The Option Investor Newsletter Sunday 01-19-2003 Copyright 2003, 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: Is That It? Futures Market: Levels Lining Up Index Trader Wrap: IT'S THE EARNINGS STUPID Editor’s Plays: The End of Innocence Market Sentiment: Slip Sliding Ask the Analyst: Pivot Analysis to define levels and range Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Out Like a Bear Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 01-17 WE 01-10 WE 01-03 WE 12-27 DOW 8586.74 -198.21 8784.95 +183.26 8601.69 +297.91 -208.22 Nasdaq 1376.20 - 71.55 1447.75 + 60.67 1387.08 + 38.62 - 14.59 S&P-100 457.36 - 13.05 470.41 + 11.21 459.20 + 16.14 - 12.40 S&P-500 901.78 - 25.79 927.57 +165.21 908.59 + 33.17 - 20.34 W5000 8530.33 -228.10 8758.43 +165.21 8593.22 +287.59 -169.60 RUT 388.10 - 8.34 396.44 + 6.13 390.31 + 6.15 - 2.72 TRAN 2344.53 - 49.14 2393.67 + 28.73 2364.94 + 73.28 - 32.56 VIX 28.68 + 1.55 27.13 - 0.85 27.98 - 6.17 + 2.68 VXN 42.84 + 0.56 42.28 - 3.43 45.71 - 1.00 - 1.80 TRIN 1.60 0.80 1.32 3.60 Put/Call 0.83 0.75 0.76 0.94 ****************************************************************** Is That It? by Jim Brown The Dow lost -111, the S&P -13, is that all we get from a seriously negative flurry of earnings? No, the real damage came in the Nasdaq which dropped -47 points on Friday with Microsoft leading the drop at -$4.00. I guess investors were not that excited about the dividend. Dow Chart – Daily Nasdaq Chart – Daily Let's get the economic news out of the way first. Industrial production surprised analysts with a drop of -0.2% compared to estimates for a gain of +0.3%. Nearly all the major segments experienced a decline. Makes you wonder what the next ISM report will show. Possibly a major correction to the last blowout number. With Capacity Utilization at 75.4% and the lowest since last March, the inflation pressures remain zero because pricing power is zero. The only positive factor, or so the analysts tell us, is that inventory levels are so low that any increase in demand will cause a strong jump in manufacturing. The key word in that sentence is demand. The Michigan Consumer Sentiment came in at 83.7 compared to consensus estimates of 87. The index is getting very close to the October low of 80.6 despite the holidays and the Bush tax cut package. Unemployment is still rising and consumer debt is increasing. As more troops saddle up to leave for Iraq everyone in their extended family begins to worry that the war could be messy, lengthy and dangerous to their loved ones. The stock market rally has failed to produce any follow though in January and that was before the negative earnings guidance on Thursday. Home Sales may have peaked according to the NAHB Index. It is much too early to tell but the index dropped from its high of 65 in December to 64 in January. Not a screaming decline but with everyone predicting the eventual demise it could be the beginning of the end. With the recent economic reports I don't think there is any chance of a rate hike soon which means a booming spring if everything remains the same. Once those rates start up it could be a long dry spell for builders. Scratch the second half recovery. That was the tone of many analysts on Friday. They are quickly abandoning the hope of a recovery in the second half of 2003 and it is only January. There were several interviews on Friday about the "lack of any significant global IT spending" comment from Microsoft. Suddenly those bears who had been reconsidering their position only a week ago have suddenly become diehards again. When a dozen of the largest companies in the US lower guidance for the year due to a lack of visibility it makes for a lot of headline grabbing. Remember also that the early reporters typically have the best results and that paints a dreary picture for our future. The Semiconductor sector was probably one of the hardest hit this week. With Intel's warning on Tuesday and several other unfriendly reports during the week the SOX dropped over -14% from the opening high of 348 last Monday to 297 at Friday's close. PMCS added to the gloom by saying they would be cutting -16% of their workforce. You could be tempted to buy chip stocks at this level because it is strong support. However, investors would be hard pressed to provide a reason to own them other than really long term given the recovery now moving to 2004. GE added to the negative sentiment with a -$1.5 billion loss at a reinsurance unit and warned that profits could fall as much as -10% in the current quarter. The company has been hit in insurance, power generation, jet engines, airline maintenance and problems with its pension fund. GE said power systems could see its net income drop by -50% in the 1Q. The CEO said the pension fund was dwindling and could fall from its $14 billion surplus in 2001 to as little as $2 billion in 2003. Historically pension income has been a plus to the GE bottom line with +$1.4B in 2001 but in 2003 it will be a -$300 million drain instead. GE announced earnings of 31 cents, which were inline with reduced estimates. They are a long way from broke with net income for the year at $15.1 billion. They are just suffering from the same problems that are killing the smaller companies. EBAY soared +3.60 and touched $75 intraday. CEO Meg Witman said they would consider offering a dividend once the tax plan was approved. She did not mention a stock split but they split at $75 in both 1999 and 2000. Does lightning strike three times in the same spot? Stay tuned. The number one home improvement supply company, Home Depot, warned that same store sales could fall as much as -10% this quarter alone. They lowered their outlook for the year and said they were going to spend $4 billion to renovate old stores and enhance service levels. HD said long term sales were now expected to grow only +10% compared to prior estimates of +15% to +18%. The stock has fallen to $22 from $52 in 2002 and actually closed up +26 cents on Friday. Microsoft took a lot of heat for its dividend program. For a company with nearly $50 billion in cash the 0.28% dividend was considered chump change. The average dividend from S&P companies in 2002 was 1.80% or six times the MSFT dividend. Considering the -4.00 drop in the stock it is going to take a long time to recover the money. With the cash on hand MSFT could pay the dividend for 51 years. Hopefully it won't take that long to breakeven. The Fed heads are worried. At least that is the message I am seeing. SF Fed President Robert Parry said on Friday that there "are good reasons to feel a good deal of uncertainty about the road ahead." He said the war in Iraq, terrorists, lingering concerns over corporate governance and the fragile state of the economy were all causes for concern. Parry is a voting member of the FOMC. The next two day meeting is a little over a week away on Jan-28th/29th. No, they will not raise rates and an unexpected rate cut could send the market reeling on fears of the unknown. Next week could be rocky for the major indexes. We came to a screeching halt at 900 on the S&P and 8560 on the Dow with the Nasdaq leading the drop. The bulls are kicking and screaming as they slide down that slope of hope and the odds are good we could see a rebound on Tuesday. Monday is a market holiday. I think a three day weekend prompted many traders to go flat or limit positions but they will come back into the market rested and eager on Tuesday. I see resistance at 8600 and again at 8650 and 8700. Going uphill is going to be rough. The only major support is at 8560 then it could be free fall to 8400 where the 100 DMA could slow the descent to real support at 8350. The Nasdaq is grossly oversold with its -47 point drop but it may not be done. 1361 is the next support but that support may be weaker now than before. The 100 DMA at 1332 is the most likely resting place. Chips are on support at 297 on the SOX and MSFT could rest just over $50. The tech majors have already announced and what they said will now weigh on those others to come. Colin Powell made a strong statement on Friday. He said that by the end of the month Iraq will be proven beyond a doubt to be in violation of the UN resolution. He said it forcefully and without wavering. There is a good possibility that somebody knows something and they are waiting until just before the Jan-27th UN meeting to "find" it. This would prevent days of posturing and excuses by Iraq and a "major" find the day before would color the opinions of the security council. The war could then begin around Feb-14th after the Muslim pilgrims return home. The deadline is fast approaching, Saddam is more defiant than ever and troop movements are escalating. All the players are taking their places and the curtain is about to go up on the show. The market may rally once the shooting starts but with world opinion strongly against the war it is more likely to go down before the deadline. The UN deadline is Jan-27th and the President's State of Union speech is Jan-28th. The Muslim holy days are over Feb-12th and all troops and equipment will be in theater by Feb-14th. The key point for me is the Jan-27th and Jan-28th events. I suspect the speech will tell us we are going to start the war. The markets will expect this also and that weight should push them down in advance. Just my opinion but I think roadmap is clear. I see no reason to buy stocks now and I expect institutions are thinking the same thing. What if? What if Saddam really has a couple of nasty weapons and he manages to launch a preemptive strike somewhere? What if Osama is ready to launch a round of attacks on us when we attack Iraq. He already warned about it. "What if" is a game the market plays well. Are you ready to play? Enter Very Passively, Exit Very Aggressively! Jim Brown "An optimist sees an opportunity in every calamity, a pessimist sees a calamity in every opportunity." Winston Churchill ************** FUTURES MARKET ************** Levels Lining Up By John Seckinger jseckinger@OptionInvestor.com With Friday's decline, all three futures contracts managed to test important retracement areas below. Heading into another busy earnings week, lining up short-term and intermediate levels should help traders going forward. Friday, January 17th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 8586.40 -111.47 8695.82 8559.11 YM03H 8583.00 -117.00 8669.00 8538.00 17,088 Nasdaq-100 1017.58 -43.88 1041.43 1017.53 NQ03H 1020.00 -44.50 1077.50 1018.00 207,668 S&P 500 901.78 -12.82 914.60 899.02 ES03H 903.00 -13.50 923.50 897.75 487,942 Contract S2 S1 Pivot R1 R2 Dow Jones 8477.07 8531.74 8613.78 8668.45 8750.49 YM03H 8467.00 8524.00 8597.00 8655.00 8728.00 Nasdaq-100 1001.61 1009.59 1025.51 1033.49 1049.41 NQ03H 979.00 999.50 1038.50 1059.00 1098.00 S&P 500 889.55 895.66 905.13 911.24 920.71 ES03H 882.25 892.50 908.08 918.50 933.75 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 8336.00 8459.00 8662.00 8785.00 8988.00 NQ03H 958.25 989.25 1048.75 1079.50 1139.25 ES03H 873.25 888.25 912.50 927.50 951.75 Monthly Levels (December's High, Low, and Close) Contract S2 S1 Pivot R1 R2 YM03H 7726.00 8028.00 8524.00 8826.00 9322.00 NQ03H 861.75 924.25 1041.75 1104.25 1221.75 ES03H 814.75 846.75 900.25 932.50 985.75 YM03H = E-mini Dow $5 futures NQ03H = E-mini NDX 100 futures ES03H = E-mini SP500 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. ================================================================= Before we begin, I thought it was a very successful first week of posting within the Futures Monitor. Jim Brown had a total for the week of +19.25 ES03H points (Each 1 point move = $50). On Friday, Jim's signals resulted in the following: Short 904.50, exit 906.25, loss -1.75 Short 908.00, exit 902.50, gain +5.50 Long 898.50, exit 899.50, gain +1.00 Total for the day = +4.75 For more information on Jim's posts for Friday, please go to the following link and download the current market monitor. If you already have the most recent version, simply go to the Futures Monitor Post on the upper left hand portion of the applet. http://www.OptionInvestor.com/itrader/marketbuzz/download.asp The March E-mini S&P 500 Contract (ES03H) The E-mini contract on Friday easily fell under the December 50% area of 910.75, dropping to the 38.2% level (next objective at 900.66) before closing at 903 and barely above the 50 DMA (exp, green line). The daily pivot is above at 908, while a weekly pivot (based on this week's range) comes in at 912.50. With that said, if we do get a bid on Monday, I would expect the range from 908 to 912.50 to hold a certain amount of significance (read: act a zone of resistance until a five minute-minute close is above 912.50). Remember, a five-minute close above 908 could easily mean a move to the top of that range; therefore, traders have to be watching for confirmation of both failure or rejection and move higher. As far as the downside is concerned, a move back under 900 could be the catalyst for a test of S1 at 892.50 and possibly S2 at 882.25. With the 19.1% at 884, I will use the 882 to 884 area as an intermediate objective. S1 at 892.50 should be a solid area for shorter-term traders. Chart of ES03H, Daily A 60-minute chart of the ES contract is profiled because of the range between R2 and S2. MACD is certainly in a downtrend, but notice how Friday's close has the index above the 38.2% area. This could portend a slight bounce on the open. The pivot of course comes in at 908. For more aggressive traders looking for a tighter range, I definitely recommend using the "fitted retracement" theory. An article on this subject can be found at the following link: http://www.OptionInvestor.com/futurescorner/fc_010703_1.asp I like to use this when there is a good chance R2 or S2 is taken out; however, it works well to give intra-day traders a nice edge. The other way to use fitted retracements is to take the range at 16:45 p.m. (make sure "all sessions" is clicked in Q- charts), since that can be construed as the true opening level. There is a chart with this method showed within the NQ charts. Chart of ES Contract, 60-minute Bullish Percent of SPX: 61.40% and still in column of O’s (Recent High at 66%, Low of current column at 58%). On Friday, the Bullish Percent only fell a surprising 0.52 percent. On a normal P&F chart of the SPX, there was a negative breakout today that gives a bearish price objective of 860. Support is seen in the SPX at 890 based on P&F analysis. The March E-mini Nasdaq 100 Contract (NQ03H) As noted in Thursday night's wrap, the NQ contract seemed to have bears more confident relative to the other futures' contracts. The over 4% loss on Friday sent the NQ contract underneath the 38.2% retracement area of 1047 and towards the 1013 area and the 19.1% level. It should not be a coincidence that the pivot on Monday comes in very close to 1047. If weakness takes the contract underneath 1013, the first objective can be S1 at 999, while a more intermediate objective should be down near the range from 979 to 983. Chart of NQ03H, 30-Minute Here is a bonus chart below. I did the "fitted retracement" analysis based on the five-minute chart from 16:45, and it is interesting how the levels line up with the normal retracements from S2 to R2. A coincidence? Not likely. This technique can be done before the next day's opening in order to line up levels and see if there will be either buy or sell programs in order for cash to catch up. Chart of NQ03H, 5-minute A chart of the NQ contract below shows the range between S2 and R2 for Tuesday. It is also interesting how the mid-point of a Bollinger Band comes in at 1038. The 22 PMA is there as well. Certainly an area the bears will try to defend if the market finds a bid. I would not be surprised to see either a bounce get sold or immediate weakness bringing the contract just underneath the 1000 area. With the contract well under weekly and monthly pivots, least resistance should still be lower as of Friday's close. Chart of NQ03H contract, 30-minute Bullish Percent for NDX: Fell by two percent to 63% and still in a column of X's (Recent High at 82%, last Significant Low at 14%). A sell signal would be given if 58% is reached. Until that happens, a P&F chart shows risk down to 950 and resistance at current levels. The March Mini-sized Dow Contract (YM03H) Early weakness weighed on the YM contract, and the 8620 objective (next retracement as 8714 was taken out, see chart below) was reached rather easily. Even the next retracement down at 8525 was almost hit, as the YM had an intra-day low of 8538. The close was above its 50 EMA (not 200, as listed); therefore, traders heading into Tuesday may not be as bearish as one would think. With the contract in-between 8620 and 8525, a neutral sentiment level appears to make sense. However, the contract did close under Tuesday's pivot and under 8620. These mixed signals should make the opening that much more important. Chart of YM03H, Daily Chart A 30-minute chart of the YM contract shows the aggressive downward channel during today's trading, and the CBOT settled the contract at 8583 and above the 61.8% retracement area of 8566. This could mean we will see a bounce on Tuesday, taking the contract over 8600 and into resistance near 8620. That is certainly one possible scenario after the extended weekend. MACD appears oversold, and it appears as though this oscillator might cross higher from a pretty low level. Something to definitely keep your eye on. Chart of YM03H, 30-minute Bullish Percent of Dow Jones: 60.00% and in column of X’s. A move to 50% would cancel out the recent bullishness. The last significant high comes in at 72%. On Friday, despite the decline, the Bullish Percent remained unchanged. On a normal P&F chart of the Dow, a sell signal would be given at 8550. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** IT'S THE EARNINGS STUPID By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE: Or I could say it's the stupid earnings that drive the market and the PERCEPTION of earnings POTENTIAL in case someone remembers the Internet (stock market) bubble. And with negative reports from tech giant MSFT and sluggish Industrial production data (again) being reported last week, the prospect for more of a rebound in earnings than is already "priced" into the market is looking dim - so, look for stock prices to head lower again. Technically, the stronger S&P Index, the S&P 100 (OEX) made a bearish retreat from resistance implied by its 200-day moving average on Thursday and then proceeded to "gap" lower on bearish news on Friday, falling substantially below its 50-day moving average. The (Nasdaq) Composite, which was actually trading above its 200-day average had an even more miserable failure. Momentum is down and I anticipate further downward price action in the holiday shortened week ahead after resuming Tuesday. FRIDAY TRADING ACTIVITY – Before I recount the end of the week, let me say a bit more about earnings - my favorite print media, the (Wall Street) Journal, reported on Friday that while the market, in terms of the Dow Industrials is up some 18% from its low point, the issue of earnings quality is still with us and could weigh on the ability to advance further - while the market can bottom on hope and prayer it takes "good" earnings in this post-Enron environment to keep whooping and driving em. The use of so-called "pro-forma" earnings and the other types of reports that are less than the accounting standards board demands continue to be used by many in corporate America. So, besides the Iraq war possibility and its uncertain aftermath, there are more things that must be done to really restore market the sound underpinnings of investor confidence. On Friday, the FASB - sorry, the Federal Financial Standards Board - unveiled details of new rules that will restrict off-the- book partnerships, such as Enron used to bury costs and inflate earnings. Moreover, the SEC said it will require companies to make public filings of their earnings announcements within a day or tow of the release, giving analyst types much quicker access to the details - and, the devil IS in the details, not the company PR spin. However, some in Wall Street think that reporting to the public should be by general accounting principles - period! For example, so far in Q4, about 40% of companies releasing earnings have reported in a way that can exclude one-time or recurring charges. The example the Journal cited was the giant to my north (now that I look out on the Pacific) - Microsoft earned 47 cents according to accounting standards - but by excluding investment losses, court settlement costs and counting a gain from a favorable tax ruling - on a "pro forma" basis the company could maintain that they earned 53 cents a share. A big difference when companies live and die by a few pennies on their earnings. Oh well, Microsoft (and IBM) got creamed anyway. So, companies are still trying to "play" with their numbers in various ways and the problems of trust are NOT behind us yet - probably more regulations are going to be needed, OR a wave of sudden "got religion" conversions which somehow I am not banking on. Back to Friday - Dow components Microsoft (MSFT) and IBM accounted for a big part of the 111 point drop in the Industrials. Tech stocks got hit pretty hard in general as the COMPX was the biggest loser, down 3.3% versus the Dow decline which amounted to a more modest 1.3% - the S&P 500 (SPX) was down a similar amount. MSFT was down 7% and it weighs heavily in the capitalization weighted Nasdaq. Microsoft was downgraded by one major firm, ditto IBM, as MSFT "cautioned" on PC demand ahead. And, disappointment on the most recent Microsoft earnings and its caution on what they can expect to achieve ahead, dampened the hoped for 2-for-1 stock split and - believe it not - their plans to begin paying a dividend. It seems that stockholders are starting to feel that the company should pay out some of their huge hoard of cash. As noted by my favorite online financial news source, CBS Marketwatch, IBM earnings fell for the - count em - 6th. straight quarter. Did I mention that "it's the earnings stupid"? - not to be insulting, but I belong to the Stock Market valuations for Dummies school and have to keep this saying written down and pull it out constantly. And least we forget Iraq - can we ever forget Saddam and Iraq - the "smoking gun" specter was raised by the report that UN weapons inspectors found 11 artillery shells capable of carrying chemical weapons - oh, they were empty. Except that they looked new, we could hope that they were souvenirs of the last war. GE met its earnings target and Home Depot (HD) rose after it reaffirmed its expectations for strong sales growth ahead but I was in one of their monster stores recently and found the employees hopeless to answer questions, so go figure - still, I was there in spite of the help for the selection and prices. EBay (EBAY) jumped after they beat expectations. Lastly, U.S. Industrial Production was reported down 0.2% versus expectations to be up a fraction of percent in December and this the forth reported decline in 5 months. Auto production was the culprit, but of course autos are coming off incentive programs that could not last forever and which would cause saturation in demand at some point. Capacity Utilization was down and the lowest since last March. Lack of investment in the tools and equipment to increase capacity is what is holding the economy back - hence President Bush is recommending a new tax break for business capital investments. And, least we not forget the consumer, whose spending is keeping us afloat, the U of M said its first read on its consumer sentiment index fell to 83.7% in January from 86.7 in December - they cited Consumers as growing more negative about job growth and the ability of the economy to get going. No kidding. OTHER MARKETS - Gold continued to rise as nearby futures rose a couple of more bucks per ounce (to 356.80), following the same upward track as oil which is being pushed by the continued shut down in Venezuelan production. Gold now has realized my "minimum" upside targets, which is not to say that it can't go still higher, especially if bullion continues to remain above the 350 midpoint between 300 and $400 an ounce. Can $400 be a target? Stay tuned! COMING UP (NEXT WEEK) – Lots and lots of earnings reports as we are in full swing of earnings reporting season. Key stocks include JNJ, Citigroup, Ford, Motorola, EK, JP Morgan Chase, Tyco, Merrill Lynch, Texas Instruments, McDonalds, Caterpillar, Telephone (AT&T), Lilly, JDS Uniphase, Nokia, Corning, BellSouth, Lockheed and many others. On balance earnings have been in line with consensus expectations with 9% or so growth in Q4. But, expectations are that this will not last. MY INDEX OUTLOOKS – As I said before, if gold continued to climb above $350 an ounce, it would hard to maintain a similar bullish view on financial assets like stocks in the first months of the New Year. And here's the bullish looking chart of the nearby weekly futures contract - A consolidation (the "triangle") will often occur about midpoint in a move which would suggest that gold would go to 380.00. And, if it gets up to 380, then it seems possible that the yellow metal could touch 400 at some point. The "X" was a "minimum" upside objective calculated from the triangle. If curious on this type pattern and its measuring implication you can find more at - http://www.OptionInvestor.com/traderscorner/082202_1.asp Anyway, this chart above is not filling me with the same confidence in the stock indices, which have failed to yet exceed their prior highs (of last August). The indices therefore remains stuck in either a sideways consolidation at best or in a downtrend still at worst - technically, a downtrend is assumed to remain in force until/unless a prior significant rally peak is exceeded. S&P 500 Index (SPX) – Daily chart: I previously figured that the market in terms of the S&P 500 (SPX) would be locked in trading range and that the high end of it was near. But, that SPX might get up to 950 - WRONG! - it only managed a peak at 935, shy of the prior top and well under the extreme implied by the 6% "envelope" line, a line that is floats at this percentage above its latest 21-day moving average. (I think the envelope range is narrowing in and will lower it to 5%.) In the trading envelope way of looking at the back and forth swings of the Indexes - the 21 day moving average is my standard midpoint benchmark on daily charts. Above the 21-day average I look for more upside until "confirming" signs of a reversal or until the upper envelope line is reached AND there is a confirming reversal - below the same average, look for more downside which is the case now. Injecting a note about my call to put ratio for CBOE equities options trading during the period shown, this way of keeping the figures is not the standard PUT to call readings and I explain why, and more about it, in my latest Trader's Corner article. Please go there for more on this indicator. The way it is constructed, it's not unlike a stochastic, as the recent rally got to an "overbought" reading on the lower chart - unlike the stochastic this indicator provides value as it tends to peak 1 to 5 days ahead of the market top and give some forewarnings. Similar to how 950/960 at the prior upswing high was a key focus on the SPX chart, the previous low around 870 is a possible downside objective now. And, if this prior bottom was penetrated, the lower envelope line at least gives an idea of a point where it could get to if there was sustained bearishness now - with earnings expected to decline in the first quarter or two and with Iraq, the fundamentals would support more than a shallow further drop. So, 870 is the area to watch but it may be less than rock solid support. Keep selling rallies and see where it goes - the chart is bearish again for sure. Near potential support at 900-905 has been exceeded - look for this area to now provide resistance. S&P 100 Index (OEX) – Daily and Hourly charts: I said last week that "key resistance comes into play at 477, at the 200-day average" - the weekly high was 475. The 200-day moving average notched down a bit by midweek - hey, not for nothing it's called a "MOVING" average. The idea here was that with an overbought reading registering on the 14-day stochastic, it was going to take a substantial amount of buying to lift the S&P 100 (OEX) ABOVE its 200-day average as institutional money managers will pay attention to and sell into, the 200-day benchmark. There are not many technical indicators that are on the tip of their tongues at lunch but this is one that is widely followed by the institutional set - a self-fulfilling prophecy? I doubt it, but on the other hand I don't really care, as long as it "works" and it does. I also discussed the fact that hourly and daily oscillators had DIVERGED from price action and were not “confirming” the latest highs. This tends to be a good technical sell “signal” and I suggested a strategy of exiting calls and buying puts on a scale up basis around the moving average, which worked pretty well. Divergences of this type, where prices go up to higher highs but oscillators like the stochastic model (and RSI) make LOWER highs, is one of my favorite trade entry "signals - in fact, I would hold that you can make more by trade entry ONLY on such divergent sell (and buy) indications than by attempting to trade the stochastic up and down as "automatic" buy or sell signals when they cross. For those wanting more info on divergences, see - http://www.OptionInvestor.com/traderscorner/101302_2.asp Looking ahead, a further decline is likely and my first objective is to 452-455, but a longer range target is to around 440 as this as been the area of prior lows. I favor selling rallies (buy puts) on any rebound up to resistance implied by the bearish downside gap at 462-464. NASDAQ COMPOSITE (COMPX) Daily chart – The COMPX got above resistance implied by IT'S200-day moving average, but the Index didn't stay there long and reversed well under the 1500 area which was well under tougher technical resistance around 1500. Now, we're looking at 1400-1420 as key resistance and an area likely to cap any rally attempts, being as this zone is the gap area where there was "unfulfilled" selling from Thursday-Friday as least during the regular trading hours. 1320-1300 is my downside objective in the Composite. QQQ Hourly and Daily charts: I was looking to sell rallies/buy puts above 27, although I thought QQQ might reach 27.50 or a bit higher judging by the upside momentum we were seeing in the Nasdaq/tech area. However, keeping me bearish was the lack of volume expansion on the rallies and very definitely the pronounced price/oscillator (in this case, the Relative Strength Index or RSI) DIVERGENCE which was very apparent on the hourly line (close-only) chart on the right hand side below - Where we did see volume expand was on the move on the downside which is again suggesting that the dominant trend is still DOWN. Look for potential support in the 23.25 to 24.00 area and I would take some profits on stock held short, in this area if reached. Conversely, I suggest shorting rallies to the 26-26.25 area in the Q's and wait for the stock to get fully oversold again before thinking about exiting or taking profits on short stock or long puts. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** Editor's Plays ************** The End of Innocence Finding something I would put my money on this weekend was really tough. With my market bias down I find it hard to even consider a call play. I already have DJX puts on the play list from two weeks ago. I looked at a bunch of tech stocks for put plays but many of them had already dropped too far or were right on strong support. Look at FISV, MXIM, LLTC, KLAC, APOL. All are right on the 100 DMA, which has provided support in the past. That would seem to indicate a chance for a tech bounce but I am not convinced. So I passed for a better odds play. Everyone saw EBAY beat earnings and raise guidance and shorts ran for cover. EBAY added +$3.60 to close at $75. I wanted to short it really bad but with a potential split announcement any day that could be sudden death. Thinking along those lines brought me back to YHOO. They beat estimates by 33% and they raised guidance with expectations that they would post more revenue this year than during the Internet bubble. No gap up there. They gapped down and are still falling. Expectations were so high that everyone thought they would beat. Who else in the Internet sector has high expectations and a strong chance of failure. You guessed it. Amazon has earnings next Thursday, the 23rd. The expectations are so high that AMZN only dropped -40 cents on Friday with all the tech stocks down huge. Those diehard bulls are expecting a blowout with all the new products and partnerships. The trouble with Amazon is that they are still trying to build the brand. They spend every dime on advertising, low prices and free shipping to attract new customers. We all know how competitive Internet pricing is for everyone. With almost every search engine offering price comparisons from dozens of stores on exactly the same product I have rarely found AMZN competitive. They appear to be trying to capitalize on their easy of shopping. I agree they are easy to buy from. I bought four things with one click in the last week. But I doubt they made more than $1 profit on any of them. They are cheap enough to lose money but not cheap enough to get all the business. I bought $35,000 of books for the end of year special and Amazon could not even get close on price. Price competition is not their strong point. Convenience is and that convenience is costly. Yes, their prices are a couple dollars higher but with multiple warehouses, thousands of people and free shipping are they really making any money? Even if they make any money this quarter will it be enough to satisfy the ever demanding investors. Yahoo beat substantially and they trashed the stock. AMZN can beat substantially and get trashed as well. Amazon can no longer run on expectation like the Internet non-earnings of the past. They have to start producing or end up in the penny stock category. Jeff Bezos can only get so far in the market on a bubbling good attitude and investors are going to start trading in the stock for something with real growth prospects. How much more can Amazon grow? A gazillion dollars in volume does not pay any bills unless there is profit in the bank. Their PE is infinite because they have never made any money. They lost -2.18 in 1999, -4.02 in 2000, -1.55 in 2001 and they are projected to lose -0.40 in 2002 on $3.5 billion in revenue. With 381 million shares and a market cap of $8 billion they would have to net $152 million in the 4Q to break even for the year. They only netted $3.8 million in the 4Q of 2001 and it was the only quarter they have ever made a profit and it was only one cent. The more I researched this play the more I liked the potential. Obviously this is a very speculative play. The concept is a put ahead of earnings and the expectation is that they disappoint. I guarantee they are not going to announce a dividend or a stock split and short of a windfall profit the natives are going to be thinking bonfire. AMZN closed Friday at $21.46. That makes the Feb-$22.50 put $2.25 and the Feb-$20 put $1.10. The 100 DMA is at $19.49 and while that stopped the drop back in December I don't think it will cause more than a pause this time around. Next support is about $18.50 and then $15.50 if they really stink up the place. Picking a price target helps decide what option you want to play. Assuming they drop to $18.50 and hold then the $20 put would be $1.50 plus a little time premium for the market makers. The $22.50 put would be worth $4.00 plus the juice. For my money I would go with the $22.50 put for $2.25 as the better deal. We are not talking about puts on QCOM at $600, just a $2 option. Spend the extra money. Any further drop would translate dollar for dollar on either option. I am not going to put a trigger on this play. I expect the Nasdaq to bounce slightly at the open on Tuesday so you should be able to get either put cheaper if it does. I would not sell them immediately after earnings unless AMZN gets crushed. Give it some time for the war talk to increase and a few more tech earnings to deflate the market sentiment. Who knows $15 may not be out of range. No guarantees of course! There is always the possibility that AMZN will gap up after earnings on some positive spin by Bezos as he is sure to get some face time on CNBC. Keep the faith and if earnings doesn't get them the war and tech slide should. ******************************** Play updates: EXTR Call from Jan-12th. EXTR spiked up on Monday to 5.43, just below the 5.50 trigger for entry into the play. With the Intel news on Tuesday the tech sector has been going down hill since. This play was never triggered and has been cancelled. DJX Puts from Jan-5th. Remarkable turn around. The Dow toyed with 8800 several times since this play was initiated but remember it was a long term play 45-60 days and it has only been two weeks. Momentum and sentiment seems to be finally on our side. The target for this play is 8350 with a potential for an even deeper drop. Feb $85 and Mar $85 puts were profiled. I still favor the Mar-$85. Powerball - From 12/29/02 The Powerball lottery play took a serious hit last week and dropped in value from a value of $1405 on Jan-12th to only $955 at the close this Friday. Since this is a 12 month play I am not concerned but considering these are all tech stocks I am sure we are going to see more red before we see green again. It would have taken $1,135 to buy one contract of each on January-2nd. Any bets on what this will be worth on 2/31/03 ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Slip Sliding by Steven Price The rollover continued today, as expected. The after hours pounding in IBM and Microsoft resumed in mass when the market opened, driving both stocks lower throughout the day and into the close. IBM lost -$4.75 and fell through its 200 exp, 50 and 21 day moving averages to close at $81.30. Microsoft lost -$3.89 to fall through its 200, 100, 50 and 21 day moving averages and finished the day at $51.46. Those stocks led all major indices lower. Dow lost -113 points and fell below support at the 50-dma (8607). The COMP lost -47.56 to fall through the 21, 50 and 200 dmas, as well as support at 1400, finishing at 1376. The SPX lost -12.82, dropping through its 50 and 21 dmas to finish just above support at 900, with a close of 901.78. It was just a few days ago we were looking at a possible breakout to new highs after these indices ran to their 200-dmas on the upside. After gaining 6-7% in the Dow, SPX and OEX, and 9-11% in the COMP and NDX over the first two weeks of the year, we have not only paid the piper, but overpaid the piper and gone into debt. Why the sudden reversal of fortune? Part of the reason is the worse than expected comments about prospects for 2003. Combine that guidance with an unsustainable rally on no real fundamental basis, other than the President's plan to make dividends tax- free, and the recipe for a sell-off seemed complete. However, trading on expectations doesn't usually lead to profits if those expectations never come true. It appears, however, that expectations for a rollover are finally fulfilling themselves. Of course, if the President's plan does make it through Congress in tact, dividend-paying stocks will automatically provide higher returns than they do now, all other things being equal. Of course, all other things will not be equal if the current business environment does not improve. If one trend has been reliable over the past couple of years, it is the trend of predicting a recovery 6 months to a year out. Even Apple CEO Steve Jobs said recently that he continues to hear that prediction every six months or so, and has seen no real sign of it yet. Now that Microsoft lowered guidance for the full year 2003, we are looking at least a year ahead, if not more. The bearish head and shoulders pattern that would include a left shoulder at the November 6 Dow high of 8800; the head at the December 2 high of 9043; and the right shoulder recently formed over the last couple weeks between Dow 8800 and 8869; continues to get signals each day that it is still very much alive. The point and figure charts registered sell signals today in the SPX at 905 and OEX at 457.50, with the Dow coming only a few points shy of its own sell signal at 8550. This mirrors the point and figure pattern we saw on the possible left shoulder, where the second leg up of the rally gave a buy signal and then almost immediately rolled over to new relative lows. We just got buy signals in the Dow at 8850, SPX at 935 and OEX at 472.50 on the second leg of the rally, before rolling over into sell signals now present in two of the three. Of course those rallies in November eventually bounced and achieved a new relative high a month later, but not before turning bulls into grumpy old bears with an immediate loss of 4.5% in the Dow and 5.2% in the SPX. If the head and shoulders pattern does complete itself with a neckline break at the Dow 8200-8250 range, the measuring objective is down around 7500, over 1000 downside points from here. Given the string of cautious statements accompanying most recent earnings releases in both the tech and non-tech sectors, it is hard to imagine an event that will turn the tide back in a positive direction. However, we are now into the meat of earnings season and sentiment can shift quickly. Dow theorists will point to the need to confirm downtrends with the Dow Transports, as well, and so far the Transports are holding above the 50-dma of 2337, with a close at 2344. While the theory has its merits, it seems outdated to focus on the transports in a clearly technology driven market. Still, conservative traders can look for a breakdown in the TRAN below that 50-dma and the point and figure sell signal in the Dow at 8550 to confirm the sell-off. The TRAN still remains in a point and figure column of "X" and would require a trade of 2,250 to reverse into a column of "O." The sell signal would not come until 2,200 and by then the Dow could be testing support in the 8400 range. A failed rebound below Dow 8700/SPX 910 may provide an excellent short entry point after today's big sell-off, now that we have gotten the sell-signals in the OEX and SPX and the cue from the biggest tech players that earnings season will most likely bring further disappointments. While it is possible that we don't get any bounce, it seems likely after such big gaps down in IBM and Microsoft. If we don't get a bounce, then that confirming sell signal in the Dow may be the next signal for short entries. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8586 Moving Averages: (Simple) 10-dma: 8731 50-dma: 8606 200-dma: 8896 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 901 Moving Averages: (Simple) 10-dma: 921 50-dma: 908 200-dma: 945 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1017 Moving Averages: (Simple) 10-dma: 1067 50-dma: 1049 200-dma: 1054 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The chip stocks took a tumble today, following cautious statements from IBM and Microsoft about the coming quarter and coming year. While neither of these techs make up the index, they set the tone for the computer industry and when combined with a big earnings miss from AMD, sent the COMP down almost 50 points and the SOX down to a failed support test at 300. The 300 level, as noted in this space last night, has tended to stick like glue for long periods. Today's action found support just above that level for much of the morning, before breaking down and finding resistance there on a failed afternoon rally attempt. If the SOX is unable to break back above that level on a Monday morning bounce, look for the next support level in the 283-289 range. If we break below 280, then it may be a steep drop down into the low 200s. Given the slew of earnings releases still ahead, a break of 280 seems entirely possible in the next couple of weeks if we don't get any better news from the tech sector than IBM, AMD and Microsoft had Thursday night. 52-week High: 657 52-week Low : 214 Current : 336 Moving Averages: (Simple) 21-dma: 312 50-dma: 323 200-dma: 365 ----------------------------------------------------------------- Market Volatility The VIX once again bounced from the 26% support level, which has been reliable as far as picking recent market tops from the contrarian side. If we are going to break down below that level, we will need a broad market rally that at least erases the losses of the last several days. If we continue to sell off, the VIX is likely to move back toward the recent resistance range around 35- 36. That range has been reliable as far as indicating recent market bottoms around Dow 8200-8300. CBOE Market Volatility Index (VIX) = 28.68 +1.01 Nasdaq-100 Volatility Index (VXN) = 42.84 –1.96 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.82 891,456 733,634 Equity Only 0.74 751,226 555,660 OEX 1.12 41,590 46,635 QQQ 1.80 36,665 66,047 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 52.7 + 0 Bull Confirmed NASDAQ-100 63.0 - 2 Bull Confirmed Dow Indust. 60.0 + 0 Bull Confirmed S&P 500 61.4 - 2 Bull Correction S&P 100 61.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.32 10-Day Arms Index 1.11 21-Day Arms Index 1.33 55-Day Arms Index 1.25 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 899 1971 NASDAQ 1021 2075 New Highs New Lows NYSE 133 25 NASDAQ 96 38 Volume (in millions) NYSE 1,639 NASDAQ 1,607 ----------------------------------------------------------------- Commitments Of Traders Report: 01/14/02 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 left positions mostly unchanged with a small reduction to the short side. Small traders reduced the long side by 1,000 contracts, while adding 9,000 contracts to the short side. Commercials Long Short Net % Of OI 12/23/02 408,592 467,259 (58,667) (6.7%) 12/31/02 410,968 462,782 (51,814) (5.9%) 01/07/03 411,542 455,538 (43,996) (5.1%) 01/14/03 411,052 453,164 (42,112) (4.9%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 12/23/02 138,756 58,236 80,520 40.9% 12/31/02 139,383 75,640 63,743 30.0% 01/07/03 143,169 83,895 59,274 26.1% 01/14/03 144,182 92,358 51,824 21.9% 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 added slightly to the long side, while reducing short positions by 3,000 contracts. Small traders added 1,000 to the long side and left shorts virtually unchanged. Commercials Long Short Net % of OI 12/23/02 32,067 44,451 (12,384) (16.2%) 12/31/02 31,399 44,387 (12,988) (17.1%) 01/07/03 37,966 48,156 (10,190) (11.8%) 01/14/03 38,057 45,060 ( 7,003) ( 8.4%) 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 12/23/02 17,009 5,865 11,144 49.0% 12/31/02 19,841 5,009 14,832 60.1% 01/07/03 19,708 8,453 11,255 40.1% 01/14/03 20,757 8,320 12,437 42.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 14,832 - 12/31/02 DOW JONES INDUSTRIAL Commercials added slightly to both sides, with a net 500 contract ncrease on the long side. Small traders reduced long and short positions slightly. Commercials Long Short Net % of OI 12/23/02 14,991 11,103 3,888 14.9% 12/31/02 15,940 11,253 4,687 17.2% 01/07/03 16,210 11,333 4,877 17.7% 01/14/03 17,804 12,427 5,377 17.8% 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 12/23/02 4,584 6,296 (1,712) (15.7%) 12/31/02 4,997 6,553 (1,556) (13.5%) 01/07/03 4,963 8,334 (3,371) (25.4%) 01/14/03 4,552 7,697 (3,145) (25.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Pivot Analysis to define levels and range Where can I find and article about these pivots and levels you keep talking about in the market monitor and intra-day updates? Is there an article I can read on this topic? It looks to have merit, but I can't understand why. Yes, here is a re-print of fellow OptionInvestor.com analyst John Seckinger's original article on pivots, how they are "derived" or calculated. While John's article used the futures charts and previous day's high, low and closing values, this tool is useful not only for equity indexes, but individual equities themselves. Using Pivots Effectively By John Seckinger Using pivots effectively can increase a trader’s confidence when entering or exiting a position, and such a simple formula can at times be one of the most powerful tools. When describing a pivot, I like to use the word “equilibrium,” since it is this level that will act as a focal point for market makers, institutions, and retail traders. When a specific contract trades away from the recognized pivot, traders will already be aware of important support and resistance areas calculated from using the calculated pivotal level. The calculation is as follows: Pivot point (P) = (H + L + C) / 3 First resistance level (R1) = (2 * P) – L First support level (S1) = (2 * P) – H Second resistance level (R2) = P + (R1 - S1) Second support level (S2) = P - (R1 - S1) Note: H, L, C are the previous day's high, low and close, respectively: Let us use the ES03H contract as an example: High: 908.00 Low: 895.25 Close: 901.00 Pivot becomes 901.41 First Resistance: 907.57 First Support: 894.82 Second Resistance: 914.16 Second Support Level: 888.66 Chart of ES03H, 10-minute Note how the pivot at 901.41 lines up with the 50% retracement at 901.65, as well as the second resistance area just under the 915 area? Coincidence? Not likely. Note: 910 was the high just a few days earlier, so keeping the bottom green line intact still seems to make sense (versus only highlighting 915). Moreover, the 907 level is seen in the SPX contract (50 PMA), so that matches up well also. In theory, trading throughout a session should remain between the first support and resistance levels due to market maker activity. If either of these first levels penetrated, then it is time to look for off-floor traders coming into the market and taking the contract towards the second levels of support and resistance. Of course, once a support or resistance area is broken, look for support to become resistance and vice versa. Intermediate and long- term traders should then become involved if the second support or resistance level is cleared. When is there a caveat that changes the scope of the pivot? When there is a gap the following morning; since a move outside the projected pivot will usually hurt the market makers ability to move the market effectively around the aforementioned pivot. It is important to realize that pivot analysis should be used with other technical indicators, since those other indicators will provide a higher confirmation of the level(s) listed. Example: The ES trades 907.57 and oscillators, trend lines, etc. are all pointing bullish; therefore, look to buy above that level with 914.16 as the upside target instead of looking to sell the resistance area short. If used blindly, the chances of being caught in a trap greatly increases. Why? I am sure that I am not the only person looking at these exact levels, and traders like nothing more than getting another trader into the market just above a support or resistance level, only to reverse price action and try to force that same trader to take an immediate loss. If using other analysis, confidence grows and traps occur less frequently. Let us do one more example, and this time we will back test the pivot theory. Note: I really am randomly picking a day. Chart of NQ02Z, Daily The 1078 noted resistance area really turned out to be important (top of a wedge pattern), while 1013.50 came extremely close from being the low on December 9th and 10th (1014 and 1014.50, respectively). The 975 level does hold a solid intermediate level of importance, but 1104.50 never really materialized into much. I would still stay this pivot analysis worked out rather well. Of course, traders can use pivot analysis on any timeframe that has a low, high, and close. Obviously, all of them do. However, be careful about the shorter moving averages. Remember, from S1 to R1, this is an area that should be controlled by market makers. With that said, I am not sure if they look at 17 minute chart patterns when trying to figure out levels to reduce or increase inventory. I recommend starting with a daily chart and then playing with a 120 and 60-minute chart. If another timeframe works and you are profitable trading it, perfect. Why do traders like pivots? It is a “matter-of-fact” number and emotions are stripped away. It is almost like putting together a trading plan via some simple math. That is what worries me. I have absolutely no problem using the levels for small positions (or even exiting large positions); however, it is too costly to simply rely on these numbers to be the holy grail. Trading is too much of an art for that to happen. I do, however, think these support and resistance areas from pivotal analysis makes for an excellent tool to trading. If I have resistance at 906.50 and pivot analysis has 907.25, I can see (as long as other indicators match up) putting on a quarter position at each. If the pivot analysis works better on a consistent basis, confidence grows and position sizes increase. I have used pivot analysis when trading in the past, and on a scale of 1-10 I give it a 7.5. Solid, but not great. I will start incorporating the numbers into the futures wrap and we can together see how it works. Good Trading! Questions are welcomed! John Seckinger jseckinger@OptionInvestor.com Wow John, that was great. Now.... I can't remember how John and I started up a discussion about these pivots and support/resistance levels, but somehow it came from a conversation we were having about point and figure charts. I think I said something about "pivot" or mentioned some "level" and John started rambling about how that certain level was a pivot or intra-day support/resistance level and that's why the index did what it did that day. He started talking about some mathematical formula and from where it was derived. I don't know why I asked from where it was derived. If the darned thing seemed to have merit, then it should work. I didn't care if he picked it up out of a trashcan or if Charles Dow handed it down to him. I just wanted to see if it worked. So, for those that may have ever met John personally, like myself, then you know that you have to question anything that John says (big grin). I'm kidding of course. But, like I've said before, I'm one of these "prove it to me" guys and I like to back-test EVERYTHING. Being able to back test the point and figure charts as well as Professor Davis' study is what interested and convinced me that supply/demand analysis need to be one of the tools in my investment and trading tool box. Like point and figure charts, the pivots/support/resistance levels don't ALWAYS hold as a "key" level, but like a p/f chart, when the stock/index does something it shouldn't have done, then you know something may be wrong and you're ALERT to something potentially being WRONG. As I started looking and John's pivot analysis stuff, I started thinking. This is nothing more that some type of "fancy" retracement stuff. It gives me a "pivot" which is similar to a 50% retracement level, which is nothing more than the middle of a range. Shoot, you can see that from the above mathematics of pivot calculation. Then, the S2, S1, and R1 and R2 are nothing more than mathematically derived levels around the pivot, with S2 and R2 attempting to define an outer range for a day's trade. I love retracement brackets. Please don't ask me anything about where retracement brackets came from, how they're derived, or anything. All I know is that they seem to show "levels" that traders somewhere in this world seem to trade from time to time. So, I got to thinking. Wow, these levels that John's pivot analysis seems to lay out each day, did seem to have one of the levels coming into play on that particular day. I can't remember what day we were talking about these levels, but I do remember looking at a chart of the S&P 500 Index using the above calculations to derive the daily pivot and S2, S1, R1 and R2, and sure enough, the SPX traded right to on of the levels, hovered there for an extended period of time, but when that level was broken, then a rather quick move higher was found as if there was some type of consolidation at a level where buyers and seller all had stock to buy and stock to sell, then when the buyers won out they seemed even more hungry for stocks and drove the SPX higher. But that wasn't enough. Are these pivots really like retracement? Have you ever been trading a stock or index based on retracement and at certain level of retracement, the stock sure trades well around one of the level, but then at other times, the stock trades right "through" a level as if it were not even there, and then suddenly shows some type of consolidation in-between one of your levels of retracement? I asked myself. Why did the stock/index do that? Who in their right mind picked that level, when that level didn't line up with retracement or anything historically significant? Why oh why oh why did it do that? I think that sometimes, the answer to that question has been pivot analysis. So.... I began testing the pivot analysis using some historical daily data. That's easy enough to do. Take yesterday's high, low close, plug it into the formula, then make an observation of those levels and see if the stock, or index did anything "funny" at any of those levels. "Aha!" I said.... this one didn't work at all that day. Or "this did me no good this day as the stock/index traded between these levels all day." And that's when it hit me. So why did the stock trade the way it did that day? Laughing... I think I ask myself more questions in a day than subscribers do. But that's me. I always try to figure out why something does what it does. When I think I've uncovered a pattern, then by golly I've got to trade it. But then I thought about other subscribers that aren't interested in daily fluctuations and levels. Is this tool only good on a day to day basis? Not at all. While the daily support, pivot and resistance levels can be used to determine or identify potential entry and exit points for a trade, why can't we "step back" and look at the results of the weekly data? Why not take last week's trading range (high, low, close) and establish some type of "range" and levels within that range. After all, this pivot stuff is nothing more than a mathematical formula, that seemed to have significance on a daily basis. What if it does on a weekly basis too? And why shouldn't it? How do you think Merrill Lynch controls its inventory of stocks and manages inventory risk on a day-to- day or week-to-week basis? I don't think that Merrill has a trader for EVERY stock in the market. Do you? No! A great deal of equity trades are handled by computers was my thought. And guess what? Computers are great with math aren't they? Do you see where I'm going here, and why I think this pivot analysis stuff seems to depict levels of trade on a daily and sometimes weekly and even monthly basis? Imagine for a second, that you need some efficient way to control your stock inventory of 6,000 stocks that are listed on the NASDAQ and NYSE. At the end of each day, you know to the share how much inventory you have. At the end of each day, you also know to a share how much IBM you may have sold and what the average selling price was. You also know how much inventory you may have bought of IBM that day and at what the average price paid was. Based on IBM's close, you know to the penny how profitable or unprofitable that position is. Then, guess what happens that night if you find out that you either have too much profit, or too great a loss in that positions? For Merrill Lynch or any other brokerage house that holds inventories in stocks, then risk management becomes key. The next day, if Merrill Lynch is "too unprofitable" in a stock, then the only way to reduce risk in the position is to either sell some of the losing position and reduce risk, or short to the market in another account that same position as a hedge. How can Merrill Lynch do this? What about Lehman Brothers, Goldman Sachs, Fidelity and others? Program it into a computer and at certain levels, have the computer sell/buy a certain number of shares if one of your programmed LEVELS is traded. The computer will look at inventory, know to the dollar at any second during the day what the inventory value is, and then sell or buy as much stock as it can at a particular level, but only to a point where it will then stop selling and wait for another level in the program to be reached. As we've discussed in the past, a market maker, institutional trade and now a computer, always knows what his/her or its order flow is like. Any institutional trader KNOWS to the dollar how much stock he/she is long or short at the end of each day and has a feel based on observation of buying/selling order flow from customers. If the trader is "too profitable" in a stock and begins to observe that buyers or seller are beginning to "dry up" at his "too profitable" level, then its time to start taking some profits right? The same is true for Merrill, Goldman and Solomon. Each night, the computer spits out net inventory and a profit/loss statement. The next day the computer is programmed to manage the inventory in those positions deemed "getting too risky" and that's it. No emotion, just run the program as described based on the math. It's the "math" in John's pivot analysis that makes it so "ideal" for institutional stock inventory management and why I think that the levels from John's pivot analysis seem to come into play on a daily, weekly and perhaps monthly basis. How can these levels come into play on a weekly and monthly basis if the programs are being run each day? Now put yourself in the shoes of a mutual fund manager that is running a $6 billion equity fund. You're "order flow" is the number of deposits or redemptions from your shareholders. Your inventory is your "top picks" that should benefit from whatever fundamental analysis or scenarios you feel should play out to the benefit of the stocks you hold. Sure, you're going to have some dogs in the portfolio and when they're identified, then your either going to the head trader and have him or her sell the position (not all at once, as the order needs to be worked and sold at the best price available over time). You can't just call up and say sell 2 million shares at market. You do that and the bid will drop quickly as other traders perceive something is wrong and will only take stock at a lower price. Either that, or they'll sense some "desperation" on your part and "know" they can get you to sell them the bulk of it at a lower price. Or, you being the fund manager can simply have your trader set up a computerized program that has you out of the position over the next couple of weeks say between $25 and $28. It may be difficult for you to swallow my thinking here, but this goes on for thousands of stocks each day. For every buyer there's a seller and the opposite is true. Each wants the "best price" and much of the day-to-day transactions are left to the computers. So can this pivot analysis stuff be useful to you? Now that you know the formula for the pivot stuff, you at least know how the levels are now calculated. Now you're a little more "comfortable" with how the support and resistance levels are calculated as well as the pivot. You may now also get greater benefit out of John's future's wraps and perhaps my index wraps each night (Monday-Thursday) where I've started showing a "matrix," which is nothing more than a spreadsheet I've put together, using the formulas above, to give us some levels to look at on a daily, weekly and monthly basis. While we are just really starting to use the weekly and monthly observations, it is my "thought" that we as traders and investors might look for levels that may correlate with each other from the matrix, that might come into play each trading day. Today is Friday, January 17, 2003 and I've plugged in today's high, low and close for Friday's trading, which has John's pivot formulas generating S2, S1, Pivot, R1 and R2 levels for Tuesday (the markets are closed on Monday for Martin Luther King Jr. Day). The weekly section has also been updated with this week's high, low and close. The monthly section has not been updated since December 31. Why? At this point, the monthly data is somewhat of an "all encompassing benchmark" that we might envision the various indexes trading within. There is not stated rule that the indexes cant trade outside of their S2 and R2, but perhaps serves as some type of monthly range the markets might trade within and perhaps "gravitate" toward some of the levels, especially if there is some type of commonality found with the weekly and daily levels. Here's what I'm talking about, and how I think a trader or investor might view things in the coming week. I'm going to make some statements here and see if you can figure out why I say this based on the "pivot matrix" below. Statement #1: Next week, I will want to look for the possibility that the Dow Industrials will trade between the 8,475 and 8,670 range. I think the S&P 100 Index will trade between 450 and 463. I think the S&P 500 will trade between 890 and 912. Pivot Analysis Matrix I made the above statement based off of the above pivot analysis matrix and simply made some observations of correlative levels found in the "daily" and "weekly" pivot levels. I "know" we have a subscriber or two that are color blind, but I note correlative support levels in the Dow Indu, OEX and SPX at Tuesday's (01/21/03) S2, with the weekly S1s. Making note to potential "key" levels of support at INDU=8,475 and OEX=450 and SPX=890. On the resistance side of things, I note correlative points at Dow Indu, OEX and SPX, with their daily R1s, and their weekly PIVOTS. Making note to potential "key" levels of resistance at INDU=8,670, OEX=463 and SPX=912. Let's look at the S&P 500 Index (SPX.X) 901.78 and use the weekly S2 and R2 levels to define a "range" with our retracement bracket. What we find may be interesting. S&P 500 Index Chart - Daily Interval The SPX certainly looks to be sliding lower with MACD oscillator rolling over and stochastics approaching oversold. With correlative levels of 890 and 889 found in the daily and weekly charts, if find interesting correlation with those matrix levels with the technical level found in the SPX chart itself. Since the "pivot" by mathematical approach DEFINES the mid-point of the weekly range, then the 50% retracement bracket, with upper and lower levels of retracement set at the lower and upper S2 and R2 reflects the weekly pivot itself. However, it is the correlative R1 of 911 from the DAILY pivot analysis that correlates with the weekly "pivot" that gives the SPX some potential resistance at 911 to 912. How would I look to trade this? The matrix by itself does not lend itself to "predicting" directional movement. But if we think like a computer and trade the levels then the following approach could be taken. Bearish thought for Tuesday. IF SPX breaks below DAILY S1 of 896, then short and target 890, stop just above 61.8% retracement of 903.48 or DAILY pivot of 905. If SPX rebounds on Tuesday in "relief rally", then look for bearish entry near 911 or 912, stop 915.50 and target 890. Bullish thought for Tuesday. If SPX breaks below DAILY S1 of 896, begin looking for SPX to firm near 890 and go long a rebound attempt at 892, stop 887 and target 910. Expect some resistance at daily and weekly S1s, DAILY pivot and look to exit either just below weekly Pivot, or any correlative resistance found in coming sessions between daily and weekly pivot matrix correlations. The reason a "swing trader" must look for daily and weekly correlations is that each day, as the SPX trades a different high/low/close, the daily S2, S1, PIVOT, R1 and R2 will change. Conclusion I did some back testing and some paper trading with the pivot analysis and have "developed" some trading techniques using retracement like that above from the daily S2 and R2 levels and have found some "uncanny" correlations as to how the indexes and even stocks have seemed to trade the levels of the pivot analysis and levels of retracement. Maybe there will be some questions generated from this article that we can use for a topic next week? Have a great 3-day weekend. Remember, the markets are closed for trading on Monday. It will be very interesting to see how things shake out in next weeks trade. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of January 20th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- BXS BancorpSouth, Inc. Mon, Jan 20 After the Bell 0.38 CX CEMEX S.A. Mon, Jan 20 -----N/A----- 0.47 FAST Fastenal Mon, Jan 20 Before the Bell 0.21 FISV Fiserv Mon, Jan 20 After the Bell 0.35 HE Hawaiian Electric Mon, Jan 20 -----N/A----- 0.77 ------------------------- TUESDAY ------------------------------ MMM 3M Company Tue, Jan 21 07:30 am ET 1.28 ADTN ADTRAN, Inc. Tue, Jan 21 Before the Bell 0.29 ACS Affiliated Comp Serv Tue, Jan 21 Before the Bell 0.53 AMTD Ameritrade Holding Co Tue, Jan 21 Before the Bell 0.04 ARM ArvinMeritor, Inc. Tue, Jan 21 Before the Bell 0.46 AVB Avalonbay Communities Tue, Jan 21 After the Bell 0.85 BPC Banco Com Portugues Tue, Jan 21 After the Bell N/A BJS BJ SVCS CO Tue, Jan 21 09:15 am ET 0.22 BXP Boston Properties Tue, Jan 21 After the Bell 1.07 BNI Burl No Santa Fe Corp Tue, Jan 21 Before the Bell 0.52 CDN Cadence Design Sys Tue, Jan 21 After the Bell 0.04 CNI Canadian Natl Railway Tue, Jan 21 After the Bell 0.84 CKFR CheckFree Tue, Jan 21 After the Bell 0.17 C Citigroup Inc. Tue, Jan 21 -----N/A----- 0.46 CYT Cytec Industries Inc. Tue, Jan 21 After the Bell 0.35 DV DeVry Tue, Jan 21 -----N/A----- 0.20 ETN Eaton Tue, Jan 21 -----N/A----- 0.92 F Ford Motor Company Tue, Jan 21 Before the Bell 0.06 FULT Fulton Financial Tue, Jan 21 After the Bell 0.34 GP Georgia-Pacific Tue, Jan 21 Before the Bell 0.22 GPT GreenPoint Financial Tue, Jan 21 Before the Bell 1.44 HDI Harley-Davidson Tue, Jan 21 Before the Bell 0.46 HCP Health Care Property Tue, Jan 21 Before the Bell 0.89 HMA Hlth Mana Ass Inc. Tue, Jan 21 Before the Bell 0.24 HUBb Hubbell Incorporated Tue, Jan 21 11:00 am ET 0.46 HU Hudson United Bancorp Tue, Jan 21 Before the Bell 0.61 ICBC Independence Com Bank Tue, Jan 21 4:00 pm ET 0.58 JNJ Johnson & Johnson Tue, Jan 21 Before the Bell 0.47 KRI Knight Ridder Tue, Jan 21 05:30 am ET 1.14 LEE Lee Enterprises, Inc Tue, Jan 21 -----N/A----- 0.50 LOGI Logitech Intl Tue, Jan 21 11:30 am ET 0.71 MXO Maxtor Tue, Jan 21 After the Bell 0.12 MCK McKesson Corporation Tue, Jan 21 After the Bell 0.46 MEL Mellon Financial Corp Tue, Jan 21 -----N/A----- 0.42 MOT Motorola Inc. Tue, Jan 21 After the Bell 0.10 PRK Park National Tue, Jan 21 -----N/A----- 1.60 PPP Pogo Producing Tue, Jan 21 12:00 pm ET 0.59 PCO Premcor Inc. Tue, Jan 21 -----N/A----- 0.39 RYN Rayonier Inc. Tue, Jan 21 After the Bell 0.34 RGIS Regis Corporation Tue, Jan 21 Before the Bell 0.46 RFMD RF Micro Devices, Inc Tue, Jan 21 -----N/A----- 0.05 ROK Rockwell Automation Tue, Jan 21 -----N/A----- 0.20 SANM Sanmina-SCI Corp. Tue, Jan 21 After the Bell 0.01 SOV Sovereign Bancorp Tue, Jan 21 After the Bell 0.33 SU Suncor Energy Tue, Jan 21 -----N/A----- 0.28 TKR The Timken Company Tue, Jan 21 Before the Bell 0.18 TMA Thornburg Mortgage, Tue, Jan 21 After the Bell N/A TDW Tidewater Tue, Jan 21 Before the Bell 0.42 TRMK Trustmark Corporation Tue, Jan 21 -----N/A----- 0.50 USB U.S. Bancorp Tue, Jan 21 -----N/A----- 0.48 UIS Unisys Tue, Jan 21 After the Bell 0.27 UBSI United Bankshares Tue, Jan 21 Before the Bell 0.53 WM Washington Mutual Tue, Jan 21 After the Bell 1.03 WFC Wells Fargo Tue, Jan 21 Before the Bell 0.86 WABC Westamerica Bancorp Tue, Jan 21 08:00 am ET 0.67 XLNX Xilinx, Inc. Tue, Jan 21 After the Bell 0.12 ----------------------- WEDNESDAY ----------------------------- ATVI Activision Wed, Jan 22 -----N/A----- 0.61 ACXM Acxiom Wed, Jan 22 After the Bell 0.19 APD Air Products & Chem Wed, Jan 22 Before the Bell 0.59 ALTR Altera Corporation Wed, Jan 22 4:15 pm ET 0.06 DOX Amdocs Limited Wed, Jan 22 After the Bell 0.18 AMR AMR Corporation Wed, Jan 22 -----N/A----- -3.84 BAX BAXTER INTL INC Wed, Jan 22 Before the Bell 0.60 BSG BISYS GROUP INC Wed, Jan 22 After the Bell 0.24 BCC Boise Cascade Wed, Jan 22 Before the Bell 0.09 BOKF BOK Financial Wed, Jan 22 -----N/A----- 0.59 EAT Brinker International Wed, Jan 22 Before the Bell 0.43 BRO Brown & Brown Wed, Jan 22 After the Bell 0.29 CFFN Capitol Federal Finl Wed, Jan 22 Before the Bell 0.35 CDWC CDW Computer Centers Wed, Jan 22 After the Bell 0.51 CTX Centex Corporation Wed, Jan 22 Before the Bell 2.14 CHKP Chk Point Sftwre Tech Wed, Jan 22 After the Bell 0.24 CTXS Citrix Systems Wed, Jan 22 After the Bell 0.15 COH Coach, Inc. Wed, Jan 22 Before the Bell 0.65 CA Computer Ass Intl Wed, Jan 22 After the Bell 0.04 CPWR Compuware Corporation Wed, Jan 22 -----N/A----- 0.07 CVG Convergys Corporation Wed, Jan 22 -----N/A----- 0.32 ET E*TRADE Group, Inc. Wed, Jan 22 Before the Bell 0.14 EK Eastman Kodak Company Wed, Jan 22 Before the Bell 0.68 FIC Fair, Isaac Com Inc. Wed, Jan 22 After the Bell 0.36 FII Federated Investors B Wed, Jan 22 After the Bell 0.43 FMBI First Midwest Bancorp Wed, Jan 22 Before the Bell 0.47 FO Fortune Brands Wed, Jan 22 Before the Bell 0.91 FBN Furniture Brands Wed, Jan 22 After the Bell 0.52 GD General Dynamics Wed, Jan 22 Before the Bell 1.45 HP Helmerich & Payne, Wed, Jan 22 -----N/A----- 0.07 ICST Integrted Circuit Sys Wed, Jan 22 Before the Bell 0.23 IGT Intl Gaming Tech Wed, Jan 22 -----N/A----- 0.92 ITT ITT Industries Wed, Jan 22 Before the Bell 0.97 JPM J P MORGAN CHASE & CO Wed, Jan 22 Before the Bell -0.06 JEF Jefferies Group Wed, Jan 22 -----N/A----- 0.52 LRCX Lam Research Wed, Jan 22 After the Bell 0.00 LSI LSI Logic Wed, Jan 22 After the Bell 0.01 LU Lucent Tech Inc. Wed, Jan 22 Before the Bell -0.21 MYG Maytag Wed, Jan 22 After the Bell 0.62 MERQ Mercury Interactive Wed, Jan 22 After the Bell 0.24 NSCN NetScreen Tech Wed, Jan 22 After the Bell 0.07 NYB New York Comm Banc Wed, Jan 22 07:30 am ET 0.57 NTRS Northern Trust Wed, Jan 22 -----N/A----- 0.47 PSFT PeopleSoft Wed, Jan 22 After the Bell 0.14 PLCM Polycom Incorporated Wed, Jan 22 After the Bell 0.07 PGN Progress Energy Wed, Jan 22 Before the Bell 0.69 QCOM QUALCOMM Inc. Wed, Jan 22 After the Bell 0.37 RSLN Roslyn Bancorp, Inc. Wed, Jan 22 -----N/A----- 0.46 SNDK SanDisk Corp. Wed, Jan 22 After the Bell 0.19 SIB SI Bank & Trust Wed, Jan 22 After the Bell 0.58 SEBL Siebel Systems Wed, Jan 22 After the Bell 0.04 SLAB Silicon Labs Inc. Wed, Jan 22 After the Bell 0.18 SKM SK Telecom Wed, Jan 22 -----N/A----- N/A SWKS Skyworks Wed, Jan 22 After the Bell -0.02 SNA Snap-on Incorporated Wed, Jan 22 Before the Bell 0.50 LUV Southwest Airlines Wed, Jan 22 Before the Bell 0.03 STK Storage Technology Wed, Jan 22 After the Bell 0.41 STU Student Loan Wed, Jan 22 -----N/A----- N/A TE TECO Energy Inc. Wed, Jan 22 -----N/A----- 0.41 TLAB Tellabs Wed, Jan 22 -----N/A----- -0.03 TXN Texas Instruments Wed, Jan 22 4:30 pm ET 0.03 JNC The John Nuveen Comp Wed, Jan 22 Before the Bell 0.34 PGR The Progressive Group Wed, Jan 22 -----N/A----- 0.83 REY The Reynolds Reynolds Wed, Jan 22 08:00 am ET 0.40 TYC Tyco International Wed, Jan 22 Before the Bell 0.34 UNP Union Pacific Wed, Jan 22 -----N/A----- 1.08 WBS Webster Financial Wed, Jan 22 Before the Bell 0.84 WY Weyerhaeuser Co. Wed, Jan 22 Before the Bell 0.26 ------------------------- THURSDAY ----------------------------- AGRa Agere Systems Thu, Jan 23 Before the Bell -0.08 ATG AGL Resources Thu, Jan 23 -----N/A----- 0.47 ACV Alberto-Culver Co. Thu, Jan 23 10:30 am ET 0.56 ALEX Alexander & Baldwin Thu, Jan 23 After the Bell N/A ATK ALLIANT TECHSYSTEMS Thu, Jan 23 Before the Bell 0.84 AMZN Amazon.com, Inc. Thu, Jan 23 After the Bell 0.14 ABK AMBAC FINL GROUP INC Thu, Jan 23 Before the Bell 1.22 AXL Am Axle Manu Holdings Thu, Jan 23 -----N/A----- 0.85 AMGN Amgen Thu, Jan 23 -----N/A----- 0.35 AOT Apogent Technologies Thu, Jan 23 After the Bell 0.29 ABI Applied Biosystems Thu, Jan 23 Before the Bell 0.23 AMCC Applied Micro Circ Co Thu, Jan 23 After the Bell -0.05 ASH Ashland Thu, Jan 23 Before the Bell 0.44 AF Astoria Financial Co Thu, Jan 23 After the Bell 0.72 T AT&T Thu, Jan 23 Before the Bell 0.70 ATML Atmel Corporation Thu, Jan 23 After the Bell -0.06 ALV Autoliv Thu, Jan 23 -----N/A----- 0.45 AVT Avnet Thu, Jan 23 After the Bell 0.04 AVX AVX Corporation. Thu, Jan 23 Before the Bell 0.00 BDX BD Thu, Jan 23 Before the Bell 0.39 BLS BellSouth Corporation Thu, Jan 23 Before the Bell 0.51 BMS Bemis Company, Inc. Thu, Jan 23 Before the Bell 0.80 BMC BMC Software Thu, Jan 23 Before the Bell 0.08 BRCM Broadcom Thu, Jan 23 After the Bell -0.03 BR Burlington Resources Thu, Jan 23 Before the Bell 0.60 CBT Cabot Thu, Jan 23 After the Bell 0.48 CCMP Cabot Microelec Thu, Jan 23 Before the Bell 0.42 CAI CACI International Thu, Jan 23 Before the Bell 0.34 CAH Cardinal Health, Inc. Thu, Jan 23 Before the Bell 0.77 CAT Caterpillar Inc. Thu, Jan 23 Before the Bell 0.67 CEN Ceridian Thu, Jan 23 -----N/A----- 0.25 CERN Cerner Corporation Thu, Jan 23 After the Bell 0.42 CPS ChoicePoint, Inc. Thu, Jan 23 Before the Bell 0.35 CIN Cinergy Corp. Thu, Jan 23 Before the Bell 0.64 CIT CIT Group Thu, Jan 23 Before the Bell 0.67 CBE Cooper Industries Thu, Jan 23 Before the Bell 0.62 GLW Corning Thu, Jan 23 After the Bell -0.09 CVD Covance Thu, Jan 23 After the Bell 0.26 CR Crane Thu, Jan 23 After the Bell 0.33 XRAY DENTSPLY Intl Inc. Thu, Jan 23 After the Bell 0.52 DLTR Dollar Tree Stores Thu, Jan 23 After the Bell 0.77 D Dominion Resources Thu, Jan 23 Before the Bell 1.15 DJ Dow Jones & Company Thu, Jan 23 -----N/A----- 0.24 LLY Eli Lilly Thu, Jan 23 Before the Bell 0.68 EMC EMC Corporation Thu, Jan 23 Before the Bell 0.01 ELX Emulex Thu, Jan 23 -----N/A----- 0.19 EEP Enbridge Energy Part Thu, Jan 23 After the Bell 0.54 EFX Equifax Inc. Thu, Jan 23 Before the Bell 0.38 FDC First Data Thu, Jan 23 Before the Bell 0.48 FLEX Flextronics Thu, Jan 23 After the Bell 0.11 GDW Golden West Financial Thu, Jan 23 -----N/A----- 1.57 HYSL Hyperion Thu, Jan 23 After the Bell 0.18 IEX Idex Thu, Jan 23 Before the Bell 0.40 IKN Ikon Office Solutions Thu, Jan 23 Before the Bell 0.21 IMO Imperial Oil Limited Thu, Jan 23 -----N/A----- N/A IR Ingersoll-Rand Co. Thu, Jan 23 Before the Bell 0.93 ISCA Intl Speedway Thu, Jan 23 -----N/A----- 0.69 IRF Intl Rectifier Thu, Jan 23 -----N/A----- 0.13 ISSX Inter Sec Systems Thu, Jan 23 After the Bell 0.15 ITG Investment Tech Grp Thu, Jan 23 Before the Bell 0.34 IFIN Investors Finl Serv Thu, Jan 23 -----N/A----- 0.26 ESI ITT Educational Serv Thu, Jan 23 Before the Bell 0.36 JEC Jacobs Enginering Grp Thu, Jan 23 Before the Bell 0.51 JDSU JDS Uniphase Corp Thu, Jan 23 After the Bell -0.05 KLAC KLA-Tencor Thu, Jan 23 After the Bell 0.14 LR Lafarge Thu, Jan 23 Before the Bell N/A LSCC Lattice Semiconductor Thu, Jan 23 After the Bell 0.06 LXK Lexmark Intl, Inc. Thu, Jan 23 -----N/A----- 0.85 MRO Marathon Oil Corp Thu, Jan 23 Before the Bell 0.62 KRB MBNA Thu, Jan 23 -----N/A----- 0.46 MCD McDonalds Corporation Thu, Jan 23 -----N/A----- 0.25 MCHP Microchip Technology Thu, Jan 23 After the Bell 0.17 MCHP Microchip Technology Thu, Jan 23 After the Bell 0.17 NATI National Instruments Thu, Jan 23 -----N/A----- 0.19 NCR NCR Corporation Thu, Jan 23 -----N/A----- 0.71 NET Network Associates Thu, Jan 23 Before the Bell 0.24 NOK Nokia Thu, Jan 23 -----N/A----- 0.23 NT Nortel Networks Thu, Jan 23 -----N/A----- -0.06 NVS Novartis Corporation Thu, Jan 23 Before the Bell 0.45 NST NSTAR Thu, Jan 23 -----N/A----- 0.69 ONB Old National Bancorp Thu, Jan 23 Before the Bell 0.42 ORI Old Republic Intl Thu, Jan 23 -----N/A----- 0.82 OSK Oshkosh Truck Thu, Jan 23 Before the Bell 0.48 PKG Packaging Corp of Am Thu, Jan 23 Before the Bell 0.13 PTV Pactiv Thu, Jan 23 Before the Bell 0.35 PCL Plum Creek Timber Thu, Jan 23 After the Bell 0.27 PMCS PMC-Sierra, Inc. Thu, Jan 23 After the Bell -0.07 DGX Quest Diagnostics Thu, Jan 23 After the Bell 0.78 RDA READERS DIGEST ASSN Thu, Jan 23 Before the Bell 0.97 RESP Respironics, Inc. Thu, Jan 23 Before the Bell 0.40 RHI Robert Half Intl Thu, Jan 23 -----N/A----- -0.01 SLE Sara Lee Thu, Jan 23 -----N/A----- 0.42 SGP Schering-Plough Thu, Jan 23 Before the Bell 0.41 SI Siemens AG Thu, Jan 23 -----N/A----- N/A SBUX Starbucks Thu, Jan 23 After the Bell 0.18 STE Steris Thu, Jan 23 -----N/A----- 0.28 SUN Sunoco Thu, Jan 23 -----N/A----- 0.80 TXT Textron Inc. Thu, Jan 23 Before the Bell 1.01 SSP The E.W. Scripps Co Thu, Jan 23 -----N/A----- 0.86 SMG The Scotts Company Thu, Jan 23 Before the Bell -1.53 UNH UnitedHealth Group Thu, Jan 23 Before the Bell 1.16 UTSI UTStarcom Thu, Jan 23 After the Bell 0.31 VAR Varian Medical Sys Thu, Jan 23 After the Bell 0.24 VSEA Varian Semi Eq Ass Thu, Jan 23 After the Bell 0.00 VRSN VeriSign, Inc. Thu, Jan 23 After the Bell 0.14 VVI VIAD CORP Thu, Jan 23 -----N/A----- 0.25 WDC Western Digital Corp. Thu, Jan 23 After the Bell 0.13 ZION Zions Bancorp Thu, Jan 23 After the Bell 0.94 ------------------------- FRIDAY ------------------------------- ALE Allete Fri, Jan 24 Before the Bell 0.31 AEP American Elec Power Fri, Jan 24 -----N/A----- 0.57 ABC AmeriSourceBergen Fri, Jan 24 Before the Bell 0.82 ADM Archer Daniels Mdlnd Fri, Jan 24 Before the Bell 0.18 CEY Certegy Fri, Jan 24 Before the Bell 0.44 CFC Countrywide Finl Corp Fri, Jan 24 Before the Bell 1.91 FPL FPL Group Fri, Jan 24 07:45 am ET 0.70 LMT Lockheed Martin Fri, Jan 24 Before the Bell 0.80 PGL Peoples Energy Corp. Fri, Jan 24 Before the Bell 0.87 RTN Raytheon Fri, Jan 24 -----N/A----- 0.65 SWK The Stanley Works Fri, Jan 24 Before the Bell 0.56 WPO The Wash Post Company Fri, Jan 24 -----N/A----- 7.47 UST UST Inc. Fri, Jan 24 Before the Bell 0.77 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable PVBT PrivateBancorp 3:2 Jan. 17th Jan. 20th CWTR Coldwater Creek 3:2 Jan. 30th Jan. 31st -------------------------- Economic Reports This Week -------------------------- Welcome to another week of Q4 earnings reports! If the tensions in Iraq don't steal the spotlight again then major earnings from the likes of MMM and Citigroup will be headlining the week. Inside we have a big list of the major companies announcing. ============================================================== -For- Monday, 01/20/02 ---------------- None Tuesday, 01/21/02 ----------------- Housing Starts (BB) Dec Forecast: 1.693M Previous: 1.697M Building Permits (BB) Dec Forecast: 1.700M Previous: 1.738M Wednesday, 01/22/02 ------------------- Treasury Budget (DM) Dec Forecast: $9.0B Previous: $26.6B Thursday, 01/23/02 ------------------ Initial Claims (BB) 01/18 Forecast: N/A Previous: 360K Leading Indicators(DM) Dec Forecast: 0.0% Previous: 0.7% Friday, 01/24/02 ---------------- None Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* SWING TRADE GAME PLAN ********************* Out Like a Bear The week certainly ended with a different feeling than it started. Just a few days ago, we seemed to be building a nice series of higher highs and higher lows and those bears pointing to a possible head and shoulders pattern had gone into hibernation. 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. 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The Option Investor Newsletter Sunday 01-19-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: OCR Put Play of the Day: ERTS Dropped Calls: CMCSK Dropped Puts: WLP ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week CI 46.23 0.29 1.14 -0.26 0.77 1.91 Good strength CTAS 43.26 -0.45 0.21 -1.20 –0.51 –3.54 Triple bottom CMCSK 26.02 0.02 0.80 -0.24 –0.31 –0.46 Drop, rolled OCR 26.30 0.06 0.76 -0.76 0.85 1.30 New, new high RJR 46.93 0.24 0.83 -0.14 1.15 2.73 Steady climb PUTS ASD 67.02 -0.15 0.03 -0.25 0.66 –1.53 $68 failure CTSH 60.14 -0.51 -0.44 0.01 –0.05 –2.32 New, On verge ERTS 47.98 -2.28 -0.09 0.41 –1.01 –4.25 New, try again KSS 56.60 -0.59 0.05 0.65 –0.79 –1.59 New, stalled WLP 69.80 -0.96 -1.00 -0.14 –0.61 –0.96 Drop, sector ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* OCR – Omnicare, Inc. $26.30 (+1.70 last week) See details in play list Put Play of the Day: ******************** ERTS - Electronic Arts - $47.95 -1.78 (-3.93 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 ^^^^^ CMCSK $26.02 (-0.39) CMCSK had a great run in the first two weeks of the year, and we were looking to benefit from the next leg of the rally. Since we didn't want to get caught buying the top of the rally, we waited for the pullback and bounce from support. While the pullback occurred, there just hasn't even been a hint of a bounce over the past 2 days, and there should have been something with the stock closing right on solid support at $26. The fact that there wasn't a bounce today at that level hints that there isn't going to be one. With daily Stochastics rolling over and the 10-dma being violated at the close, we're going to pull the plug on CMCSK early. The momentum appears to have been drained away, and we want to drop the play before the bears really get angry. PUTS ^^^^ WLP $69.80 (+0.23) After grinding lower for the past couple weeks, WLP did a sharp about face on Friday, gaining back all the ground it had lost during the first four days of the week, closing just below its high of the day. The entire HMO index was up sharply as well, with a 2% gain. That's not huge, but in light of the across-the-board losses in the broad market, it's pretty impressive. Impressive enough that we don't want to stick around and found out if our $70.25 stop is going to be violated on Tuesday. The magnitude of today's move, combined with above-average volume indicates that Friday was a trend reversal session. Use any weakness next week to exit open positions, but if it doesn't materialize, honor your stops. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 01-19-2003 Sunday 3 of 5 In Section Three: New Calls: OCR Current Calls: CI, RJR New Puts: ERTS, CTSH, KSS ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** NEW CALL PLAYS ************** OCR – Omnicare, Inc. $26.30 (+1.70 last week) Company Summary: Omnicare, Inc. is a provider of pharmacy services to long-term care institutions, such as skilled nursing facilities, assisted living facilities and other institutional health care facilities. The company also provides comprehensive clinical research for the pharmaceutical and biotechnology industries. OCR operates in five business segments: Pharmacy Services, Consultant Pharmacist Services, Pharmaceutical Case Management Services, Ancillary Services and Contract Research Organization Services. Why We Like It: The fabric of our society is changing, as the demographics are shifting more heavily in favor of the elderly. Fortunately there are plenty of facilities and services to help us care for our families in their golden years, and there are ways to benefit from the trend as well. OCR services the whole long-term care industry, and judging by its price action, business must be growing. In contrast to the broad market weakness throughout December, shares of OCR just consolidated near their 200-dma before launching higher at the beginning of the year. Since then, the stock has blasted through its $25 resistance level and with last week's push through $26, the bulls are now setting their sights on resistance in the $28.00-28.50 area. If OCR can clear that level, it will be trading at levels not seen since early 1999. The PnF chart is certainly in favor of such a goal, as the current Buy signal is pointing to an upside target of $42, and the push through $26 succeeded in breaking through the bearish resistance line. As good as that sounds, we do need to be careful as the stock looks ripe for the next near-term pullback. If the recent stair-step action continues, then OCR ought to pull back into the $25.00-25.25 area, where it ought to bounce and make an assault on new recent highs. But if this trend is going to continue, then the $25 level needs to hold as support. A close below there would not be a good development for the bulls, so despite being tight, that's where we're placing our stop. Looking at the intraday chart, we can see possible support at $26, getting stronger by $25.50 and looking very solid at $25, also the site of the ascending trendline from the beginning of December. Target entries on the bounce, but wait for the bounce. BUY CALL FEB-25*OCR-BE OI=2913 at $2.00 SL=1.00 BUY CALL FEB-27 OCR-BY OI= 55 at $0.75 SL=0.25 BUY CALL MAR-25 OCR-CE OI= 304 at $2.55 SL=1.25 BUY CALL MAR-27 OCR-CY OI= 22 at $1.15 SL=0.50 Average Daily Volume = 413 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** CI - Cigna Corp. - 44.31 +0.71 (+2.93 for the week) Company Description: With businesses in Asia Pacific, Latin America and Europe, CIGNA International, the global division of CIGNA Corporation, provides health care, medical care management services and defined contribution pension products to the workplace and consumer markets, and life, accident and health insurance to individuals. It is also a leading supplier of specialized health care and insurance benefits to expatriate employees of multinational companies on international assignments. (source: company press release) Why We Like It: Shares of CI came within four cents of setting a new relative high on Friday. That fact alone is pretty impressive, given the overall market's nosedive. Shares traded in a narrow 96-cent rage before finishing with a fractional loss, outpacing both the Dow Jones and the IUX.X insurance index. CI still looks poised to fill in a larger chunk of its October 25th gap, but the bulls may have a tough time gaining traction if the market sees more weakness next week. On the other hand, a reversal in the major indices would provide the perfect climate for a rally to the $50.00 area. Traders looking to enter new long positions can continue to watch for a move above $46.69 or a pullback to $45.00. We'd be looking for the latter level to provide support if shares head lower on Tuesday. BUY CALL FEB-40*CI-BH OI= 191 at $7.00 SL=3.50 BUY CALL FEB-45 CI-BI OI= 490 at $3.20 SL=1.60 BUY CALL APR-40 CI-DH OI= 588 at $7.80 SL=3.90 BUY CALL APR-45 CI-DI OI= 1494 at $4.40 SL=2.20 Average Daily Volume = 523 k --- RJR - RJ Reynolds $46.93 +0.69 (+3.59 for the week) Company Description: R.J. Reynolds Tobacco Company is the second-largest tobacco company in the United States, manufacturing about one of every four cigarettes sold in the United States. Reynolds Tobacco's product line includes four of the nation's 10 best-selling cigarette brands: Camel, Winston, Salem and Doral. (source: company press release) Why We Like It: The tobacco group is typically thought of as one of the "defensive" sectors that sees buying during times of weakness in the overall market. This makes sense from a fundamental perspective. After all, cigarettes are a relatively recession- proof product. The high dividends offered by tobacco companies also help to attract buyers when the market is in turmoil. Today's action was a textbook case of defensive rotation. RJR, apparently oblivious to the sinking Dow Jones, ticked higher throughout the session before finishing near the highs of the day. The 30-minute chart shows a bullish trend of steady gains that began on the third trading day of the year. RJR has been able to move higher regardless of what the market is doing. Based on this pattern of strength, it looks like shares will be able to continue higher next week - even if the Dow manages to retrace its latest decline and money moves back out of more defensive sectors. On the other hand, it wouldn't be surprising to see some profit-taking in RJR to consolidate some of the recent gains. If a pullback does take place we'll be looking for support at $45.00. A rebound from this level would provide a potential entry point for traders thinking about taking new long positions. But wait...Doesn't RJR announce earnings next Thursday? According to our usually-reliable source for earnings, the company has moved its release date to January 28th. However, we weren't able to confirm this information at the RJR investor relations department or through a secondary news source. So while it appears the company won't be announcing until the 28th, we won't assume that's the case until we get some solid confirmation. We'll update this situation on Tuesday. BUY CALL FEB-42.50*RJR-BV OI= 867 at $5.30 SL=2.65 BUY CALL FEB-45 RJR-BI OI= 1229 at $3.40 SL=1.25 BUY CALL MAY-42.50 RJR-EV OI= 185 at $6.30 SL=3.15 BUY CALL MAY-45 RJR-EI OI= 776 at $4.70 SL=2.35 Average Daily Volume = 876 k ************* NEW PUT PLAYS ************* ERTS - Electronic Arts - $47.95 -1.78 (-3.93 for the week) Company Description: Electronic Arts, headquartered in Redwood City, California, is the world's leading interactive entertainment software company. Founded in 1982, Electronic Arts posted revenues of more than $1.7 billion for fiscal 2002. The company develops, publishes and distributes software worldwide for video game systems, personal computers and the Internet. (source: company press release) Why We Like It: Okay...Let's try this again. Ten days ago we added ERTS to our bearish play list. Speculation that the company's critical "Sims Online" game was seeing weak initial sales had sent the stock to 52-week lows. However, shares quickly rebounded after Electronic Arts' CEO said that the program had sold 90,000 copies within the first three weeks of its release. ERTS then gravitated to the $50.00 area before Steve Ballmer & Co. dropped a bombshell on the NASDAQ. Microsoft's earnings report was responsible for a lot of the tech weakness on Friday. The company said that in addition to a "tepid" IT spending environment, demand for personal computers continues to be poor. But it was additional comments regarding the X-Box videogame console that really spooked shareholders of ERTS. Electronic Arts, you'll recall, is a leading software producer for the system. MSFT's CFO said that a softer-than-expected videogame market would result in less revenue from the X-box. As a matter of fact, this challenging environment was cited as one of the primary reasons for Microsoft's subdued third-quarter outlook. It doesn't take a brain surgeon to link poor X-box results to a weaker bottom line for Electronic Arts. Both stocks responded in predictable fashion on Friday morning. ERTS gapped lower and finished the day with a 3.5% loss. This decline did a significant amount of damage to the technical picture. In addition to breaking down to new multi-month lows, the stock also violated its 200-week moving average for the first time since 1997. This moving average has acted as support on various pullbacks in 1998 and 2000. With shares now trading below the 200-wma ($48.21), there is no historical support until the 2001 lows at $41.00. We're going to be somewhat aggressive with this play and target a move to psychological support at $40.00. Due to the large amount of selling that's taken place over the past week, we've also classified ERTS as a high- risk/high-reward play. The rolling MACD and technical breakdown suggest that the selling will continue. However, we need to be aware of the possibility that short-covering could send the stock back towards the $50.00 area. Conservative traders may want to wait for a failed rally at this level to enter short positions. Our stop-loss is set at $52.00, just above the descending 21-dma. On another earnings-related note, Electronic Arts is expected to announce their quarterly results on January 29th. We'll let you know as soon as this date is confirmed. BUY PUT FEB-50*EZQ-NJ OI= 1474 at $4.30 SL=2.15 BUY PUT MAR-50 EZQ-OJ OI= 2202 at $5.50 SL=2.75 Average Daily Volume = 5.75 mil --- CTSH – Cognizant Technology Solutions $60.14 (-2.32 last week) Company Summary: Cognizant Technology Solutions Corporation delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. Among CTSH's prominent clients are ACNielsen Corporation, ADP, Inc., Brinker Int'l, Computer Sciences, The Dun & Bradstreet Corporation, First Data Corporation and Nielsen Media Research. Why We Like It: Remember when buying the good news and selling the bad news actually made sense? Lately it seems all logic has been thrown out the window, but therein lies the opportunity for profit. After reaffirming its Q4 earnings estimates and raising guidance for 2003 on January 6th, CTSH was taken out behind the woodshed and severely beaten. The initial drop seemed to run out of steam near the $62 level and it actually looked like the bulls might be interested in propping the stock up. But they couldn't do it and now the stock looks ripe for another big breakdown. After stubbornly holding near the $61.50 level for most of this week, cracks in support began to appear Friday and the stock fell all the way to $60. The constant stream of bad news from major Technology companies was just too much for any weak-handed bulls and it looks like they are in the process of giving up. While that isn't much of an additional drop, this level is major support and if it gives way, things could get ugly in a hurry. The current column of O's on the PnF chart is giving a tentative vertical count of $43, and that's a long way below current levels. Not only that, but Friday's trade at $60, violated the bullish support line. We could get a bounce from this level, but it's looking rather unlikely. But just in case, we're going to require a trade of $59.75 to trigger the play to active status. Once below the trigger, new entries can be taken on the breakdown, or more cautious traders may want to wait for a rebound attempt that fails in the $60-61 area. We're initiating the play with a fairly tight stop at $62.50, as a trade above that level would take out some significant resistance that has been building for the past couple weeks. BUY PUT FEB-60*UPU-NL OI=976 at $4.30 SL=2.75 BUY PUT FEB-55 UPU-NK OI=156 at $2.50 SL=1.25 Average Daily Volume = 585 K --- KSS - Kohl's Corporation $56.60 (-1.58 last week) Company Summary: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why We Like It: No matter how many different ways you look at all the variables, the Retailers are in trouble. Even in the best part of the year for the industry (Q4), consumers just weren't buying, as evidenced by the lackluster Retail Sales numbers from the month of December. Looking at last week's Retail report, December came in flat (no growth) in the best season of the year. Is there any question that the next earnings cycle isn't going to be pretty? Apparently investors are starting to get that picture, as the Retail index (RLX.X) started rolling over early in the week and at $266, it doesn't have far to go before taking out the $260 level, the site of the December lows. Despite the hope for good news, it is worth noting that there really wasn't much bullish action in this sector following the rebound from the December lows. One of the weaker stocks in the group is KSS, which bounced up to $58.50 and dropped just as quickly, and then rebounded again to the same level. Then in the last week, the stock has been rolling over again and this time looks like it could break down hard. Remember the PnF Sell signal that KSS gave back in early December? The vertical count from that drop points to a price target of $46, which has yet to be achieved. It is notable that none of the rally attempts since that Sell signal have been able to create a reversing Buy signal. Every rally attempt this year has been knocked back before reaching the $59 level, which is what would be necessary to generate a PnF Buy signal. KSS is clearly weak and even looks weak relative to the RLX. Another rally failure below the $59 level can be used as a prime entry point, while more cautious investors will want to wait for a break below $56 (which would constitute a breakdown under both the 10-dma and the 20-dma) before entering on weakness. While there is some mild support near $54, the next significant test of support will come near $52.50, the site of the early January lows. Initial stops are set at $59. BUY PUT FEB-60*KSS-NL OI=1078 at $5.00 SL=3.00 BUY PUT FEB-55 KSS-NK OI=1951 at $2.20 SL=1.00 Average Daily Volume = 3.66 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 01-19-2003 Sunday 4 of 5 In Section Four: Current Put Plays: CTAS, ASD Leaps: Crash and Burn Traders Corner: No Surprise - The CPTI Casino Wins Again! Traders Corner: Volume extremes warn of reversals ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** CTAS - Cintas Corp. $44.74 -0.51 (-2.03 for the week) Company Description: Cintas Corporation, with revenues of $2.27 billion, headquartered in Cincinnati, Ohio, is the leader in the corporate identity uniform industry providing uniforms to a wide variety of industries nationwide. The Company also provides a wide range of outsourcing services including entrance mats, sanitation supplies, cleanroom services and first aid and safety products and services. (source: company website) Why We Like It: It's nice to see some follow through by the bears heading into the weekend. With the broader indices in pull back mode, shares of CTAS accelerated lower losing 3.4% compared to the 3.3% and 4.1% drops in the Nasdaq composite and the Nasdaq 100 index (NDX), respectively. What is encouraging for traders holding bearish positions in CTAS is the new triple-bottom breakdown on its PnF chart. We're going to lower our stop to $45.51, which is above overhead resistance at $45. Our target remains near the $40 mark but keep an eye on the $41 level, which has acted as support in the past. New positions should only be added to carefully as the stock appears ready to accelerate to the downside. Meanwhile a failed rally at $44.50 might be an opportunity to go short again. BUY PUT FEB-50*NQQ-NJ OI= 583 at $5.90 SL=3.00 BUY PUT FEB-45 NQQ-NI OI= 552 at $2.20 SL=1.10 Average Daily Volume = 1.3 mil --- ASD - American Standard Companies $67.02 (-1.52 last week) Company Summary: American Standard Companies is a global, diversified manufacturer of high-quality, brand name products in three major product groups: air conditioning systems and services, bathroom and kitchen fixtures and fittings and vehicle control systems for heavy and medium-sized trucks, buses, trailers, luxury cars and sport utility vehicles. The company's brand names include Trane and American Standard for air conditioning systems, American Standard, Ideal Standard, Porcher, Jado, Armitage, Shanks, Dolomite, Meloh, Venlo and Borma for plumbing products and Wabco for vehicle control systems. Why We Like It: It seems like it took forever to happen, but on Friday ASD finally traded below the $67 level. The bulls managed to prop the stock up at the close, ending just a couple pennies above that level, but the damage was done. The stock broke its bullish support line at $67, making a move down to the $64 bearish price target look that much more realistic. The stock has been continually pressured by its declining 10-dma since the first of the year, and Thursday was no exception, with the rally attempt falling just short of that average and then rolling sharply lower with the rest of the market on Friday. Throughout this move, the high-odds entry points have come on the rally failures, and that is likely to continue to be the case. Breaking below $67 just brings more support between $66.50-65.50 into play and with Stochastics now buried in oversold, a short-covering rebound could materialize at any time. There hasn't been one of those with any staying power for the past few weeks, and until there is, we want to continue to enter new positions on the rollover. Resistance levels that are likely to be the site of a rollover are $68.50, then $69 and finally just below $70. While the trade is definitely going our way, we don't want to get too stingy, so we're leaving our stop at $71, so that we have some room to maneuver into new positions ahead of the company's earnings report, currently scheduled for January 30, before the opening bell. BUY PUT FEB-70*ASD-NN OI=380 at $4.40 SL=2.75 BUY PUT FEB-65 ASD-NM OI=299 at $2.20 SL=1.00 Average Daily Volume = 450 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Crash and Burn By Mark Phillips mphillips@OptionInvestor.com One week into the January earnings cycle, and big Technology has failed to impress investors. I won't dissect the details here, but based on the reports from IBM, INTC, MSFT and a slew of others, there is no business spending recovery just over the horizon. The best case (hoped for) is that a second half '03 recovery appears, but even that is going to be anemic. The net result is that investors' hopes for a continuation of the January rally crashed and burned, with the 8800 level in the DOW (and 935 for the SPX) holding as resistance. The disappointing earnings report from MSFT and lack of encouraging words from IBM sealed the market's fate Thursday night, leading to Friday's selloff. While the action in the broad markets on Friday doesn't really qualify as a 'crash and burn' event, it certainly is discouraging for the bulls. The DOW and S&Ps were all turned back below their 200-dma's last week, and I must say I'm not encouraged by what I see on the charts, as all three of those indices breached their 50-dmas at the close. To make matters worse, those 50-dmas are all turning downwards for the first time since late October. This bull run is losing steam. I think Jim said it very well last week when he stated, "With every earnings report, bulls will lose another reason to buy. The short-term reasons to buy will diminish even more with every 'no recovery yet' guidance statement. That's certainly what we got last week, with not one of the big guns that reported earnings having anything positive to say about the future. I think that is the biggest cause for the weakness seen throughout the latter half of last week. A quick look at the Bullish Percent charts really provides no guidance, as the bullish reversals are still intact, but failing to gain any additional ground. The DOW is Bull Confirmed at 60%, the SPX is Bull Correction at 60%, the OEX is Bull Confirmed at 61%, and the NASDAQ-100 is Bull Confirmed at 63%. Using that measure of market internals, I'd say the verdict isn't quite in on whether those December highs will be broken. I think it is very unlikely that it will happen, but we can't rule it out just yet. I recently wrote that I didn't place much stock in the current H&S tops being formed in the major indices because of the lack of symmetry. Well, with last week's reversal from the 8850 area in the DOW, I could be dead wrong. And we really won't know for sure unless we test the 8250 support level again. If it breaks, it will confirm those H&S tops and we can focus on a DOW target in the 7500 area. Now that could get really interesting as a rebound from DOW 7500 could possibly set us up for a H&S bottom, with the neckline near the 9050 level. If that neckline were subsequently broken to the upside, the calculation would project an upside potential of the DOW to 10,600!! When was the last time you heard such bullish thoughts from me? It's not even close to likely right now, but since we're focused on the long-term here, I thought I'd mention the possibility, and we can all watch for it together in the months ahead. I found the action in the VIX rather interesting this week as well, with it gradually creeping higher into the end of the week, ending at 28.74, which is very close to where it ended on January 2nd. Likewise, the OEX rolled over this week, working its way back to just below where it ended on January 2nd. Take a look at the chart below, and I think you'll see why this action caught my attention. Volatility Index (VIX) vs. S&P 100 Index (OEX) - Daily Over the past 2 weeks, the market has rallied and then retreated, giving back all of its gains since the close on January 2nd, while at the same time, the VIX has dropped to test the November lows and is now sitting very near the level where it came to rest at the end of the first trading day of the year. Another way of looking at it is that the market hasn't accomplished anything since the first day of the year, and the VIX is reflecting almost exactly the same level of fear now as it was then. See the intraday high in the VIX on Friday -- 29.50, which is right at the top of the normal historical range. The next couple weeks are going to be really interesting, as we see whether the VIX holds back in its lower recent range, or the broad market breaks down (meaning that the VIX will be headed higher again). Remember the historical pattern that we can rely on in the first part of the year. If the market takes out its December lows anytime in the first quarter, that is a bearish omen for the remainder of the year. That December low (intraday) on the DOW was 8242. If that level is violated before the end of March, then look out below. With earnings getting off to a rather disappointing start, negative economic news seeming to poke out around every corner and war with Iraq moving closer to a certainty, I think the likelihood of that low being breached is good and growing with each passing day. "Crash and Burn" applies to our LEAPS Portfolio as well this week, with both of our remaining Put plays (GM and BBH) biting the dust. No question, I was surprised to see both of them get stopped out, but that's what stops are for. Last week, I had two possible ideas for new Watch List plays -- a call on QLGC and a put on IBM. I chose poorly, as the post-earnings selloff in shares of QLGC was disastrous, while IBM almost perfectly met the entry criteria I was looking for and the play would have performed very well in the wake of its earnings report. I was also frustrated with the fact that I didn't do a better job of keeping on top of the developments related to our Watch List plays this week, as we should have taken entries in both GS and the DJX Put plays, but I neglected to point these developments out in the Market Monitor during the week. Normally, I'd still log them as new Portfolio plays this weekend, but since I only had the higher entry targets listed last week (which weren't triggered), I feel it would be intellectually dishonest to enter them as new Portfolio plays this weekend. My apologies for this, as I think the Market Monitor is a great medium for me to keep you updated on any meaningful play developments during the week. I'm still getting used to providing meaningful updates in this forum, and I'll endeavor to do a better job of staying on top of it in the future. Since I've already started to hint at developments in the playlist, let's now go through it in detail, and see what sense we can make of the week's developments. Portfolio: NEM - Not only did Gold hold up well last week, but it blasted to a new multi-year high of $358.90 (basis the GC03G contract) on Thursday. Despite the strength in the price of the yellow metal, gold stocks experienced a round of profit-taking, with the XAU index actually dipping to as low as $72.81 on Wednesday. The 50-dma did in fact cross up through the 200-dma last week, and I expect the 50-dma (now at $71.83) to provide support going forward. Things got a little goosey for our NEM play on Wednesday, with an intraday dip under the 200-dma, but so far, support at $27 is holding firm, with the intraday low of $26.89 coming in just above the still-rising 50-dma (currently $26.74). We're sticking firm to our $27 stop on the play, but if we are stopped out, I'll put NEM right back onto the Watch List, with an entry target near $25. I believe gold and gold stocks are in the early stages of a bull market, which will continue to be fed by economic and currency weakness, and I intend to benefit from that trend. MO - It may not have been a stellar bullish week for MO, but it is notable, that the stock didn't really lose ground with the rest of the market. If anything, the stock looked rather healthy, inching up to just below $42 and importantly now moving above the descending trendline (now $40.90) that had kept the stock under pressure over the past several months. If the President's dividend-tax plan is approved by Congress (as I expect it will be), it will be just one more factor adding upside pressure to the stock. We still need a decisive breakout over $42 before raising the stop on the play, so it remains at $37. DELL - I hate it when that happens! No sooner do we get what I thought was a good entry near the 200-dma, the bottom falls out, identifying my entry as a poor entry point. Clearly, from the action in DELL last week, which I believe is largely due to the disappointing results from INTC and MSFT, DELL shattered its 200-dma and then proceeded to break below that ascending trendline, closing below $25 for the first time since early October. The 'no-recovery' comments are weighing heavily on the stock, and I am concerned about this play. I'll stick with the $23 stop, as that is what is required to turn the PnF chart bearish. Traders that are not in the play will want to wait to see where support materializes, keeping in mind that at these lower levels, the risk/reward ratio becomes more favorable. The problem is that the bullish triangle right now looks like it has failed to the downside. A rebound from above the level of the October lows can still be used for new entries, but I consider that to be more aggressive now. No matter what, keep a hard stop set at $23. Watch List: DJX - It was clearly a disjointed week in the market, with the DOW making a couple of convincing attempts at testing its 200-dma near $89, but eventually falling short. I didn't recognize the rally attempt on Tuesday for what it was, and didn't comment on it in the Market Monitor. And then I failed to highlight the continued weakness on Thursday. Friday was another issue, with Technology issues taking center stage in my day. If you took a put entry on Tuesday or Wednesday, then good for you. In hindsight, I think that is a great entry into the play, and I would initially place stops at $89, just above last week's highs. With support still lurking in the $83-84 area, Friday's close at $85.87 is too low to enter the play, so let's wait for the next failed rally. Remember that the weekly Stochastics are still pointed up, so we still might get another rally attempt and failure near last week's highs. This week, I've modified the entry target again -- most likely, we get a rollover in the $87-88 area and I would target new positions there. Just in case the unexpected occurs though, I'm going to keep the secondary target of $90 in place, as it will be an even better entry, if reached. BEAS - We wanted a decent pullback in shares of BEAS before taking a position, but the carnage on Friday was a bit more than I had bargained for. The stock didn't respond well at all to the earnings and forward-looking statements from Technology bellwethers MSFT and IBM, losing more than 9% on Friday, and breaking the ascending trendline from the October lows. Even the PnF chart gives cause for concern, with its High Pole Warning, hinting that perhaps there is more weakness to come. I see bearish Stochastics divergence on the weekly Stochastics and the stock has now wiped out all the gains since mid-November! This is no place to take a long-term bullish entry into BEAS, and now we have to wait and see whether the stock finds support above the 50-dma (currently $11), although I expect it will fail. More realistically, we need to look at stronger support near the early December lows. While I'm not placing the play on HOLD this weekend, I am significantly lowering my desired entry target to $9.50-10.00. That is just above the level required to give a PnF Sell signal and the risk/reward becomes much more favorable there. If we do get a bounce from that level, we'll take the entry and place a very tight stop at $9.00. GS - Our GS play is another victim of a convincing failed rally (convincing enough for me to raise the entry target last weekend), that resulted in another missed entry opportunity. With the rally through the $75 level, I figured we'd get some more upside action last week, with an eventual failure near $79. Wrong! One more intraday push above $75 on Monday and it was all downhill from there, with the Wednesday drop under $74 providing a good entry point, that I neglected to catch. But don't worry, as I think we'll get another shot at it before the bottom falls out. Look for a failed rally in the $74-75 area to provide entry. If you took the initiative last week and entered when the stock began to roll over, then congratulate yourself on a job well done. Based on the recent action, I think a test of the $79-80 resistance level is unlikely, but I want to be prepared. Therefore, I'm leaving both triggers in place this weekend. QLGC - That didn't last long! I was looking for an attractive bullish entry into this play on a post-earnings dip into the $39-40 area, but not a full-fledged selloff. Despite the solid earnings report, investors sold the news with a vengeance, slicing nearly $6 from the share price by Friday's close (basis the pre-earnings close on Wednesday). I came very close to just pulling the plug on the play this weekend, but I'm going to leave it open, just in case the bulls come back next week. But I don't want to consider new position until we see the stock begin to base above the $35 level. If that level fails, we'll have a big PnF Sell signal to contend with and I'll drop the play in a heartbeat. For now, QLGC is on HOLD. In the past 2 weeks, we've had three dropped plays, all for a slight loss. While I find this frustrating, I have a hard time finding fault with the plays. What I do take away from them is that it is a reminder of how difficult it is to try to capture a significant longer-term move in an essentially rangebound market. Each of the plays in question (LEN, BBH and GM) were entered at solid points of resistance and the plays each went on to be profitable before reversing and stopping us out. The stops were all placed just above firm resistance, and eventually taken out. Unfortunately, none of those plays moved far enough in our favor to allow us to tighten stops sufficiently to keep those profits without guaranteeing that we get stopped out and miss out on the trend move that I was anticipating. I'm still struggling with how to better play some of these moves to our advantage -- do we just harvest the small gains while we have them? That seems to defeat the purpose of buying all the time value we get with LEAPS. But holding on for the trend move hasn't been working either. I think there will be a couple of big trend moves this year (both down and up) as I've detailed in some recent articles. I'll continue to try to position for those big moves before they happen. In the meantime, we need to keep position sizes small, and stops must be rigidly adhered to. Capital preservation is key while we await the big moves that LEAPS are designed to allow us to capture. Enjoy the extended weekend, and we'll hit the ground running on Tuesday. Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None NEM 10/30/02 '04 $ 30 LIE-AF $ 3.90 $ 4.20 + 7.69% $27 '05 $ 30 ZIE-AF $ 6.10 $ 6.50 + 6.56% $27 MO 11/13/02 '04 $ 40 LMO-AH $ 3.90 $ 5.30 +35.90% $37 '05 $ 40 ZMO-AH $ 4.80 $ 6.70 +39.58% $37 DELL 12/19/02 '04 $ 30 LDE-AF $ 3.70 $ 2.55 -31.08% $23 '05 $ 30 ZDE-AF $ 6.10 $ 4.70 -22.95% $23 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BEAS 12/22/02 $9.50-10.00 JAN-2004 $ 12 LZP-AV CC JAN-2004 $ 10 LZP-AB JAN-2005 $ 12 ZWP-AV CC JAN-2005 $ 10 ZWP-AB QLGC 01/12/03 HOLD JAN-2004 $ 50 KGM-AJ CC JAN-2004 $ 40 KGM-AH JAN-2005 $ 50 ZBG-AJ CC JAN-2005 $ 40 ZBG-AH PUTS: DJX 12/08/02 $87-88, 90 DEC-2003 $ 84 DJX-XF DEC-2004 $ 84 YDJ-XF GS 12/22/02 $74-75, 79 JAN-2004 $ 70 KGS-MN JAN-2005 $ 70 ZSD-MN IBM 01/19/03 $85-86, 89 JAN-2004 $ 80 LIB-MP JAN-2005 $ 80 ZIB-MP New Portfolio Plays None New Watchlist Plays IBM - International Business Machines $81.30 **Put Play** While we definitely should have had this play in place last week, I think there is still some solid downside potential in store for the stock. IBM had solid earnings, but it was in the guidance that I think the real meat lies. The company sees no hope for strong growth in 2003, and that admission led to a selling frenzy on Friday, with the stock losing more than 5.5%. The technical reason this play made so much sense a week ago was that it was nearing major resistance at $90 and a rally failure there would have provided an excellent risk/reward ratio. Clearly we don't want to jump headlong into new positions, with the huge gap down after earnings, and weekly Stochastics still on the rise. But the next rally failure could turn out to be just what Dr. Bear ordered. Allow some time for the weekly Stochastics to roll over, in conjunction with a gap fill and rollover near the $85-86 area, and we could be looking at a nice steady decline to fill some of those gaps left behind in the middle of October. The PnF chart is still on a Buy signal on the standard price scale, but drilling down to the 0.5 box size, we can see a big Sell signal from Friday's drop, which allows us to calculate a downside target of $74. But if that price level is achieved, it will create something interesting on the much longer-term chart (2.0 box size), a Sell signal that will give us a bearish price target of $58. I know I'm playing some games here with scale to make this play fit my fundamental bias for IBM (which is down) before the technicals bear it out, but work with me. Isn't it interesting that $58 is the bottom of the first gap up in early October? The other interesting thing about the longer-term PnF chart is the bearish resistance line at $92. That certainly looks like a good level to place a stop if we do get into the play. IBM could certainly continue to fall next week, after Friday's penetration of the 50-dma. But I think the bulls are going to take another run at resistance, and that is where we'll want to take our entry. If IBM just continues to fall, we'll let it go, because it is too difficult to quantify risk vs. reward at these lower levels. BUY LEAP JAN-2004 $80 LIB-MP BUY LEAP JAN-2005 $80 ZIB-MP Drops BBH - $93.05 The action in our BBH play over the past 3 weeks is a perfect example of the perils involved in trying to anticipate a trend breakout from rangebound trading pattern. We got a good entry near the top of the recent range and everything was looking good in late December, with the BBH threatening to break down below the bottom of its range since mid-October. But after recovering to hold the ascending trendline once more, the sector rocketed higher last Friday and continued that move this past week, running right through our $92 stop on Thursday. Even if I hadn't tightened the stop down from the $93 level, we still would have gotten kicked out by a nickel. Positive earnings from DNA and positive comments about GENZ and IDPH were just too much for the bears and they let the bulls have their way on Thursday's euphoric pop. Despite the pullback on Friday, this looks like a real bullish breakout, with the new Buy signal on the PnF chart. If still holding a bearish position, take advantage of any near-term weakness to exit the play at a more favorable level. GD - $74.15 GD has been drifting along in that neutral wedge for the past several months, and I actually thought an upside breakout was on the horizon. But I started to lose my conviction several weeks ago due to concerning developments on the PnF chart, putting the play on HOLD, pending better price action. We got another hint of the stock's weakness on the latest rally attempt, with the stock's inability to trade the $82 level, which was PnF resistance. Friday's selloff in the stock appears to have sealed GD's fate with a big PnF Sell signal, and there is no longer any point in continuing to monitor the stock for an upside reversal. GM - $40.50 Expectations for strong earnings propped up shares of GM ahead of the report on Thursday, and stopped us out of the play Tuesday afternoon when the stock closed over the $40 level. Sure enough, the company beat earnings estimates and then issued an upside pre-announcement of $1.50 EPS vs. the consensus of $1.14 for the March quarter. That's a big revision, and given the lack of a price gain through the remainder of the week, I think the good news was largely factored into the stock already. Of course, that doesn't help us, with our play already stopped out. Traders still holding open Put positions will need to decide whether to cut the play loose or hold for another drop. If holding those positions entered near current levels, using a stop at $42 would make sense. Note that $42 is just above the intraday highs posted in December. I still think it made sense to lower the stop on this play to $40 following the early December drop from that level, but in hindsight, I'd sure like to have a do-over, keeping the stop for the play set at $42. For now, I'll continue to watch the stock, waiting for the weekly Stochs to reach overbought before playing the downside again. ************** TRADERS CORNER ************** No Surprise - The CPTI Casino Wins Again! By Mike Parnos, Investing With Attitude There are no sure things. However, selling premium is the next best thing. Let the speculators speculate. Let the expectors expectorate. We’ll just continue to salivate. Cold hard cash is a turn on. People who say that money can’t buy love, don’t have any – or enough. Four weeks ago we initiated three new positions in the CPTI Portfolio. Two of the three positions were scheduled to expire at January expiration while the third is a February QQQ play we established in December. January expiration has come and gone. Our record is still intact. Perfectly Profitable!! How profitable? Read on. The Breakdown 1. BBH Iron Condor – Closed at $91.40. We wanted BBH to finish between $80 and $95 at January expiration. Our risk was $3,500. We took in a credit of $1,500 on our ten-contract position. 2. XAU Calendar Spread – Currently trading at $75.43. We bought the June $80 call for $7.20 and sold the January $80 call for $2.20. Our debit (or cost basis) was $5.00. We wanted XAU (Gold & Silver Index) to move up slowly and finish as close as possible to $80. This is a longer-term was 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. About a week ago, XAU moved up, and broke through our $80 level a little faster than we wanted. When it was trading at $80.77 on Friday, the June $80 call was selling for $9.60 and we could buy back the January $80 call for $3.30. That’s a difference of $6.30. Our cost was only $5.00. That’s a profit of $1.30 on a $5.00 risk. We stated that, if XAU trades back up to that level, we would close the spread and take our profits. That Monday, XAU ran up over $81 and we closed our calendar spread for a profit of $1,300. We bought back the January $80 call for $3.60 and sold our June $80 call for $9.90. Shortly thereafter, XAU pulled back below $80, remained there and closed Friday at $75.43. CPTI traders had a number of opportunities to close out their position at a very nice profit. Since the January $80 calls expired worthless, those who did not close out their position, can now sell a February $80 call for $2.35 if they choose – further reducing their cost basis to $3.65. Or, they can simply sell their June $80 call for $6.50. (See new positions). 3. QQQ ITM Strangle – Currently trading at $25.31. 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 and collecting a chunk of money every few months. When we put on the position, we took in a total of $.95 premium on our original risk of $7.20. Our risk is now only $6.25. For bookkeeping purposes, we’re going to include the $950 with our January profits. Why? To make me look like I know what I’m doing. Don’t worry, this isn’t Worldcom or Enron. I won’t add it again at February expiration. BTW, did you know that the word “bookkeeping” or “bookkeeper” is the only word in the English language that has three consecutive sets of double letters? Do you care? This piece of trivia will come in handy someday. It’s Adding Up Nicely The total amount of premium we collected, and kept, from the three positions was $3,750 (less commissions) – and we gained five pounds to boot! Now we can afford to join Weight Watchers – but only if they deliver. Dominos delivers, Weight Watchers doesn’t. This is not a tough decision for a CPTI student. The only choice left is – pepperoni, Italian sausage or green peppers. _______________________________________________________________ So What Have You Done For Me Lately? January is behind us and another 3,750 dead presidents have joined 9,160 of their friends. Now there are 12,910 GWs, BFs, and an occasional AH holding up the Oreos in your cookie jar. As the kitty increases, you just have to make sure everyone keeps their hands off of your cookies. CPTI students, who followed the plan, made another chunk of cookie dough. They’re never satisfied – and shouldn’t be. Keep in mind, though, that the rainy days will come, so keep the umbrella handy. Like last month, we’ll start with a $50,000 trading account. We will continue to go on the assumption (or hope) that you have other marginable securities in your account that will enable you to make necessary adjustments on our newly established positions. February is a five-week option cycle. Since we’re facing a three-day weekend, the prices you get may vary slightly from those described below due to additional time erosion. _____________________________________________________________ Position #1: Iron Condor – Once More, With Feeling! An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The objective is that the underlying, at expiration, finish anywhere within the spread. Since it worked so well the last three months, we’ll use BBH (Biotech Index) again. Friday it closed at $91.40. The support at $80 once again seems strong. Enough. Because BBH got a bit frisky this week, we’ll up our resistance level to $100. That should give BBH enough room (20 points) to bounce around for the next five weeks. So we will: Sell 15 contracts of the BBH Feb. $80 puts (BBHNP) @ $.85 Buy 15 contracts of the BBH Feb. $75 puts (BBHNO) @ $.40 Sell 15 contracts of the BBH Feb. $100 calls (BBHBT) @ $.80 Buy 15 contracts of the BBH Feb. $105 calls (BBHBA) @ $.35 The credit for our bull put spread is $.45 and for the bear call spread is $.45. Total credit (and potential profit) for the position is $.90. Risk is $4.10 ($5.00 - $.90). Total margin requirement is $10,000 ($5,000 for each credit spread). The position is safer than last month’s because the maximum profit range is 20 points compared to last month’s 15-point range. ______________________________________________________________ Position #2: XAU Calendar Spread – It felt so good, so we’ll do it again! A Calendar Spread, using calls, is a neutral to bullish strategy. In this instance, however, a calendar spread on the Gold/Silver index is actually a neutral to bearish market strategy because Gold usually trades opposite the market. XAU is trading at $75.43. Though it traded above $80 briefly this month, resistance at $80 held as XAU bounced back down. The reason we entered the trade last month is still valid. As the market continues to falter, it’s likely that the XAU will move up slowly. As XAU increases in value, we will sell calls each month to reduce our cost basis and put bucks in our pocket. We will: Buy 10 contracts of XAU June $80 call (XAUFP) @ $7.20 Sell 10 contracts of XAU February $80 call (XAUBP) @ $2.35 The out-of-pocket cost for this trade is $4.85 ($7.20 - $2.35). There are four more option cycles before June. If we get about $2.20 each month for the next four months, we’ll have taken in $8.80. Plus, there will likely still be some value in the June call. Will this position last through June? Probably not. Just look at last month’s XAU play. This will take a little time to develop. There are various adjustments that can be made along the way. There is no maintenance requirement for this calendar spread because it is a long position. _______________________________________________________________ Position #3: SMH Straddle – Going Up, Going Down, Just Get Going! We’re getting bits and pieces of evidence that our economy, is not improving as fast as some hoped. More earning announcements will come with not-so-positive guidance – especially in the tech sector. What sector gets hit hardest and quickest? The semiconductors. SMH is the semiconductor holders index traded as a stock. CPTI students know I hate to pick a direction – so I won’t! SMH is approaching a support level at about $22.50. Either it’s going to continue down, break support and go on to test its October lows, or, it will bounce up. Personally, I’m voting for the October lows, but I could care less about the direction. We’re going to: Buy 10 contracts of SMH August $22.50 calls (SMHEX) @ $3.10 Buy 10 contracts of SMH August $22.50 puts (SMHQX) @ $2.75 Based on our CPTI straddle rules, we have spent $5,850. But, since we’re going to stay in this position only for the February option cycle (5 weeks), we’ll only be risking about $.85 ($850) which is appx. 15% of the current value – the estimated premium erosion of SMH if the holder doesn’t make a big move. SMH has the potential of moving up into the high $20s and down to about $17.50. Since we’re only risking $.85, a $.50 return would be a nice return on risk. We’ll see how it goes and sleep real well – knowing our risk is defined and that we have all the discipline in the world! Just keep me away from the corner 7-11. ______________________________________________________________ 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. Mike Parnos CPTI Instructor ************** TRADERS CORNER ************** Volume extremes warn of reversals By Leigh Stevens lstevens@OptionInvestor.com I've spoken before about extremes in buying or selling, in stocks or in options, as suggesting that the market may be getting overdone on the upside or downside which also suggests a possible upcoming reversal. A common way to look for such an extreme is by using the Arms Index (TRIN), which measures overall daily buying versus selling volume for either the NYSE or the Nasdaq. Another measure of market "sentiment" is to look at the daily volume of option put volume relative to call volume - a "standard" measure is the so called put/call readings. This is a ratio of total put volume to call volume, such as on the CBOE (Chicago Board Options Exchange) alone or all options exchanges together. Put volume that day for both (individual) equities AND index options is compared and is usually a fractional number - for example, .75, indicating that put volume was 75% of call volume. If the put/call reading was 1.00, put volume equaled call volume that day which is uncommon. Total daily put volume is divided by total daily call volume. You can see this ratio daily on the CBOE web site (www.cboe.com) or, if you have a charting program like QCharts, their symbol to graph this daily number is "QC:PUTCALL". WHY USE THE OPTION RATIOS? It has been noticed that when put volume gets quite high, such as being equal to call volume, traders are getting pretty bearish and the market may be at or approaching an "oversold" extreme in terms of trader "sentiment". Obviously how bullish or bearish option traders are is best shown by where they are actually putting their money - more into calls or an increasing amount into puts. Of course, selling calls should not be considered a bullish play just as selling puts can be a mildly bullish play. Nevertheless, as we know, most option speculators are betting on market direction, so call volume goes up on rally phases and put volume increases substantially in declining markets. Charles Dow, more than 100 years ago, was an early observer that at significant market tops most everyone is bullish and caught up in a bullish outlook and at market lows most traders are shorting stocks, if they are in the market at all. Here begins the idea that if there is especially heavy buying or heavy selling, the market could be nearing a trend reversal - that the contrary was about to happen when trader "sentiment" was heavily leaning one way or the other. The concept of "contrary opinion" is that extremes in bullishness are bearish and bearish extremes in trading are bullish. Sounds like Alice in Wonderland! Welcome to the market and the Street of Dreams. PUT/CALL RATIO - THE CONVENTIONAL WAY When put/call ratios have gotten down to the .40 to .45 area, this is seen to mark a bullish extreme and caution is indicated as to the FURTHER prospects for much more of a rise. When put/call ratios have gone to or above about .90, this is considered to be a sign that there is "too much" put buying or bearishness and this may signal an upcoming (upside) reversal. Often a moving average is used to smooth out temporary extremes as we want to see where the broader trend is. The trickiest thing is that this option indicator tends to be early in pegging an actual reversal. In fact, buy or sell "signals" are regularly 1 to 5-6 trading days ahead of an actual market reversal. This suggests, at a minimum, that you need to be carefully watching other things in the market that also weigh in the side of suggesting a significant top or bottom. The other thing that can make the put/call standard way of measuring market extremes less than useful is the effect of index calls and index puts in the total option volume figures. There is a lot of hedging of portfolios that goes on by large institutional funds and this can be related more to "insurance" than simply how individual traders see the market. I have found it useful to keep up my own numbers and ONLY measure total equities option volume numbers. I've found that this way I tend to get a more pure measure of bullish or bearish sentiment, and also produce an indicator that "reads" the same way that other overbought/oversold indicators (like stochastics) do - that is, a LOW number is suggesting a possible "oversold" market and a high reading is indicating an "overbought" market. So, if you notice the ORDER of the words - I use a CALL/put indicator and one that takes out Index option volume - and not the standard PUT/call ratio that divides the other way round and also includes the Index options. Keeping and plotting an indicator like I've described can be done in Excel. Or, can be done in trading software like TradeStation that allows the user to build "custom" indicators. I've talked enough about the concept - my indicator (as of the close on Friday, 1/17/03) is shown below and is compared to the S&P 500 (SPX) price chart. If you look over the chart, you'll notice that readings at or above (>) 2 tended to occur a day or a few days - for some reason it's often either 1 day ahead or about a week (5-trading days) ahead - before tops or downside reversals. That is, CBOE equities call volume was running 2 times that of put volume and would be equivalent to a put/call reading of 1, if index option volume was excluded - otherwise its a bit like comparing apples to oranges. It can be helpful to look at a 5-day moving average of the call to put equities option ratio - for example, there was a useful hint using this average for the late-December SPX low, within a few days prior to the upside reversal. The 1-day reading of "1" was too far, at 10-days, BEFORE the actual bottom to be of much practical help in trading. However, on balance, upcoming bottoms tend to be "signaled" within a day or few days, of when my call/put indicator gets to 1 or less (<) than 1. When the extremes are seen in the option indicators, whether you are used to seeing them as the (total) PUT/call reading or in the way that I'm showing them above (Call volume relative to puts), it is like saying "get ready" - the "go" is when you ALSO then see other technical indications like breakouts above/below trendlines, stochastic crossovers from extremes, etc. And of course, the "other" confirming indications (for a reversal) might be fundamental news events such as relating to earnings surprises, political situations, economic reports, etc. TRIN EXTREMES AS A WARNING OF REVERSALS - I started off this Trader's Corner by suggesting that the Arms Index or TRIN was another useful way to measure extremes in bullish or bearish trading activity. A full description of the Arms Index invented by Dick Arms (known better as "TRIN", short for TRading INdex) is in a previous Trader's Corner at - http://www.OptionInvestor.com/traderscorner/062002_2.asp As an Indicator the TRIN tends to be showing a selling extreme when its 10-day moving average gets to 1.50 or above. Buying tends to be overdone when the 10-day TRIN gets to .80 or less. Buy "signals" at 1.50 or above also tend to be more reliable than sell signals suggested by low extremes (buying predominates). The thing with TRIN extremes, especially brought on by prolonged selling in a bear market (or buying extremes in a bull market) is that it can be some time before an actual upside reversal worth trading is seen. In September and October, 10-day TRIN readings above 1.5 were seen 3 times before a sustained upside reversal occurred. When such extremes occur twice within a short time of each other, the second tends to be the one that precedes an upside reversal within a few days. With TRIN 10-day readings at or below .80, the lead time to a top can be either an interim top or a "final" top within a few days - however, this "lead" time can also stretch out to more than 5 trading sessions. Again, the 2nd extreme reading is more likely to occur ahead of a top that is the peak for some time to come. The thing with technical indicators is always to watch the few good ones, plus trendlines and price action (e.g., key reversals) and put together a "story" from what several are telling you - in this way, it's not that different than piecing together the various news events affecting an individual stock or the market as a whole to tell you where the trend is going. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. 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The Option Investor Newsletter Sunday 01-19-2003 Sunday 5 of 5 In Section Five: Covered Calls: Trading Basics: Our Approach To Covered-Calls Naked Puts: More Q&A With The Editor Spreads/Straddles/Combos: Rally Fades As Dismal Outlook Resurfaces! Updated In The Site Tonight: Market Watch: Something For Everyone Market Posture: Sell-Off Continues ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************* COVERED CALLS ************* Trading Basics: Our Approach To Covered-Calls By Mark Wnetrzak One of our new readers asked a common question about the plays offered in this section. Attn: Covered-Calls Editor Subject: Picking stocks for covered-calls Hello, I just started the trial subscription and I was impressed by your candidates for selling covered-calls. The thing I liked most was the technical conditions of your stocks and the use of "in the money" options to help increase the chance of a successful play. My question is, what are you looking for in a company's fundamentals with this strategy and how do you pick the best stocks for covered calls? KJ Regarding your questions about our covered-call candidates: In this section, we use a two-pronged approach to generate a wide variety of candidates to supplement your search for profitable trading positions: technical scans and option scans. I personally scan through hundreds of charts each week looking for technically strong stocks with favorable option premiums. I then sort through several over-priced option lists, looking for stocks with favorable technical indications. The method I use to select the published plays is based on a conservative approach using the "total return" concept that Lawrence McMillan adeptly describes in his original book, "Options: As a Strategic Investment." By using in-the-money calls, an investor can view the covered write as a single entity, thus he is not interested so much in stock ownership or bullish movement, but rather in obtaining a consistent (monthly) return on investment. Based on this approach, my target return is generally in the range of 3%-6% per month (6%-12% on margin), and in all but a few cases, the stock is called-away or sold outright after one strike period. Of course, it is still good advice not to purchase an issue you wouldn't mind owning in the long-term, as that outcome is always a possibility with the covered-write position. I favor a short-term approach that isn't predicated on forecasting a stock's (or the market's) directional movement. Still, whether the covered write strategy is applied short-term or longer term, it requires a neutral to slightly bullish outlook on the underlying equity and the overall market. Obviously, the sale of covered-calls can help hedge against downside movement, but the strategy is not a remedy for protracted bearish activity. Traders who utilize this method of option trading simply prefer the higher probability of making a consistent (low) return with their stock portfolios. Some investors prefer to strive for higher potential returns with an aggressive outlook, writing "out-of-the-money" calls on stocks in their portfolios. These (OTM) positions offer greater rewards, however they also provide less downside protection. The maximum potential profit of an OTM position, while greater than that of an "in-the-money" (ITM) position, will always require an increase in price by the underlying stock. Thus, by utilizing an OTM option, the success of the overall position depends more on the movement of the stock price and less on the benefits of writing the call. Since the premium generated from the sale of the call is smaller, the overall position will be more susceptible to loss if the stock price declines. In contrast, ITM positions are more conservative, offering less risk but also smaller reward potential. Though the strategy is less aggressive, there is risk of loss in all trading. My primary goal in this section is to provide positions that make acceptable returns while still receiving an above-average amount of downside protection. If you decide to use OTM calls, concentrate on the "return not called." This is the return on investment that one would achieve even if the stock price were unchanged when the sold option expires. You can compare potential plays more fairly using this approach since no assumption is made about the price movement in the underlying issue. The approach you take depends on your personal preference and risk-reward tolerance. Some investors split the difference, preferring to write a combination of both OTM and ITM calls to balance the outlook between upside potential and downside risk. As far as company research, the publishing deadline prevents me from doing little more than a cursory scan of the latest news and events. The listed positions are based almost entirely on technical analysis and little weight is given to the valuation or the long-term outlook for an issue. As with all recommendations, it remains your responsibility to perform due diligence and thoroughly research any stock you are considering for a covered-call position. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of actual traders, due to the variety of ways in which each play can be opened, closed and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The play commentary (when provided) is simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield XMSR 3.00 4.05 JAN 2.50 0.80 0.30* 14.8% RAD 2.46 2.97 JAN 2.50 0.15 0.19* 11.9% AES 3.25 4.04 JAN 2.50 1.05 0.30* 11.9% FEIC 15.88 16.24 JAN 15.00 1.75 0.87* 8.9% LVLT 5.13 5.20 JAN 5.00 0.50 0.37* 8.7% DNDN 5.43 5.30 JAN 5.00 0.70 0.27* 8.3% BSTE 35.82 38.85 JAN 35.00 2.10 1.28* 8.2% ELN 2.90 3.45 JAN 2.50 0.65 0.25* 8.0% MMR 5.20 7.92 JAN 5.00 0.60 0.40* 7.6% TKLC 10.33 11.29 JAN 10.00 0.80 0.47* 7.1% AGIL 8.10 7.45 JAN 7.50 1.00 0.35 7.1% CAL 8.32 8.73 JAN 7.50 1.05 0.23* 6.9% LWSN 5.26 6.22 JAN 5.00 0.55 0.29* 6.7% MATK 24.20 25.13 JAN 22.50 2.30 0.60* 6.0% ADVS 13.51 14.10 JAN 12.50 1.50 0.49* 5.9% SEPR 9.48 12.99 JAN 7.50 2.35 0.37* 5.6% BEAS 12.15 11.51 JAN 10.00 2.60 0.45* 5.1% EP 7.74 9.96 JAN 7.50 0.40 0.16* 4.7% IMCL 13.50 10.92 JAN 10.00 4.10 0.60* 4.6% ASML 9.20 8.27 JAN 7.50 1.85 0.15* 4.4% ALXN 15.30 14.20 JAN 12.50 3.40 0.60* 4.4% DCTM 16.97 17.63 JAN 15.00 2.25 0.28* 4.1% AVID 22.03 21.58 JAN 20.00 2.75 0.72* 4.1% VISG 5.72 4.70 JAN 5.00 1.05 0.03 0.5% MOGN 8.30 7.03 JAN 7.50 1.15 -0.12 0.0% IDNX 5.40 4.48 JAN 5.00 0.70 -0.22 0.0% GSPN 5.62 5.16 FEB 5.00 1.00 0.38* 6.0% ALA 5.76 6.54 FEB 5.00 1.10 0.34* 5.3% WEBM 10.89 10.31 FEB 10.00 1.55 0.66* 5.1% ALO 16.00 16.63 FEB 15.00 1.95 0.95* 4.9% JDEC 13.86 12.50 FEB 12.50 2.05 0.69 4.2% MEDC 9.31 9.26 FEB 7.50 2.20 0.39* 4.0% ASYT 10.71 8.95 FEB 10.00 1.45 -0.31 0.0% * = Stock price is above the sold striking price. Comments: Well, that was a rather horrid way to finish an options-expiration week! Mr. Softee tried to pull a rabbit out of the hat but could only manage a skunk. Yuck! Yet, the model covered-call portfolio did manage to weather the storm without too much damage. Both MGI Pharmaceuticals (NASDAQ:MOGN) and Identix (NASDAQ:IDNX) could have been exited or adjusted this week for little or no pain. A few of our closed positions actually ended in positive territory. The Murphy's Law award goes to Biomarin Pharma (NASDAQ:BMRN) which rocketed higher on favorable news; (sigh) the price of discipline. The new tech-wreck is threatening a few of our February positions. Last Monday, I mentioned on the Market Monitor that the worrisome action in Asyst Technologies (NASDAQ:ASYT) -- the stock dropped fairly hard after gapping higher at the open -- precluded opening any bullish or even neutral plays. The ticker will be removed from the summary next week. On the early exit watch list for next week: Globespan-Virata (NASDAQ:GSPN), Webmethods (NASDAQ:WEBM), and J.D. Edwards (NASDAQ:JDEC). As for entering new positions; sometimes the best thing to do is absolutely nothing! Positions Closed: BioMarin Pharmaceuticals (NASDAQ:BMRN), VISX (NYSE:EYE), Zix Corp. (NASDAQ:ZIX), and Massey Energy (NYSE:MEE). 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 ALKS 8.07 FEB 7.50 QAL BU 1.00 1079 7.07 35 5.3% EMIS 5.44 FEB 5.00 MTQ BA 0.75 65 4.69 35 5.7% LMNX 5.16 FEB 5.00 UEN BA 0.60 6 4.56 35 8.4% MEDC 9.26 FEB 7.50 MQH BU 2.15 145 7.11 35 4.8% MMR 7.92 FEB 7.50 MMR BU 1.00 70 6.92 35 7.3% ORB 5.02 FEB 5.00 ORB BA 0.35 147 4.67 35 6.1% REGN 21.27 FEB 20.00 RQP BD 2.30 757 18.97 35 4.7% 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 LMNX 5.16 FEB 5.00 UEN BA 0.60 6 4.56 35 8.4% MMR 7.92 FEB 7.50 MMR BU 1.00 70 6.92 35 7.3% ORB 5.02 FEB 5.00 ORB BA 0.35 147 4.67 35 6.1% EMIS 5.44 FEB 5.00 MTQ BA 0.75 65 4.69 35 5.7% ALKS 8.07 FEB 7.50 QAL BU 1.00 1079 7.07 35 5.3% MEDC 9.26 FEB 7.50 MQH BU 2.15 145 7.11 35 4.8% REGN 21.27 FEB 20.00 RQP BD 2.30 757 18.97 35 4.7% 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). ***** ALKS - Alkermes $8.07 *** Forging A Base *** Alkermes (NASDAQ:ALKS) is a pharmaceutical company developing products based on applying its sophisticated drug delivery technologies to enhance therapeutic outcomes. The company's areas of focus include controlled, extended-release of injectable drugs using its ProLease and Medisorb delivery systems, and the development of inhaled pharmaceuticals based on its proprietary Advanced Inhalation Research pulmonary delivery system. Alkermes partners its proprietary technology systems and drug delivery expertise with many other pharmaceutical companies, and it also develops novel, proprietary drug candidates for its own account. The company has a pipeline of products in various stages of development. Alkermes recently received about $24 million from Johnson & Johnson's Janssen Pharmaceutica as a prepayment of the first two years of the minimum revenue guaranteed under an agreement between the parties over the manufacture of Risperdal Consta. We simply favor the technical support near the cost basis in this position and investors who are interested in a long-term portfolio position in the drug sector should consider this issue. FEB 7.50 QAL BU LB=1.00 OI=1079 CB=7.07 DE=35 TY=5.3% ***** EMIS - Emisphere $5.44 *** What's Up Doc? *** Emisphere Technologies (NASDAQ:EMIS) is a biopharmaceutical company engaged in solving one of the most challenging technical hurdles in the pharmaceutical industry: the oral delivery of medicines, which, for a variety of reasons, cannot be offered to patients directly in an oral form. EMIS has pioneered the oral delivery of otherwise injectable drugs, including proteins, peptides, polysaccharides and other compounds not currently deliverable by oral means. These drugs present challenges for oral delivery because they are often large molecules, which are inactivated in the gastrointestinal tract, have limited ability to cross cell membranes and generally cannot be delivered orally. Did the company say something at the 21st Annual J.P. Morgan H&Q Healthcare Conference on January 6th? Somebody wants this stock (there is no news to explain Friday's explosion) and as I always say, the "tape doesn't lie" (sorry Mr. Weinstein). Traders can speculate on the near-term performance of the issue with this conservative position. Try target-shooting a lower net-debit as any pullback should offer a better cost basis and a higher potential yield. FEB 5.00 MTQ BA LB=0.75 OI=65 CB=4.69 DE=35 TY=5.7% ***** LMNX - Luminex $5.16 *** On The Rebound? *** Luminex (NASDAQ:LMNX) manufactures and markets products that have a proprietary technology which advances and simplifies biological testing for the life sciences industry. Their xMAP technology is used within the various segments of the life sciences industry in the fields of drug discovery, clinical diagnostics, genetic analysis and biomedical research. Earlier this week, Abbott Labs (NYSE:ABT) and Luminex announced the execution of two agreements that grant Abbott license, supply and distribution rights to LMNX's proprietary biological testing technologies. Was that the reason for Wednesday's rally on strong volume? Our outlook is bullish due to the recent technical strength which suggests a change-of- character, and this position offers a low risk cost basis in the rebounding issue. FEB 5.00 UEN BA LB=0.60 OI=6 CB=4.56 DE=35 TY=8.4% ***** MEDC - Med-Design $9.26 *** Royalty Suit Resolved *** Med-Design (NASDAQ:MEDC) is engaged principally in the design, development, licensing & manufacture of safety medical devices intended to reduce the incidence of accidental needlesticks. Each safety medical device the company designs and develops incorporates a proprietary needle retraction technology. The company's technology enables healthcare professionals to retract a needle into the body of the medical device for safe disposal without any substantial change in operating technique. MEDC's products generally can be categorized into the following four groups: hypodermic syringes; fluid collection devices; venous and arterial access devices; and specialty safety devices for other needle based applications. Becton, Dickinson and Company, a major medical technology company, is the principal licensee of Med-Design's products. Med-Design has rallied strongly after the company said it had settled its royalty dispute with Becton Dickinson. We simply favor the bullish "break-out" on high volume and this position offers traders a great way to speculate on the future movement of the issue with relatively low risk. FEB 7.50 MQH BU LB=2.15 OI=145 CB=7.11 DE=35 TY=4.8% ***** MMR - McMoRan $7.92 *** Well Discovery = Rally Mode *** McMoRan Exploration (NYSE:MMR) is engaged in the exploration, development and production of oil and gas offshore in the Gulf of Mexico and onshore in the Gulf Coast region. The company has rights to explore on over 400,000 gross acres, which is one of the largest exploration acreages held by any independent company in the Gulf of Mexico. In November, shares of McMoRan rallied sharply after it said it found hydrocarbons at an exploratory well in the Gulf of Mexico. We simply favor the bullish break-out on increasing volume and the current bullish momentum in the Oil and Gas industry. This position offers excellent reward potential at the risk of owning MMR stock. FEB 7.50 MMR BU LB=1.00 OI=70 CB=6.92 DE=35 TY=7.3% ***** ORB - Orbital $5.02 *** Next Leg Up? *** Orbital Sciences (NYSE:ORB) is a space technology company that designs, manufactures, operates and markets a broad range of space-related systems for commercial, civil government and military customers. The company's primary products and services are grouped into three segments: launch vehicles and advanced programs, including ground- and air-launched rockets that deliver satellites into orbit, and suborbital launch vehicles and missile defense boosters that are used as interceptor and target vehicles for missile defense systems; spacecraft and related space systems, including low-orbit, geosynchronous-orbit and planetary spacecraft for communications, remote sensing and scientific missions, and space-related technical services; and electronic systems consisting of satellite-based transportation management systems for public transit agencies and private vehicle fleet operators. Orbital recently announced that it has received approximately $50 million in incremental modifications to its current contract from Boeing (NYSE:BA) reference their missile defense system. We like the bullish move above the recent consolidation area around $4.50 and this position offers a method to participate in the future movement of the issue with relatively low risk. FEB 5.00 ORB BA LB=0.35 OI=147 CB=4.67 DE=35 TY=6.1% ***** REGN - Regeneron $21.27 *** Bracing For A Rally *** Regeneron Pharmaceuticals (NASDAQ:REGN) is a biopharmaceutical company that discovers, develops and intends to commercialize therapeutic drugs for the treatment of serious medical conditions. The company's product pipeline includes product candidates for the treatment of obesity, rheumatoid arthritis and other inflammatory conditions, cancer and related disorders, allergies, asthma and other diseases and disorders. Regeneron recently announced that federal regulators have granted fast-track status to part of the development program for its obesity drug Axokine. We favor the bullish technical pattern that suggests further upside potential: a confirmed long-term double-bottom formation (JUL and SEP lows) with a test of the neckline (support) at the end of December. With the favorable technical outlook for Regeneron, investors can use this conservative position as an excellent way to participate in the future movement of the issue with relatively low risk. FEB 20.00 RQP BD LB=2.30 OI=757 CB=18.97 DE=35 TY=4.7% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield DNDN 5.30 FEB 5.00 UKO BA 0.80 132 4.50 35 9.7% TVX 15.08 FEB 15.00 TVX BC 1.45 80 13.63 35 8.7% RRI 5.40 FEB 5.00 RRI BA 0.80 10078 4.60 35 7.6% ADCT 2.82 FEB 2.50 TLQ BZ 0.50 1238 2.32 35 6.7% CVTX 20.70 FEB 20.00 UXC BD 2.10 789 18.60 35 6.5% ADRX 15.82 FEB 15.00 QAX BC 1.85 8244 13.97 35 6.4% GNTA 8.27 FEB 7.50 GJU BU 1.25 992 7.02 35 5.9% DIGE 10.78 FEB 10.00 QDG BB 1.40 35 9.38 35 5.7% FTS 8.50 FEB 7.50 FTS BU 1.40 60 7.10 35 4.9% NWAC 8.30 FEB 7.50 NAQ BU 1.20 267 7.10 35 4.9% GENZ 35.41 FEB 35.00 GZQ BG 2.15 8442 33.26 35 4.5% APPX 20.94 FEB 20.00 AQO BD 1.90 173 19.04 35 4.4% PKTR 8.56 FEB 7.50 XOU BU 1.40 89 7.16 35 4.1% CVC 19.36 FEB 17.50 CVC BW 2.65 1603 16.71 35 4.1% ***************** NAKED PUT SECTION ***************** Options 101: More Q&A With The Editor By Ray Cummins One of our readers wants some suggestions for real "nuts and bolts" information on selling covered-calls a naked puts. Attn: Contact Support Subject: Need info on strategies Ray, Would you be able to recommend a resource (book, video-seminar, on-line materials etc.) to learn in detail writing covered calls and selling naked puts. I am not interested in general principles but real nuts and bolts info on setting up a trading plan using options. Most specifically using covered calls and naked puts as the basis for the plan. There is minimal info out there on naked puts. Such as repair strategies, risk management etc. I have 50K in un-margined trading capital and I am looking to turn a 3-4% return per month on that capital. I would appreciate if you could point me in the right direction. Thank You, BG Hello BG, The problems you have encountered while researching these trading strategies are common among our readers and the truth is, there are very few books that detail a comprehensive approach to using covered-calls or naked-puts as primary techniques in an investment portfolio. Of the publications I have reviewed personally, only a few come to mind as potential candidates for further study. These include: Options as a Strategic Investment, 4th edition, by Larry McMillan. This is the bible of options trading, used by professional as well as retail participants, and it is the benchmark by which all other books on this subject are compared. The chapter on covered-writes provides a complete explanation of the "Total Return Concept," which is the foundation of our approach to the covered-write strategy here at the OIN. Stocks for Options Trading: Low-Risk, Low-Stress Strategies for Selling Stock Options -- Profitably, by Harvey Friedentag This book explains how to develop a successful investment plan by creating and utilizing covered-calls in a conservative stock-option portfolio. It is likely the only (recent) book completely devoted to the strategy of writing calls against long-term portfolio issues. LEAPS Strategies with Jon Najarian, by Jon Najarian Not one you would expect in this group, but Dr. J's book is an excellent source of information on the advantages of buying LEAPS as a substitute for stock ownership with the idea of writing "covered" calls for consistent, low risk profits in a conservative stock-option portfolio. Option Volatility and Pricing: Advanced Trading Strategies and Techniques, by Sheldon Natenberg. This is a must-read for serious option traders as it covers the concept of volatility and pricing theory in great detail. It is the other "bible" of professional traders and I have personally seen it at many of the trading desks on the CBOE floor. However, if you want to learn about many of the same concepts in a more user-friendly format, consider the next book. The Option Trader's Guide to Probability, Volatility, and Timing, by Jay Kaeppel. Another great book by one of the foremost volatility specialists, covering risk-reward analysis, exit-adjustment methods, and the most common mistakes made by inexperienced option traders. The book is an excellent resource for "premium sellers" as it explains the fundamentals of a statistical approach to option trading and provides some guidance on when to implement those strategies. Trading for a Living: Psychology, Trading Tactics, Money Management, by Dr. Alexander Elder One of the most popular and well-known books about trading, it covers three major areas that are key to success; psychology, trading tactics and money management. This material is essential to developing discipline when participating in the stock market and learning how to avoid the pitfalls of emotional trading. Since there is obviously a dearth of written material on the subject of covered-calls and naked-puts, my suggestion is to simply read the newsletter each week, including the back-issues on the website and especially our past commentaries on these strategies. Read any other worthy trading publications and learn all you can about option pricing and the effects of volatility on common trading techniques. As far as "premium selling" strategies, I have written a number of narratives on the methods used with both puts and calls and those are posted in the website archives. Of course, there are also a plethora of great articles by other OIN researchers, covering just about every imaginable option trading strategy that is commonly used by retail traders. We are often asked about the timing and techniques for closing a trade, but unfortunately, there is no way to produce a list of specific guidelines or a step-by-step approach to exiting positions. The methods we use are similar to those discussed by Jim and the other traders in the daily articles and each is based on simple, proven money-management techniques; the most important of which is "keep the losses small." I hope that helps with your search for information on these strategies and I wish you much success as an options trader. 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 Stock Price Last Option Price Gain Max Simple Symbol Picked Price Series Sold /Loss Yield Yield VXGN 18.99 19.52 JAN 15.00 0.35 0.35* 18.3% 5.2% YHOO 18.10 18.37 JAN 15.00 0.25 0.25* 12.4% 3.7% MATK 25.55 25.13 JAN 22.50 0.60 0.60* 11.2% 4.0% CTAC 27.34 23.95 JAN 22.50 0.30 0.30* 10.2% 2.9% MATK 24.94 25.13 JAN 20.00 0.50 0.50* 9.8% 2.8% BSTE 34.48 38.85 JAN 30.00 0.60 0.60* 8.8% 3.0% AVID 22.80 21.58 JAN 20.00 0.40 0.40* 8.6% 3.0% ACAS 22.69 23.45 JAN 20.00 0.40 0.40* 8.5% 3.0% GG 12.62 12.57 JAN 11.25 0.40 0.40* 8.5% 3.2% ESPD 16.90 17.75 JAN 15.00 0.30 0.30* 8.4% 3.0% XLNX 22.94 22.59 JAN 20.00 0.25 0.25* 8.4% 2.8% DISH 23.90 25.77 JAN 22.50 0.30 0.30* 7.7% 2.9% GFI 14.68 13.55 JAN 12.50 0.35 0.35* 7.5% 2.5% RGLD 26.08 24.99 JAN 22.50 0.35 0.35* 7.0% 2.3% PLMD 32.77 27.50 JAN 25.00 0.45 0.45* 7.0% 2.0% BVF 29.00 31.10 JAN 25.00 0.25 0.25* 6.9% 2.2% LEA 37.09 38.20 JAN 35.00 0.40 0.40* 6.6% 2.5% COF 31.54 33.25 JAN 20.00 0.40 0.40* 6.5% 2.2% IMPH 19.48 21.53 JAN 17.50 0.35 0.35* 6.2% 2.2% WERN 22.21 20.35 JAN 20.00 0.40 0.40* 6.1% 2.2% DISH 22.20 25.77 JAN 20.00 0.40 0.40* 6.1% 2.2% MATK 23.37 25.13 JAN 17.50 0.35 0.35* 6.1% 1.8% BSTE 31.41 38.85 JAN 22.50 0.45 0.45* 5.8% 1.8% OVER 28.99 25.77 JAN 22.50 0.40 0.40* 5.6% 1.6% AU 33.99 34.69 JAN 30.00 0.65 0.65* 5.5% 1.9% IGEN 43.56 43.77 JAN 35.00 0.35 0.35* 5.5% 1.5% IGEN 41.10 43.77 JAN 30.00 0.55 0.55* 5.5% 1.6% GRMN 28.95 30.26 JAN 25.00 0.40 0.40* 5.4% 1.8% GRMN 29.78 30.26 JAN 25.00 0.25 0.25* 4.9% 1.5% OVTI 17.35 14.50 JAN 15.00 0.35 -0.15 0.0% 0.0% QSFT 12.57 10.57 FEB 10.00 0.30 0.30* 7.7% 2.2% FEIC 18.94 16.24 FEB 15.00 0.45 0.45* 7.7% 2.2% SEPR 13.20 12.99 FEB 10.00 0.30 0.30* 7.4% 2.2% VECO 15.39 14.82 FEB 12.50 0.35 0.35* 7.0% 2.1% CVC 19.44 19.36 FEB 15.00 0.40 0.40* 6.8% 2.0% XLNX 25.75 22.59 FEB 20.00 0.50 0.50* 6.4% 1.9% COF 39.00 33.25 FEB 30.00 0.65 0.65* 5.6% 1.6% NET 20.18 18.90 FEB 15.00 0.30 0.30* 5.0% 1.5% * = Stock price is above the sold striking price. Comments: The bears took control of the market with a vengeance this week and if Friday's activity is any indication of the future trend, the recent sharp declines may be just the beginning of a full scale retreat. With that outlook in mind, traders are cautioned to keep a close watch on bullish portfolio issues and adjust or exit any positions with unfavorable technical indications. The first candidate on the list is Quest Software (NASDAQ:QSFT) and prudent money management suggests a timely exit of the position. Other stocks on our watch-list include: Capital One Financial (NYSE:COF), FEI Company (NASDAQ:FEIC), Xylinx (NASDAQ:XLNX) and Network Associates (NYSE:NET). Positions Closed: Quest Software (NASDAQ:QSFT) 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 ANF 27.11 FEB 22.50 ANF NX 0.40 301 22.10 35 5.2% 1.6% CURE 17.49 FEB 15.00 QCW NC 0.40 10 14.60 35 7.1% 2.4% FTE 24.40 FEB 20.00 FTE ND 0.45 15 19.55 35 6.7% 2.0% GTRC 19.63 FEB 17.50 UGR NW 0.45 110 17.05 35 6.3% 2.3% IMPH 21.53 FEB 20.00 QPH ND 0.75 85 19.25 35 8.3% 3.4% SEPR 12.99 FEB 10.00 ERQ NB 0.35 605 9.65 35 10.3% 3.2% TVX 15.08 FEB 12.50 TVX NV 0.40 143 12.10 35 9.0% 2.9% 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 SEPR 12.99 FEB 10.00 ERQ NB 0.35 605 9.65 35 10.3% 3.2% TVX 15.08 FEB 12.50 TVX NV 0.40 143 12.10 35 9.0% 2.9% IMPH 21.53 FEB 20.00 QPH ND 0.75 85 19.25 35 8.3% 3.4% CURE 17.49 FEB 15.00 QCW NC 0.40 10 14.60 35 7.1% 2.4% FTE 24.40 FEB 20.00 FTE ND 0.45 15 19.55 35 6.7% 2.0% GTRC 19.63 FEB 17.50 UGR NW 0.45 110 17.05 35 6.3% 2.3% ANF 27.11 FEB 22.50 ANF NX 0.40 301 22.10 35 5.2% 1.6% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MY-Maximum Yield (monthly basis - using margin), SY-Simple Yield (monthly basis - without margin). ***** ANF - Abercrombie & Fitch $27.11 *** Multiple Upgrades! *** Abercrombie & Fitch Company (NYSE:ANF), through its subsidiaries as a specialty retailer that operates stores selling casual apparel, personal care and other accessories for men, women and kids under the Abercrombie & Fitch, abercrombie and Hollister Co. brands. As of February 2, 2002, the company operated 491 stores in the United States. A&F's stores and point-of-sale marketing are designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are carefully planned and coordinated to create a shopping experience that is consistent with the A&F lifestyle. Last week, Credit Suisse First Boston said that Richard Baum had upgraded Abercrombie & Fitch to "outperform" from "neutral," citing, among other factors, evidence that sales at the core are stabilizing with continued strong margins. Investors were elated with the news and the buying pressure pushed the stock to 80-month highs near $27. Traders who believe the recent rally will continue can speculate on that outcome with this position. FEB 22.50 ANF NX LB=0.40 OI=301 CB=22.10 DE=35 MY=5.2% SY=1.6% ***** CURE - Curative Health Services $17.49 *** Solid Outlook! *** Curative Health Services (NASDAQ:CURE) is engaged in businesses that serve patients who are experiencing serious or chronic medical conditions. The company operates two business units: Specialty Pharmacy Services and Specialty Healthcare Services. The Specialty Pharmacy Services business unit provides services to help patients manage the healthcare process and offers related pharmacy products to patients for chronic and critical disease states. Through the unit, the company purchases various biopharmaceutical products from manufacturers and contracts with insurance companies, government agencies and other payors to provide distribution, education and other services in connection with these products. The Specialty Healthcare Services business unit is a disease management company engaged in chronic wound care management. The unit manages, on behalf of hospital clients, a nationwide network of Wound Centers that provide a comprehensive range of services for treatment of chronic wounds. Early in the week, CURE reiterated its previously stated guidance for 2003 of revenues of approximately $219-$230 million and earnings per share in the range of $1.47-$1.53. The current trend is bullish and investors can profit from continued upside activity with this position. FEB 15.00 QCW NC LB=0.40 OI=10 CB=14.60 DE=35 MY=7.1% SY=2.4% ***** FTE - France Telecom $24.40 *** European Telecom Growth! *** France Telecom is a French telecommunications operator with over 100 million customers worldwide. France Telecom provides retail consumers, businesses and telecommunications carriers with a range of telecommunications services, including local, long distance and international telephony, as well as data, wireless communications, multimedia, Internet, cable television, broadcast and value-added services. France Telecom is also a major participant in developing satellite and undersea cable systems and it has its own Telecom 1 and Telecom 2 satellites. A number of favorable news items have contributed to the bullish activity in the French telecom market and FTE is one of the beneficiaries of the current trend. Traders who believe the upside bias will continue in the near-term can speculate on that outcome with this position. FEB 20.00 FTE ND LB=0.45 OI=15 CB=19.55 DE=35 MY=6.7% SY=2.0% ***** GTRC - Guitar Center $19.63 *** Retail Of A Different Note! *** Guitar Center (NASDAQ:GTRC) is a musical instruments retailer that operates Guitar Center and American Music stores. Guitar Center stores are organized into five departments, each focusing on one product category. The American Music stores sell band as well as orchestral instruments and related accessories, primarily to the school band market. In addition to its musical products, Guitar Center offers, through its retail and direct response operations, technical product information, confirmation of needs by a live person and after-sale support from a musician-based staff. The company's Musician's Friend unit is an integrated e-commerce and catalog business that offers an assortment of products and online promotions throughout the year. Guitar Center shares rallied in early January after the company said it expects a higher fourth quarter profit amid a sales surge that took 2002 revenues through the $1 billion barrier. Analyst William Armstrong, of C.L. King & Associates, raised his earnings estimates for the company for both 2002 and 2003 as a result of GTRC's better-than-expected sales. Investors can establish a low risk cost basis in a unique retail issue with this position. FEB 17.50 UGR NW LB=0.45 OI=110 CB=17.05 DE=35 MY=6.3% SY=2.3% ***** IMPH - Impath $21.53 *** Own This One! *** Impath (NASDAQ:IMPH) is a cancer information company that focuses clinical applications of advanced technologies in community-based hospital environments to enable doctors to make better treatment decisions for their cancer patients. The company harnesses the information it generates from performing analyses on thousands of cancer specimens to broaden the applications of this biological information. The company has also completed multiple strategic acquisitions including technologies for; software; complementary cancer information such as treatment and outcomes data; a range of pharmacoeconomic analytical capabilities; a tissue and serology archive of well-characterized, fully documented cancer specimens linked to longitudinal information on donors of those specimens, and a network of clinical trial sites around the United States that provides protocol design and review, patient recruitment, data collection and analytical services. Impath emerged as a bullish candidate in one of our "technicals only" chart scans and investors who want to own a unique issue in the Health Services sector should consider this position. FEB 20.00 QPH ND LB=0.75 OI=85 CB=19.25 DE=35 MY=8.3% SY=3.4% ***** SEPR - Sepracor $12.99 *** Drug Sector Speculation *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The firm's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which Sepracor refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to current products. Beyond the multitude of lawsuits, the most recent news for SEPR occurred in mid-December when the company announced it is on track to seek government marketing approval for its new insomnia drug. Estorra, a unique compound used to treat transient and chronic insomnia, has successfully completed clinical Phase III studies and the company expects to submit it to the FDA in mid-February for review before seeking final marketing approval. Traders who agree with a bullish near-term outlook for the issue should consider this position. FEB 10.00 ERQ NB LB=0.35 OI=605 CB=9.65 DE=35 MY=10.3% SY=3.2% ***** TVX - TVX Gold $15.08 *** Broad-Market Hedge *** TVX Gold (NYSE:TVX) is an international gold mining company with interests in five precious metal-producing mines located in North and South America, through the TVX Newmont Americas joint venture, and 100% of the Stratoni base metal mine in Greece. The North and South American precious metals operations are managed within the Company's majority-owned TVX Newmont Americas business partnership, whereas the Stratoni silver-lead-zinc operation is held within its wholly owned subsidiary, TVX Hellas S.A. The five long-life, mature, precious metals mines in the Americas have been consistent producers. In 2001, exploration replaced 100% of reserves mined and in 2002, the firm explored opportunities to increase its production in these regions and to become a significant multi-tier gold producer. TVX is our choice for a market "hedge" and traders who believe equity values will continue to slump in the coming weeks can benefit from a resultant rise in gold stocks with this position. FEB 12.50 TVX NV LB=0.40 OI=143 CB=12.10 DE=35 MY=9.0% SY=2.9% ***** ***************** 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 EMBT 8.21 FEB 7.50 MBQ NU 0.35 0 7.15 35 10.4% 4.3% ALN 13.26 FEB 12.50 ALN NV 0.60 71 11.90 35 10.1% 4.4% CREE 18.66 FEB 15.00 CVO NC 0.50 325 14.50 35 10.1% 3.0% WGRD 8.04 FEB 7.50 RUH NU 0.35 129 7.15 35 10.1% 4.3% ICST 21.10 FEB 17.50 IUY NW 0.60 9 16.90 35 9.6% 3.1% CVTX 20.70 FEB 17.50 UXC NT 0.60 105 16.90 35 9.2% 3.1% REGN 21.27 FEB 17.50 RQP NW 0.50 119 17.00 35 8.3% 2.6% BSTE 38.85 FEB 35.00 BQS NG 1.05 247 33.95 35 7.2% 2.7% SLAB 22.80 FEB 17.50 QFJ NW 0.40 216 17.10 35 7.0% 2.0% ELK 17.80 FEB 17.50 ELK NW 0.55 10 16.95 35 6.5% 2.8% ESPD 17.75 FEB 15.00 ENU NC 0.35 113 14.65 35 6.5% 2.1% MATK 25.13 FEB 20.00 KQT ND 0.40 20 19.60 35 6.4% 1.8% ADRX 15.82 FEB 12.50 QAX NV 0.25 298 12.25 35 6.4% 1.8% CELG 24.41 FEB 22.50 LQH NX 0.60 148 21.90 35 6.2% 2.4% HNT 26.81 FEB 25.00 HNT NE 0.55 7 24.45 35 5.1% 2.0% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Rally Fades As Dismal Outlook Resurfaces! By Ray Cummins The Bears regained control of the stock market Friday as buyers evaporated after a glut of negative reports ended hopes of a quick recovery for the U.S. economy. Technology stocks sank on disappointing outlooks from Microsoft (NASDAQ:MSFT) and International Business Machines (NYSE:IBM) while a sluggish forecast from blue-chip giant General Electric (NYSE:GE) weighed heavily on industrial issues. The Dow Jones Average fell 111 points to 8,586 and the NASDAQ Composite Index closed down 47 points at 1,376, its biggest one-day loss since last December. The broader Standard & Poor's 500 Index slid 12 points to 901 amid selling pressure in almost every major market group. Declining stocks outpaced advancers more than 2 to 1 on both the New York Stock Exchange and on the NASDAQ. Over 1.35 billion shares changed hands on the Big Board and more than 1.6 billion shares were traded on the technology exchange. In the bond market, the benchmark 10-year note jumped 16/32, yielding 4.02% while the 30-year bond gained 26/32 for a yield of 4.92%. ***************** 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 45.96 JAN 40 45 0.55 44.45 $0.55 Closed VLO 36.39 37.10 JAN 30 33 0.30 32.20 $0.30 Closed ASA 39.30 40.03 JAN 33 35 0.35 34.65 $0.35 Closed FNM 66.61 69.69 JAN 55 60 0.40 59.60 $0.40 Closed NBR 37.75 34.25 JAN 30 33 0.30 32.20 $0.30 Closed DHR 65.10 63.88 JAN 55 60 0.40 59.60 $0.40 Closed IGEN 41.96 43.77 JAN 30 35 0.55 34.45 $0.55 Closed RD 43.21 43.89 JAN 38 40 0.15 39.85 $0.15 Closed LMT 57.70 52.50 JAN 50 55 0.50 54.50 ($1.25) Closed * STJ 39.17 41.02 JAN 35 38 0.25 37.25 $0.25 Closed FRX 53.04 52.19 JAN 48 50 0.23 49.77 $0.23 Closed MYL 36.74 39.44 FEB 30 35 0.65 34.35 $0.65 Open XAU 79.51 75.43 FEB 65 70 0.75 69.25 $0.75 Open BHE 35.30 32.52 FEB 25 30 0.45 29.55 $0.45 Open CHIR 40.18 39.63 FEB 35 38 0.40 37.10 $0.40 Open INTU 50.40 48.29 FEB 40 45 0.60 44.40 $0.60 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Lockheed Martin (NYSE:LMT) was closed Wednesday for a small loss when the stock ended the session below the sold (put) strike at $55. Intuit (NASDAQ:INTU) and Benchmark Electronics (NYSE:BHE) are on the "early exit" watch-list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status JCI 81.79 80.95 JAN 90 85 0.20 85.20 $0.20 Closed LEH 56.72 57.37 JAN 65 60 0.25 60.25 $0.25 Closed GS 73.10 72.58 JAN 85 80 0.60 80.60 $0.60 Closed LXK 61.93 60.56 JAN 75 70 0.55 70.55 $0.55 Closed MMM 121.77 126.32 JAN 135 130 0.70 130.70 $0.70 Closed GD 78.87 74.15 JAN 90 85 0.40 85.40 $0.40 Closed CDWC 44.06 45.56 JAN 55 50 0.45 50.45 $0.45 Closed CEPH 49.02 52.05 JAN 60 55 0.40 55.40 $0.40 Closed GILD 34.57 36.35 JAN 40 38 0.25 37.75 $0.25 Closed UBS 47.56 49.55 JAN 53 50 0.35 50.35 $0.35 Closed ABK 57.56 56.50 FEB 70 65 0.55 65.55 $0.55 Open KBH 44.01 46.10 FEB 55 50 0.55 50.55 $0.55 Open BZH 61.98 61.60 FEB 75 70 0.50 70.50 $0.50 Open ITW 65.70 64.12 FEB 75 70 0.60 70.60 $0.60 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 49.97 JAN 60 55 4.45 54.45 0.55 Closed 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 75.56 JAN 65 70 4.25 69.25 0.75 Closed OCR 25.03 26.30 FEB 25 27 1.00 26.00 0.30 Open UOPX 38.08 37.45 FEB 30 35 4.40 34.40 0.60 Open EBAY 73.36 74.85 FEB 60 65 4.45 64.45 0.55 Open SYMC 46.12 45.05 FEB 35 40 4.50 39.50 0.50 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 36.10 JAN 40 25 0.00 0.25 Closed PXD 26.11 25.44 MAR 30 23 0.10 0.20 Closed VAR 50.38 49.74 FEB 55 45 0.10 0.00 Open? WPI 29.22 28.83 MAY 35 22 (0.10) 0.50 Open ANF 26.39 27.11 FEB 30 22 0.05 0.10 Open The best performer this week was Watson Pharmaceuticals (NYSE:WPI), which rose over $4 on heavy trading volume. The bullish synthetic position offered conservative traders a favorable near-term profit. Varian Medical Systems (NYSE:VAR) and Scios (NASDAQ:SCIO) climbed higher after our initial selections, however the rallies were too late to yield favorable profits in our bullish synthetic positions. Pioneer National Resources has retreated to a recent trading range near $24-$25 and since it is unlikely the stock will rally in the near future, the position has been closed. SYNTHETIC (BEARISH) ******************* Stock Pick Last Expir. Long Short Initial Max Play Symbol Price Price Month Put Call Credit Value Status IMN 35.00 37.99 APR 30 40 0.15 0.00 Closed AMZN 18.86 21.40 FEB 15 22 0.10 0.00 Open? The recent sharp rally stalled the bearish trends in Amazon.com (NASDAQ:AMZN) and it may be prudent to close the position on any further upside activity. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status HNT 25.75 26.81 JAN-30C DEC-30C 0.60 0.60 Closed GISX 20.21 18.70 FEB-22C DEC-22C 0.95 0.75 Closed COF 29.65 33.25 FEB-25P JAN-25P 1.00 0.90 Closed HSY 67.76 68.33 FEB-65C JAN-70C 3.25 3.75 Open? RTN 30.47 31.10 FEB-30C JAN-32C 1.65 2.20 Open? AMAT 15.70 13.53 J04-17C J03-17C 2.40 2.00 Open? The volatility play in Capital One (NYSE:COF) did not benefit from the recent bullish activity and the position was closed for a small loss. The new diagonal spread in Raytheon (NYSE:RTN) has already yielded a small profit and the Hershey (NYSE:HSY) spread finished the expiration period with a respectable gain. The bullish spread in Williams Sonoma (NYSE:WSM) was closed early, after the December option expired, for a favorable profit. The LEAPS/covered-calls play in Applied Materials (NASDAQ:AMAT) will be closed swiftly if the issue moves below technical support near $13. SHORT-PUT COMBOS **************** Stock Pick Last Short Long Initial Max Play Symbol Price Price Option Option Credit Profit Status AES 2.92 4.04 J04-7.5P J03-2.5P 4.50 0.40 Open EDS 19.64 18.82 J04-25P M03-17P 6.50 0.25 Open? The rally in Electronic Data Systems (NYSE:EDS) appears to be over in the near-term and conservative traders should consider closing the position to limit losses. ImClone (NASDAQ:IMCL), which was previously closed, offered a gain of up to $2.25 in the bullish play. CREDIT STRANGLES **************** 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 35.41 JAN 35 35 6.15 6.50 Closed L 9.95 10.19 JAN 10 10 1.35 1.55 Closed VRTS 19.81 17.47 JAN 20 20 1.25 1.75 Closed This week's big winner was the short-term straddle in Veritas Software (NASDAQ:VRTS), offering traders up to a $2.75 profit on $1.25 invested. The speculative position in Liberty Media (NYSE:L) generated a small gain as the issue slumped to a low near $8.50. Genzyme (NASDAQ:GENZ) achieved profitability as the issue fell to the "break-even" point in the bearish portion of the play. Traders who sold the JAN-$35 puts during the slump had "risk free" calls for the rally that began after Monday's FDA meeting. 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. ***** AET - Aetna $43.86 *** Hot Sector! *** Aetna (NYSE:AET) is a health benefits company whose main business operations are conducted in the Health Care, Group Insurance and Large Case Pensions segments. The Health Care segment consists of health and dental benefit products such as health maintenance organization, point-of-service, preferred provider organization and indemnity products, and group insurance products including life, disability and long-term care insurance products. Aetna's Group Life Insurance segment consists principally of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. Large Case Pensions manages a variety of retirement products, including pension and annuity products, offered to qualified defined benefit and contribution plans. PLAY (conservative - bullish/credit spread): BUY PUT FEB-35.00 AET-NG OI=204 A=$0.30 SELL PUT FEB-40.00 AET-NH OI=532 B=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$39.50 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=77% ***** HCA - HCA Inc. $43.75 *** On The Rebound! *** HCA (NYSE:HCA) is a healthcare services company that operates approximately 200 hospitals comprised of general, acute care hospitals, psychiatric hospitals and hospitals included in joint ventures. In addition, the company operates approximately 80 freestanding surgery centers. The firm's facilities are located in 23 states, England and Switzerland. HCA's general, acute care hospitals provide a full range of services to accommodate such medical specialties as internal medicine, surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and most ancillary healthcare services are provided by HCA's general, acute care hospitals and through the firm's freestanding outpatient surgery and diagnostic centers, and rehabilitation facilities. HCA's psychiatric hospitals provide a full range of mental healthcare services through inpatient, partial hospitalization as well as outpatient settings. PLAY (conservative - bullish/credit spread): BUY PUT FEB-37.50 HCA-NU OI=577 A=$0.35 SELL PUT FEB-40.00 HCA-NH OI=583 B=$0.55 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$39.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=77% ***** BGEN - Biogen $37.93 *** Amgen's Enbrel Upstages Amevive *** Biogen (NASDAQ:BGEN) is a biopharmaceutical company principally engaged in the business of developing, manufacturing and marketing drugs for human healthcare. The firm derives revenues from sales of its AVONEX (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis (MS) and from royalties on worldwide sales by its licensees of a number of products covered under patents it controls. In addition, Biogen has a significant number of ongoing research programs and a pipeline of development stage products, including AMEVIVE (alefacept), which is being considered for approval by the United States FDA and regulatory authorities in the European Union and Canada for the treatment of moderate to severe psoriasis. PLAY (conservative - bearish/credit spread): BUY CALL FEB-45.00 BGQ-BI OI=1321 A=$0.25 SELL CALL FEB-42.50 BGQ-BV OI=1256 B=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$42.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=77% ***** PIXR - Pixar $53.76 *** Profit-Taking Underway! *** Pixar (NASDAQ:PIXR) is a digital animation studio with the creative, technical and production capabilities to create a new generation of animated feature films and related products. The firm's objective is to create, develop and produce computer-animated feature films with a three-dimensional appearance. Since its inception, Pixar has created and produced four full-length animated feature films, Toy Story, A Bug's Life, Toy Story 2 and Monsters, Inc., which were marketed and distributed by The Walt Disney Company. PLAY (conservative - bearish/credit spread): BUY CALL FEB-65.00 PQJ-BM OI=12 A=$0.30 SELL CALL FEB-60.00 PQJ-BL OI=108 B=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$60.50 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=86% ***** RE - Everest Re Group $51.70 *** Sell-Off In Progress! *** Everest Re Group (NYSE:RE), through its subsidiaries, principally provides reinsurance and insurance in the United States, Bermuda and international markets. The company underwrites reinsurance both through brokers and directly with ceding companies. Everest underwrites insurance mainly through general agency relationships. Everest Reinsurance company specializes in property and casualty reinsurance and insurance. Everest Reinsurance (Bermuda), Ltd., established in 2000, principally writes property and casualty reinsurance and also offers reinsurance and insurance with respect to life and annuity classes of business. PLAY (conservative - bearish/credit spread): BUY CALL FEB-60.00 RE-BL OI=90 A=$0.20 SELL CALL FEB-55.00 RE-BK OI=123 B=$0.75 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$55.60 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=75% ***** ROAD - Roadway $36.43 *** Trading Range? *** Roadway Corporation (NASDAQ:ROAD) is a holding company with two primary operating entities, Roadway Express, and Roadway Next Day Corporation. REX is the primary operating subsidiary of the Company. REX and its primary subsidiaries provide long-haul, less-than-truckload freight services on city-to-city routes in North America, and on international routes to and from North America. Roadway Next Day Corporation, formerly known as Arnold Industries, was acquired in 2001, and provides regional next-day LTL and truckload freight services in North America in two major business segments. At the beginning of 2002, REX owned a total of 8,555 tractors and 25,175 trailers. The company also operated 2,130 tractors and 9,349 trailers under long-term leases. The average age of the intercity fleet was six years. New Penn and ATS together operate 2,100 tractors and 5,800 trailers. PLAY (conservative - bearish/credit spread): BUY CALL FEB-45.00 EJQ-BI OI=56 A=$0.20 SELL CALL FEB-40.00 EJQ-BH OI=74 B=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$40.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=72% ************* 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. ***** PHSY - PacifiCare Health Systems $29.19 *** Bullish Outlook! *** PacifiCare Health Systems (NASDAQ:PHSY) offers managed care and other health insurance products to employer groups and Medicare beneficiaries in eight Western states and Guam. The company's commercial and Medicare programs are designed to deliver quality healthcare and customer service to the company's members in a cost-effective manner. Programs include health maintenance organizations, preferred provider organizations and Medicare supplement products. PHSY also offers a variety of specialty products and services that employers can purchase to supplement the firm's basic commercial plans, or as stand-alone products. These specialty products include pharmacy benefit management, behavioral health services, life insurance, indemnity health insurance and dental and vision benefit plans. The company's earnings are due 2/12/03. PLAY (moderately aggressive - bullish/debit spread): BUY CALL FEB-25.00 HYQ-BE OI=131 A=$4.90 SELL CALL FEB-27.50 HYQ-BY OI=41 B=$2.90 INITIAL NET-DEBIT TARGET=$1.95-$2.00 POTENTIAL PROFIT(max)=25% B/E=$27.00 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=68% ***** APPX - American Pharmaceuticals $20.94 ** Favorable FDA Decisions ** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. The company produces over 100 generic injectable pharmaceutical products in more than 300 dosages and formulations. Its primary focus is in the oncology, anti-infective and critical care markets. The firm manufactures products in all three of the three basic forms in which injectable products are sold: liquid, powder and lyophilized (freeze-dried). PLAY (conservative - bullish/diagonal spread): BUY CALL APR-20.00 AQO-DD OI=125 A=$3.10 SELL CALL FEB-22.50 AQO-BX OI=0 B=$0.80 INITIAL NET-DEBIT TARGET=$2.15-$2.20 INITIAL TARGET PROFIT=14% B/E=$22.20 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=42% ***** SNPS - Synopsys $40.00 *** Technicals Only! *** Synopsys (NASDAQ:SNPS) is a global supplier of electronic design automation (EDA) software to the electronics industry. The firm's products are used by designers of integrated circuits, including system-on-a-chip ICs, and the electronic products (such as PCs, cellular phones and Internet routers) that use integrated circuits to automate significant portions of their chip design process. Ics are distinguished by the speed at which they run, their area, the amount of power they consume and the cost of production. The firm's 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. Synopsys provides consulting services to assist customers with their IC designs, as well as training and support services. PLAY (conservative - bearish/debit spread): BUY PUT FEB-50.00 YPQ-NJ OI=30 A=$10.20 SELL PUT FEB-45.00 YPQ-NI OI=236 B=$5.50 INITIAL NET-DEBIT TARGET=$4.50-$4.60 POTENTIAL PROFIT(max)=8% B/E=$45.40 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=75% ******************* 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. ***** UPL - Ultra Petroleum $10.11 *** Reader's Request! *** Ultra Petroleum (NYSE:UPL) is an independent oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The company's operations are focused mainly in the Green River Basin of southwest Wyoming, and Bohai Bay, offshore China. Ultra holds interests in 265,400 (gross) acres in Wyoming, covering approximately 410 square miles. With the acquisition of Pendaries Petroleum in 2001, the company became active in oil and gas exploration and development in Bohai Bay. In addition, the company owns and operates minor operations in Pennsylvania and Texas. PLAY (very speculative - bullish/synthetic position): BUY CALL MAR-10.00 UPL-CB OI=314 A=$0.95 SELL PUT MAR-10.00 UPL-OB OI=10 B=$0.65 INITIAL NET DEBIT TARGET=$0.05-$0.10 INITIAL TARGET PROFIT=$0.45-$0.75 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold put is approximately $475 per contract. However, do not open this position if you can not afford to purchase the stock at the sold strike price! ***** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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