operating subsidiaries and substantial equity positions in public companies. The company is a facilities-based provider of a broad range of integrated communications services. Level 3 has created, generally by constructing its own assets, but also through a combination of purchasing and leasing of facilities, the Level 3 Network, an advanced, international, facilities-based communications network. LVLT has designed the Level 3 Network to provide communications services that employ and leverage rapidly improving underlying optical and Internet Protocol technologies. Level 3, which is in the process of acquiring the assets of the bankrupt Genuity Inc., has been in a lateral trend with support near $4 for over a year. This position allows investors to obtain a reasonable entry point in Level 3 from which to speculate on a continuation of the current trading range. JAN 5.00 HGY AA LB=0.50 OI=14125 CB=4.63 DE=28 TY=8.7% ***** LWSN - Lawson Software $5.26 *** On The Rebound *** Lawson Software (NASDAQ:LWSN) is a provider of enterprise software solutions targeting specific service industries. In the markets it serves, the company offers comprehensive financial management, human resources, services automation, procurement, distribution and merchandising solutions designed to manage, analyze & improve its customers' businesses. The company also provides professional services that optimize and support the selection, implementation and execution of a customer's e-business technology and solutions infrastructure. Lawson has over 2,000 customers, primarily in the healthcare, professional & financial services, public sector, and retail markets. Lawson generates revenue through license fees and separate fees for professional services. Lawson Software reported better than expected earnings this week and also said the company will repurchase up to $15 million of its stock. The stock appears poised to move higher in the coming sessions and this position offers a favorable cost basis in the issue. Try "target shooting" a lower net-debit to increase the potential yield in the position and further reduce the cost basis of the issue. JAN 5.00 QPA AA LB=0.55 OI=20 CB=4.71 DE=28 TY=6.7% ***** SEPR - Sepracor $9.48 *** New Drug Speculation *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The company's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which Sepracor refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to currently marketed products. Shares of Sepracor spiked this week after the company said it is on track to seek government marketing approval for its new insomnia drug, Estorra, which could be on the market by 2004 if approved by the FDA. The current technical outlook is recovering and this position offers an excellent reward potential at the risk of owning Sepracor at a favorable cost basis. JAN 7.50 ERQ AU LB=2.35 OI=2488 CB=7.13 DE=28 TY=5.6% ***** XMSR - XM Satellite Radio $3.00 *** Get Some Air Time! *** XM Satellite Radio Holdings (NASDAQ:XMSR) seeks to become a nationwide provider of audio entertainment and information programming for reception by vehicle, home and portable radios. Through its two high-power satellites "Rock" and "Roll," the company's XM Radio service offers 101 channels of music, news, talk, sports and children's programming developed by XMSR or third parties. The company will build a subscriber base for XM Radio through multiple distribution channels, including an exclusive distribution arrangement with GM, other automotive manufacturers, car audio dealers and electronics retailers. XMSR rallied earlier this month when Avis said it would add about 50,000 XM-equipped General Motors vehicles to its fleet from the first quarter of next year. The stock is forging a stage I base with support near our cost basis and this position offers investors who believe in the company's future, a way to participate in the future movement of the issue with relatively low risk. JAN 2.50 QSY AZ LB=0.80 OI=4252 CB=2.20 DE=28 TY=14.8% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield FSII 5.12 JAN 5.00 FQH AA 0.60 100 4.52 28 11.5% ARRS 2.85 JAN 2.50 AQC AZ 0.55 25 2.30 28 9.4% SWKS 8.86 JAN 7.50 GAK AU 1.85 45 7.01 28 7.6% BSTE 34.98 JAN 35.00 BQS AG 2.20 827 32.78 28 7.3% Q 5.30 JAN 5.00 Q AA 0.60 16227 4.70 28 6.9% BORL 13.11 JAN 12.50 BLQ AV 1.35 648 11.76 28 6.8% ESPD 17.75 JAN 17.50 ENU AW 1.25 19 16.50 28 6.6% COF 31.54 JAN 27.50 COF AY 5.50 732 26.04 28 6.1% ADLR 13.86 JAN 12.50 UAH AV 2.00 29 11.86 28 5.9% WBSN 22.15 JAN 20.00 DQH AD 3.10 144 19.05 28 5.4% ADRX 14.81 JAN 12.50 QAX AV 2.90 2235 11.91 28 5.4% GG 12.23 JAN 11.25 GG AT 1.50 5953 10.73 28 5.3% UNTD 16.40 JAN 15.00 QAB AC 2.05 36 14.35 28 4.9% CLHB 16.85 JAN 15.00 QPB AC 2.50 486 14.35 28 4.9% GFI 13.75 JAN 12.50 GFI AV 1.75 2709 12.00 28 4.5% ***************** NAKED PUT SECTION ***************** Options 101: More Q&A With The Naked-Puts Editor By Ray Cummins Last week's discussion about the "real" risk in writing uncovered options prompted one reader to ask if the benefits of selling puts outweigh the disadvantages of the strategy. Attn: Ray Cummins (Naked Puts Editor) Subject: Put Selling - Risk/Reward Hello Ray, The article on the risk involved in selling naked puts hit home with me as I have owned a few stocks that almost went to zero (and the jury is still out on a couple of my technology stocks). Although only one of these losers came from sold puts I have to take the blame for that mistake because I did not use the proper exit strategies that are necessary in any type of trading. The phrase "cut your losses early" comes to mind and if only I had learned that lesson before the real bear market arrived. Anyway, my question is simple. Based on past history, is the strategy of selling naked options (puts in this case) a useful and productive strategy in the long run? In short, should it be part of a conservative trader's portfolio or is it better left to the professionals? I am sure your opinion would be appreciated by the readership. TY Hello Again TY, First, thanks for your interest in the Naked Puts section and I am glad you have (apparently) learned the most important lesson new traders must be taught. That is the need to limit losses whenever they occur, so they do not significantly affect your portfolio capital. Of course, it's "easier said than done" but the simple fact is, position management is far more crucial to long-term success than any other facet of trading. With "naked" options, this truth is even more applicable because the risk in each position is so large, in percentage terms, when compared to the profit potential. The first question you asked: "Is the strategy of selling naked options (puts in this case) useful and productive...?" is easily answered. Yes, selling uncovered options is a viable technique, when utilized properly in the appropriate market conditions. The validation for this statement can be substantiated in many ways however a simple observation of the activity at a major exchange reflects the popularity of the strategy among both professional and retail traders, fund managers, and institutions such as large corporations. Having made that assertion, the second question: "Should it be part of a conservative trader's portfolio?" is far more difficult to answer. In my opinion, the most efficient way to evaluate an option-trading strategy is to examine its basic advantages and weaknesses. These would include: ease of use and management; risk versus reward potential; the affects of pricing components such as time decay, volatility and leverage (delta); and the capital required to effectively employ the technique on a regular basis. Writing uncovered options ranks fairly well in all of these areas except one -- the ratio of risk to reward. Not surprisingly, that component is also the most misunderstood aspect of selling naked puts and it leads to the worst drawback of all; the possibility of a catastrophic loss where only minimal collateral is required. Based on that observation, the sale of uncovered (put) options is definitely not appropriate for everyone. However, to suggest that "conservative" traders should not use the strategy is analogous to saying they are also incompetent or incapable of understanding the various attributes of a particular position or technique. Instead, I would venture that most market participants, regardless of their level of experience, can be educated about the shortcomings of the strategy and be taught to implement and manage it correctly in market conditions that are appropriate for its use. With that idea in mind, it is obvious that one must become knowledgeable, as well as proficient, to succeed in this unique (and often controversial) method of option trading. The best way to achieve those goals is to read all you can about the strategy and fortunately, there are number of excellent books on the subject, as well as articles about position management and adjustments, available on the OIN website. Let me know if there is any way I can help you with the process. Merry Christmas & Happy Holidays! 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 19.08 DEC 17.50 0.45 0.45* 12.7% 3.8% HAL 20.19 19.08 DEC 15.00 0.25 0.25* 12.7% 3.7% PPD 28.40 26.80 DEC 22.50 0.30 0.30* 10.9% 2.9% AFCO 19.52 19.09 DEC 17.50 0.30 0.30* 10.7% 3.8% IGEN 42.08 41.96 DEC 35.00 0.50 0.50* 10.6% 3.1% SCIO 33.72 33.46 DEC 30.00 0.50 0.50* 10.6% 3.7% MATK 22.07 24.94 DEC 17.50 0.45 0.45* 10.1% 2.9% NWRE 20.19 15.50 DEC 15.00 0.30 0.30* 10.0% 3.0% IMCL 15.04 11.91 DEC 10.00 0.30 0.30* 9.8% 3.4% NWRE 17.68 15.50 DEC 12.50 0.55 0.55* 9.7% 3.3% BBY 26.60 24.75 DEC 22.50 0.30 0.30* 9.5% 2.9% ESIO 22.99 20.05 DEC 17.50 0.55 0.55* 9.3% 2.8% HAL 18.85 19.08 DEC 15.00 0.35 0.35* 9.2% 2.6% ALXN 17.55 14.99 DEC 12.50 0.30 0.30* 8.6% 2.7% IMCL 11.77 11.91 DEC 7.50 0.25 0.25* 8.4% 3.0% MSTR 18.16 14.70 DEC 12.50 0.30 0.30* 8.3% 2.7% NEM 26.77 28.61 DEC 25.00 0.35 0.35* 8.2% 3.1% BBY 27.68 24.75 DEC 22.50 0.35 0.35* 8.1% 2.3% ISSX 22.19 19.43 DEC 17.50 0.45 0.45* 8.0% 2.3% BSTE 31.02 34.98 DEC 22.50 0.75 0.75* 7.8% 2.5% HAL 17.85 19.08 DEC 12.50 0.35 0.35* 7.8% 2.5% PPD 28.65 26.80 DEC 22.50 0.30 0.30* 7.2% 2.0% CYMI 33.43 31.60 DEC 25.00 0.60 0.60* 7.2% 2.1% GNSS 17.17 14.30 DEC 12.50 0.30 0.30* 7.0% 2.1% PLMD 30.31 32.77 DEC 22.50 0.60 0.60* 6.5% 2.0% ESIO 24.50 20.05 DEC 17.50 0.30 0.30* 6.3% 1.9% FAST 38.25 38.04 DEC 35.00 0.35 0.35* 6.1% 2.2% KOSP 19.13 19.78 DEC 15.00 0.35 0.35* 6.1% 1.7% SEE 21.33 38.00 DEC 15.00 0.25 0.25* 6.0% 1.8% RIMM 16.58 13.06 DEC 12.50 0.30 0.30* 6.0% 1.8% NPSP 28.24 26.07 DEC 20.00 0.50 0.50* 5.9% 1.9% POSS 14.20 14.92 DEC 12.50 0.35 0.35* 5.9% 2.1% IGEN 38.65 41.96 DEC 30.00 0.55 0.55* 5.8% 1.6% ESIO 21.15 20.05 DEC 15.00 0.35 0.35* 5.5% 1.7% MEDI 28.07 27.91 DEC 20.00 0.30 0.30* 5.5% 1.7% AMZN 22.21 21.93 DEC 17.50 0.30 0.30* 5.5% 1.5% PPD 27.08 26.80 DEC 20.00 0.35 0.35* 5.3% 1.5% PHTN 28.50 22.30 DEC 22.50 0.50 0.30 4.2% 1.2% JEC 36.31 34.75 DEC 35.00 0.50 0.25 2.6% 1.0% RINO 19.40 17.16 DEC 17.50 0.30 -0.04 0.0% 0.0% PHTN 32.32 22.30 DEC 27.50 0.50 -4.70 0.0% 0.0% ** PHTN 35.25 22.30 DEC 27.50 0.40 -4.80 0.0% 0.0% ** GG 12.62 12.23 JAN 11.25 0.40 0.40* 8.5% 3.2% GFI 14.68 13.75 JAN 12.50 0.35 0.35* 7.5% 2.5% MATK 23.37 24.94 JAN 17.50 0.35 0.35* 6.1% 1.8% BSTE 31.41 34.98 JAN 22.50 0.45 0.45* 5.8% 1.8% OVER 28.99 28.15 JAN 22.50 0.40 0.40* 5.6% 1.6% AU 33.99 32.20 JAN 30.00 0.65 0.65* 5.5% 1.9% IGEN 41.10 41.96 JAN 30.00 0.55 0.55* 5.5% 1.6% * = Stock price is above the sold strike price. ** = Posted losses do not reflect a timely exit trade based on Thursday's move below the sold strike. Comments: There is little for investors to be cheerful about this Holiday season as concerns over the economy and tensions overseas have conspired to thwart all attempts at a "Santa Claus" rally. The late-week surge on Friday, while comforting for market bulls, did little to help the overall outlook for stocks. The current technical indications suggest further consolidation in the coming month, thus it is paramount for traders to closely monitor their portfolios and initiate timely exits in questionable positions. Photon Dynamics (NASDAQ:PHTN) was a perfect example of that fact as the issue fell almost $5 after announcing it will miss first quarter sales projections by up to 20%. Thursday's move below a long-term moving average (and the sold strike at $27.50) was a great indicator of things to come but traders who did not heed the warning were punished for their indolence. For those of you who have yet to learn (the hard way) the necessity of keeping losses small, I hope the large (negative) numbers in the summary will give you enough motivation to make position management a priority. Issues on the watch-list include: all gold stocks in a bullish market; all other issues in a bearish market. Positions Previously 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. MARGIN REQUIREMENTS 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 if assigned through an exercise. 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. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & 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, thus 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 COF 31.54 JAN 20.00 COF MD 0.40 5362 19.60 28 6.5% 2.2% DISH 22.20 JAN 20.00 UAB MD 0.40 4470 19.60 28 6.1% 2.2% GRMN 28.95 JAN 25.00 GQR ME 0.40 110 24.60 28 5.4% 1.8% IMPH 19.48 JAN 17.50 QPH MW 0.35 0 17.15 28 6.2% 2.2% MATK 24.94 JAN 20.00 KQT MD 0.50 52 19.50 28 9.8% 2.8% PLMD 32.77 JAN 25.00 PM ME 0.45 676 24.55 28 7.0% 2.0% WERN 22.21 JAN 20.00 QEH MD 0.40 40 19.60 28 6.1% 2.2% Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield MATK 24.94 JAN 20.00 KQT MD 0.50 52 19.50 28 9.8% 2.8% PLMD 32.77 JAN 25.00 PM ME 0.45 676 24.55 28 7.0% 2.0% COF 31.54 JAN 20.00 COF MD 0.40 5362 19.60 28 6.5% 2.2% IMPH 19.48 JAN 17.50 QPH MW 0.35 0 17.15 28 6.2% 2.2% DISH 22.20 JAN 20.00 UAB MD 0.40 4470 19.60 28 6.1% 2.2% WERN 22.21 JAN 20.00 QEH MD 0.40 40 19.60 28 6.1% 2.2% GRMN 28.95 JAN 25.00 GQR ME 0.40 110 24.60 28 5.4% 1.8% 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). ***** COF - Capital One Financial $31.54 *** Bad News Priced-In? *** Capital One Financial Corporation (NYSE:COF) is a holding company whose principal subsidiaries, Capital One Bank and Capital One, F.S.B., offer consumer lending products. Capital One's principal subsidiaries are among the largest providers of MasterCard and Visa credit cards in the world. The firm's businesses include other consumer lending services such as unsecured installment lending and automobile financing. Credit-quality fears and an increase in bad loans have hampered Capital One's profit outlook over the past few months but bullish investors say the condition is "priced-in" to the current share value. Traders who agree with that assessment can attempt sell the inflated option premium for a profit in this speculative position. JAN 20.00 COF MD LB=0.40 OI=5362 CB=19.60 DE=28 MY=6.5% SY=2.2% ***** DISH - EchoStar Communications $22.20 *** Recent Deals *** EchoStar Communications (NASDAQ:DISH) operates through two major business units, the DISH Network and EchoStar Technologies. The DISH Network offers a direct broadcast satellite subscription TV service in the United States with almost 7 million DISH Network subscribers. EchoStar Technologies Corporation is engaged in the design, development, distribution and sale of DBS set-top boxes, antennae and other digital equipment for the DISH Network and the design, development and distribution of similar equipment for a range of international satellite service providers. Dish recently announced a deal to buy back 57 million shares of its stock from Vivendi Universal at a discount to the current value and below the original purchase price. The news comes on the heels of another favorable agreement which voids an obligation to purchase Hughes Electronics' stake in PanAmSat. Both of the events were positive for DISH and the near-term outlook for the stock reflects that bullish condition. JAN 20.00 UAB MD LB=0.40 OI=4470 CB=19.60 DE=28 MY=6.1% SY=2.2% ***** GRMN - Garmin $28.95 *** Solid Revenue Outlook! *** Garmin (NASDAQ:GRMN) is a provider of navigation, communications and information devices, most of which are enabled by GPS (global positioning system) technology. The company designs, develops, manufactures and markets under the Garmin brand a diverse family of hand-held, portable and fixed-mount, GPS-enabled products and other navigation, communications and information products for the general aviation and consumer markets. Each of the company's GPS products utilizes its proprietary integrated circuit and receiver designs to collect, calculate and display location, direction, speed and other information in forms optimized for specific uses. Last week, Garmin raised its quarterly revenue outlook, citing increased holiday demand for consumer products and significant shipments of back-ordered aviation products. The company also recently received a prestigious Consumer Electronics Association Best of Innovations Award for its iQue 3600 PDA with integrated GPS technology. Investors who wouldn't mind a basis near $25 in the issue should consider this position. JAN 25.00 GQR ME LB=0.40 OI=110 CB=24.60 DE=28 MY=5.4% SY=1.8% ***** IMPH - IMPATH $19.48 *** New 6-Month High! *** IMPATH (NASDAQ:IMPH) is a cancer information company that focuses on the clinical application of various advanced technologies in the community-based hospital environment to enable clinicians to make better treatment decisions for their cancer patients. The company harnesses the information it generates from performing analyses on thousands of cancer specimens annually to broaden the applications of this biological information. The company has also completed multiple strategic acquisitions including technologies, software, complementary cancer information such as treatment and outcomes data, pharmacoeconomic analytical capabilities, a tissue and serology archive of well-characterized cancer specimens linked to longitudinal information on donors of those specimens, and a network of clinical trial sites in the U.S. that provides protocol design and review, patient recruitment, data storage and analytical services. IMPH shares hit a new 6-month high Friday and despite the lack of bullish (public) news, the share value appears to be headed higher in the near-term. JAN 17.50 QPH MW LB=0.35 OI=0 CB=17.15 DE=28 MY=6.2% SY=2.2% ***** MATK - Martek Biosciences $24.94 *** The Rally Resumes! *** Martek Biosciences (NASDAQ:MATK) develops and sells products made from microalgae. Microalgae are microplants. The firm 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. Last week, MATK shares soared after a favorable Q4 report and the near-term outlook is definitely bullish. Investors who are interested in a portfolio addition of a unique biotechnology company should consider this position. JAN 20.00 KQT MD LB=0.50 OI=52 CB=19.50 DE=28 MY=9.8% SY=2.8% ***** PLMD - PolyMedica $32.77 *** Positive Earnings Guidance *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer medical products and services, conducting business through its Chronic Care, Professional Products and Consumer Healthcare segments. The company sells diabetes supplies and products, and provides services to Medicare-eligible seniors suffering from diabetes and related chronic diseases through its Chronic Care segment. Through its Professional Products segment, it provides direct-to-consumer prescription respiratory supplies and services to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease. It also markets, manufactures and distributes a broad line of prescription urological and suppository products. PolyMedica markets prescription oral medications not covered by Medicare to its existing customers through its Professional Products segment. PolyMedica recently reaffirmed its net revenue guidance for the current quarter and raised EPS guidance for the coming quarter, based on lower than expected legal expenses. Traders who favor "premium-selling" strategies on potentially volatile issues should consider this speculative position. JAN 25.00 PM ME LB=0.45 OI=676 CB=24.55 DE=28 MY=7.0% SY=2.0% ***** WERN - Werner Enterprises $22.21 *** Trucking Sector *** Werner Enterprises (NASDAQ:WERN) is a transportation company engaged primarily in hauling truckload shipments of general commodities in both interstate and intrastate commerce. Werner has a fleet of over 7,000 trucks and the principal types of freight transported by the company include consumer products, retail store merchandise, food and paper products, beverages, industrial products and building materials. The firm operates in the 48 contiguous states pursuant to operating authority, both common and contract, granted by the United States D.O.T and pursuant to intrastate authority granted by various states. Werner also has authority to operate in the 10 provinces of Canada, and provides through trailer service in and out of Mexico. WERN emerged in scan of bullish issues with recent high trading volume and the combination has proven to be very accurate in identifying short-term rallies. Traders who think the upside activity will continue over the next few weeks can profit from that outcome with this position. JAN 20.00 QEH MD LB=0.40 OI=40 CB=19.60 DE=28 MY=6.1% SY=2.2% ***** ***************** 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 - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield IDCC 15.50 JAN 12.50 DAQ MV 0.40 50 12.10 28 12.1% 3.6% WBSN 22.15 JAN 17.50 DQH MW 0.45 11 17.05 28 10.0% 2.9% NBIX 44.25 JAN 40.00 UOT MH 1.35 33 38.65 28 9.9% 3.8% BSTE 34.98 JAN 30.00 BQS MF 0.90 174 29.10 28 9.9% 3.4% IGEN 41.96 JAN 35.00 GQ MG 0.95 435 34.05 28 9.6% 3.0% XLNX 21.26 JAN 17.50 XLQ MW 0.45 5728 17.05 28 9.4% 2.9% CELG 22.76 JAN 20.00 LQH MD 0.60 1621 19.40 28 9.4% 3.4% PSFT 19.01 JAN 15.00 PQO MC 0.35 2504 14.65 28 9.2% 2.6% PPD 26.80 JAN 20.00 PPD MD 0.35 210 19.65 28 6.7% 1.9% BMC 17.22 JAN 15.00 BMC MC 0.25 3654 14.75 28 5.5% 1.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Last-Minute Christmas Present! By Ray Cummins Stocks rebounded Friday as investors shopped for holiday bargains after a government report showed the U.S. economy expanded briskly in the third quarter. The Dow Jones industrial average closed up 147 points at 8,512 amid strong performances from J.P. Morgan Chase (NYSE:JPM), AT&T (NYSE:T) and Alcoa (NYSE:AA). The NASDAQ Composite index of technology stocks rose 9 points to 1,363 as semiconductor shares bounced-back from recent losses. The broader Standard & Poor's 500 index climbed 11 points to 895 with biotechnology, finance, home furnishing, casino and shoe stocks among the day's leaders. Trading volume was heavy as traders adjusted their portfolios during the quadruple-witching expiration of futures and options contracts. On the Big Board, 1.8 billion shares changed hands while 1.7 billion shares were exchanged on the NASDAQ. Market breadth was positive with winners outpacing losers by a 2 to 1 margin on NYSE while advancers bested decliners 4 to 3 on the technology exchange. The bond market retreated from recent gains with the yield on the 10-year note finishing at 3.95%. Merry Christmas! ***************** 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 LP SP Credit CB G/L Status BR 42.01 42.67 DEC 35 38 0.30 37.20 $0.30 Closed EBAY 64.79 69.84 DEC 50 55 0.55 54.45 $0.55 Closed IGEN 36.49 41.96 DEC 25 30 0.65 29.35 $0.65 Closed SLM 102.94 105.58 DEC 85 90 0.65 89.35 $0.65 Closed DE 49.00 47.57 DEC 40 45 0.65 44.35 $0.65 Closed INTU 52.91 48.20 DEC 40 45 0.50 44.50 $0.50 Closed LLY 62.24 63.25 DEC 50 55 0.55 54.45 $0.55 Closed IGT 77.06 74.30 DEC 65 70 0.55 69.45 $0.55 Closed PIXR 55.67 57.50 DEC 45 50 0.50 49.50 $0.50 Closed FPL 59.87 59.60 DEC 50 55 0.55 54.45 $0.55 Closed UOPX 36.65 36.26 DEC 30 34 0.45 33.30 $0.45 Closed ABK 62.51 57.71 DEC 50 55 0.40 54.60 $0.40 Closed AGN 58.79 53.68 DEC 50 55 0.55 54.45 ($0.77) Closed APC 49.59 48.53 JAN 40 45 0.55 44.45 $0.55 Open VLO 36.39 37.40 JAN 30 32 0.30 32.20 $0.30 Open ASA 39.30 38.71 JAN 32 35 0.35 34.65 $0.35 Open FNM 66.61 66.70 JAN 55 60 0.40 59.60 $0.40 Open NBR 37.75 37.55 JAN 30 32 0.30 32.20 $0.30 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Previously closed (losing) positions include: Kohl's (NYSE:KSS) and Autozone (NYSE:AZO). Everest RE Group (NYSE:RE) rebounded to end the month positive while the bullish spread in Allergan (NYSE:AGN), which was closed Thursday, finished the expiration period negative. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ABC 72.45 51.30 DEC 85 80 0.65 80.65 $0.65 Closed MCO 45.12 42.50 DEC 55 50 0.40 50.40 $0.40 Closed WLP 74.04 71.88 DEC 90 85 0.60 85.60 $0.60 Closed UNH 86.83 81.09 DEC 105 100 0.55 100.55 $0.55 Closed DNA 35.46 35.00 DEC 45 40 0.60 40.60 $0.60 Closed DP 40.40 38.20 DEC 50 45 0.40 45.40 $0.40 Closed LXK 63.75 61.91 DEC 75 70 0.60 70.60 $0.60 Closed IDPH 39.27 34.35 DEC 45 40 0.45 40.45 $0.45 Closed UHS 44.85 45.10 DEC 55 50 0.30 50.30 $0.30 Closed AAP 51.55 49.30 DEC 60 55 0.50 55.50 $0.50 Closed ACDO 35.19 35.33 DEC 43 40 0.35 40.35 $0.35 Closed JCI 81.79 80.10 JAN 90 85 0.20 85.20 $0.20 Open LEH 56.72 56.35 JAN 65 60 0.25 60.25 $0.25 Open GS 73.10 71.86 JAN 85 80 0.60 80.60 $0.60 Open LXK 61.93 61.91 JAN 75 70 0.55 70.55 $0.55 Open MMM 121.77 124.13 JAN 135 130 0.70 130.70 $0.70 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Previously closed (losing) positions include: Sinclair Broadcast Group (NASDAQ:SBGI). CALL DEBIT SPREADS ****************** Symbol Pick Last Month LP SP Debit B/E G/L Status WMT 50.54 50.79 JAN 60 55 4.45 54.45 0.55 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status COX 30.25 28.50 DEC 35 25 0.10 0.30 Closed OMC 66.32 63.80 DEC 75 55 0.15 0.45 Closed SCIO 32.84 33.46 JAN 40 25 0.00 0.25 Open GG 11.15 12.23 JAN 12 10 0.10 1.10 Closed PXD 26.11 25.97 MAR 30 23 0.10 0.20 Open All of the speculative small-cap positions were closed when the market began to retreat from its recent rally. The position in Nextel (NASDAQ:NXTL) was the best performer, however FCS, LTXX, MENT and FLEX also offered favorable profits. The bullish play in ZRAN, although not available at our target price, achieved an excellent gain. Cypress Semiconductor (NYSE:CY) was closed early to limit losses, but Scios (NASDAQ:SCIO) achieved a small profit. The hedge position in Goldcorp (NYSE:GG) was very successful and Pioneer Natural Resources (NYSE:PXD) has held up well despite the market-wide declines. Last week's slump below a recent support area by Abbott Labs (NYSE:ABT) signaled our exit in that position. SYNTHETIC (BEARISH) ******************* Stock Pick Last Expir. Long Short Initial Max Play Symbol Price Price Month Put Call Credit Value Status IMN 35.00 35.70 APR 30 40 0.15 0.00 Open Imation may be forming a base near the current price thus traders are advised to monitor the issue regularly for signs of a bullish reversal. CALENDAR SPREADS **************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status HNT 25.75 27.00 JAN-30C DEC-30C 0.60 0.60 Open WSM 24.53 27.55 FEB-30C DEC-30C 0.80 1.55 Open? GISX 20.21 17.69 FEB-22C DEC-22C 0.95 0.75 Open? Global Imaging Systems (NASDAQ:GISX) has rebounded off of the lower end of its recent trading range and the hopefully, the issue will continue to recover in the coming week. Healthnet (NYSE:HNT) is also showing signs of bullish activity in the near-term. Positions in United Airlines (NYSE:UAL) and The Sharper Image (NASDAQ:SHRP) have previously been closed to limit losses. SHORT-PUT COMBOS **************** Stock Pick Last Short Long Initial Max Play Symbol Price Price Option Option Credit Profit Status AES 2.92 3.25 J04-7.5P J03-2.5P 4.50 0.25 Open EDS 19.64 18.38 J04-25P M03-17P 6.50 0.00 Open ImClone (NASDAQ:IMCL), which was previously closed, offered a gain of up to $2.25 in the speculative play. CREDIT STRANGLES **************** Stock Pick Last Exp. Short Short Initial Current Play Symbol Price Price Month Call Put Credit Debit Status ERTS 64.13 52.52 DEC 70 55 2.40 2.50 Closed SLAB 25.16 20.86 DEC 30 20 1.00 0.00 Closed MEDI 26.21 27.91 DEC 30 20 1.45 0.00 Closed Last week's sell-off in Electronic Arts (NASDAQ:ERTS) forced us to exit the position early for a small profit. The speculative play in Medimmune (NASDAQ:MEDI) was closed prior to the company's FDA advisory panel meeting for a minimal gain. 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 31.79 JAN 35 35 6.15 6.00 Open L 9.95 9.00 JAN 10 10 1.35 1.30 Open XLNX 22.06 20.37 DEC 22 22 2.30 2.25 Closed The short-term position in Xilinx (NASDAQ:XLNX) was very volatile and also came within $0.05 of the break-even point in the bearish portion of the play, however the straddle was not profitable on a simultaneous order basis. Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** DHR - Danaher Corporation $65.10 *** A Big Day! *** Danaher Corporation (NYSE:DHR) is a producer of precision motion control products, scientific and technical tools and instruments for commercial and industrial applications. The firm conducts its operations through two business segments: Process/Environmental Controls and Tools & Components. Process/Environmental Controls, in 2001, encompassed three strategic platforms, which included Motion Control, Environmental and Electronic Test, and also three focused niche businesses, which included Power Quality, Aviation & Defense and Industrial Controls. Another strategic platform was recently added; Product Identification, to the segment through the purchase of Videojet Technologies. The Tools & Components segment encompasses one strategic platform, Mechanics Hand Tools, and five focused niche businesses, which include Jacobs Chuck Manufacturing Company, Delta Consolidated Industries, Jacobs Vehicle Systems, Hennessy Industries and Joslyn Manufacturing Company. PLAY (conservative - bullish/credit spread): BUY PUT JAN-55.00 DHR-MK OI=166 A=$0.40 SELL PUT JAN-60.00 DHR-ML OI=215 B=$0.80 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$59.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=82% ***** IGEN - IGEN International $41.96 *** Testing 2002 Highs! *** IGEN International develops and markets products that incorporate its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of various biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. The product is incorporated into instrument systems and other related consumable reagents, and IGEN also offers assay development and services used to perform analytical testing. Products based on ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. PLAY (less conservative - bullish/credit spread): BUY PUT JAN-30.00 GQ-MF OI=548 A=$0.40 SELL PUT JAN-35.00 GQ-MG OI=435 B=$0.95 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$34.45 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=90% ***** RD - Royal Dutch Petroleum $43.21 *** Oil Sector Hedge *** Royal Dutch Petroleum (NYSE:RD) is a holding company that owns, directly or indirectly, investments in the companies constituting the Royal Dutch/Shell Group of Companies. The Group includes a range of other businesses such as Shell Hydrogen, Shell Internet Works and Shell Capital. The company has a 60% interest in the Group. The Operating Companies of the Group are also engaged in various activities related to oil and natural gas, chemicals, power generation, renewable resources and other energy businesses in over 135 countries. The companies of the Royal Dutch/Shell Group are engaged in the business of exploration and production, gas and power, oil products and chemicals and renewables, as well as other related activities. Royal Dutch/Shell has grown out of an alliance made in 1907 between Royal Dutch and Shell Transport, by which the two companies agreed to merge their interests on a 60:40 basis, while remaining separate and distinct entities. PLAY (conservative - bullish/credit spread): BUY PUT JAN-37.50 RD-MU OI=10564 A=$0.20 SELL PUT JAN-40.00 RD-MH OI=7349 B=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(monthly)=11% B/E=$39.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=80% ***** CDWC - CDW Computer Centers $44.06 *** Lower Q4 Revenues! *** CDW Computer Centers (NASDAQ:CDWC) is a direct marketer of a wide range of computers and related technology products and services. CDW's extensive offering of products, including hardware, software and accessories, combined with its service offerings, provide comprehensive solutions for its customers' technology needs. The company offers more than 80,000 products, which include a variety of product types from manufacturers such as Cisco, Compaq, Intel, Hewlett Packard, IBM, Microsoft, Sony and Toshiba, among others. The firm's value-added services include its ability to configure multi-branded solutions for its customers and offer technical support 24 hours a day, seven days a week. The company has two operating segments, corporate, which is primarily comprised of business customers, but includes consumers as well, and the public sector, which is comprised of federal, state and local government and educational institutions who are served by CDW Government, a wholly owned subsidiary. PLAY (conservative - bearish/credit spread): BUY CALL JAN-55 DWQ-AK OI=1954 A=$0.30 SELL CALL JAN-50 DWQ-AJ OI=2905 B=$0.80 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$50.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=83% ***** GD - General Dynamics $78.87 *** No War Until January? *** General Dynamics (NYSE:GD) operates a range of businesses that produce information and communications technology, land and amphibious combat systems, and is engaged in naval and commercial shipbuilding, and business aviation. These are high technology businesses that use design, manufacturing and program management expertise together with advanced technology and the integration of complex systems as part of their everyday operations. The company operates in four primary business groups: Information Systems and Technology, Combat Systems, Marine Systems, and Aerospace. The company employs approximately 54,000 people worldwide and anticipates 2002 revenues of $14-$15 billion. PLAY (conservative - bearish/credit spread): BUY CALL JAN-90 GD-AR OI=3056 A=$0.25 SELL CALL JAN-85 GD-AQ OI=45232 B=$0.65 INITIAL NET CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$85.45 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=79% ************* 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. ***** GDW - Golden West Financial $72.33 *** Strong Sector! *** Golden West Financial Corporation (NYSE:GDW) is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly owned savings bank subsidiary, World Savings Bank, FSB (WSB). Golden West also has two operating subsidiaries, Atlas Advisers and Atlas Securities. These two firms were formed to provide services to Atlas Assets, a registered open-end management investment company sponsored by the company. Atlas Advisers is a registered investment adviser and the investment manager of Atlas Assets' 14 portfolios; the Atlas Funds. Atlas Securities is a registered broker-dealer and the distributor of Atlas Fund shares. The principal business of the firm, through WSB, is attracting funds from the investing public and the capital markets and investing those funds principally in loans secured by deeds of trust or mortgages on residential real estate, and other mortgage-backed securities. PLAY (less conservative - bullish/debit spread): BUY CALL JAN-65.00 GDW-AM OI=61 A=$8.10 SELL CALL JAN-70.00 GDW-AN OI=299 B=$3.70 INITIAL NET-DEBIT TARGET=$4.25-$4.30 POTENTIAL PROFIT(max)=16% B/E=$69.30 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=70% ***** HSY - Hershey Foods $67.76 *** Something Different! *** Hershey Foods Company (NYSE:HSY) and its subsidiaries are engaged in the manufacture, distribution and sale of consumer food products. The company produces and distributes a broad line of chocolate and non-chocolate confectionery and grocery products. Hershey's major product groups include chocolate and non-chocolate confectioneries sold in the form of bar goods, bagged items and boxed items; and grocery products in the form of baking ingredients, chocolate drink mixes, peanut butter, dessert toppings, and beverages. PLAY (speculative - bullish/diagonal spread): BUY CALL FEB-65.00 HSY-BM OI=4334 A=$4.10 SELL CALL JAN-70.00 HSY-AN OI=3248 B=$0.70 INITIAL NET-DEBIT TARGET=$3.25-$3.30 POTENTIAL PROFIT(max)=50% B/E=$68.30 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=47% ******************* 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. ***** VAR - Varian Medical Systems $50.38 *** Reader's Request! *** Varian Medical Systems (NYSE:VAR) is engaged in the design and production of equipment for treating cancer with radiation, as well as high-quality, cost-effective X-ray tubes for original equipment manufacturers, replacement X-ray tubes and imaging subsystems. In serving the market for advanced medical systems (primarily for cancer care), the company continues to broaden its offerings to address the continuing demand to contain costs and enhance efficacy of healthcare. In addition to developing medical equipment, the company develops software products and devices designed to enhance the productivity and quality of its equipment, devices manufactured by other companies and the general delivery of healthcare services. PLAY (speculative - bullish/synthetic position): BUY CALL FEB-55.00 VAR-BK OI=137 A=$1.15 SELL PUT FEB-45.00 VAR-NI OI=107 B=$1.10 INITIAL NET CREDIT TARGET=$0.05-$0.15 TARGET PROFIT=$0.90-$1.50 Note: Using options, the position is similar to being long the stock. The initial margin/collateral requirement for the sold put is approximately $1,600 per contract. Do not initiate this position if you can not afford to purchase the stock at the sold strike price! ***** ************************************************************** 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. 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