The Option Investor Newsletter Sunday 12-29-2002 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: Traders Return Stocks Purchased in November Futures Market: When Support Becomes Resistance Index Trader Wrap: Get this year behind us! Editor’s Plays: Option PowerBall Market Sentiment: South for the Winter Ask the Analyst: Relative strength, but with X's and O's Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Down the Chimney...and then some Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 12-27 WE 12-20 WE 12-15 WE 12-06 DOW 8303.78 -208.22 8512.01 + 78.16 8433.85 -211.92 -250.32 Nasdaq 1348.46 - 14.59 1363.05 + 0.63 1362.42 - 60.02 - 56.30 S&P-100 443.06 - 12.40 455.46 + 3.65 451.81 - 12.61 - 14.43 S&P-500 875.42 - 20.34 895.76 + 6.28 889.48 - 22.75 - 24.08 W5000 8305.63 -169.60 8475.23 + 48.97 8426.26 -202.90 -217.52 RUT 384.16 - 2.72 386.88 - 1.10 387.98 - 8.74 - 9.64 TRAN 2291.66 - 32.56 2324.22 + 5.75 2318.47 - 70.34 + 28.19 VIX 34.15 + 2.68 31.47 - 0.65 32.12 - 0.56 + 1.60 VXN 46.71 - 1.80 48.51 - 2.41 50.92 - 1.36 + 2.80 TRIN 3.60 0.66 1.34 1.11 Put/Call 0.94 0.88 0.87 0.91 ****************************************************************** Traders Return Stocks Purchased in November by Jim Brown Traders may have returned stocks Friday for cash but the bargain hunting was confined to the malls. Market volume was very low at only 1.8 billion across all markets but 1.5 billion of that was down volume. Considering the holiday period is normally bullish there is a definite trend change in progress. Dow Chart – Daily Nasdaq Chart – Daily Friday began with another surprising economic announcement. New home sales soared to a record annual rate of 1,069,000 and well over consensus estimates. This +5.7% bounce caught everyone off guard considering mortgage applications were down significantly on Thursday. On a deeper look the internals showed that most of the gains came from the Midwest with a sharp -26% decline in the Northeast and a -4% decline in the West. Sales rose +41% in the Midwest and only +2.4% in the South. Inventories fell to a 3.8 month supply due to a flurry of price cutting. Median home prices fell -6.5% as builders competed to sell excess inventory before mortgage rates begin to rise. The median home price fell from $191,900 in June to $167,300 in November. With pricing power falling the stocks of the major homebuilders also were knocked for a loss. The additional sales obviously came as the result of strong incentives and is not something we should expect to continue. The Conference Board help Wanted Index remained at 40 in November for the second consecutive month. This is the low for the year, very close to a historic 40 year low, and indicates there has not been any surge in help wanted ads that would indicate a recovery in progress. If there is a recovery in progress it is obviously a jobless one and many analysts think this could continue until the 2H of 2003. Several high profile analysts are now expecting unemployment to go as high as 6.5% before the economy recovers. The nonfarm payroll report for December will be delayed by the holiday to Jan-10th. The positive home sales report only managed to hold up the market for a very few minutes. Other factors quickly came into play and the descent began. North Korea ordered the IAEA inspectors to leave the country as they prepared to begin nuclear work. They are currently thought to be moving 1000 plutonium fuel rods back to the reactor complex every day. Scientists thought North Korea was only a couple months away from making a bomb when the last treaty was brokered. Since North Korea recently admitted they never quit their bomb making efforts like they had agreed eight years ago the risk is now that they have the capability and only need to extract the plutonium to complete the weapons. This means within 60 to 90 days they can have those weapons in their arsenal. This overt "in your face" threat to go nuclear is a wildcard the markets are not prepared to deal with. Add to this problem the news of the attack in Grozny, which could have killed as many as 200, when suicide bombers drove truck bombs into a government building. This is not a problem for the world as it is more of a civil war but it was just one more negative news event. Oil prices spiked to $32.72 and will be much more of an impact to the markets than the Russian civil war. Most investors think the Iraq war will impact prices but they are wrong. Iraq is only pumping 400,000 barrels a day, which is down from millions a day. The US has not used any Iraq oil for over a year. The real problem is Venezuela and there does not appear to be any resolution in sight. The US imports 14% of its oil from Venezuela and that pipeline has been shut off. This is the same amount as we import from Saudi Arabia. There will be additional purchases from other countries but the price of oil is going up. For every $1 increase it represents a monthly $7 billion undeclared tax on US consumers. Every recession since 1970 has been preceded by a large spike in oil prices. This is the kind of news that makes investor nightmares. The lack of retail sales continues to make headlines with the official estimates falling to only +1.5% sales gains for the season. This is the lowest sales growth since 1970 and means the profit forecast for retailers is grim. There is still hope by some that the returns and post holiday discounts will help lift the numbers but reports from the malls are very discouraging. Adding to bearish investor sentiment was the call up of another 25,000 troops to go to Iraq. This makes over 150,000 officially called up but there was as many as 60,000 in the area before the build up "officially" started. 4,000 marines were put on alert and told to prepare to leave. Orders were issued to put four or more carrier battle groups in the oceans around Iraq by Jan-27th. Orders were given to begin moving aircraft from US locations to attack launch points in the area. The intent is clear. The pressure is building on Saddam to come clean or face the consequences with a Jan-27th deadline. This is the date the inspectors have to formally report to the UN on the status of the search. The most recent news from their spokesman was Iraq had failed to comply with the resolution. They have not claimed to have found any weapons and the weapons they already knew about have disappeared. Considering Saddam had years to move/hide them I am not surprised. 250,000 troops are expected to be in theater before Feb-1st so investors know there is more bad news coming. The US does not have near the consensus of opinion this time and there are going to be dissenters at the UN. The current indications are that the US will attack regardless of the opposition and that could cause grave global repercussions. Investors flight to gold and bonds is increasing with gold hitting $349 on Friday and a five year high. The dollar fell again on the world markets as Asian and European investors shifted their positions. Volume on the NYSE was the second lightest day of the year with Thursday being the lightest. 83% of the volume across all the US markets was down volume. While there was no rush to the exits it was a steady procession. Just because it was an orderly exit does not mean investors should not panic. The Dow closed only 3 points above 8300 and the lowest close since Oct-17th. Make no mistake, this is a critical area for the markets. Serious technical damage has been done and there is only the bare minimum of support between us and disaster. By disaster I am speaking about a move to 8127 and the 50% retracement level or even lower to 8000 or below. A break below 8000 sets up a possible retest of the October lows at 7200. The Dow is on track to post the worst December since 1931 and the Nasdaq will post its first three down years in a row ever. The Dow has lost -1717 points or -17% for the year. The Nasdaq is even worse with a -602 point loss and a -31% drop. Despite these numbers there are still some significant problems in our immediate future. There will be a flurry of earnings warnings over the next three weeks. Because of the holidays the January warnings period is normally compressed into the first two full weeks of the year instead of stretched out over 4-5 weeks. This means we could get a serious dose of bad news in a short period of time. As is normally the case the COT report is showing the retail traders lined up on the wrong side of the playing field. On the Nasdaq, commercial traders increased their net short positions by 600% and small traders just posted their most bullish position of the year at a 3:1 net long. Retail traders are clearly betting on the typical holiday tech bounce and commercial traders are happy to take those bets. I see considerable risk over the next three weeks. I have been telling readers for three weeks I expected a drop after Christmas and it appears that drop is underway. There is a significant chance that we will see a bounce on Monday simply because of the oversold conditions. The TRIN closed on Friday at 3.60 which is extremely bullish. It is an indicator of very oversold conditions and is powered by advancing/declining volume. At this level the indicator typically predicts a very quick bounce to equalize pressure. With much of Friday's drop related to weekend event risk that bounce could be traders coming back into the market on Monday. However, the oversold conditions can be relieved very quickly with a very small spike so I would not look to it for salvation. I would look to short any real bounce over the next week. I believe the earnings warnings, the increasing buildup in Iraq and the increasing noise out of North Korea will weigh heavily on trading until companies begin announcing real earnings the week of Jan-13th. To put it bluntly, we are entering a period where negative news is likely to outweigh fundamentals and the path of least resistance is down. I will leave you with the bright side. I would be very surprised if the current weakness will last much longer. Looking at the problems long term provides much more hope. The Iraq problem will go away once the shooting starts. There are considerable indications the Iraqi army will evaporate once the war begins. Privately the Iraq citizen would love to see Saddam depart. Want proof? The Iraq stock market has soared recently as the threat of a forced regime change gets nearer. Iraqi civilians cannot speak out about Saddam but they can vote with their money. The implications are not that the country will be obliterated by attacks but that the post Saddam regime will be pro-business and life will be better for all. The Korean thing will not deteriorate into a war because their army is too strong and South Korea would suffer too much damage. It is likely to be only an attempt by North Korea to blackmail the world powers into yet another payoff to "stop" nuclear research. They have a history of this and eventually somebody will pay their bribe or blockade them into submission. They can't afford to feed their people much less risk a real war. In Venezuela, Chavez will eventually be toppled by either internal or external forces and oil will flow again. On the home front the Y2K PC upgrade wave will eventually take place. Too many companies have already paid MSFT for licenses they are not using and rumors are surfacing about multiple bids being floated for 20,000 to 50,000 PC lots for delivery later in the year. One OIN reader emailed that his company was scheduled to replace 24,000 Intel PII laptops with 28,000 new P4s in 2003. I am pretty convinced that despite the serious problems in our immediate future there is a recovery about to take place. Flaws in that theory are the rising unemployment, lack of consumer spending and the possibility of a double dip recession before the recovery appears. With the 4Q GDP estimated to be only 1.5% any second dip recession will be in the 1Q. The Fed has gone into overdrive and is pumping large sums of money into the system. If another economic dip occurs it should be short and the rebound from a double dip could be strong. Once any real signs of a recovery appear the race to upgrade and the release of pent up spending could be violent. Technically I think the current dip in the market is being artificially created. I think institutions want to invest in the market since bonds have peaked and money market rates are near zero. They are afraid to make heavy bets with all the uncertainty. My view is that they are trying to force a retest of the October lows. Many institutions missed the bounce in October because they were expecting a stronger dip later. They will not miss it this time. If they can force a retest by pulling bids and some strategic short selling then they will be ready to go long for the recovery when the retest is complete. That retest would have a tough time breaking below 7700 so that is where I think the real buyers will begin to appear. The next likely support point for the current market is Nasdaq 1320. This is the confluence of the 50% retracement and the 100 DMA and with the Nasdaq bullish sentiment at the high of the year I see that as a potential bounce point. On the Rukeyser show on Friday he hosted his four best market forecasters for 2002. They were quizzed on their outlook for 2003. The average of their predictions were Dow high 9913, low 7505, close 9155. The Nasdaq high 1732, low 1186 and close 1525. What is your guess? On New Years Day we are going to activate our "Guess the Dow" contest and award a total of $2003 to the top three forecasters. Get out your charts and get ready to place a bet. We will be asking for the Dow high, low and close for 2003. Enter Very Passively, Exit Very Aggressively! Jim Brown "Don't gamble in the market; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it." - Will Rogers ********************** 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 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 ************** When Support Becomes Resistance By John Seckinger jseckinger@OptionInvestor.com All three futures contracts closed under important retracement levels on Friday, turning support into resistance as Christmas becomes a memory and the New Year approaches. Friday, December 27th at 3:15 P.M. Contract Last Net Change High Low Volume Dow Jones.. 8303.78 -128.83 8449.41 8285.14 YM03H 8275.00 -160.00 8437 8261 12,079 Nasdaq-100 997.85 -18.63 1018.16 996.10 NQ03H 1001.50 -18.50 1025.00 997.50 108,357 S&P 500 875.40 -14.26 890.46 873.62 ES03H 871.75 -19.00 891.50 871.25 256,017 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: Geopolitical concerns took headlines once again on Friday, as reports that North Korea will expel two nuclear inspectors dispatched by the U.N. International Atomic Energy Agency made headlines. This is the agencies only remaining means to monitor the state’s nuclear weapons program. In other news, there was talk of Morgan Stanley (MWD), JP Morgan (JPM), and other large financial firms will be severely cutting back on the investment-banking sector due to a two-year revenue fall of 40%. In economic news, November New Housing Sales rose a better-than-expected 5.7% to 1.069 million. Technical News: The Dollar continued to implode on Friday, hitting multi-year lows against the yen as cash from Foreign Central Banks made its way towards the Euro instead. However, Gold failed to rally and follow a common inverse relationship with the Greenback. Looking elsewhere, the Sox just missed the profiled 295 level with a low of 295.25, but IBM did give a sell signal by trading $78. IBM is a bellwether, and only a move above $83 would turn sentiment around. The OEX gave a sell signal as well when the index traded 445 (noted in the monitor after noting IBM). Going forward, if short, watch the dollar (Dx00Y) for confirmation and expect additional buying with bonds (ZB03H) following Friday’s impressive rally towards the 113 handle. If the Sox does weaken, it should have a broad based effect on stocks as well. ================================================================= The March Mini-sized Dow Contract (YM03H) A weekly chart of the Dow shows prices falling under both the mid-point of a Bollinger Band as well as under the 38.2% retracement level from October’s low to the high during the first week of December. Moreover, a 38.2% retracement of the move from March to October comes in at 8525. The Dow failed at this level as well. With that said, least resistance has to remain lower until prices can close back above the 8525 level. I know I have been saying this for some time, but the blue chips evidently continue to let shorts know that selling can be profitable. The long-term objective remains at 8035, and expect support at 8120 and the 50% retracement level along the way. For Monday, support is seen at 8242 and 8181. If looking to go long, 8181 seems like the better of the two levels; moreover, a move above 8338 could be a start as well. Chart of Dow Jones, Daily Dow Jones Support Resistance Pivot 8242.81 8407.08 8346.11 8181.84 8510.38 Bullish Percent: 54% (Recent High at 72%, Last Significant Low at 10%) – This is new to the section. I use Bullish Percent to gauge risk and get a feel if the market is coming down from relatively high levels, or falling from low levels to even lower levels. 54%, to me, means there is some more downside left in this move. If under 30%, risk for selling is high. If above 70%, risk for buying is high. I will experiment a lot with this area in the next few months. For a chart, go to stockcharts.com and type in BPDJIA. For more information, see link: http://www.OptionInvestor.com/baileysbasics/bb_112200_6.asp A chart of the YM contract on a daily basis shows a similar pattern, and look to see if 8187 lines up with the bottom of the regression channel (this is based on time). It looks like it could if prices trade there on Monday. If prices hit the 8150 area and then quickly rise above 8187 and back into the channel, longs should get an opportunity back towards 8280. The pivot for Monday comes in at 8324. Just like with the Dow, there is no reason to buy until price action begins to act bullish. Very aggressive traders could use 8282 as the pivot, while somewhat aggressive longs could look for a move above 8356 as a reason to enter. Chart of YM03H, Daily YM03H Support Resistance Pivot 8211.75 8387.75 8324.25 8150.25 8500.25 Bold signifies levels based on Pivot Analysis (Globex included). The March E-mini Nasdaq 100 Contract (NQ03H) The NDX appears pretty straightforward. Prices should find support between 982 and 990, while a move above the pivot of 1004 would make me begin thinking of a possible trap scenario. Least resistance in MACD is lower as well, while stochastics continue to struggle and remain buried during a week that should have been bullish for traders. Note: The intermediate term objective in the NDX is for a move to 972-975 area. A close above the 19.1% level at 1029.50 would take sentiment to more neutral levels. Whenever a chart looks this week, any sign of hope (move above 1004) could really become a catalyst for a nice short-covering rally. I recommend using a 30-minute chart and look for a period close above this level (1004) for confirmation. Chart of NDX, Daily Nasdaq-100 Support Resistance Pivot 989.91 1011.97 1004.03 981.97 1026.09 Bullish Percent: 62% (Recent High at 82%, Last Significant Low at 14%) There is definitely more risk to the downside. The NQ03H contract looks a lot like the NDX, showing support at 983 and the 50% retracement level of 983. Before 983 is reached, look for a pause at 991 along the way. The pivot comes in at 1008, while the same theory outlined above applies regarding a possible trap. I think there are some shorts getting interested at current levels, and there are certainly longs nervous about their profits from October and November. Looking at the ADX oscillator, the +DI remains underneath the –DI and still gives a bearish perspective. Because the spread between the +DI and –DI isn’t that great, I don’t think this oscillator is signaling a bottom just yet. Chart of NQ03H, Daily NQ03H Support Resistance Pivot 991.00 1018.50 1008.00 980.50 1035.50 Bold signifies levels based on Pivot Analysis (Globex included). The March E-mini S&P 500 Contract (ES03H) The SPX contract is comfortably near the bottom of the Bollinger Bands and long-term support line (green). This area correlates to 869. If this level fails to hold on Monday, look for a move to the 50% retracement area at 861.18 before bids appear. If prices fall outside the Bollinger Band, look for a close back inside before expecting a nice rebound back towards 904.7 (mid- part of Band). I do think that the 861 area should be able to temporarily stop some of the selling pressure and possibly portend a bounce back to 883. Note: Monday’s pivot comes in at 879.83. Chart of S&P 500 Index, Daily S&P 500 Support Resistance Pivot 869.19 886.03 879.83 862.98 896.67 Bullish Percent: 60% (Recent High at 66%, Last Significant Low at 20%). Certainly more risk to the downside. The ES contract is underneath the lower Bollinger Band on a 120- minute chart and also portending more weakness for Monday. But, as mentioned above, a move higher might become a catalyst for shorts to cover. Where could this happen? Above the pivot at 878.25 would be a start. Note: 50% of the move from October to December comes in at 861, while a 61.8% retracement is seen at 839.50. If 861 is reached on Monday, look for an initial bounce possibly back towards the 38.2% area. This is normally how market makers work; support at one level with expectations of the above level to be solid resistance. If the market does bounce at 50% retracement and then fails to hit 38.2% on the rebound, this is a nice failure and should be followed by solid selling. If the 50% area become resistance, market makers look towards the 61.8% level. The MACD oscillator shows solid resistance at the zero level; therefore, if the pivot is taken out, look for confirmation via a move of the MACD back into positive territory. Chart of ES03H, 60-minute ES03H Support Resistance Pivot 864.75 885.00 878.25 858.00 898.50 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 ******************** Get this year behind us! By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE: Sell rallies. The market is continuing to drift lower in line with slowing upside momentum and this looks likely to continue as rallies lack volume and conviction. The key 50-moving averages continue to define near resistance. As I suggested last week there were bearish breakdowns when the SPX (S&P 500) closed under 876 and the 100 Index (OEX) below 448. The COMPX (Nasdaq Composite) is heading toward my suspected target in the 1320-1300 area and NDX (Nasdaq 100) is flirting with key psychological support at 1000 but the more key technical level is the risk to close below 980. The Indices are “oversold” on an hourly and daily chart basis (not on the weekly charts yet), but it takes more than just being oversold to spark a rally. FRIDAY TRADING ACTIVITY – The market extended its losses on Friday on soft retail sales, political worries with Iraq and now especially North Korea – with a lack of corporate earnings news not providing any fundamental influences. The Santa Claus rally has not set in as old Saint Nick takes his own holiday. The Dow ended off 2.5% or some 200 points. The S&P (SPX) was down 20 points for the week (2.2%) and the Nasdaq Composite (COMPX) fell 15 points or about 1%. Most down January market months have tended to precede extensions of bear markets. There is a seasonal tendency for January to start higher – time will tell on this. Invasion plans seem to be well underway and could be realized by the end of January as well. Most profession traders and money managers have more or less closed their books on 20002 and would just like it over with – OUT with the old and IN with the new. Trading was light most of last week. Prices continue to rise in the oil and gold markets and this is not the increases that will cheer Wall Street. Oil gained about 2 bucks a barrel last week. Better than expected U.S. home sales failed to provide much lift. November new home sales hit a record 1.07 million – a gain of nearly 6%. Downbeat retail sales estimates such as from Wal-Mart, was another overhang – Xmas sales are shaping up as not much or nothing to cheer about. COMING UP (NEXT WEEK) – Existing home sales comes on Monday, as well as the Chicago purchasing managers index for the current month. December consumer confidence numbers come Tuesday. Release of the ISM Index on Thursday is expected to provide a window on the level of industrial activity. Friday will bring the construction spending report. Normally the unemployment report would be on the first Friday of the month – but it will be put off until January 10th. Corporate earnings reporting does not get underway until later in January – with the exception of a couple of reports (e.g., WAG), there is nothing on the earnings front that will help the market and it continues to react to the upward march of oil prices, the downward slide of the dollar and other fundamental worries. MY INDEX OUTLOOKS - S&P 100 Index (OEX) – Daily and Hourly charts: Friday’s breakdown below the low end of the recent trading range was the most bearish development – that and the way that the 50- day moving average provided a deflection to the Thursday rebound. The Thursday rally was typical of bear market rallies – given the low volume and a lack of conviction, as soon as concerted selling came in, down we went. I suggested selling a “failed” rally to the area of the 50-day moving average and this turned out to be THE place to stake a new bearish put position in the OEX. In that area it was possible to place tight stops as only a decisive upside penetration of the average would have possibly suggested that the bulls were back in control. I also suggested that a break of the prior swing low at 445 would set up a technical objective to around 430. OEX is now at the low end of the its hourly downtrend channel as you can see by the chart above and is oversold on both the short-term and longer term stochastic models – this tends to mean there is potential for a short-covering or “technical” rebound. It looks ok to buy some further puts on a rally back up the 447- 450 area, if that develops, at the recent “breakdown point” – the hourly down trendline intersects around 455 currently and a move ABOVE this line would suggest a stopping out point. DJ Industrial Index (INDU) Daily: It is hard to measure sometimes the exact “minimum” downside objectives implied by “flag” type formations, such as the bear flag that formed on the daily chart above. I could see 8300 as one possibility and that target has been met. The other technical target is to the 8200 area. I suggested in my last Sunday’s weekly Index Trader’s wrap to buy DJX puts on a move to the 8600 area basis the Dow Average. I also suggested that call purchases might then be the play back down at 8300. I think I would just hold the puts and take a new profit objective for 8200 – in this area, a cal play might be a possibility but I lack the conviction to suggest this ahead of time. Profit taking (in the 8200 area) on puts does look favorable on a risk to reward basis – the further reward potential may be to 8000, but the risk is giving up profits if there is first a rebound to the 8400 area. I would rather sell rallies than buy dips and trade WITH the dominant current trend which is down. NASDAQ COMPOSITE (COMPX) Daily chart – I continue to view the chart bearishly and see potential for a move to the 1300-1320 area as this is the next potential support implied by the prior (swing) low and fulfills my “bear flag” objective. QQQ Daily/Hourly charts: The trend is your friend and trendlines are your best buddy – notice how the rebound that came in toward the end of last week, put the Q’s back up at that resistance. You may have noticed also the downward volume trend in daily volume. As suggested last week: only a move through or above the 26.30 – 26.70 resistance zone would be a cause to cover short positions – this is still the case, although near resistance is now more like 25.75 in QQQ and definitely at 26.00 on an hourly closing basis. Better to say that TWO consecutive hourly closes above 26.00 would suggest decent upside momentum on a short-term basis. Next potential support continues to look like it’s at the prior downswing low at 24 and this area remains my downside profit objective for short stock and long puts. I’m however now less convinced now that it’s ALSO a place to play the long side. It depends on whether you are close to the action (watching it intraday) and nimble. The low $23 area, basis the Nasdaq 100 tracking stock MAY turn out to the place to take a stab on a long side play. If you take at look at the 14-day RSI above, you’ll see that this indicator is getting near the level where rallies often develop - but a fully oversold condition is not yet here and this might take another 2-3 weeks to set up; so, there’s no apparent hurry. I “worry” less about peace breaking out than the opposite. Still, we can hope for a peaceful resolution to current conflicts and wish for a better New Year – my closing comments this week to all Option Investor.com readers is that 2003 is good for you – meanwhile, be careful out there! ************************************************************** 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 ************** Option PowerBall I think we have an opportunity to buy some Powerball tickets in the market this week. No, you will not have a chance to win $314 million but you do have a good chance to double or triple your money over the next 12 months. I did say "chance" since the options I am going to list below are extremely risky. The low prices and potential returns are roughly equivalent to an option lottery. With the first three year crash in the tech sector there are many stocks that have been beaten severely. This does not mean they are going out of business. It just means that during a tech recession their sales and profits did not justify the previously enormous prices their stocks garnered. The market tends to price stocks in extremes. Either way over priced or way under priced and rarely exactly where they should be. These stocks below have been beaten so badly that the odds are good they are currently under priced. Once a recovery begins they should rise quickly in price but not necessarily to prior levels. Still the possibility exists to reap significant profits from a material move. With the markets in the tank and expected to drop further the prices for Jan-2004 options are relatively cheap. Some of the stocks I am listing will fall even lower over the next couple of weeks if my market outlook is correct. So here is the plan. Would you bet $50 that ADCT will move from its current $2.25 to something a little closer to its 2000 high of $49? It does not have to move much to break even but even a $4 move will double your money by Jan-2004. Would you bet $55 that JDSU will rise from its current $2.53 to $6 or better? Its high in 2000 was $153. Nobody expects those lofty prices but what about $10? That would return a profit of about 900%. I am not claiming any of these stocks are going to be comets again but I do suspect they will all move $7-$10 or more over the next 12 months. Some of them are pricier than the 50 cent options for ADCT or JDSU but then the possibility of a stronger move also exists. Most of the options listed are for Jan-2004, which allows for the second half 2003 recovery. You know the one we were supposed to get in 2002? (grin) I am betting it shows up in 2003. I know, I have about 100 PII and PIII computers of my own that are gathering dust. Major corporations may have phased out many workers and have computers stacked up by the pallet but they are all obsolete. When they start hiring again they will have to buy new computers for each one. Here they are the top 10+ lottery plays for 2003. They are not the top ten stocks I would pick on a stock basis. They are the stocks where I think you can get the most bang for your buck on a decent move. These are not trading plays but a 10-12 month hold. Company Price Option Symbol Price ADCT $ 2.25 Jan-2004 $5.00 KTL-AA $ .50 VTSS $ 2.30 Jul-2003 $5.00 VQT-GA $ .35 shorter = more risk JDSU $ 2.55 Jan-2004 $5.00 KAJ-AA $ .55 SUNW $ 3.31 Jan-2004 $5.00 LSU-AA $ .75 close to sure bet AMCC $ 3.72 Jan-2004 $5.00 KXF-AA $1.00 BRCD $ 4.48 Jan-2004 $7.50 KNU-AU $1.05 found a bottom? TLAB $ 7.45 Jan-2004 10.00 KDM-AB $1.35 RFMD $ 7.50 Jan-2004 10.00 LKN-AB $2.50 worth it? IDTI $ 8.40 Aug-2003 10.00 ITQ-HB $1.60 Mikey likes it! FLEX $ 8.50 Jan-2004 12.50 KPB-AV $1.65 expensive potential CMVT $10.23 Jan-2004 12.50 KNZ-AV $2.30 I am going to update the prices as of Thursday morning Jan-2nd to reflect purchases at the open of trading for 2003. I am not making any claims about the value of these companies. I simply think they are recognized tech names that will attract money once the recovery begins. Be very careful with the Jul/Aug entries as that is before any real recovery is expected to be strong. Fall is the most likely scenario for any major gains. You can buy one contract of each for less than $1400. If only a couple make a big move they could make it all worth while. I will update this list once a month so we can see if I have a winning ticket. ******************************** Play updates: Goldman Sachs $67.80 Short Goldman was profiled as a long term Put play if it broke $70 or $74. It rallied slightly on Monday and then gapped down at the open on Tuesday to below $70. The play has a target of $60 and a stop loss of $76. I am going to leave the stop at $76 this week but if we get another significant drop I will lower it next Sunday. Goldman Sachs broke $70 at 9:32 on Tuesday 12/24. The numbers below represent what you could have paid for each option at that time, Friday's closing bid and the percentage gain. APR-$65 GS-PM Tuesday $4.00 12/27 bid $4.40 +10% APR-$70 GS-PN Tuesday $5.00 12/27 bid $6.60 +32% APR-$75 GS-PO Tuesday $8.25 12/27 bid $9.60 +16% APR-$80 GS-PP Tuesday $11.50 12/27 bid $13.10 +14% JUL-$65 GS-SM Tuesday $5.50 12/27 bid $6.50 +18% JUL-$70 GS-SN Tuesday $7.80 12/27 bid $8.70 +11% JUL-$75 GS-SO Tuesday $10.10 12/27 bid $11.50 +14% JUL-$80 GS-SP Tuesday $13.50 12/27 bid $14.80 +10% We will continue to follow these options until the play is closed. See the Editors Plays from Sunday 12/22 for the play description. ******************************** Forrest Labs $97.80 Call 2:1 Split Jan-9th Forrest rallied above the $99 top on Monday and traded as high as $100.75 before getting taken down with the market. This is a split run play with a 2:1 split on Jan-9th. I think the pull back was all market related but we have to go with what the market gives us. I am not sure FRX will rally enough with only five trading days left before the split to make it a winner. I would plan on exiting the play for a breakeven or better at the first opportunity. Good stock, good run, bad market. ******************** XRAY Jan-$40 Call The XRAY call play was also looking really good until about 1:30 on Thursday when the market dive finally got the best of it. XRAY was stuck at 38.50 and trying to break out but the sucking sound from the Nasdaq pulled it back to close Friday at $37. The 38.50 level was the 200 DMA and we knew in advance it would be hard to break on the first try. ******************** DJX Laddered call As expected in last weeks update the DJX call play went down in flames. The lack of any momentum by the Dow kept a lid on the options. They traded as high as 65 cents on Monday but it was all down hill from there. We will call this one dead and blame North Korea for being the Christmas grinch. ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** South for the Winter by Steven Price Did someone say something about a traditional year-end rally? We're getting awfully close to the end of the year and with only a couple of days left, things are looking awfully weak. We are at the low end of the recent trading range, going all the way back to October, and a break below those recent lows could mean a gloomy start to 2003. The morning started off slow, with the Dow drifting slightly to the negative side prior to the new home sales report. That report came out better than expected, with a gain of 5.7% and an annualized rate of 1.07 million in November. Expectations had been for a rate of less than a million. The interesting part of the report was a shift from the hotbed of sales in the Northeast, to the Midwest. Sales jumped 41% in the Midwest, while dropping 26% in the Northeast. The supposed "good news" gave us a boost, but that boost was short-lived, with the Dow Jones U.S. Home Construction Index (DJUSHB) dropping almost 2% on a broad market sell-off. That broad market sell-off took the Dow down through 8300, where it gave a fresh point and figure sell signal. The SPX also broke down through 880, giving its own sell signal, and tacked on an additional "O" to the downside at 875, where it found closing support. The Dow traded as low as 8285 intraday, which was its lowest close since October 29, when it traded down to 8198, before a furious afternoon rally took it back to a close of 8368. We are now resting on a cluster of support in the Dow 8250-8300 range and if we get a year-end bounce, this should be the level. If that bounce ends up shy of recent resistance in the 8625-8650 range, then traders might want to look for a failed rally to short. I've been talking about the possibility of a head and shoulders possibly forming, with the right shoulder in the Dow around 8800. That is looking far less likely, as the recent bounces have failed to hold up enough to form a base for a bullish move. Our best shot appeared to be on Thursday, when the morning rally appeared to have changed the trend of lower lows and lower highs. However, that rally failed miserably and we ended today with yet another lower low. If the last rally to 8638 turns out to have been a sloppy right shoulder, then the downside target for the Dow would be in the 7800 area, based on a neckline at 8400. I'm not ready to identify that bounce as a shoulder, since it is not very neatly defined, but the possibility remains. For now however, we are simply seeing a series of lower lows and lower highs. We have sold off over 250 points from Thursday's high. We could be in for an end of year bounce on Monday and Tuesday, but it is possible that we got our year end rally back in November. We have now seen reversals in the bullish percents in the Dow, SPX, OEX and NDX. The Nasdaq Composite has yet to reverse itself, but is right up against its bearish resistance line and will be hard pressed to continue higher with reversals in the other indices. The picture is certainly looking ugly for the beginning of the New Year. With the bullish percents in reverse at the same time we are getting PnF sell signals, traders can certainly lean short with confidence. The resistance directly below us will take an awful lot of selling pressure to break through and we may end up trapped between levels on the way down. Traders playing bounces from this level should be quick to take profits on market rallies, as those rallies are swimming against the tide. If we break down below this support, and that October low of 8198 in the Dow, then there will be little argument for any bounce until we approach the July lows in the Dow 7500 range. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8303 Moving Averages: (Simple) 10-dma: 8459 50-dma: 8546 200-dma: 9019 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 875 Moving Averages: (Simple) 10-dma: 892 50-dma: 902 200-dma: 961 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 997 Moving Averages: (Simple) 10-dma: 1019 50-dma: 1031 200-dma: 1082 ----------------------------------------------------------------- The Gold and Silver Index (XAU): The XAU has been on a tear recently, as the dollar has sunk to new relative lows on an almost daily basis. Gold futures have been in rally mode and are finally starting to appear as though they may have reached an exhaustion point. They were still up on the day on a big drop for the equity markets, but ended well off their highs, which were reached mid-day. Those futures mirrored the action in the XAU, which is approaching resistance at 80 and has failed in its attempts to crack the barrier. Those traders long gold stocks may want to consider taking some profits as we continue to fail at that level, however, if we break above 81 in the XAU, it could be fast trip up to 89. Given the recent bearishness in the equities, gold bugs should probably give it a chance to break that resistance, but a move back under 74 in the XAU would be a sign to take profits. 52-week High: 89 52-week Low : 53 Current : 78 Moving Averages: (Simple) 10-dma: 76 50-dma: 68 200-dma: 70 ----------------------------------------------------------------- Market Volatility The VIX jumped 3 points today, as the Dow sold off into the low end of its range over the last several months. Volatility kicked in as we rallied on Thursday morning, giving traders a warning sign in regards to long positions. The premium buyers who drove that volatility higher were rewarded today on an uncharacteristic drop heading into the end of the year. If we see the Dow drop below 8200, the VIX could well be on its way back to another test of 50 and the July lows in the equities. We don't usually see this much activity with traders on vacation, but this year has been anything but normal. Volume was once again light and with fewer buyers to support drops and fewer sellers to combat rallies, it seems that the moves are heading to extremes the last several days. If these swings continue, option straddle holders will be the only ones seeing a happy New Year. CBOE Market Volatility Index (VIX) = 34.15 +3.07 Nasdaq-100 Volatility Index (VXN) = 46.71 +1.35 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.96 281,391 265,939 Equity Only 0.78 207,461 162,682 OEX 1.25 14,505 18,124 QQQ 2.95 17,236 51,696 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 49 + 0 Bull Confirmed NASDAQ-100 61 - 2 Bear Alert Dow Indust. 53 - 4 Bear Alert S&P 500 60 + 0 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 1.71 10-Day Arms Index 1.58 21-Day Arms Index 1.45 55-Day Arms Index 1.20 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 795 2005 NASDAQ 1121 2084 New Highs New Lows NYSE 47 31 NASDAQ 55 41 Volume (in millions) NYSE 909 NASDAQ 789 ----------------------------------------------------------------- Commitments Of Traders Report: 12/23/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials reduced both sides of their positions, shaving 57,000 contracts off the long side and 61,000 contracts off the short side. Small traders also reduced significantly, with long positions losing 56,000 contracts and short positions dropping by 32,000. Commercials Long Short Net % Of OI 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%) 12/23/02 408,592 467,259 (58,667) (6.7%) 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 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% 12/23/02 138,756 58,236 80,520 40.9% 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 long positions by 20,000 contracts and shorts by 10,000. Small traders, on the other hand, got longer, reducing the long side by 6,000 contracts, while closing 12,000 on the short side. Commercials Long Short Net % of OI 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%) 12/23/02 32,067 44,451 (12,384) (16.2%) 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 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% 12/23/02 17,009 5,865 11,144 Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 11,144 - 12/23/02 DOW JONES INDUSTRIAL Commercials reduced both long and short positions by about 9,000 contracts, Small traders got slightly longer, losing 900 long contracts and 3,000 shorts. Commercials Long Short Net % of OI 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% 12/23/02 14,991 11,103 3,888 14.9% 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 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%) 12/23/02 4,584 6,296 (1,712) (15.7%) 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 *************** Relative strength, but with X's and O's I've been using point and figure charts with some pretty good success in recent months, both for call and put trades. I'm more of a 2 to 3-month type of options trader. When I first started trading, I incorporated relative strength into my stock selection and found this indicator useful. I see Stockcharts.com has a relative strength comparison button at the bottom of a stock's p/f chart, but not really sure how to interpret the relative strength chart. Can you help? Ahhhh.... you are wise beyond your years when using relative strength when looking to make a trade (long/short) in a specific stock or sector. Relative strength is one of those indicators that doesn't really tell a trader all that much about future price direction, but tells a trader/investor one heck of a lot about what's in favor or out of favor with a market. I've learned to enjoy the point and figure methodology of charting relative strength, as a trader/investor can make several comparisons. Not only can a trader compare the relative strength of a stock to a major market index to try and determine the strength/weakness of a stock versus the MARKET, but the point and figure system also allow for comparison of a stock's price "strength" versus it's sector. It is widely thought, and perhaps backed up by historical evidence, that WEAKNESS leads WEAKNESS lower, while STRENGTH leads STRENGTH higher. In essence, a weak stock or sector will be the first to lead a broader market move lover as the stock/sector was really not in favor during a market advance and simply traded higher as broader market bullishness dictated. From the strength side of things during a market/sector decline, a stock/sector that declines 5% versus a market that declines 10% is considered a "win" from the institutional perspective. Ask any mutual fund investor that holds a MANAGED mutual fund (indexed mutual funds are not managed funds) if he/she would rather be down 10% this year or 22% like the S&P 500 and most will say 10%. However. It's every trader's goal to OUTPERFORM the market. If the SPX is down 22% then a BEARISH trader's benchmark is to be up at least 22%, if not more, while a BULLISH trader takes some comfort if his/her account is down 15%. One can begin to envision, the best way to "beat" a 22% market decline, is to have at least stacked some type of odds in favor of trading bearish in a stock/sector that is weaker, or "out of favor" with the market, especially during a decline. Even in an advancing market it is best to avoid "out of favor" stocks/sectors, as a sudden change in tone toward a bullish market environment may have the weaker stock/sector we're holding long turning south first! True, there are some sectors/stocks that trade directly inverse of a bullish and bearish market environment, but that would be an entirely different subject. Still, relative strength would be a way of determining which stocks/sector tend to trade inverse the broader market. So let us use last weekend's "Ask the Analyst" column and discussion of International Business Machines (NYSE:IBM) $77.36 -1.45% as our "guinea pig" stock when trying to better understand the point and figure methodology of tracking relative strength. Many of the observations we made last weekend as it relates to TIME (monthly benchmarks) and perhaps "double-top" buy signals or pattern recognition may have not only been present in IBM's p/f chart, but perhaps IBM's relative strength chart. Let's also look at a picture of Stockcharts.com p/f chart "radio button" that the subscriber is asking about regarding relative strength. If I wanted to make a relative strength observation as it relates to IBM versus the SPX, then I'd want to select (put a checkmark) in the "Show Relative Strength vs. ____" box, then type in the major market average/index that I want to compare IBM too. Example of how to get a relative strength p/f chart All I wanted to show here was what "boxes" to check, spaces to fill in with the index/sector you want to compare your stock/sector against, and finally what button to press to get your relative strength chart. It's really as simple as 1,2,3. Now. Before we look at the resulting relative strength chart, you're going to see a "scale" on the right that you might not fully understand. All we are doing with this relative strength chart is this. At the END of each DAY. We would take the PRICE of IBM $77.36 and DIVIDE it by the PRICE of the S&P 500 Index (SPX.X) 875.40. Equation ... Relative strength = $77.36 / 875.40 = 0.88371 Now, there's no way I can easily chart 0.88371, so lets multiply it by some scale factor, say 1,000, so I can get a chartable value. Equation.... 0.88371 * 1,000 = 88.371. I have done nothing abnormal to the RS number, just multiplied it to get a chartable number. So let's see if this relative strength chart, charted on 1-point increments "tells us anything" or would have been useful. Remember, last week, we might have thought IBM was worth 1/4 or 1/2 bullish position when the stock triggered a "bearish signal reversed" pattern and "double-top" buy signal at $63, in mid- October, which would be sometime after a "red A" on the p/f chart. Before you look at the chart, ask yourself this. Do you think or perceive that IBM is STRONGER or WEAKER than the SPX? Relative Strength Chart of IBM vs. $SPX - 1-point box Now. Clear your mind for a minute and just view the RS chart of IBM vs. the SPX as you would a regular point and figure chart. At each day's close, you would take IBM's price and divide it by the SPX closing price, then chart the value using the 3-box reversal technique of charting. I will admit that this 1-point box doesn't show enough "detail" or noise to really "confirm" what the regular p/f chart of IBM was saying back on October 11th, but we'll address that in a moment by introducing some more "noise" and decreasing the scale to 0.50 increments. But do you see how the RS chart would have at least reversed up into X's on October 11th? (pink text). In "green text" we see the RS chart of IBM actually give a relative strength "buy signal." That is, a column of X exceeded a previous column of X. What that "tells us" is that for the first time in a while; IBM is really starting to outperform the SPX on a more MEANINGFUL basis. This RS "buy signal" was achieved on October 30th (IBM=$78.67 : SPX=890.71). While IBM was a stronger performer after early October (red A), it really started outperforming the SPX at a greater degree when RS achieved an 87 reading. In "blue text" I make a general observation, but can QUANTITATIVELY back it up by saying that IBM is a STRONG stock RELATIVE to the SPX if benchmarked to October (red A), but is still a WEAKER stock longer-term if compared to mid-February (after red 2) and March (red 3) when IBM's RS chart was generating some RS "sell signals." So... right now, what would I "conclude." In last weekend's column I wrote.... "Right now I can envision a bear shorting IBM at $79, with a stop at $83....." As I look at the above RS chart of IBM, I think I should have written, "Right now, I can envision a bear shorting 1/4 or 1/2 position IBM with a stop at $83. As we look at the RS chart of IBM versus the SPX, would I want to be "full position" short on IBM? Right now, on the above chart, I would read it as "IBM's RS chart is currently on a buy signal, but in a column of O." I interpret this to mean. IBM is CURRENTLY a STRONGER stock RELATIVE to OCTOBER, but showing some near-term weakness RELATIVE to the SPX. If IBM's RS chart were to give a RS "sell signal" at RS=86, then I become more comfortable with current bearish positions and begin to look for IBM to OUTPERFORM to the downside. Relative Strength Chart of IBM vs. $SPX - 1-point box Even when I reduce the scale to 0.50 box size I can't "get" IBM's RS chart versus the SPX to give me a sell signal. This is a great "test" for any stock or sector your looking to trade when comparing the stock's/sector's relative strength versus a major market index. However, do you see how reducing the box size of the chart to 0.50, we pick up more "noise" and actually get more RS "buy signals" as IBM started moving higher in early October? See the little RS pullbacks (O's) that were then reversed higher and a new buy signal generated? We would still read the above RS chart as "IBM's relative strength versus the SPX is still on a "buy signal," but column of O, and would take a RS reading of 87 to have me observing that IBM is outperforming the SPX to the DOWNSIDE." In essence, if short/put IBM right now, it would be considered very EARLY. Now, let's make something clear. It might certainly seem that a trader or investor could simply make buy/sell decisions on stocks/sectors when only looking at a RS chart. This however is NOT true. Remember, to ALWAYS trade your stock/sector on its OWN technical merits. NOT its RS, NOT its sector bullish %, NOT its stochastics, NOT its MACD. As it relates to relative strength, use it to "confirm" strength or weakness of the stock you're trading. Does it do any good for you and I to trade bullish in a stock "just because" it has strong relative strength? What if the market indexes are down 10% and our bullish trade is down 5%. The stock we're trading bullish in still has good relative strength, but it's because it isn't down as much as the major index. My assessment of IBM right now is that the technicals don't lead me to believe that there is "wrong" with it (fundamentally, geopolitical, etc. etc.). To think that, then I would want to observe some type of relative strength weakness that at least hints of OUTPERFORMANCE to the downside. So "why" did IBM give the double-bottom sell signal on Friday? You know the answer to this. BECAUSE market risk has been HIGH as depicted by the BULLISH % CHARTS, and the market is removing risk, just as it has several other times the past couple of years that subscribers have been following the bullish % charts. The relative strength charts give a trader/investor a quick snapshot look at how their stock/option positions are trading RELATIVE to another security. Here's how a SECTOR trader might use relative strength to make an investment decision. I had a couple of question's from subscribers this week about trading bullish in the Semiconductor HOLDRs (AMEX:SMH) $22.98 -1.58%, as they look to be trying to hold support at $22.50. Let's see if they are "in favor" or "out of favor" as it relates to relative strength. How would you read this chart. If determined that the sector is going to get a bounce, but it doesn't happen, where would a stop loss be placed under a bullish trade? Here's the RS chart of the SMH versus the SPX. Relative Strength chart of Semi HOLDRs vs. SPX - 1-point box If you simply looked at the SMH vs. SPX relative strength chart as you would a normal p/f chart of a stock, you'd observe weakness. At least I do. While I can't establish what the "odds" are of a successful bullish trade, I'd say they are less that 50/50 as the RS chart would read "SMH RS chart is on a sell signal and column of O." The sell signal was established in May (just after red 5) and the SMH has yet to achieve enough strength versus the SPX to generate a buy signal. Now, this doesn't mean that SMH or semiconductor sector hasn't had some nice bullish runs. It's my turn to ask YOU the subscriber some questions as to "why" certain things played out the way they did. I'm going to try and answer them, but lets see if you understand how "risk" plays into things. Why were the RS reversals UP in October of 2001 and 2002 "longer- lasting" and reversing with more X's on the RS chart? Was it because RS had been so weak? No, that's not the answer. It was because RISK for bulls was so LOW, and RISK for bears was so high. That RS "buy signal" in March, after the "red 3." That was a sign of SMH really starting to outperform the SPX. Why did that fail and reverse lower by April (red 4)? Was it because RS was too strong? No, that's not the answer. It was because RISK for bulls was HIGH, and RISK for bears was so LOW. Why did the two upward reversals in the SMH RS chart at RS=39 and RS=33 get reversed back lower? The answer to this question is more difficult to answer and would only come from the bearish technicals of the SMH that were in play and the sector bullish % of the semiconductors from Dorsey/Wright and Associates, which I unfortunately can't show a chart of. But this is why the BULLISH % charts are so darned important. Especially when answering the first two questions of the more powerful looking reversals up in the SMH chart from October periods of 2001 and 2002. And the "failed" RS buy signal in March of this year. It was all about "risk" and the markets unwinding the risk. Here's what I'm talking about. Our main observation points are October 2001 and 2002 (red A's) and March (red 3). Since we're still in December, lets also see what RISK or the bullish % for the NASDAQ-100 was saying about who had the most risk (bulls or bears). NASDAQ-100 Bullish % Chart ($BPNDX) - 2% box The "best" bullish moves in the SMH came from "oversold" levels in the more heavily technology weighted NASDAQ-100 Bullish % ($BPNDX). This is the "best" bullish % from www.stockcharts.com that I can show that would correlate with the Semiconductor Bullish % (BPSEMI) from Dorsey/Wright & Assoc. However, it is worth noting that currently, Dorsey's semiconductor bullish % is "bear alert" status at 50%. Compare that to the NASDAQ-100 Bullish % being "bear alert" status at 61%. A comparison between the bullish % tells us the semiconductor sector has a greater % of stocks giving sell signals than the NASDAQ-100 itself and that the SMH is perhaps LEADING WEAKNESS in the NASDAQ-100. You could check this for yourself with an RS chart of the SMH vs. the $NDX. Where the relative strength charts kept a bull out of some trouble, was between May (red 5) and September (red 9). Or at least the bullish SMH trader understood he/she was trading in a weak sector relative to the broader SMH and not a leading strength sector. Under these types of conditions a bull understands they are trading bullish in a low probability trade and any gains found are protected with very tight trailing stops as most likely, the sector will be one of the first to reverse into weakness and LEAD index weakness to the downside. These are more difficult trades for bulls to manage, as there is little "alert" to the renewed weakness. Thus the need for tight trailing stops and greater need for taking of gains when/if found. In March (red 3) when the RS chart of the SMH vs. SPX gave a RS "buy" signal, the NASDAQ-100 Bullish % ($BPNDX) soon reached a more "overbought" condition when it neared the 70% level of bullishness. This can be viewed as a "high risk" level for technology bulls. The eventual reversal in both the NASDAQ-100 Bullish % ($BPNDX) in April (red 4) and confirming relative strength reversal in the SMH vs. the broader SPX gave some confirmation that semiconductors as a group were loosing some favor on a near-term basis and in May (red 5) the relative strength sell signal of the SMH vs. SPX was sign that the semiconductor sector was losing longer-term favor vs. the broader SPX and that loss of favor continues on a longer-term basis and shorter-term basis currently. I said earlier to use relative strength, bullish % and other indicators that a trader trusts, but to always honor the technicals of the stock/sector you're trading and trade it on its own merits. This is SO important as it relates to INDIVIDUAL STOCKS, as it is not unlikely to see ONE stock trade AGAINST the sector or market. That's DIVERGENCE and often indicates that the MARKET "knows" something about that stock, which can have the stock trading against broader market and sector trend. Here's a chart of the SMH where a trader begins to associate bullish % observations AND relative strength observations, while looking at the SMH and honoring its technicals. Semiconductor HOLDRs (SMH) - $1 and $0.50 box With the NASDAQ-100 Bullish % ($BPNDX) and Dorsey's semiconductor bullish % (BPSEMI) in "bear alert" status, I'm at least cautious toward any bullish trades. With the SMH relative strength chart reading "sell signal and column of O" versus the SPX and even the NDX (I checked its RS chart comparison too) I'm further cautious. For bullish traders that think the saying "buy what's out of favor as someday, it will come into favor again" is a good investment axiom, a test against that would be to say we should have bought the SMH in May of this year at $37 when its relative strength chart gave a sell signal versus the broader S&P 500 and continue to hold it as it is longer-term out of favor. To "drive home" the point of honoring the security you're trading, while the NASDAQ-100 Bullish % ($BPNDX) was at some very overold levels from May-September periods, the SMH was in a rather severe longer-term downward trend. Little RS reversals, while RS was in a downward trend (similar to current readings) found little "double-top" buy signals in the SMH, but the SMH itself reversed back lower and gave another sell signal. Right now, I think this is an IMPORTANT observation to make if looking to trade the SMH. I've pointed out the "high pole warning" in the SMH. In last weekend's column we discussed a "high pole warning" in IBM. Do semiconductors have any type of tie to IBM? IBM and several semiconductor companies are "reliant" on each other is a broadly accepted fundamental observation. From a trading perspective, I'd argue that as IBM's business grows/slows, the semiconductor sector/industry grows/slows. One might look for IBM's "sell signal" on Friday at $78, and even current trading near $77 to tie in with the SMH trading near $23. We can surely see the "red C" in both the SMH and IBM chart showing some type of correlation. One might say that IBM isn't just a "key stock" for the Dow Industrials, SPX and OEX, but perhaps the SMH and semiconductor sector as well. Currently, I'd associate a trade at $76 in IBM, with an SMH trade at $22. Should the SMH trade $22 without reversing into a column of X currently, what would the bearish vertical count be? I calculate $12. This might not correlate with IBM's currently building bearish count of $71, but if both begin seeing further weakness, then some correlative thoughts to lower price targets become interesting. Conclusion: Relative Strength will not ALWAYS give a trader/investor the "heads up" for stock/sector price action, but is VERY VALUABLE in helping the trader/investor understand if he/she is attempting to trade both short or longer-term strength weakness. From the p/f perspective of relative strength, a technician first wants to see if relative strength is on a "buy" or "sell" signal on the p/f chart. This is the "longer-term" strength analysis. Then, the observation is made if the RS chart is in a column of X or O. If in X, then the shorter-term observation is of strength. If in O, then shorter-term observation is weakness. Ideally, a bullish trader looks for longer-term and shorter-term strength from which to trade. A bearish trader prefers longer-term and shorter-term weakness indications. The most powerful bullish moves come from the broader market condition of reversing higher from "oversold" market conditions of which the BULLISH % charts depict. Stocks with both shorter- term and longer-term bullish relative strength, when market internals begin to recover from "oversold" levels are often times the BEST performing sectors/stocks in the bullish phase. Those sectors/stocks that exhibit both shorter-term and longer-term relative weakness tend to outperform to the downside when market internals weaken from an "overbought" condition. Traders, both bullish and bearish learn to appreciate "heads up" or "alerts" to strength and weakness. A bull that trades both shorter-term and longer-term strength often finds he/she is alerted to potential weakness in the sector/stock they are trading as the WEAKEST sectors/stocks begin to fade lower first. Again, this is based on the thought that WEAKNESS leads lower. A bear that trade both shorter-term and longer-term weakness will often find that they are alerted to strength, as the stronger sectors/stocks begin to lead higher, and as broader market bullishness build, the stocks/sectors the trader is short/put, will then begin to ride the coattails of bullishness. The problems that present themselves for shorting/putting stronger sectors/stocks, especially with FULL positions, is that the stock/sector you're short/put may well be the first stock/sector to show renewed short-term strength, especially if longer-term relative strength is still in play. In my bearish comments regarding IBM, it should be understood that the bearish play is based on an "overbought" market condition that is weakening (bullish %), there are some outward technical signs from the SPX and OEX that the markets are breaking down, and that IBM's technicals were giving hint that distribution was taking place. Today, we find IBM having just generated a "double-bottom" sell signal at $78. This is favorable for a bearish trader. (Trade the stock on its own merits). However, the longer-term trend, as depicted by the bullish support trend at $64 is UP and this is longer-term negative for bearish trader, but does represent some further "risk" that could eventually be taken out of the stock. The Bullish % charts are still relatively high and showing further weakness. This is favorable for a bearish trader. The relative strength chart of IBM is in a column of O. This is short-term weakness. The only thing missing from the equation is a longer-term relative strength sell signal. Put your stocks/sectors to the test. How strong or weak are they? If a stock is giving a significant buy/sell signal, is there some confirmation from the relative strength that the stock giving the buy/sell signal is either coming into or has been holding favor with the market as depicted by the relative strength chart? If a significant sell signal is taking place, has the stock been out of favor or just now losing favor with a fresh relative strength sell signal? Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of December 30th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- None ------------------------- TUESDAY ------------------------------ None ----------------------- WEDNESDAY ----------------------------- None ------------------------- THURSDAY ----------------------------- None ------------------------- FRIDAY ------------------------------- WAG Walgreen Fri, Jan 3 -----N/A----- 0.20 ---------------------------------------------- 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 CVBF CVB Financial Corp 5:4 Jan. 3rd Jan. 3rd FRX Forest Labs 2:1 Jan. 8th Jan. 9th -------------------------- Economic Reports This Week -------------------------- Wall Street moving from one holiday week to another with the New Year's holiday and market closure this Wednesday. Volume will continue to be light. Reports to watch this week are the Consumer Confidence on Tuesday, Vehicle sales and the ISM index on Thursday, plus the Construction spending numbers on Friday. ============================================================== -For- Monday, 12/30/02 ---------------- Existing Home Sales(DM) Nov Forecast: 5.69M Previous: 5.77M Tuesday, 12/31/02 ----------------- Consumer Confidence(DM) Dec Forecast: 86.0 Previous: 84.1 Chicago PMI (DM) Dec Forecast: 52.8 Previous: 54.3 Wednesday, 01/01/02 ------------------- None Thursday, 01/02/02 ------------------ Auto Sales (NA) Dec Forecast: 5.8M Previous: 5.6M Truck Sales (NA) Dec Forecast: 7.3M Previous: 7.0M Initial Claims (BB) 12/28 Forecast: 384K Previous: 378K ISM Index (DM) Dec Forecast: 50.2 Previous: 49.2 Friday, 01/03/02 ---------------- Construction Spnding(DM)Nov Forecast: 0.1% Previous: 0.3% 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 ********************* Down the Chimney...and then some That Santa Claus rally is certainly taking its own sweet time. With only a couple of trading days left before the end of the year, we are closer to support than resistance and if we are going to get a bounce, then it will most likely come from this level. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Sunday 12-29-2002 Sunday 2 of 5 In Section Two: Stock Pick: Long Distance Play Daily Results Call Play of the Day: SNPS Put Play of the Day: BSC Dropped Calls: BSX, CTXS Dropped 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/ ************************************************************** ********** Stock Pick ********** Long Distance Play Q – Qwest Communications Int. $5.09 Strategy: Long stock with put insurance The company profile reads: Qwest Communications International is a leader in broadband Internet-based data, voice and image communications. In a nutshell the company provides local telecommunications and related services, wireless services and directory assistance services in its 14-state local service area. You’ve undoubtedly heard all of the stories surrounding the embattled telecom company. From the subpoena in the Global Crossing case, the cloud surrounding the resignation of former CEO, Joseph Nacchio, accounting concerns, accusations of secret deals, a criminal investigation and rumors of bankruptcy, Qwest shareholders have had to digest more than their share this past year. We won’t rehash all of old news as it’s certainly already “priced into the stock”, as they say on Wall Street. The announcement that the U.S. Attorney’s office had began a criminal investigation in mid July seemed to be the final straw, pushing the price of Qwest shares down near the $1 area. The stock hovered between $1.05 and $1.25 for the next few weeks. In mid August the company announced that it believed the US Attorneys office was investigating matters that were also the subject of investigations by the SEC and Congress. Not exactly news that should bring the bulls stampeding back into the pits. Interestingly though, Qwest gained 35% on the news. A few days later reports surfaced that Q had agreed to sell its yellow-pages business for more than $7 billion. Over the next couple of months, Qwest stock made a nice recovery, pushing its way just past the $4 level, as analysts took a stab at enlightening investors of their opinions on the future telecom company. In the middle of November the next shoe dropped when Q said it had found further accounting mistakes that would force it to erase $358 million in EBITDA for 2000-01, and that it would be unable to file its quarterly reports on time. That’s the kind of news that easily could have tanked the stock, however there were very few sellers waiting in the wings. Last Friday, Qwest completed a $5.2 billion bond swap. The company estimated its debt load fell to about $22.6 billion from $24.5 billion. The bond swap gives Qwest as much as three extra years to repay some of its more burdensome debts. This past Monday, Q’s shareholders received an early Christmas present. It came after the Federal Communications Commission approved Qwest’s application to provide long-distance service in nine states in the west. Company officials see the approval as a chance for Qwest to offer their customers simplified long- distance service, with the convenience of getting all of their telecommunication services from one company. The underlying positive from the announcement has some suggesting income at the telecom company could double in the coming year. When the FCC news hit the trading floor, investors bid the price of Q stock to nearly $6 on Tuesday, before traders began to take some money off the table. While we believe Qwest has faced more than its share of problems and that the company may not be out of the woods just yet, the stock has performed exceptionally in the last few months in spite of the negative press. The additional income created by the long-distance services should bolster confidence, and cause investors to add shares of Qwest stock to their portfolios in coming months. Technically, Q’s move to the top of its channel near $6 came on solid volume. The pull back to the bottom of the channel has come on light volume, which suggests the momentum to higher prices should continue. The bottom of the channel and support is just under $5. If current support fails, the next area buyers could step in is near $4.20. However, if investors continue to show up to the party and push Q through the top of its channel, resistance may not come into play until $7, $10 or $15. The 50- dma just crossed over the 200-dma, which is also considered by many technicians to be a buy signal. How do we suggest you approach our new play? Since this is a long-term position, further strength or a bounce off the support levels mentioned above could provide a good entry depending on your personal risk tolerance. Option 1. Purchase Q stock at the current level and purchase 1, July $5 Put(Q-SA) for every 100 shares of stock purchased. If the stock is under $5.00 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, or buy another $5 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 In-the-Money LEAP Call, rather than purchasing the stock. As of Friday’s close, Jan 2004(LWH-AZ) & 2005(ZWK-AZ) $2.50 strike LEAP Calls were priced at $3.20 and $3.60 respectively. For those that want added protection, the purchase of 1, July $5.00 put(Q-SA) 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 on the breakeven levels of the position. Option 3. Purchase Q stock at the current level and wait for the stock to move higher. Once you feel Qwest has reached a point of consolidation or are expecting a pullback, buy 1 July $5.00 Put(Q-SA) or a $7.50(Q-SU) 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 $6-$7 level. Option 4. Purchase the stock or a LEAP Call without protection and close out the position if it Q falls below support between $3.50 and $3.60 Qwest Communications Intl. (Q) Daily Chart *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week ACS 51.73 -0.97 1.74 0.00 0.10 –0.13 Market pullback BEAS 11.85 0.55 -0.13 0.00 –0.09 –0.10 Hanging in BSX 42.08 0.30 -0.35 0.00 –0.52 –1.83 Drop, trend CTXS 12.66 0.25 0.29 0.00 –0.27 –0.44 Drop, stalled SNPS 46.25 0.74 0.27 0.00 0.39 1.30 New, Strength TRMS 43.38 -0.25 1.03 0.00 –0.28 –0.94 above bounce PUTS AIG 56.68 0.33 -0.13 0.00 –0.99 –2.40 Got breakdown BSC 59.78 -0.29 -0.58 0.00 –0.25 –2.06 New, on verge CEPH 49.02 0.88 -0.33 0.00 –1.34 0.88 New, $50 break COST 27.39 -0.56 -0.10 0.00 0.43 –0.56 Stubborn RKY 60.04 0.35 -0.34 0.00 0.02 –0.57 $60 trigger ROOM 53.17 0.42 -1.89 0.00 –1.44 –5.72 Sinking fast ************************************************************** 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: ********************* SNPS - Synopsis, Inc. $46.25 (+1.28 last week) See details in play list Put Play of the Day: ******************** BSC - Bear Stearns - $59.78 -1.37 (-2.05 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 ^^^^^ BSX $42.08 -1.26 (-2.10 for the week) BSX has remained above horizontal support on its recent drop over the last couple of days. However, it has broken the rising trend line, mirrored by the 21-dma, that has served as support since the beginning of October. That trend was the move we were trying to capture and the severe drop in both the Biotech Index (BTK.X) and Pharmaceutical Index (DRG.X) have taken BSX out of that pattern. Traders who wish to give the play a little more time can stick to the stop loss of $40.99 and continue to seek ongoing analysis on the Market Monitor. However, we will close the play and look for a more consistent trend to follow. --- CTXS $12.66 (-0.34) Despite every attempt to rebound off the bottom of its ascending channel over the past couple weeks, it has become clear since Wednesday, that the stock is simply out of gas. On Thursday, CTXS closed below the bottom of the channel for the first time in months and then continued to head lower on Friday, closing at the low of the day. While still above our $12.50 stop, it doesn't take a genius to see that this bullish run is over and we had better look elsewhere for winning bullish plays. If still holding open positions, use any rebound into from current levels as an opportunity to exit the trade. PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************************************************** 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 12-29-2002 Sunday 3 of 5 In Section Three: New Calls: SNPS Current Calls: ACS, BEAS, TRMS New Puts: BSC, CEPH ************************************************************** 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 ************** SNPS - Synopsis, Inc. $46.25 (+1.28 last week) Company Summary: Synopsis is a supplier of electronic design automation software to the global electronics industry. The company's products are used by designers of integrated circuits (ICs), including system-on-a-chip ICs, and the electronic products (such as computers, cell phones, and internet routers) that use such ICs to automate significant portions of their chip design process. SNPS' products offer its customers the opportunity to design ICs that are optimized for speed, area, power consumption and production cost, while reducing overall design time. Why We Like It: There have really been some volatile swings in the Semiconductor sector (SOX.X) over the past few months, with a nearly 100% gain from the October lows to the early December highs. Since then, the SOX has given back over 50% of that advance, and looking vulnerable to further downside. Against that backdrop, we're really seeing a divergence in shares of SNPS. The stock rallied with the rest of the sector through October and November, before being knocked back due to poor reception of its Q4 earnings report on December 4th. The resulting weakness dropped the stock down to the $43 area in short order, but since then, it has been looking pretty solid. Despite the continuing weakness in the SOX, SNPS has been gradually moving higher. While we'd be hard-pressed to label the move last week as a breakout, it is encouraging to the bulls that it managed to close above both its 20-dma ($46.15) and 200-dma ($46.13). This followed closely on the heels of another successful rebound from the 50-dma (currently $44.72). With the move above $46, SNPS has now moved into the gap left after its earnings report. The one missing ingredient to a continuation of this move is volume, which likely won't appear until after the first of the year. While aggressive traders can pursue SNPS higher on a breakout over the $46.50 level, without strong volume to support the move, we prefer to enter on a pullback to support in the $45.00-45.50 area, or possibly as low as $44. Initial stops are in place at $43, which has held up well as support throughout the past month. BUY CALL JAN-45*YPQ-AI OI= 381 at $2.95 SL=1.50 BUY CALL JAN-50 YPQ-AJ OI=3725 at $0.70 SL=0.25 BUY CALL FEB-45 YPQ-BI OI= 10 at $4.40 SL=2.75 BUY CALL FEB-50 YPQ-BJ OI= 51 at $2.00 SL=1.00 Average Daily Volume = 1.89 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 ****************** ACS – Affiliated Computer Services, Inc. $51.73 (-0.13 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: Based on the price action earlier in the week, it looked like our ACS play was going to charge higher right into the end of the year. But a dose of reality hit Thursday morning, and the euphoria that drove ACS up to the $54 level quickly faded, making way for some orderly profit taking into the end of the week. A large part of the stock's weakness over the past two days is likely due to the broad market weakness and a lack of volume to continue the upward trend. There is some mild support near $51.50 and then again near $50.75, before ACS drops into the strong support offered at the $49.50-50.00 area. The early part of next week is likely to still be dominated by light volume, so we'll want to take advantage of that light volume to initiate new bullish positions on a rebound from support. The PnF chart has given us a strong Buy signal with a price target up in the stratosphere ($76), so it definitely appears that the bulls are still very much in charge. Dips should provide solid entry points, so long as the broad market doesn't completely break down. Keep stops set at $48. BUY CALL JAN-50*ACS-AJ OI=2565 at $3.30 SL=1.75 BUY CALL JAN-55 ACS-AK OI=1946 at $0.85 SL=0.40 BUY CALL FEB-50 ACS-BJ OI= 25 at $4.80 SL=2.75 BUY CALL FEB-55 ACS-BK OI= 32 at $2.10 SL=1.00 Average Daily Volume = 1.68 mln --- BEAS - BEA Systems $11.85 (-0.30 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: Since we began coverage of BEAS last weekend, we've been looking for a bit of profit-taking to let us in at a more attractive price point, and it looks like that is just what has been happening over the past couple days. After failing to push through near-term resistance at $12.65 on Thursday (likely due to a lack of sufficient buying volume to get the job done), BEAS drifted lower right up until the closing bell on Friday. Following last week's breakout over the $12 level, the stock has solid support between $11.00-11.50, and we're looking for a rebound from that area to provide for a solid entry point. The PnF chart has been strongly bullish since late October, and continues to be so even now, with a bullish price target of $20. Despite the decline in price, the action in BEAS last week is rather encouraging as it has come on extraordinarily light volume (less than half the ADV on Friday). This is ideal consolidation behavior, and should set the stage for a renewed rally once trading volumes return to normal after the first of the year. Either use a rebound from support to initiate new positions, or else wait for a rally through $12.75 (just above the recent highs) on strong volume before playing. BUY CALL JAN-10*BUC-AB OI=19289 at $2.30 SL=1.25 BUY CALL JAN-12 BUC-AV OI= 6981 at $0.70 SL=0.25 BUY CALL FEB-10 BUC-BB OI= 40 at $2.75 SL=1.25 BUY CALL FEB-12 BUC-BV OI= 165 at $1.45 SL=0.75 Average Daily Volume = 10.3 mln --- TRMS - Trimeris, Inc. $43.31 (-1.01 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: After reclaiming most of its December losses, shares of TRMS finally ran into some selling pressure on Thursday near the $45 level. With the Biotechnology index (BTK.X) getting hit hard by the sellers on Thursday and Friday, TRMS was unable to continue its ascent. The stock's drop is still rather mild, and it is still resting just above the 20-dma ($43.07). Along with the 10- dma at $42.51 and historical support near $42.50, TRMS ought to have strong support coming in near current levels. The one fly in the ointment is the BTK index, as Friday's 3.4% drop put the index at its lowest level since November 1st, and at this point, the index looks vulnerable to the $330 level, which is the site of the ascending trendline connecting the July and October lows. As of right now, the pullback in TRMS looks like a normal pullback before continuing higher, but it will need the BTK to hold above support if it is going to stage another leg of this rally. Look to initiate new positions on a successful bounce in the $42.50-43.00 area. Keep in mind that volume will likely continue to be light ahead of next Thursday, so take that into account in your trading. We've raised our stop on TRMS to $41.50, as a close below that level would clearly indicate that the bulls have lost control. BUY CALL JAN-40 RQM-AH OI= 240 at $5.10 SL=3.00 BUY CALL JAN-45*RQM-AI OI=1263 at $1.75 SL=0.75 BUY CALL FEB-40 RQM-BH OI= 0 at $6.50 SL=4.50 BUY CALL FEB-45 RQM-BI OI= 11 at $3.50 SL=1.75 Average Daily Volume = 618 K ************* NEW PUT PLAYS ************* BSC - Bear Stearns - $59.78 -1.37 (-2.05 for the week) Company Summary: Founded in 1923, The Bear Stearns Companies Inc. is the parent company of Bear, Stearns & Co. Inc., a leading investment banking and securities trading and brokerage firm. With approximately $30.6 billion in total capital, Bear Stearns serves governments, corporations, institutions and individuals worldwide. The company's business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear, Stearns Securities Corp., it offers financing, securities lending, clearing and technology solutions to hedge funds, broker-dealers and investment advisors. Headquartered in New York City, the company has approximately 10,500 employees worldwide. Why We Like It: BSC followed the brokerage sector higher a week ago, following the announcement of a settlement with the New York Attorney General regarding the not so tidy relationship between investment banking and brokerage divisions at many of the larger investment banks. BSC's portion of the $1.4 billion settlement was only about $80 million, a pittance compared to the penalty paid by Citigroup, CSFB and Morgan Stanley. After scooping these stocks for a day, investors switched gears and it has been downhill ever since. In fact the stock has now given back the entire post- settlement rally and then some. Bear Stearns problems are not just its own; however it is one of the higher priced stocks in the group, with an awful lot of room to the downside if the sector sell-off continues. Merger and acquisition business, which comprises a large portion of BSC's business, is off more than 40% in the last year. At the current rate, it will finish at its lowest yearly total since 1994. That trend figures to continue into 2003, as investment banks continue to shed staff in order to adjust to the business slowdown. The industry shed almost 80,000 jobs between April and November of this year and continues to downsize. According to J.P. Morgan Investment Bank chairman Walter Gubert, " The economic environment will remain difficult next year, and the investment- banking environment may not be substantially different from what we've seen in 2002." That is certainly not good news for an industry that is still adjusting to the drop-off in activity from the boom-boom 90s. BSC has been testing support just below 460 since the beginning of December. Its lows have come above $59.00, a trade of which would give a fresh PnF sell signal and trigger a spread triple bottom breakdown. The trade of $59 would also establish a bearish vertical count down to $51, which would be derived from the current column of "O." The stock has already cleared its 200-dma, 50-dma and 21-dma and has little support between $59 and horizontal support of $55 on the daily chart. That support at $55 is not terribly strong and a trip to $52 seems entirely reasonable if we can get the break below $59. The ascending PnF bullish support line at $57 is likely to give it some minor support, as well, but does not have corresponding horizontal support on the daily chart. Traders can use a trade of $58.99 as a trigger for the short play, in order to avoid another bounce from the same level once again. Once triggered, we'll use an initial stop loss of $63, which is above recent resistance and the 50-dma that contained the stock on Thursday morning's broad market rally. BUY PUT JAN-60*BSC-ML OI= 4186 at $2.05 SL=1.00 BUY PUT FEB-60*BSC-NL OI= 12 at $3.20 SL=1.60 Average Daily Volume = 1.12 mil --- CEPH - Cephalon Inc - 49.02 -1.31 (-2.15 for the week) Company Description: Founded in 1987, Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products to treat sleep and neurological disorders, cancer and pain. (source: company press release) Why We Like It: Cephalon has developed perhaps one of the most intriguing "lifestyle" drugs to come down the pipeline in recent years. On Monday the company submitted an application with the FDA to market its Provigil drug, which is currently approved for use with epilepsy patients, for treatment of "excessive sleepiness associated with disorders of sleep and wakefulness in adults." Studies have shown that Provigil has been effective in allowing individuals to stay awake and alert for up to 48 hours without any major side effects. Should Cephalon receive a green light from the FDA, thousands of Americans would be eligible to receive the drug. However, some have speculated that doctors may use a broad interpretation of "sleep disorders" to prescribe the treatment to anyone dealing with sleep deprivation. This brings to mind images of pilots, truck drivers, and overworked grad students regularly popping Provigil. Needless to say, this would have a very positive effect on Cephalon's bottom line. But as promising as Provigil is, we don't think the prospect of an FDA approval is enough to keep CEPH afloat in the short-run. For one thing, the agency probably won't make its decision for several months. It's unlikely that the company's request will be approved anytime soon. A more pressing issue for shareholders of Cephalon is the recent weakness in the biotech sector. The BTK.X biotech index is looking decidedly bearish after falling to new relative lows on Friday. This breakdown produced a quadruple- bottom breakdown on the p-n-f chart and also took the index below bullish support. Not surprisingly, CEPH has also been subjected to a large amount of selling pressure. The past two sessions saw the stock rollover from its 50-dma ($52.31) and fall below the 200-dma at $50.54. Shares also violated the December low of $49.30. The falling daily stochastics and MACD indicate that CEPH could retrace a large chunk of its rapid October gains. Given the current sector weakness, we think shares could eventually reach the $42-$43 area. As far as action points are concerned, we'll enter this short play if/when CEPH falls under today's low of $48.78. If we're triggered our stop-loss will be placed at $53.00, above the relative highs and the rising 50-dma. More conservative traders could use a stop just above the 200-dma at $51. BUY PUT JAN 50 CQE-MJ OI= 2469 at $3.40 SL=1.70 BUY PUT FEB 50 CQE-NJ OI= 765 at $5.10 SL=2.55 Average Daily Volume = 2.25 mil ************************************************************** 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 12-29-2002 Sunday 4 of 5 In Section Four: Current Put Plays: AIG, COST, RKY, ROOM Leaps: Lump of Coal Traders Corner: Manufacturing Wealth -- Among Other Things ************************************************************** 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 ***************** AIG - American Intl. $56.68 -1.62 (-2.39 for the week) Company Description: AIG is the world's leading U.S.-based international insurance and financial services organization, the largest underwriter of commercial and industrial insurance in the United States, and among the top-ranked U.S. life insurers. Its member companies write a wide range of general insurance and life insurance products for commercial, institutional and individual customers through a variety of distribution channels in approximately 130 countries and jurisdictions throughout the world. AIG's global businesses also include financial services, retirement savings and asset management. AIG's financial services businesses include aircraft leasing, financial products, trading and market making, and consumer finance. (source: company press release) Why We Like It: It's not looking good for shareholders of AIG. The stock rebounded from the $58.00 area earlier this week and briefly moved above $60.00 on Thursday morning. However, the bears regained control after shares failed to move above the Monday high of $60.50. This reversal carried over into today's session, leading to a violation of the previous relative low at $57.71. Shares posted a loss of 2.7% and underperformed the Dow Jones and the IUX.X insurance index. AIG and the IUX.X are both trading at fresh multi-week lows. So far this play has proceeded as we hoped it would, with AIG retracing its rapid mid-October rally. More weakness next week could take the stock to the next level of psychological support at $55.00. Conservative traders may want consider taking profits if shares bounce from this area. We're going to be a little more optimistic and place our exit-target at $53.06, more than a point above the October low. Also note that we're lowering our stop to $60.11. Traders looking to protect a larger gain could use a stop just above today's high of $58.61. BUY PUT DEC-65*AIG-XM OI= 6802 at $4.50 SL=2.25 BUY PUT DEC-60 AIG-XL OI= 6352 at $1.65 SL=0.80 Average Daily Volume = 6.45 mil --- COST - Costco Wholesale Corp - $27.38 -0.26 (-0.49 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: COST is really trying our patience here. The stock has been trading sideways in a narrow one-point range for more than a week, despite negative news from retail giants such as WMT and TGT. With the RLX.X retail index breaking to new multi-week lows today, we'd been expecting that COST would at least retest the relative low of $27.09. The stock instead traded an Inside Day and finished with a loss of less than 1.0%. While a 15-minute chart shows a bearish trend of lower highs during the recent consolidation period, we need to be prepared for the possibility that COST will break to the upside. With this in mind, we're going to lower our stop to $28.32. Very conservative traders might want to use a stop just above today's high of $27.79. Going forward, we'll be looking for COST to break down and join the RLX.X at new relative lows. New entries can be targeted on a move below $27.00. In the news this week, Costco lowered its capital spending estimate for 2003 from $1.25 billion to $900 million. The company did not give a reason for the capex reduction. BUY PUT FEB 30 PRQ-NF OI= 10 at $3.50 SL=1.75 BUY PUT JAN 30 PRQ-MF OI= 4899 at $3.00 SL=1.50 Average Daily Volume = 5.82 mil --- RKY – Adolph Coors Company $60.04 (-0.82 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: While the rest of the market has been getting closer to a major breakdown, our RKY play is inching closer to its own breakdown. The mid-December selloff pushed shares of the brewer down near the $60 level, which is significant as a support level. There is solid support in the $59-60 area, and $59 is the site of the bullish support line on the PnF chart. It has been interesting to note just how weak RKY has performed over the past several sessions. There hasn't been any heavy selling, but the rebound attempts have been downright anemic, topping out near the $61.60 level. The bulls made another attempt on resistance on Thursday and when it failed, it led to Friday's selling, complete with an intraday break below $60. Traders that took advantage of the failed rally to initiate new positions are in good shape, with risk controlled with a stop set at $62. Momentum traders are still sitting on their hands, waiting for a breakdown under $59 before entering the play. The current PnF vertical count is pointing to a price target of $51 (coincidentally the site of the July lows) and the way the stock is acting that target still looks achievable. Should the broad market catch an oversold bounce early next week, that could give us one more chance to enter on a failed rally below the $62 level. Just keep in mind that is the site of our stop, and a close above there will tell us that the downtrend has prematurely ended, prompting us to drop the play. BUY PUT JAN-65 RKY-MM OI=174 at $5.30 SL=3.25 BUY PUT JAN-60*RKY-ML OI=255 at $1.70 SL=0.75 Average Daily Volume = 379 K --- ROOM – Hotels.com $53.17 (-6.28 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: ROOM has performed like a champ this week, at least if you were in on the bearish side. Monday's failed rally attempt at the $60 level set the stage for the decline that has unfolded over the past few days. Mild support at $57.75 was taken out ahead of the holiday and selling volume has been on the rise over the past two days, which culminated with Friday's nearly 5% slide. By the end of the day on Friday, ROOM was just fractionally above the $53 level and the 200-dma at $52.98. As pointed out in the Market Monitor on Friday, this level makes a lot of sense for harvesting at least partial gains in the play, as an oversold rebound from this level seems quite likely. So why are we keeping the play active, rather than dropping it as a successful play? Simply put, it looks like there could still be some decent downside in the play if it closes under the 200-dma. Below there, we have the ascending trendline at $49.50 and then strong chart support near $48, and with the PnF chart looking very weak and giving us a bearish price target of $44, it seems entirely possible that we'll see those support levels tested over the near term. We don't want to initiate new positions on a breakdown here, as the risk/reward is not that favorable. But traders already in the play can look to manage their positions with a tight stop at $55, where intraday resistance came into play this morning after the initial drop. A failed rally below that level can be used for opening new positions in anticipation of a breakdown and eventual test of the $50 level. BUY PUT JAN-55*URD-MK OI=2073 at $4.00 SL=2.50 BUY PUT JAN-50 URD-MJ OI=2558 at $1.85 SL=1.00 Average Daily Volume = 889 K ************************************************************** 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 ***** Lump of Coal By Mark Phillips mphillips@OptionInvestor.com Investors seemed in a jubilant mood on Thursday following the mid-week holiday, bidding all the major averages higher. But something strange happened on the way to Dow 9000. Almost as a group, investors discovered that the gift left in their stocking was not the newest reason to rally, but actually a lump of coal. Once the discovery was made, the weak impetus for a Santa Claus rally evaporated and the broad market headed south right into the close of trading on Friday. The DOW just barely managed to hang onto the 8300 level at the close, while the S&P 500 closed just above 875, and the OEX just above 442.50. The NASDAQ indices didn't fare quite so well, with the NDX falling below 1000 for the first time since mid-November and the Composite breaching the 1350 level. The PnF charts of all the major indices look horrible from a bull's perspective -- The DOW and S&Ps are all on Sell Signals, while the NASDAQ indices are still barely bullish. Bullish Percent readings aren't looking any better, with the NDX, DOW, and OEX all in Bear Alert status and the SPX looking only slightly better, in Bull Correction. The question we need to ask ourselves here is whether we're going to see the Bullish Percent readings cave in an head down to the 10-20% area like we've seen on the last two failed rally attempts. Despite my long-term bearish bias for the equity markets, I don't think so this time. The market weakness this time around has been coming on rather light volume surrounding the holidays, and I expect to see another bold rally attempt before we push to new lows on any of the major indices. What could change my mind? Part of my bias is based on the historical tendency for the market to do well in the November-April time frame and the fact that the Bush administration seems determined to do whatever is humanly possible to 'fix' the economy. But those are rather nebulous, touchy-feely kind of aspects to the market, that I really don't put too much credence in. The action on the charts is my consistent guide and so far it just isn't showing me the major weakness that I would expect. Oh sure, there are hints of weakness, and the VIX is solidly back over 30, but still very much rangebound. Whether you view it on the candle or PnF chart, the VIX is stuck in a range between 29-36. Is this a glimpse of the VIX moving into a new range? I don't know, but recent action certainly hints that there is enough fear in the market to make a return to the low 20s look very unlikely over the near to intermediate term. So despite the fact that it is a lagging indicator, I'm keeping a sharp eye on the VIX. A trade at 36 will put it back on a PnF Buy signal and indicate a tentative target of 49. We know from past experience that we won't see a VIX in the high 40s unless the markets are trading substantially lower than they are right now, so I would take a VIX of 36 as a very bearish sign for the first quarter of 2003. On the other hand, if the VIX fails to push that high and instead reverses to trade below 29, then I would take that as a more bullish sign, as it would keep the current PnF target of 19 in play. There are a lot of cross-currents in play in the current market right now, and to be entirely honest, I'm having a hard time resolving them into a coherent picture of what to expect. We have the Dollar breaking to new lows and Gold breaking out to its highest level since March of 1997. Those two factors are bearish for the equity market. At the same time, we have bond yields breaking down hard across the maturity spectrum, and quite possibly heading down to retest the October lows. Against that backdrop, the major market averages aren't yet seeing heavy selling, even when important support levels are broken. If there's one thing I've learned in my time analyzing the markets, it is that they very rarely do as we expect or want. I see a lot of factors pointing to significant downside ahead, but then I see conflicting or non-confirming signals and I am forced to ask the questions, What am I missing, and What is different this time. Right now, I don't know the answer, but when (if) I do, I'll be sure to share it with you. Now let's take a more focused look at our plays and see what excitement occurred last week. Portfolio: LEN - Well now, that was pretty exciting, don't you think? Twice last week, the bulls managed to push LEN slightly above the $54 level, but were unable to hold that level on a closing basis. So while it did generate a PnF Buy signal, we have the very real possibility of a bull trap, as it occurred right at the bearish resistance line. News out of the Housing sector continues to be very bullish with record sales numbers again last week. But judging by the price action in the homebuilding stocks, that good news is already factored in. The $DJUSHB index reversed from its descending trendline again last week and LEN really looked weak on Friday. Keep those stops at $54 (closing basis) and watch to see what happens as the stock nears the $50 level. Each cycle of the stock since mid-October has produced lower highs and lower lows. But last week's rally attempt produced a slightly higher high. If we get a higher low from this cycle, then we'll have a pretty good indication that LEN is done moving down for awhile and we'll take our cue and close the play. In the meantime, keep those stops in place or lock in gains on a failure to break below the recent lows. NEM - Did you buy NEM's breakout over $30 on Friday? If you've been listening to me, I certainly hope not. The action in gold and gold shares continues to be very bullish, but keep in mind that this group has had a heck of a run over the past month and is due for a bit of consolidation, and possibly some downright weakness. Certainly currency and geopolitical concerns are factoring heavily into the rise in the yellow metal to the $350 level. But I would be surprised to see much more of a rise in the near-term without some constructive consolidation. Look for NEM to drift down to support before we have another high-odds entry point. While one possibility is to enter on a rebound from the $28 level which recently provided support, my personal preference is to look for a drop into the $26.50-27.00 area to provide that solid entry opportunity. With historical support just above $26 and the 200-dma at $27.10, this should be a tough level to break on the downside. Note that the 50-dma ($25.66) is also rising sharply towards the 200-dma, and when the two of them cross (probably near the $2750 level in mid January), it will just add one more longer-term bullish factor to the mix. While it isn't much of a change, let's raise our stop to $25.50 this weekend, just below the 50-dma. MO - Traders looking for some excitement last week could certainly have done better than to watch shares of MO. While it was nice to see a brief foray above the $42 level on Thursday, it didn't last and MO fell back to end the week with a mere 20 cent gain. For now, all looks good as the stock consolidates its rise back over the $40 level. Now we just wait (im)patiently for the stock to get through the $42 level and then challenge the $43.50-44.00 area. With the first half of next week likely to be dominated by light volume, I don't have any hopes of a significant move before the end of the year. Traders that are still looking to enter the play will want to look for a rebound near the $40 level to provide that opportunity. Until we can get a close over the $42 level, our stop remains at $37. GM - Light volume leads to negligible price moves. That's certainly been the case with GM since we entered the play back in early December. For the past three weeks, the stock has been stuck in a tight range between $35.75 and $37 on continually weakening volume. That pattern will break eventually, and we're obviously biased towards a downside move. The 20-dma seems is rolling over again and appears to be pressuring the price action in GM over the past few weeks. In contrast, the 50-dma is trying to turn up and has been providing support. Since those two moving averages are rapidly approaching one another, this duel will soon be resolved, and I think with a breakdown under the 50-dma. Once we get a solid breakdown under $35.50, then I'll look to tighten the stop to $38, just above the recent highs. Until then, keep stops set at $40. BBH - Last week brought a lot of things into focus with respect to our BBH play. It looked like the bulls might manage a breakout to the upside, with the BBH once again moving above $90, and this time clearing both the descending trendline and the 200-dma. But without broad market strength or strong volume, it couldn't last and the stock fell back into its consolidation range. Friday's large drop was very encouraging from our perspective though, as it gets us very close to the bottom of the range ($84.50-85.00) that has held since the middle of October. The BBH is now back under its 50-dma, which is rolling over below the 200-dma, adding to the bearish tone. Look for confirmation of this weakness with a drop under $84 next week, but keep in mind that we need volume to confirm the validity of any move. For now, keep stops set at $93.50. It may seem rather wide, but that's necessary until we get a decisive break from this broad trading range. DELL - Well, I guess we didn't need to be in a hurry entering the DELL play last week. As expected from a light-volume holiday week, the stock wasn't able to sustain much upward action. After running into resistance at the 20-dma just below $28, DELL fell back towards its 200-dma. I still like entries on a successful rebound from the 200-dma or even as low as the $25.50-26.00 area, with strong support likely to be provided by the ascending trendline (now at $25.25). This play won't rocket higher, but should provide a solid gain over the next several months as DELL breaks out above the top of the bullish triangle that has been building since September of last year. Watch List: GD - Nothing significant has occurred with shares of GD, except that it continues to look more weak than strong. If not for the fact that we're in a very tenuous geopolitical situation and in the midst of the light holiday volume season, I probably would have dropped the play by now. The PnF chart looks bearish, as does the candle chart, but GD is still in the middle of the neutral wedge that has been building since September. The recent weakness down near $77 may turn out to be a good entry point, but we won't really know until we see a decisive breakout over the $84 level. For now, the plan remains the same -- watch and wait, with a bias towards dropping the play. DJX - This is one of those plays where I was definitely a day late and a dollar short. Just saying "buy puts now" in the initial play writeup would have us up by a tidy sum, but that's not how I run the plays in this column, as I strive to teach and demonstrate discipline at the same time that I work to put together winning plays. While the DJX has headed lower throughout the past several weeks, it really hasn't fallen apart. Based on the charts, we'll either get a breakdown next week or another failed rally. I'm sticking to my guns and looking to enter on that rally failure. If it is a weak rally, then look to enter on a rollover near $86. Otherwise, we'll look for a push up to the $87.50-88.00 area to allow entry. BEAS - As expected in a light-volume holiday week, shares of BEAS didn't do too much. By the end of the week, the broad market weakness was beginning to wear on the stock, which drifted down below the $12 level. Since we're looking for a decline to the $11 level (or possibly a bit lower) before we contemplate new entries, we can safely say nothing material happened last week. Wait for the right entry. GS - Santa stiffed us! I was counting on a bit of holiday cheer to drive GS up towards the $74-75 area and give us a solid entry. Stingy was definitely not the way to go, as the stock broke $70 early in the week and continued down from there. My gut feel is that we could get an oversold bounce next week, but I don't expect any great upside from it. Look for any rally to fail in the $70-71 area, and that's where we'll want to enter the play. Remember, we're looking for an eventual decline into the $58-60 area, driven in large part by the class action lawsuits that are bound to come. As you can see from the play list, there just wasn't a lot of meaningful price action last week, making it difficult to make prudent decisions either on new or existing plays. Rather than try to read something in the light-volume noise that just isn't there, I've abstained from adding any new Watch List plays this weekend. By this time next week, we should be starting to see some clarity emerge due to a resurgence of volume and the early stages of earnings warnings season. Take advantage of the few remaining days of light volume action to get ready for what promises to be a busy and exciting 2003. Happy New Year! 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 $ 5.90 +51.28% $25.50 '05 $ 30 ZIE-AF $ 6.10 $ 8.60 +40.98% $25.50 MO 11/13/02 '04 $ 40 LMO-AH $ 3.90 $ 5.30 +35.90% $37 '05 $ 40 ZMO-AH $ 4.80 $ 6.20 +29.17% $37 DELL 12/19/02 '04 $ 30 LDE-AF $ 3.70 $ 3.90 + 5.41% $23 '05 $ 30 ZDE-AF $ 6.10 $ 6.30 + 3.28% $23 Puts: LEN 10/02/02 '04 $ 50 KJM-MJ $ 8.60 $ 9.10 + 5.81% $54 '05 $ 50 XFF-MJ $11.20 $12.70 +13.39% $54 BBH 12/02/02 '04 $ 85 KBB-MQ $12.10 $13.90 +14.88% $93.50 '05 $ 80 XBB-MP $14.40 $16.10 +11.81% $93.50 GM 12/02/02 '04 $ 35 LGM-MG $ 5.20 $ 6.40 +23.08% $40 '05 $ 30 ZGM-MF $ 5.50 $ 6.50 +18.18% $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 $86, $88 DEC-2003 $ 84 ZDJ-XF DEC-2004 $ 84 YDJ-XF GS 12/22/02 $70-71 JAN-2004 $ 70 KGS-MN JAN-2005 $ 70 ZSD-MN New Portfolio Plays None New Watchlist Plays None Drops None ************** TRADERS CORNER ************** Manufacturing Wealth -- Among Other Things By Mike Parnos, Investing With Attitude That well-known, profound wordsmith “Anon” once said, “We are all manufacturers – making good, making trouble or making excuses.” Anon obviously overlooked a few CPTI staples like making pizza, making cookies, and making it back to the couch before the commercial is over. Anon’s observations are accurate, though, when it comes to trading. Making “good” is executing and overseeing a successful trade. Making “trouble” is using an improper strategy or using the correct strategy improperly. And, finally, making “excuses” is finding someone else to blame for the “trouble.” When you add a tablespoon of education, a teaspoon of discipline, and a package of Twinkies, you can eliminate the “trouble” and the “excuses.” What we will have manufactured is an astute, successful trader with an overflowing wallet, a few cavities and a well-rounded appearance. ______________________________________________________________ As Promised As promised, today we’re going to go over the details of the ITM QQQ Long Term Strangle position we put on in the CPTI Portfolio in last Sunday’s newsletter. We’ll use the prices as of last Sunday to keep everything consistent, and hopefully, less confusing. I’m constructing a CPTI checklist for the Long Term ITM Strangle. Send me an email and I’ll forward it to you (mparnos@OptionInvestor.com). The Long Term ITM Strangle The ITM (In-The-Money) Strangle consists of the purchase of an in-the-money LEAP put and an in-the-money LEAP call with the same expiration. For example: The QQQs were trading at $25.32. We know that the QQQs can easily make a 3-4 point move in a month’s time. However, it seems likely that the QQQs will remain in a trading range for the foreseeable future. We will use the $21 to $29 strike trading range for our new ITM Strangle position. Let’s take it step by step. For our trade we’ll use a 10-contract position. Ideally, we would like to put on the ITM Strangle when volatility is low and there is an expected increase in volatility. It’s not a necessity, but we should avoid putting on the position when volatility is particularly high. With the QQQs trading at $25.32, we will first: Buy 10 Jan. 05 QQQ $21 calls (ZWQAT) @ $8.20 = $8,200 Buy 10 Jan. 05 QQQ $29 puts (ZWQMC) @ $7.00 = $7,000 Here’s the tricky part. We just spent $15,200. Sounds like a lot, doesn’t it? However, our actual risk is substantially less. By buying this ITM Strangle, we’ve established a position that, regardless of where the QQQs trade, there will be a minimum intrinsic value of $8.00 – the difference between the strike prices ($20 - $21 = $8). Try it. If, at expiration, the QQQs are at $22, the $21 call is worth $1.00 and the $29 put is worth $7.00, totaling $8.00. If the QQQs are at $26, the $21 call is worth $5 and the $29 put is worth $3. But, stocks/indexes rarely remain in trading ranges for long periods, so it’s not likely we will hold this position to expiration in 2005. So our actual risk in this position is the initial out of pocket ($15,200) less the minimum intrinsic value ($8,000) -- $7,200. Now, we have 25 months to make money. Let’s get started. Sell 10 Feb. 03 QQQ $29 call (QAVBC) @ $.50 = $500 Sell 10 Feb. 03 QQQ $21 put (QAVNT) @ $.45 = $450 We’ve just taken in a total of $950. A 13% return on a risk of $7,200 for four weeks. Our risk is now only $6,250 ($7,200 – $950 = $6,250) That was so much fun we may do it again for the next option expiration. We may sell two months out and further reduce our risk. After we sell the seventh time, our risk is likely gone and it’s all gravy the rest of the way. Plus, on a two-year LEAPS option, a relatively small percentage of the time value will erode in the first year. Think about it. If we can do that 15 times during the 25-month life of the position, we would take in $14,200 on our original risk of $7,200. Plus, the put and call LEAPS can also have time value over and above the $8 of intrinsic value. OK. Read everything again up to this point. Is it clear? Jot down your questions and send them to me. This is not a simple strategy. It can be very profitable, but you need to understand it. Now let’s address a few scenarios that may come up along the way. It may answer a few of your questions. What would happen if . . . Since we don’t live in a perfect world, there will be complications – count on it. Into each life some rain must fall. But if you have an umbrella, a little rain “ain’t no big deal.” We have a plan, right? Q: QQQs threaten to break upper resistance and is at $29 with two weeks to go before expiration of our short-term call option and the cost to buy it back is $1.25? A: We would do nothing. (CPTI students love that answer) Remember, you are covered by the long Jan. 05 $21.00 call that is now $8.00 in the money. That means you have a high delta that will continue to be higher than the delta of the short option until the last few days prior to expiration. It makes no sense to buy back a short option (especially one that’s covered by a long position) while there is still time value. Why pay $1.25 to buy back an option when it will cost you nothing to buy back that same option in two weeks? The same logic applies if the QQQs would go down to $21. The long Jan. 05 $29 put would be increasing in value faster than the short February $21.00 put. Not to worry, it’s entirely possible the stock will retrace and return to the trading range. Remember, the $29 and $21 strikes were chosen because they represent approximate resistance and support levels. If, at an expiration, the QQQs have gone too far in a particular direction, you can always unwind the position and you should still show a profit. The risk is minimal. The likelihood that this position will last (as originally constructed) until expiration, is remote. We will be making adjustments along the way. As you become more sophisticated option traders, there are ways you can play the bounces by repurchasing and reselling the short options at appropriate times to take in additional premium. It’s not the CPTI way, but for you “players” out there, it’s a way to do some wheeling and dealing within the parameters of a basically conservative trade. The point is, take your time, evaluate and understand everything before you put on a trade. Remember, the early bird may get the worm, but it’s the second mouse that usually gets the cheese. In next week’s column, we will address the possible adjustments and variations of this Long Term ITM Strangle. The fun starts when our QQQs make their typical 3-4 point move. And remember to – SMILE -- it’s the second best thing you can do with your lips. ________________________________________________________________ CPTI PORTFOLIO UPDATE – As Of Friday’s Close BBH Iron Condor – Currently trading at $86.25. We want BBH to finish the January option cycle anywhere between $80 and $95. We’re still looking good – still in mid-range. XAU Calendar Spread – Currently trading at $78.52 We bought the June $80 call for $7.20 and sold the January $80 call for $2.20. Our debit (or cost basis) is $5.00. We want XAU (Gold & Silver Index) to move up slowly and finish as close as possible to $80. This is a longer-term cash flow generating strategy in which we sell against the June $80 call as many times as we can. It’s a neutral to bullish strategy on gold. Gold is moving up, perhaps a little too rapidly. We’ll keep an eye on it. We might be faced with making an adjustment on the XAU spread if it continues up too quickly. Basically, the delta of the June $80 call is still higher than the January $80 call. The time to close out the spread is when the June $80 call no longer has an advantage. For example: if we had to close it out today (as I write this), we could buy back the Jan. $80 for $3.40 and sell the June $80 for $9.00. Since our cost basis is $5, we'd end up with a profit of $.60. It's possible that the trade could be entered as a spread and we could negotiate another $.20. QQQ ITM Strangle – Currently trading at $24.82. This is another long-term position to generate a monthly cash flow. We own the January 2005 $21 LEAPS call and the January 2005 $29 LEAPS puts. We’ve sold the February $29 calls and February $21 puts. Now, it’s just a matter of being patient. (See discussion of strategy above) ____________________________________________________________ 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 12-29-2002 Sunday 5 of 5 In Section Five: Covered Calls: Profit/Loss And Return On Investment Naked Puts: New Year's Resolutions! Spreads/Straddles/Combos: The Grinch Steals The Show! 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: Profit/Loss And Return On Investment By Mark Wnetrzak Some questions from one of our new readers provided us with a great opportunity to review the OIN's Covered-Call calculator. Attn: Covered-Calls Editor Subject: Using the CC Calculator Mark, Thank you very much for the link info. I really like the calculator, but I have some questions if you would be kind enough to answer them for me. (1) I don't know how it figured my cost basis for a PCS CC that I made. Here are the vitals: Stock Price - 4.40 per share Share Amt. - 300 Com. - 10.99 Strike - 5.00 Prem. - .70 No. of con. - 3 Option comm. - 15.49 It says my CB would be 3.90. But 4.48 -.70 = 3.78...so how does the other 12 cents figure into it? (2) In the profit and returns columns, the numbers are tremendously skewed to the high side. Is this because I entered my original share price from the purchase on 11/19/02? Or rather is it because I have entered the CURRENT days to expiration, instead of the original date? (3) Is this calculator used primarily to judge the quality of a trade one is CONSIDERING to play rather than as a monitoring device after the play has been made? By the way, I entered the VISG CC play on 12/11 and got a little scared when the share price got very close to my cost basis of 4.60 today. What do you think of this play now? Thanks for your kind help. I really appreciate it, Mark. KM Hello Again KM, (1) If you scroll down to the bottom of the calculator, each page has notes explaining the columns above. The Cost Basis (or break- even price), which includes the cost of commissions to initiate the play, also includes one extra stock commission and assumes the stock is sold after expiration. If the share price of PCS closes below the sold strike ($5.00) at expiration, you would still retain the stock the following Monday. If you managed to sell the stock the next week at $3.90, you would incur no loss, including commissions, and anything above $3.90 would be a profit. (2) If you change the column, "Days To Expiration," you will effect the profit calculations because they are based on a Monthly yield. Essentially I annualize the return and divide by 12. This helps me visualize the value of compounding a seemingly small return over and over again. Notice if you change the "Days To Expiration" from 30 to 15, you double the potential yields. This column shouldn't be changed once a position is in play. (3) That is correct -- the calculator is just a tool one can use to evaluate and compare potential candidates for a covered-write. The data in the spreadsheet should remain static on an active position unless an adjustment is made. For example, in rolling-forward, a new "Share Price" (based on the new cost basis), "Option Premium," and "Days To Expiration" could be entered. As for VISG, I did make a comment in Thursday's Market Monitor: 12/26/02 3:39:57 PM Viisage Tech. (NASDAQ:VISG) A reader asked about Viisage Technology: The stock is testing several key support areas and should be monitored closely. Today's rebound is encouraging in the short-term, especially in the face of a down market. A break-even exit is available now (a profit if the calls were bought back on weakness), or rolling-forward to the April- or July-5.00 calls is also a viable move. (Just depends on your long-term outlook.) Mark Wnetrzak mark@OptionInvestor.com Editor's Note: The link to download the covered-calls (and naked-puts/spreads/combinations) calculator is at the top of the page here: http://www.OptionInvestor.com/indexes/coveredcalls.asp Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield XMSR 3.00 2.84 JAN 2.50 0.80 0.30* 14.8% AES 3.25 2.92 JAN 2.50 1.05 0.30* 11.9% LWSN 5.26 5.55 JAN 5.00 0.55 0.29* 6.7% MMR 5.20 4.95 JAN 5.00 0.60 0.35 6.6% SEPR 9.48 9.45 JAN 7.50 2.35 0.37* 5.6% BEAS 12.15 11.85 JAN 10.00 2.60 0.45* 5.1% IMCL 13.50 10.82 JAN 10.00 4.10 0.60* 4.6% LVLT 5.13 4.82 JAN 5.00 0.50 0.19 4.5% ALXN 15.30 14.30 JAN 12.50 3.40 0.60* 4.4% ELN 2.90 2.38 JAN 2.50 0.65 0.13 4.2% AVID 22.03 22.80 JAN 20.00 2.75 0.72* 4.1% MEE 10.65 9.70 JAN 10.00 1.25 0.30 2.8% ZIXI 5.51 4.68 JAN 5.00 0.90 0.07 1.3% VISG 5.72 4.75 JAN 5.00 1.05 0.08 1.2% EYE 10.27 9.66 JAN 10.00 0.70 0.09 1.0% MOGN 8.30 6.98 JAN 7.50 1.15 -0.17 0.0% BMRN 7.74 6.51 JAN 7.50 1.05 -0.18 0.0% * = Stock price is above the sold striking price. Comments: Ok, so Santa dropped off a sock of coal at Broad and Wall. Time to be a bit defensive as the major averages threaten a move toward their respective October lows. Still, in the midst of all the "bearishness," Avid Technology (NASDAQ:AVID) continues to be one of the few issues demonstrating strength. Some of the weaker looking stocks include: Imclone Systems (NASDAQ:IMCL), MGI Pharma (NASDAQ:MOGN), Level 3 (NASDAQ:LVLT), BioMarin Pharmaceuticals (NASDAQ:BMRN) and Viisage Technology (NASDAQ:VISG). Massey Energy (NYSE:MEE) and Visx (NYSE:EYE) should also be monitored closely for further indications of renewed downward trends. 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 ADVS 13.51 JAN 12.50 UIV AV 1.50 54 12.01 21 5.9% AGIL 8.10 JAN 7.50 AUG AU 1.00 73 7.10 21 8.2% DNDN 5.43 JAN 5.00 UKO AA 0.70 119 4.73 21 8.3% FEIC 15.88 JAN 15.00 FQE AC 1.75 14 14.13 21 8.9% IDNX 5.40 JAN 5.00 IDX AA 0.70 903 4.70 21 9.2% RAD 2.46 JAN 2.50 RAD AZ 0.15 10222 2.31 21 9.4% TKLC 10.33 JAN 10.00 KQ AB 0.80 7 9.53 21 7.1% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield RAD 2.46 JAN 2.50 RAD AZ 0.15 10222 2.31 21 9.4% IDNX 5.40 JAN 5.00 IDX AA 0.70 903 4.70 21 9.2% FEIC 15.88 JAN 15.00 FQE AC 1.75 14 14.13 21 8.9% DNDN 5.43 JAN 5.00 UKO AA 0.70 119 4.73 21 8.3% AGIL 8.10 JAN 7.50 AUG AU 1.00 73 7.10 21 8.2% TKLC 10.33 JAN 10.00 KQ AB 0.80 7 9.53 21 7.1% ADVS 13.51 JAN 12.50 UIV AV 1.50 54 12.01 21 5.9% 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). ***** ADVS - Advent $13.51 *** Bottom Fishing: Part I *** Advent Software (NASDAQ:ADVS) is a seller of enterprise investment management solutions that automate and integrate mission-critical functions of investment management organizations through software products, services and data integration. Advent Office, a suite of integrated products, addresses the demand to automate the entire range of investment management functions, including portfolio management, client relationship management, trade order management, data warehousing, partnership accounting, reconciliation management and Web-based portfolio, performance and analytic reporting. ADVS has been forming a stage I base for several months and the recent technicals suggest the selling has abated. This position offers speculators a reasonable return at the risk of owning ADVS at a favorable cost basis. JAN 12.50 UIV AV LB=1.50 OI=54 CB=12.01 DE=21 TY=5.9% ***** AGIL – Agile $8.10 *** On The Mend? *** Agile Software (NASDAQ:AGIL) develops and markets product chain management solutions to help companies work internally and with their suppliers and customers to build better, more profitable products faster. The company's solutions manage the system of record for a company's products and provide business applications for critical communication and collaboration about the product record among manufacturers, outsourced manufacturing providers, suppliers and customers. Agile has licensed its products to more than 800 customers in the following sectors: computers, consumer electronics, data networking, telecom equipment, electronics manufacturing services, medical devices & equipment, automotive, aerospace and industrial equipment. Agile rallied strongly in November after the company beat estimates (smaller loss) for its 2nd-quarter earnings. We simply favor the breakout above the recent lateral consolidation phase and this position offers an ideal way to establish a low-risk cost basis in the issue. JAN 7.50 AUG AU LB=1.00 OI=73 CB=7.10 DE=21 TY=8.2% ***** DNDN – Dendreon $5.43 *** Favorable Clinical Trials *** Dendreon (NASDAQ:DNDN) is devoted to the discovery as well as development of novel products for the treatment of diseases through its manipulation of the immune system. Dendreon's product pipeline is focused on cancer, and includes therapeutic vaccines, monoclonal antibodies and a pathway to small molecules. Their most advanced potential products are therapeutic vaccines that stimulate a patient's immunity for the treatment of cancer. Provenge is a therapeutic vaccine for the treatment of prostate cancer and is in Phase III clinical trials, the final stage of product development. The company is conducting Phase II clinical trials for Mylovenge, its therapeutic vaccine for the treatment of multiple myeloma, and Phase I clinical trials for APC8024, its therapeutic vaccine for the treatment of breast, ovarian and colon cancers. Shares of Dendreon surged after the company said it's moving forward with late-stage patient testing of an experimental treatment for prostate cancer. The company also recently reported favorable results from its Phase I study for APC8024. We like the bullish chart pattern and traders can speculate on the near-term performance of the issue with this conservative position. Target shooting a smaller "net-debit" will lower the cost basis and increase the potential yield in the position. JAN 5.00 UKO AA LB=0.70 OI=119 CB=4.73 DE=21 TY=8.3% ***** FEIC - FEI Company $15.88 *** Bottom Fishing: Part II *** FEI Company (NASDAQ:FEI) is a supplier of equipment and solutions to the high-growth segments of the semiconductor, data storage and industry and institute markets. The company's solutions are based on a combination of patented and proprietary technologies that produce highly focused electron and ion beams. These solutions enable FEI's customers to view and analyze structures in three dimensions and to measure, analyze, diagnose and modify deep sub-micron and atomic structures below the surface in semiconductor wafers and devices, data storage components and biological and industrial materials. FEI and Veeco Instruments (NASDAQ:VECO) recently announced that they will not be able to complete their pending merger by the Dec. 31 deadline and it may be to FEI's benefit not to extend the deadline. Investors can speculate on the potential fallout of the deal with this position. JAN 15.00 FQE AC LB=1.75 OI=14 CB=14.13 DE=21 TY=8.9% ***** IDNX – Identix $5.40 *** Government Order = Rally! *** Identix (NASDAQ:IDNX) provides a broad range of fingerprint and facial recognition technology offerings that facilitate the identification of individuals who wish to gain access to information or facilities, conduct transactions and obtain identifications. The company's products serve a broad range of industries and market segments, most notably, government and law enforcement, aviation, financial, healthcare and corporate enterprises. Identix' offerings can be classified into five categories: technology, products, platforms, project management services and fingerprinting services. Identix shares jumped this week after the company said the Department of Defense ordered 450 of its fingerprint readers. We simply favor the long-term support (look at a 2-year chart) near our cost basis as this position offers a method to participate in the future movement of the issue with relatively low risk. JAN 5.00 IDX AA LB=0.70 OI=903 CB=4.70 DE=21 TY=9.2% ***** RAD - Rite Aid $2.46 *** Cheap Speculation! *** Rite Aid (NYSE:RAD) is a retail drugstore chain. The company operates 3,497 retail drugstores in 28 states and in the District of Columbia. Rite Aid sells prescription drugs, which accounted for approximately 61.3% of its total sales during fiscal 2002. Its drugstores also offer other products including non-prescription medications, health and beauty aids and personal care items, cosmetics, photo processing and convenience items. The stores range in size from approximately 5,000 to 40,000 square feet. Earlier this month, Rite Aid reported a smaller quarterly loss than expected and increased its cash-flow outlook for the current year and next year. This position offers a favorable entry point for investors who believe that Rite Aid will continue to improve its performance and once again be profitable. JAN 2.50 RAD AZ LB=0.15 OI=10222 CB=2.31 DE=21 TY=9.4% ***** TKLC – TEKELEC $10.33 *** Bottom Fishing: Part III *** TEKELEC (NASDAQ:TKLC) is a designer and developer of telephone- communications signaling infrastructure, packet telephony solutions, diagnostic tools and service applications. TEKELEC offers products in 3 broad categories: network systems products, which help direct and control voice and data communications; network diagnostics products, which simulate a controlled network environment; and contact center products, which provide planning, management and call routing and control tools for single contact centers and for complex, multiple-site contact center environments. TEKELEC's customers include telecommunications carriers, network service providers, equipment manufacturers and contact center operators. TEKELEC appears to be forming a stage I base and the improving technicals suggest the lateral trend should continue in the near-term. With the current technical outlook recovering, this position offers an excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. JAN 10.00 KQ AB LB=0.80 OI=7 CB=9.53 DE=21 TY=7.1% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield UNTD 16.19 JAN 15.00 QAB AC 1.95 63 14.24 21 7.7% VXGN 17.55 JAN 15.00 UWG AC 3.30 319 14.25 21 7.6% PDLI 8.37 JAN 7.50 PQI AU 1.20 376 7.17 21 6.7% PLMD 32.67 JAN 30.00 PM AF 3.70 219 28.97 21 5.1% IGEN 43.56 JAN 40.00 GQ AH 4.90 2948 38.66 21 5.0% BEAS 11.85 JAN 10.00 BUC AB 2.15 19289 9.70 21 4.5% VMSI 23.79 JAN 22.50 QMP AX 1.95 24 21.84 21 4.4% ***************** NAKED PUT SECTION ***************** Options 101: New Year's Resolutions! By Ray Cummins With 2003 just a few days away, it's a great time to discuss the traits and abilities that make traders successful in the long run. To be a profitable in this business, it is important to review proven trading methods and techniques on a regular basis. There are always new interpretations or processes to be integrated into your current system but maintaining a structured approach to the market is the best way to achieve consistent returns. It is also paramount to have a precise set of rules to govern your actions when positions don't react as expected. These guidelines must be simple enough to recall and implement while monitoring a portfolio of complex positions in volatile conditions. As well, the rules should apply across a wide range of situations and be designed to compensate for one's weaknesses and inadequacies. To be effective in the long-term, they must be formulated to help you maintain discipline on a general basis and offer a timely memory aid for difficult situations. Before you trade next year, consider these well-known maxims: 1. Learn to limit losses and your profits will grow. The science of successful trading is less dependent on making profits, but rather on avoiding losses. The need to restrict draw-downs and prevent losing plays from significantly eroding capital should be a dominant theme in any type of trading. To reduce losses, most traders prefer to use a specific plan with pre-determined exits. Stop-loss orders can be used to remove urgent decision-making from the equation and "trailing" stops can be utilized to follow a position into greater profits while protecting for unexpected reversals. In addition, not only must losses be limited, but all positions must be reviewed regularly to ensure that the total portfolio risk is kept to a practical minimum. 2. Know your limits before you open any position! Just as setting stops on each individual trade is an absolute must, a "maximum allowable loss" must be considered when managing portfolio positions. The rule is simple: Never trade with more money than you can reasonably afford to lose and always maintain adequate cash reserves. When assessing position size and cash or collateral requirements, ensure that funds for active trades are not co-mingled with capital for other functions. It is also very important to set a "loss limit" at the beginning of each month or option expiration period. When this level is reached, trading should be halted for the duration of that period. Of course, if your losses are consistently higher than your gains, stop trading! Step back and take a few days off. When you are ready to try again, evaluate your current trading strategies and review the most recent plays (to learn from your mistakes), then move on. When you begin to make money, put some of the profits in a small reserve account, just in case there are unexpected developments in the future. 3. Know your strategy, its advantages and weaknesses and only use techniques that fit your trading style and portfolio outlook. You can't make good decisions without knowing the mechanics of a specific technique and the best traders are those who are acutely aware of the shortcomings of their particular approach. Focus on positions whose trading characteristics match your ability and risk-reward attitude. Don't use complex or advanced methods simply because they are intriguing. In addition, if the strategy is not appropriate for your financial condition, it should be avoided, regardless of how attractive it appears. Obviously every strategy has risk. The key is to develop an arsenal of profitable methods, use only those that fit the market outlook, and manage each play for maximum potential. 4. Learn the art of patience because timing is the key to success! The opening trade is of particular importance. It deserves your best analysis and judgment and it is vital to assess all potential trades well in advance. In the case of stocks, the issue should be one you want to own and the price must be technically favorable with minimal downside risk. Correctly timing the initial purchase requires a thorough knowledge of charting techniques and market trends. The entire process is something a trader must completely understand because a successful exit is by and large the product of a proper entry. Those who are guilty of "over-trading" should assess their past results in this careless practice whenever they are tempted to participate in such activities. 5. Be diligent and after you develop a plan, stick with it! Success will come when you create a favorable balance between hard work, sound judgment and patience. Too many traders give up after a few losing plays, long before they have time to learn and absorb the various methods required for profitable trading... Good Luck! 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 MATK 24.94 25.55 JAN 20.00 0.50 0.50* 9.8% 2.8% GG 12.62 13.09 JAN 11.25 0.40 0.40* 8.5% 3.2% GFI 14.68 14.45 JAN 12.50 0.35 0.35* 7.5% 2.5% PLMD 32.77 32.67 JAN 25.00 0.45 0.45* 7.0% 2.0% COF 31.54 29.65 JAN 20.00 0.40 0.40* 6.5% 2.2% IMPH 19.48 20.01 JAN 17.50 0.35 0.35* 6.2% 2.2% WERN 22.21 21.67 JAN 20.00 0.40 0.40* 6.1% 2.2% DISH 22.20 21.97 JAN 20.00 0.40 0.40* 6.1% 2.2% MATK 23.37 25.55 JAN 17.50 0.35 0.35* 6.1% 1.8% BSTE 31.41 34.48 JAN 22.50 0.45 0.45* 5.8% 1.8% OVER 28.99 28.61 JAN 22.50 0.40 0.40* 5.6% 1.6% AU 33.99 34.81 JAN 30.00 0.65 0.65* 5.5% 1.9% IGEN 41.10 43.56 JAN 30.00 0.55 0.55* 5.5% 1.6% GRMN 28.95 29.78 JAN 25.00 0.40 0.40* 5.4% 1.8% * = Stock price is above the sold striking price. Comments: Over the past few sessions, the technical indicators suggested the market was building a "shelf" near 885-890 (SPX) and since these patterns often end with sharp declines, Friday's activity was no surprise to many traders. The question now is, "Where will buying support resume?" Obviously, corporate earnings are not going to recover in the near future and if the short-term political and economic outlook continues to plague investors, we may be in for a long, hard ride. With that viewpoint in mind, traders are urged to maintain a constant watch over their current positions and exit any issues with questionable chart patterns. 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 ACAS 22.69 JAN 20.00 DQS MD 0.40 180 19.60 21 8.5% 3.0% AVID 22.80 JAN 20.00 AQI MD 0.40 48 19.60 21 8.6% 3.0% BSTE 34.48 JAN 30.00 BQS MF 0.60 452 29.40 21 8.8% 3.0% ESPD 16.90 JAN 15.00 ENU MC 0.30 19 14.70 21 8.4% 3.0% GRMN 29.78 JAN 25.00 GQR ME 0.25 60 24.75 21 4.9% 1.5% IGEN 43.56 JAN 35.00 GQ MG 0.35 816 34.65 21 5.5% 1.5% MATK 25.55 JAN 22.50 KQT MX 0.60 0 21.90 21 11.2% 4.0% RGLD 26.08 JAN 22.50 MJQ MX 0.35 464 22.15 21 7.0% 2.3% 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 25.55 JAN 22.50 KQT MX 0.60 0 21.90 21 11.2% 4.0% BSTE 34.48 JAN 30.00 BQS MF 0.60 452 29.40 21 8.8% 3.0% AVID 22.80 JAN 20.00 AQI MD 0.40 48 19.60 21 8.6% 3.0% ACAS 22.69 JAN 20.00 DQS MD 0.40 180 19.60 21 8.5% 3.0% ESPD 16.90 JAN 15.00 ENU MC 0.30 19 14.70 21 8.4% 3.0% RGLD 26.08 JAN 22.50 MJQ MX 0.35 464 22.15 21 7.0% 2.3% IGEN 43.56 JAN 35.00 GQ MG 0.35 816 34.65 21 5.5% 1.5% GRMN 29.78 JAN 25.00 GQR ME 0.25 60 24.75 21 4.9% 1.5% 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). ***** ACAS - American Capital $22.69 *** An Investment Alternative *** American Capital Strategies (NASDAQ:ACAS) provides financial advisory services to, and invests in, middle-market companies. The firm is also principally engaged in providing senior debt, subordinated debt and equity to middle-market companies in need of capital for management buyouts, including employee stock ownership plan (ESOP) buyouts, growth, acquisitions, liquidity and restructuring. American Capital Strategies is regulated as a business development company and has a publicly traded stock as well as approximately $1.5 billion of capital resources. A recent news items suggests the company is successfully pursuing the "wonderful investment opportunities available in the market today" and ACAS shares reflect the firm's recent achievements. The stock rallied to 3-month highs last week before succumbing to the wide-spread slump in equities during Friday's session. The question now is whether or not the issue can remain in its new bullish trend with the broader market destined to move lower. JAN 20.00 DQS MD LB=0.40 OI=180 CB=19.60 DE=21 MY=8.5% SY=3.0% ***** AVID - Avid Technology $22.80 *** The Rally Continues! *** 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 in mid-December sparked a rally which has helped propel AVID to a new two-year high. The technical indications are favorable and traders who believe the upside activity will continue can profit from that outcome with this position. JAN 20.00 AQI MD LB=0.40 OI=48 CB=19.60 DE=21 MY=8.6% SY=3.0% ***** BSTE - Biosite $34.48 *** Premium Selling! *** A leader in the drive to advance diagnosis, Biosite (NASDAQ:BSTE) is a unique research-based company dedicated to the discovery and development of novel protein-based diagnostic tests that improve a doctor's ability to diagnose debilitating and life-threatening diseases. The firm combines integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes. Biosite's "Triage" rapid diagnostic tests are used in approximately 50 percent of U.S. hospitals and in approximately 40 international markets. In October, Biosite reported strong growth for the third quarter of 2002 and projected continuing growth in fiscal year 2003. The company said that it expects revenues in 2003 to be 35 to 40 percent higher than in 2002, with the possibility for upside from new products and new markets that are currently under development. However, Biosite's option premiums remain inflated, suggesting there is potential for extreme volatility. Speculative traders can profit from continued lateral activity in the issue with this position. JAN 30.00 BQS MF LB=0.60 OI=452 CB=29.40 DE=21 MY=8.8% SY=3.0% ***** ESPD - eSpeed $16.90 *** Entry Point? *** eSpeed (NASDAQ:ESPD) is a provider of electronic marketplace and related trading technology solutions that operates multiple buyer, multiple seller real-time electronic marketplaces. The company's suite of marketplace tools offers end-to-end transaction solutions for the purchase and sale of financial and non-financial products via the Internet or over its global private network. In 2001, the Company processed over 3.5 million electronic transactions by over 700 clients, including fixed-income trading firms and natural gas and electricity trading firms. The firm has offices in the United States, Europe and Asia that can transact trading 24 hours a day, around the world. ESPD is one of the few bullish stocks in the technology segment and investors who believe the company has an encouraging future in the electronic trading industry can achieve a conservative cost basis in the issue with this position. JAN 15.00 ENU MC LB=0.30 OI=19 CB=14.70 DE=21 MY=8.4% SY=3.0% ***** GRMN - Garmin $29.78 *** 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 a "target-shooting" order (at $0.30 or better) in this position. JAN 25.00 GQR ME LB=0.25 OI=60 CB=24.75 DE=21 MY=4.9% SY=1.5% ***** IGEN - IGEN International $43.56 *** More Premium Selling! *** IGEN International (NASDAQ:IGEN) develops and markets products that utilize its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. ORIGEN is incorporated into instrument systems and related consumable reagents, and the company also offers assay development as well as other services used to perform analytical testing. Products based on IGEN's ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. Lots of speculation on this issue recently due in part to ongoing litigation and also a potential deal (merger/buyout?), possibly with Roche Diagnostics, which markets products based on IGEN's ORIGEN technology. Aggressive traders can profit from continued lateral activity in the stock with this speculative position. JAN 35.00 GQ MG LB=0.35 OI=816 CB=34.65 DE=21 MY=5.5% SY=1.5% ***** MATK - Martek Biosciences $25.55 *** Entry Point? *** 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. In mid-December, MATK shares rallied after a favorable Q4 report and the near-term outlook is bullish. Investors who are interested in adding this unique biotechnology company to their portfolio should consider using this position to establish a conservative cost basis in the issue. JAN 22.50 KQT MX LB=0.60 OI=0 CB=21.90 DE=21 MY=11.2% SY=4.0% ***** RGLD - Royal Gold $26.08 *** Broad-Market Hedge *** Royal Gold (NASDAQ:RGLD) is the largest U.S.-based royalty firm engaging in the acquisition and management of precious metal royalty interests. Royal Gold seeks to acquire existing royalties or to finance projects that are in production or near production in exchange for royalty interests. The firm, to a reduced extent, also explores and develops properties thought to contain precious metals and seeks to obtain royalty and other carried ownership interests in these properties through the subsequent transfer of operating interests to other mining companies. Substantially all of the firm's revenues are and can be expected to be derived from royalty interests, rather than from mining operations conducted by the company. During 2001, the company focused on the acquisition of royalty interests, rather than the creation of such interests through exploration, followed by further development and property transfers to larger mining companies. Royal Gold is a favorable candidate for a broad-market hedge and traders who want to profit from a decline in the major equity averages should consider this position. JAN 22.50 MJQ MX LB=0.35 OI=464 CB=22.15 DE=21 MY=7.0% SY=2.3% ***** ***************** 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 OVTI 15.43 JAN 12.50 UCM MV 0.40 77 12.10 21 15.9% 4.8% CTAC 27.15 JAN 22.50 QCJ MX 0.65 19 21.85 21 13.7% 4.3% PPD 26.36 JAN 22.50 PPD MX 0.50 889 22.00 21 10.1% 3.3% IDCC 15.20 JAN 12.50 DAQ MV 0.25 125 12.25 21 10.0% 3.0% LF 26.00 JAN 20.00 LF MD 0.35 25 19.65 21 9.1% 2.6% GLG 11.29 JAN 10.00 GLG MB 0.20 312 9.80 21 8.5% 3.0% TVX 16.39 JAN 15.00 TVX MC 0.30 7 14.70 21 7.9% 3.0% NEM 29.73 JAN 27.50 NEM MY 0.45 6066 27.05 21 6.4% 2.4% PLMD 32.67 JAN 25.00 PM ME 0.25 677 24.75 21 5.3% 1.5% ASA 41.78 JAN 37.50 ASA MU 0.45 378 37.05 21 5.1% 1.8% AU 34.81 JAN 30.00 AU MF 0.25 821 29.75 21 3.9% 1.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Grinch Steals The Show! By Ray Cummins The title of a popular book by Dr. Seuss may be the best way to explain the recent activity in the stock market. The Dow Jones Industrial Average endured a triple-digit loss Friday, closing the week down over 200 points at 8,303. Only one blue-chip component, AT&T (NYSE:T) moved higher during the troubled session. The NASDAQ fared little better, down 19 points to 1,348 as traders exited positions ahead of the final week of 2002. The S&P 500 slid 14 points to 875 as stocks weakened in virtually every major market sector. Trading was light with Big Board volume near 750 million while 805 million shares were exchanged on the NASDAQ. Declining stocks outnumbered advancers by roughly 2 to 1 on both the NYSE and the technology exchange. Short-term treasury yields reached record lows as global tensions drove investors to safe-haven issues. The yield on the 10-year bond closed at 3.80%. Happy New Year! ***************** 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 APC 49.59 48.10 JAN 40 45 0.55 44.45 $0.55 Open VLO 36.39 36.02 JAN 30 32 0.30 32.20 $0.30 Open ASA 39.30 41.78 JAN 32 35 0.35 34.65 $0.35 Open FNM 66.61 65.20 JAN 55 60 0.40 59.60 $0.40 Open NBR 37.75 35.59 JAN 30 32 0.30 32.20 $0.30 Open DHR 65.10 64.96 JAN 55 60 0.40 59.60 $0.40 Open IGEN 41.96 43.56 JAN 30 35 0.55 34.45 $0.55 Open RD 43.21 43.41 JAN 37 40 0.15 39.85 $0.15 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status JCI 81.79 79.60 JAN 90 85 0.20 85.20 $0.20 Open LEH 56.72 54.17 JAN 65 60 0.25 60.25 $0.25 Open GS 73.10 67.92 JAN 85 80 0.60 80.60 $0.60 Open LXK 61.93 60.65 JAN 75 70 0.55 70.55 $0.55 Open MMM 121.77 121.34 JAN 135 130 0.70 130.70 $0.70 Open GD 78.87 79.10 JAN 90 85 0.40 85.40 $0.40 Open CDWC 44.06 41.99 JAN 55 50 0.45 50.45 $0.45 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss PUT DEBIT SPREADS ****************** Symbol Pick Last Month LP SP Debit B/E G/L Status WMT 50.54 49.16 JAN 60 55 4.45 54.45 0.55 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status GDW 72.33 72.50 JAN 65 70 4.25 69.25 4.10 Open LC = Long Call SC = Short Call 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 SCIO 32.84 33.02 JAN 40 25 0.00 0.25 Open PXD 26.11 25.05 MAR 30 23 0.10 0.20 Open? VAR 50.38 49.13 FEB 55 45 0.10 0.00 Open Scios traded near a new "all-time" high Thursday before succumbing to the market-wide slump during Friday's session. On the downside, Pioneer National Resources has retreated to a recent trading range near $24-$25 and it is unlikely the issue will rally in the near future. SYNTHETIC (BEARISH) ******************* Stock Pick Last Expir. Long Short Initial Max Play Symbol Price Price Month Put Call Credit Value Status IMN 35.00 35.77 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 & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status HNT 25.75 26.76 JAN-30C DEC-30C 0.60 0.60 Open GISX 20.21 17.95 FEB-22C DEC-22C 0.95 0.75 Open? HSY 67.76 67.15 FEB-65C JAN-70C 3.25 3.10 Open The bullish position in Williams Sonoma (NYSE:WSM) was closed early, after the expiration of the (short) December option, for a favorable gain. The position in Global Imaging Systems (NASDAQ:GISX) has some hope as the issue recently rallied off of the bottom of its current trading range. Hopefully, the stock will continue to recover in the coming weeks. Prior to Friday's sell-off, Healthnet (NYSE:HNT) was also showing signs of renewed bullish activity. SHORT-PUT COMBOS **************** Stock Pick Last Short Long Initial Max Play Symbol Price Price Option Option Credit Profit Status AES 2.92 2.92 J04-7.5P J03-2.5P 4.50 0.25 Open EDS 19.64 18.00 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 No Positions DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status GENZ 34.43 30.00 JAN 35 35 6.15 6.00 Open L 9.95 8.45 JAN 10 10 1.35 1.55 Open The speculative position in Liberty Media offered a small profit as the issue crashed to a recent low of $8.45. Genzyme has also been on the move with the issue approaching the break-even point in the bearish portion of the play. 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. ***** LMT - Lockheed Martin $57.70 *** New Contract Win! *** Lockheed Martin (NYSE:LMT) is a customer-focused, worldwide enterprise engaged in the research, design, development, manufacture and integration of advanced technology systems, products and services for government and commercial customers. The corporation's core business areas are systems integration, aeronautics, space and technology services. The company's Systems Integration segment engages in the design, development, integration and production of electronic systems for undersea, shipboard, land and airborne applications. Space Systems is engaged in the design, development, engineering and production of commercial and military space systems. Aeronautics designs, researches and develops, produces, and supports combat and air mobility aircraft, surveillance/command, reconnaissance, platform systems integration and advanced development programs. Technology Services provides information management, engineering, scientific and logistic services. PLAY (less conservative - bullish/credit spread): BUY PUT JAN-50.00 LMT-MJ OI=2432 A=$0.15 SELL PUT JAN-55.00 LMT-MK OI=1464 B=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$54.50 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=72% ***** STJ - St. Jude Medical $39.17 *** J.P. Morgan Upgrade! *** St. Jude Medical (NYSE:STJ) is engaged in the design, development, manufacturing and distribution of cardiovascular medical devices for the global cardiac rhythm management, cardiology and vascular access and cardiac surgery markets. The firm's primary products in each of these minor markets are bradycardia pacemaker systems, tachycardia implantable cardioverter defibrillator systems ,and electrophysiology catheters; vascular closure devices, catheters, guidewires and introducers, and mechanical and tissue heart valves, valve repair products and suture-free devices to promote coronary artery bypass graft anastomoses in cardiac surgery. The company markets its products mainly in the United States, Western Europe and Japan. The company also sells its products in Eastern Europe, Africa, the Middle East, Canada, Latin America and the Asia-Pacific region through employee-based sales organizations and independent distributors. PLAY (less conservative - bullish/credit spread): BUY PUT JAN-35.00 STJ-MG OI=287 A=$0.30 SELL PUT JAN-37.50 STJ-MU OI=1171 B=$0.60 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$37.20 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=71% ***** CEPH - Cephalon $49.02 *** Consolidation In Progress! *** Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products are comprised of Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management, and Gabitril for the treatment of partial seizures associated with epilepsy. PLAY (conservative - bearish/credit spread): BUY CALL JAN-60.00 CQE-AL OI=3895 A=$0.10 SELL CALL JAN-55.00 CQE-AK OI=4566 B=$0.50 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$55.45 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=86% ***** GILD - Gilead Sciences $34.57 *** Range-Bound? *** Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases. The company has five products that are marketed in the United States and in other countries worldwide. These are Viread, a drug for treating HIV infection; AmBisome, a drug for treating and preventing life-threatening fungal infections; Tamiflu, a drug for treating and preventing influenza; Vistide, a unique drug for treating cytomegalovirus (or CMV) retinitis in AIDS patients, and DaunoXome, a drug for treating AIDS-related Kaposi's sarcoma. PLAY (conservative - bearish/credit spread): BUY CALL JAN-40.00 GDQ-AH OI=1788 A=$0.25 SELL CALL JAN-37.50 GDQ-AU OI=3355 B=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$37.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=75% ***** UBS - UBS AG $47.56 *** Rolling Over? *** UBS AG (NYSE:UBS) is a global, integrated investment services firm and bank, in Switzerland, with offices in over 50 countries around the world. UBS' business is managed through four primary business groups and its Corporate Center. The business groups include: UBS Wealth Management & Business Banking, UBS Warburg, UBS PaineWebber and UBS Global Asset Management. The company's clients include international corporations, small and medium-sized businesses in Switzerland, governments and other public bodies, as well as many financial institutions, market participants and individuals. UBS was formed on June 29, 1998 by the merger of two Swiss financial services groups: Union Bank of Switzerland and Swiss Bank. PLAY (conservative - bearish/credit spread): BUY CALL JAN-53.37 UBS-AV OI=710 A=$0.15 SELL CALL JAN-50.00 UBS-AJ OI=3035 B=$0.45 INITIAL NET CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=9% B/E=$50.30 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=71% ************* 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. ***** RTN - Raytheon $30.47 *** Reader's Request! *** Raytheon Company (NYSE:RTN) is a provider of defense electronics such as missiles; radar; sensors and electro-optics; intelligence, surveillance and reconnaissance; command, control, communication and information systems; naval systems; air traffic control and aircraft integration systems; and technical services. Raytheon's commercial electronics businesses leverage defense technologies in commercial markets while Raytheon Aircraft is a provider of business and special mission aircraft. The company also delivers a broad line of jet, turboprop and piston-powered airplanes. PLAY (speculative - bullish/diagonal spread): BUY CALL FEB-30.00 RTN-BF OI=1533 A=$2.20 SELL CALL JAN-32.50 RTN-AZ OI=682 B=$0.35 INITIAL NET-DEBIT TARGET=$1.75-$1.80 POTENTIAL PROFIT(max)=38% B/E=$31.80 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=33% **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. ***** COF - Capital One Financial $29.65 *** Volatility = Premium *** 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. Strategy Explanation: A more aggressive type of calendar or time spread (with puts) is initiated when the current value of the underlying issue is well above the strike price of the options. The position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the underlying issue declines further in the near-term and the position is closed for a gain as time value erosion in the short option produces a net profit or; the stock consolidates, allowing the sold option to expire and then eventually moves below the long option's strike price. PLAY (speculative - bearish/calendar spread): BUY PUT FEB-25.00 COF-NE OI=15 A=$1.80 SELL PUT JAN-25.00 COF-ME OI=13063 B=$0.75 INITIAL NET DEBIT TARGET=$0.90-$1.05 TARGET PROFIT=25% ******************* 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. ***** AMZN - Amazon.com $18.86 *** Retail Sector Slump! *** Amazon.com (NASDAQ:AMZN) is a website where customers can find and discover anything they may want to buy online. The company lists millions of items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, PC software, computer and video games, tools and hardware, outdoor living items, kitchen and house-wares products, toys, baby and baby registry, travel services and magazine subscriptions. At its Amazon Marketplace, Auctions and zShops services, businesses and individuals can sell virtually any product to millions of customers, and with Amazon.com Payments, sellers are able to accept credit card transactions in addition to other methods of payment. The company operates a U.S.-based Website: amazon.com, and four internationally focused Websites: www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp. PLAY (speculative - bearish/synthetic position): BUY PUT FEB-15.00 ZQN-NC OI=3227 A=$0.90 SELL CALL FEB-22.50 ZQN-BS OI=115 B=$0.80 INITIAL NET CREDIT TARGET=$0.05-$0.15 TARGET PROFIT=$0.50-$0.70 Note: Using options, the position is similar to being short the stock. The minimum initial margin/collateral requirement for the sold call approximately $480 per contract. However, do not open 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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