The Option Investor Newsletter Wednesday 01-22-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Slipping and Sliding Futures Wrap: Bears Showing Their Claws Index Trader Wrap: Has the market lost its mind? Weekly Fund Family Profile: AmSouth Mutual Funds Options 101: Interpreting Volatility Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 01-22-2002 High Low Volume Adv/Dec DJIA 8318.73 - 124.17 8444.61 8306.59 1542 mln 1171/2080 NASDAQ 1359.48 - 4.77 1379.61 1358.23 1491 mln 1293/1957 S&P 100 452.10 - 4.68 445.67 445.31 totals 2464/4037 S&P 500 878.36 - 9.26 889.74 877.64 RUS 2000 380.53 - 2.64 383.44 380.20 DJ TRANS 2213.63 - 67.60 2274.31 2213.50 VIX 32.01 + 1.48 32.40 30.56 VIXN 44.16 + 0.92 45.06 42.54 Put/Call Ratio 0.73 ******************************************************************* Slipping and Sliding by Kent Barton Last night the stage was set for an oversold bounce in the tech sector. After watching the NASDAQ give back nearly 7% over the past four sessions, the bulls could've rallied around Tuesday evening's strong earnings report from Motorola and the better- than-expected semiconductor book-to-bill number. Positive news from JDA Software (JDAS) and Lucent (LU) also created a favorable climate for a short-covering rally. The Composite did manage to post a decent gain during the middle of today's session, but sputtered out in late-afternoon trading and finished its fifth consecutive loss. What happened? For starters, Motorola took much of the wind of the bulls' sails this morning when they released cautious comments regarding the next quarter. MOT may have had a great Q4, but these days it's the forward-looking guidance that's of paramount importance for investors. Shares of the communications equipment provider posted a loss of 2.5%. However, the more vexing problem for tech investors was a complete lack of strength in the rest of the equity market. The bulls just couldn't seem to find any traction in the face of a steady drift lower in the key non-tech sectors. The market is attempting to scale a rather large wall of worry, and several of today's earnings reports made for a very slippery journey. Daily chart - NASDAQ Composite: While the weak technical picture pictured above certainly doesn't inspire much bullish confidence, news after the bell is likely to give the NASDAQ an upward bias tomorrow morning. Shares of Qualcomm were ticking higher by more than 4% in after- hours trading after beating estimates by four cents and raising its Q2 guidance to 34-35 cents/share. The consensus expectation was for earnings of 30 cents/share. The company also raised its 2003 top-end EPS estimates from $1.20 to $1.39. Strong earnings and upside guidance...Not too shabby! This news could help the NASDAQ to find a bid on Thursday. Especially considering how short-term oversold the market is. Texas Instruments (TXN) was also rising in the extended session after the company reported earnings that were three cents better than expectations. Strong demand during the final weeks of 2002 was largely responsible for the upside surprise. TXN also updated its Q1 outlook and said they are now expecting a result of six cents, "plus or minus a few cents." Analysts had been looking for three cents/share in the first quarter. Meanwhile, fellow chip stock Altera was trading slightly lower following their fourth-quarter announcement. ALTR beat estimates but gave a Q1 estimate that was somewhat less than expected. While the book-to-bill number was largely ignored today, the TXN data supports the idea that demand has been picking up within the semiconductor industry. Of course on the other hand you have Intel cutting capex spending and AMD doing its best impression of a cliff diver. But at the very least, it looks like tonight's news could trigger a short-term bounce in the SOX.X. Daily chart - SOX.X semiconductor index: Non-tech earnings also continued in earnest today as many more high-profile companies reported their quarterly results. Banking behemoth J.P. Morgan kicked things off with a fourth-quarter loss of $0.20/share. Factoring in a 13-cent restructuring charge, this was in-line with expectations. JPM finished the session with a 2.8% loss and closed just above its 50-dma. Meanwhile, fellow Dow component Eastman Kodak offered up a snapshot of severe fundamental weakness after missing earnings by 2 cents and guiding lower for the first quarter. The company also announced additional job cuts. EK was whacked for a loss of nearly 12%, contributing to a triple-digit decline in the Industrials. Pfizer (PFE) fared much better with its quarterly report and beat estimates by a penny. The company recorded a 46% increase in net income, thanks in large part to strong drug sales. This news wasn't enough to keep the DRG.X pharmaceutical index out of negative territory. Another earnings-induced decline was seen in shares of General Dynamics. As you might expect, the company's defense division did quite well. Pentagon expenditures on warships, weapons systems, and military vehicles raised the company's profit. Unfortunately for shareholders, GD's aerospace unit saw a huge revenue decline related to weakness in the business jet market. The bottom line showed a profit of $1.21/share, 12 cents below than expectations. Shares lost 12% after plummeting through long- term support near $72. Speaking of jets, the XAL.X airline index was pushed into a nosedive yesterday after Northwest Airlines (NWAC) reported a quarterly loss that was 41 cents wider than consensus expectations. However, it was this morning's announcement from AMR that sent the sector into an utter tailspin. The world's largest airline reported a narrower fourth-quarter loss and a modest increase in revenue. Those are decent results, but Wall Street is far more concerned with the outlook for future growth. Unfortunately that outlook is extremely gloomy. According to AMR's Chairman and CEO Don Carty, "Clearly, results such as the ones we reported today are unsustainable." Carty went on to state that a "permanent shift" in the airline industry would demand a reduction in annual costs by at least $4 billion. Talk about a Catch-22! AMR must aggressively cut costs in order to avoid the same fate as UAL...But these reductions will make continued revenue growth extremely hard to come by. This applies for most of the other major airline companies as well. Investors responded by slashing nearly one quarter off of AMR stock. On the other end of the spectrum, Southwest Airlines, one of the few profitable carriers, reported earnings that were 2 cents better than expectations. The company still had a very difficult quarter and suffered a 33% decline in net income. LUV finished with a 4% loss. Daily chart - XAL.X airline index: Airlines (and the transportation sector in general) are also being pressured by the sustained high price of oil. February crude oil futures (cl03g) reached new relative highs and closed above $34.00/barrel. Yesterday the first signs of cracks in the Venezuelan strike appeared when tanker captains agreed to go back to work. This should help to boost the country's oil exports from the current amount that's trickling out. But with 90% of oil workers remaining on the picket line, there's still no end in sight for the labor stoppage. Sector giant Sclumberger missed earnings by a nickel, citing "the absence of any significant growth in energy demand." This news pushed both the OIX.X oil index and OSX.X oil service to multi-week lows. Of course the other major catalyst for rising oil prices is the looming war with Iraq. During a speech in Missouri today President Bush reasserted that the country has weapons of mass destruction. But unless the U.N. inspectors find the proverbial "smoking gun," he'll face an uphill battle in finding international (and domestic) support for an invasion. Meanwhile, some pundits continue to speculate that Saddam Hussein might relinquish his power and go into exile with full immunity from persecution related to his various war crimes. Obviously this would be the optimal solution for both the U.S. and Iraq, not to mention the equity market. But as the saying goes, if it sounds too good to be true...it probably is. The chances of Hussein willingly stepping down are next to nil. We're talking about a power- hungry dictator who idolizes Josef Stalin and once ordered an assassination attempt on his own son. Perhaps a coup within his regime would be more likely, but in the past he's managed to squash any threats from within. Everything will be coming to a head next week with Bush's State of the Union address on the 28th, one day after the critical UN deadline. The related uncertainty has made it very easy for potential bulls to retract their buy orders and play the waiting game. The growing geo-political tension is also reflected in the volatility index (VIX.X), which has moved sharply higher over the past week. Technically, the Dow and NASDAQ are both looking painfully oversold on a short-term basis, and the latter index might possibly find some buying on the positive TXN and QCOM news. The NASDAQ seemed to be held back by the rest of the market today and should be able to move back towards the 1400 area on Thursday if the overall equity climate is more favorable. Meanwhile, the Dow is trading just above support in the 8200-8300 range. It would take a serious bearish effort to push the index below this region. Daily chart - Dow Jones Tomorrow will bring another round of earnings. Noteworthy announcements include Dow components CAT and T before the bell, followed by tech heavyweights AMZN, AMGN, and KLAC after the market closes. Barring any major downside surprises, the major indices (and the tech sector in particular) look poised to retrace some of their recent losses. Short-term traders might be able to take advantage of such a rebound, but bear mind in that any sustainable, multi-day rally probably won't happen ahead of next week's UN deadline. ************ FUTURES WRAP ************ Bears Showing Their Claws By John Seckinger jseckinger@OptionInvestor.com Bears showed their strength once again on Wednesday, pressuring all three futures contracts below another tier of support. With such support becoming resistance, how does a current risk/reward scenario for bears currently look? Wednesday, January 22nd at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 8318.73 -124.17 8444.61 8306.59 YM03H 8312.00 -123.00 8473.00 8286.00 27,207 Nasdaq-100 1006.51 -2.42 1027.08 1003.58 NQ03H 1004.50 -4.50 1029.00 999.50 292,473 S&P 500 878.36 -9.26 889.74 877.64 ES03H 877.50 -11.00 891.75 876.00 638,229 Contract S2 S1 Pivot R1 R2 Dow Jones 8218.62 8268.67 8356.64 8406.69 8494.66 YM03H 8170.00 8241.00 8357.00 8428.00 8544.00 Nasdaq-100 1009.46 1018.27 1012.39 1021.20 1035.89 NQ03H 981.50 993.00 1011.00 1022.50 1040.50 S&P 500 869.81 874.08 881.91 886.18 894.01 ES03H 866.00 871.75 881.75 887.50 897.50 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, let us take a look at Jim Brown's day in the Futures Monitor. Recapping his signals: Short 884.50, exit 885.50, loss -1.00 Short 883.50, exit 886.25, loss -2.75 Short 880.75, exit 883.50, loss -2.75 Short 884.00, exit 885.50, loss -1.50 Short 888.25, exit 886.25, gain +2.00 Short 888.00, exit 882.00, gain +6.00 Long 876.50, exit 877.00, gain +0.50 Total for the Day = A Gain of 0.50 points Total for the Week = +14.75 points (Every point equals $50) For more information on Jim's posts for Tuesday, 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) An interesting session in the ES contract, as the 'range-trade' mentality existed until the last hour of trading. There are some things we can take from Wednesday's activity (9:30 a.m. to 4:15 p.m.): The weekly S1 area of 888.25 acted as solid resistance, making it too difficult for bulls to even test the pivot at 894. Late-day weakness didn't make it to the 873.25 area (S2 for the week), but notice that S1 for Thursday comes in at 871.76. Therefore, we can use the 871.76 to 873.25 area for support if weakness continues. Remember, the last relative low was set on December 31st at 868. The daily S2 reading comes in at 866 and just underneath. What can we make of the close at 877.50? I will compare the 877.50 area to three daily retracement levels. One being the move from October to December, the other the decline in December, and then the rally during the beginning of 2003. 38.2% of the rise from October to December comes in at 883; 19.1% of December's decline comes in at 884.25; and 80.9% retracement of the rise during 2003 is seen at 881.25. Therefore, the range from 881.24 to 884.25 should now become resistance. Of course, a strong move above the 884.25 area will change things in a hurry. Chart of ES03H, Daily Going to a 15-minute chart of the ES contract, once again the settlement is underneath the next day's pivot (887.50 versus 881.75). This has to be viewed as bearish once again, despite very low Stochastic readings shown above. The aggressive regression channel (shown below) continues to indicate strength amongst bears, and it would take a quick move above R1 to shift sentiment towards more neutral levels. Ideally for bears, the pivot is never cleared on Thursday and S1 (a solid area of support) becomes resistance. It would take a close above 888.25 (S1 for the week) before sentiment will shift towards more neutral levels. Chart of ES Contract, 15-minute Bullish Percent of SPX: 57.11% and still in column of O’s (Recent High at 66%, Low of current column at 58%). On Tuesday, the Bullish Percent fell 3.29% and there will be an "O" added if 56% is reached. Based on the Bullish Percent, there is still some room to fall in the contract. The March E-mini Nasdaq 100 Contract (NQ03H) Once again, the 1024 area was protected by bears, as the NQ contract closed underneath this area for the fourth straight session. However, also once again, selling pressure was not as extreme as first thought. We did a move under 1000, but certainly not to either the 989 or 983 area. Going forward, I still expect resistance from 1024-1028, with resistance above from 1040-1048. One way to play these levels is to wait until 1028 is hit, and then look for weakness back underneath 1024. Objective would be the pivot at 1011. Therefore, confirmation will be achieved and probability of success in one's favor. On the other hand, if 1011 is taken out early on Thursday, a bearish trader can get a little more aggressive. Chart of NQ03H, Daily Looking at a 15-minute chart of the NQ contract, we did get a short pop above Wednesday's pivot and to 1029; however, this level (red line below) was just too much for bulls. Going forward, the NQ contract is at 1018 and having trouble at the 61.8% area; nevertheless, we still could get another test of 1029 and the top of the recent range early on Thursday. It is definitely conceivable that we get a bid back towards the 1040-48 area before rolling over once again during the next few days. As always, using the "Retracement Roadmaps" should help a trader during any particular session. A five-minute close above 1029 will certainly change sentiment to more neutral levels and raise eyebrows about a move to 1040.50, but if the 1040.50 area (100% level, or R2) is not hit and the NQ contract closes back under 1029 - time to look for a failure back to the pivot and possibly lower. Chart of NQ03H, 15-minute Bullish Percent for NDX: We now have a new column of O's, accomplished as the Bullish Percent reading fell 2% to 59 on Wednesday. If this indicator hits 58%, another "O" will be added and the last column of O's (from 80 to 60%) will be history. The March Mini-sized Dow Contract (YM03H) The mini-sized Dow contract (YM03H) fell rather aggressively again on Wednesday, taking out S2 for Tuesday (8287) by one point. The pivot was never reached; therefore, it was hard for bulls to get anything going. Going forward, Thursday's pivot of 8357 should be a good area to test bears' strength. Once above the 8357 to 8373 area, bulls should definitely get an increase of confidence (as long as 8357 holds). The current objective still remains lower at 8221, set on December 31st. Stochastics (not shown) on a 120-minute time frame continues to be buried; therefore, it is very difficult to predict when the 'oversold' conditions will cease. As noted yesterday, a P&F chart of the Dow signaled a downside objective of 8000. Today, as weakness continued, the objective is moved lower to 7800. Only a three-box reversal can stop this objective from signaling lower levels. Note: The Dow came 6.59- points from lowering this objective, since 8300 was not hit during the session. Getting back to the YM contract, there is definitely 'technical damage' taking place over the last few days; therefore, traders should look to sell rallies for the time being. If a bullish opportunity presents itself, most likely it makes sense to go flat at the end of the session. Chart of YM03H, 120-minute Bullish Percent of Dow Jones: 53.33% and in column of O’s. The Bullish Percent indicator lost 6.67% on Wednesday, reversing lower and signaling that the recent short covering rally at the beginning of January will be unable to generate any new longs into the market. This definitely has intermediate bearish implications. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Has the market lost its mind? What has the world come to when the Dow Industrials (INDU) 8,318 -1.47% falls 124 points and violates multiple levels of support, while the tech-heavy NASDAQ-100 Index (NDX.X) 1,006 -0.23% trades in positive territory for the bulk of the session, only to give back a session best 1.7% gain as the "blue chips" see all of their January gains erased in the past five sessions? While the NASDAQ-100's marginal decline was nothing for technology bulls to write home about, the marginal loss was "impressive" compared to the shellacking many of the "blue chips" took. An underpinning bid looked to build into the afternoon session for technology stocks, helped by a December semiconductor book- to-bill ratio that rose to 0.98 from 0.80 in November. While bookings received for every order being shipped was still below 1.0, technology bulls, if not some bears, seemed to view the numbers as a positive. Fundamental shops like Thomas Weisel and Lehman Brothers felt bookings were still very low and warned investors from extrapolating off of December's single data point with the belief that December's momentum will dissipate in the sector's seasonally slow first quarter. The Semiconductor Index (SOX.X) 292.50 -0.59% attempted a morning rally but found resistance at the psychological 300.00 level with a session high trade of 299.74. While investors continued to dump the stodgier Dow components to January lows on fears of war with Iraq, investors seemingly cheered Lucent Technologies (NYSE:LU) $1.81 +7.73% back near its January highs of $1.98 and atop the most actively traded list of stocks with 92.6 million shares traded, after the telecom equipment giant said it lost less than analyst's expected in its recently completed first quarter and that it expects sales to rise to $2.5 billion in the second quarter, which is to a level it believes it can eventually turn a profit. By the close, technology sectors held near unchanged, but it was the Gold/Silver Index (XAU.X) 77.69 +2.53% that came in with today's best sector performance, after February Gold futures (gc03g) 359.90 +0.58% reached a contract high. Trade volumes picked up from Tuesday's volume, with the NYSE turning 1.54 billion shares, which slightly outpaced the NASDAQ's 1.5 billion share volume. Breadth was negative at both the NYSE and NASDAQ with ratios almost identical to yesterday. NYSE breadth was bearish with decliners outnumbering advancers by a 2 to 1 margin, while NASDAQ breadth was negative at 3 to 2. Today's action was some changes take place in the new highs and new lows breadth indicator, which certainly shows some lack of leadership to the upside starting to take place. While the NYSE new highs/new lows breadth was still rather bullish at 87:58, it's NASDAQ's almost even 64:63 new high/new low reading that has today's NASDAQ relative out performance looking somewhat suspect. Since we're looking at NYSE and NASDAQ breadth, then we should at least mention the NYSE Composite (NYA.X) 4,962.98 -1.06% falling 53 points, compared to the NASDAQ Composite (COMPX) 1,359.48 -0.34% falling just 4.7 points. As a comparison on percentage loss basis, the lack of new highs in the NASDAQ and growing number of new lows is viewed as bearish divergence in this indicator and showed little upside leadership today. While neither of these very broad indices saw their bullish % charts reverse into a column of "O," its notable that the NYSE Bullish % ($BPNYA) from www.stockcharts.com shows the NYSE losing a net of 1.16% of its stocks (roughly 3,000) to reversing point and figure sell signal (currently reading 51.08%), while the NASDAQ Composite Bullish % ($BPCOMPQ) saw a net loss of 0.8% of stocks to reversing point and figure sell signals (currently reading 46.01%). Respective bullish % levels of 46% and 42% reading would have their bullish % charts reversing into "bull correction" phases. Here's a quick glance at how tomorrow's daily pivot analysis compares to the weekly and monthly levels. The main levels noted tonight are in the S&P 500 Index (SPX.X) at 889. The SPX failed three intra-day rally attempts at this level. With the Dow Industrials closing below its weekly S2 level of 8,361, then SPX weekly S2 support of 876, which did hold during today's session becomes an important level of support tomorrow. Pivot Analysis Matrix The ability of the narrower Dow Industrials to "blow through" intra-day and weekly support levels is disturbing to bulls and most likely begins to weigh on investor psychology. Dow Industrials Chart - Daily Interval A 2-cent per share miss on recently completed quarter and lowered guidance for Q2 by Dow component Eastman Kodak (NYSE:EK) $33.18 -11.73% got the ball rolling for today's decline in the Dow Industrials. Reversing point and figure sell signals from EK and Du Pont (NYSE:DD) $40.65 -2.4% had the Dow Industrials Bullish % ($BPINDU) reversing back into a column of O's and now reading "bull correction." A reading of 48% or lower for this narrow bullish % would be "bear alert" and there are several stocks that are $1 or less away from giving sell signals. Dow components currently showing a point and figure buy signal associated with their charts, but close to giving a reversing p/f sell signal are (AXP $34, BA $30, CAT $44, GM $35, MRK $55). Prices listed are those levels where a reversing p/f sell signal would be given. S&P 500 Index Chart - Daily Interval I'd have downside alerts set on those 5 Dow components mentioned above that are close to giving reversing lower point and figure sell signals. Then, if the SPX were to trade below 876 and I NOT see a sell signal from those 5 components listed above, look to play a bullish rebound to the upside in the SPX from 876. From there, I'd want to see a "confirming" move above 890 and look to exit an SPX bullish trade at 899, just shy of psychological resistance. Any bullish entries should be followed with a stop under lower Bollinger Band of 865. S&P 100 Index Chart - Daily Interval The S&P 500 Bullish % ($BPOEX) fell 5% today, meaning that 5 stocks gave reversing point and figure sell signals. While this indexes bullish % fell 5% to 56%, a reading of 54% or net loss of 2 stocks is needed to see a reversal back to "bull correction" status in the bullish % chart. Four of the five stocks mentioned above are components of the S&P 100 Index (OEX.X) (AXP $34, BA $30, GM $35, MRK $55) and help comprise the bullish %. Thus I think it important to monitor these stocks by simply setting downside alerts at the levels specified. It's my thinking that if the OEX is going to get an oversold bounce, then a bullish trader should not see multiple sell signals being given. For instance, if looking to play an oversold bounce in the OEX below 444, that thought would still cross my mind, only if I had not yet received downside alerts from those stocks listed above. If we were to see sell signals given, the conviction builds toward bearish trades in Dow, SPX and OEX rallies as internals deteriorate. NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval Compared to the other major indexes, the QQQ and NDX for that matter aren't as close to their lower Bollinger Bands. As such, I deem the QQQ to have greater downside risk to support. In recent sessions, the QQQ/NDX have traded "relatively" stronger and one thing I think a bearish traders looks for is some type of DIVERGENCE from this trend. In recent sessions, the QQQ has declines a lesser percentage that the Dow, SPX and OEX. Should we see a rally, look for some type of "equal" percentage gain to take place. "Normally," one would expect under rally conditions for the QQQ to "outperform" to the upside, especially since it has traded relatively stronger in recent sessions. The DIVERGENCE I'm looking for on a "short the rally" is if the other major indexes show comparable bullish gains on a percentage basis with the QQQ. That to me would hint that market makers are sitting some offers after today's trade of 50% retracement at $25.00. Today's action saw a net loss of 2 stocks to point and figure sell signals and has the NASDAQ-100 Bullish % chart ($BPNDX) reversing back to "bull correction" status at 59%. A reading of 58% would be "bear confirmed" and that's when the "gig is up" or should I say DOWN for the QQQ and NASDAQ-100. Jeff Bailey ------------------------- Advertisement ------------------------- WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oinvest21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ************************** WEEKLY FUND FAMILY PROFILE ************************** AmSouth Mutual Funds AmSouth Investment Management Company, a wholly-owned subsidiary of AmSouth Bank, a leading regional bank in the Southeast, serves as investment advisor to the AmSouth Funds. The family of mutual funds consists of 24 portfolios investing across a range of asset classes and investment styles to meet different investment needs. Five Points Capital Advisors, also a wholly-owned subsidiary of AmSouth Bank, serves as an investment subadvisor to the AmSouth Bond Fund, AmSouth Capital Growth Fund, AmSouth Large Cap Fund, and AmSouth Value Fund. Both subsidiaries are paid a management fee for their services. OakBrook Investments, which specializes in large-cap U.S. equity investment strategies for institutional and retail clients, is a subadvisor to two AmSouth Funds: Select Equity Fund and Enhanced Market Fund. The Select Equity Fund seeks to outperform the S&P 500 index over time by investing in non-diversified portfolio of stocks, while the Enhanced Market Fund utilizes a computer model to enhance returns over the index benchmark. OakBrook is paid a fee for its services. Fund Overview Below is a summary of the 24 AmSouth Funds using information from the AmSouth Funds website located at www.amsouthfunds.com. Funds are categorized into four broad peer groups: Capital Appreciation Funds, Strategic Portfolios, Income Funds, and Money Market Funds as follows: Capital Appreciation Funds: Value Fund (Five Points Capital Advisors) Capital Growth Fund (Five Points Capital Advisors) Large Cap Fund (Five Points Capital Advisors) Mid Cap Fund (OakBrook Investments) Small Cap Fund Balanced Fund Select Equity Fund (OakBrook Investments) Enhanced Market Fund (OakBrook Investments) International Equity Fund Strategic Portfolios: Aggressive Growth Portfolio Growth Portfolio Growth & Income Portfolio Moderate Growth & Income Portfolio Income Funds: Bond Fund (Five Points Capital Advisors) Limited Term Bond Fund Government Income Fund Municipal Bond Fund Florida Tax-Exempt Fund Tennessee Tax-Exempt Fund Money Market Funds: Prime Money Market Fund U.S. Treasury Money Market Fund Treasury Reserve Money Market Fund Tax-Exempt Money Market Fund Institutional Prime Obligations Money Market Fund The primary objective of AmSouth's capital appreciation funds is long-term growth of capital. The funds within this group invest across one or more capital sectors, and have different styles of investment (value, core or growth), allowing investors to choose the funds that best match their investment goals and preferences. Five Points Capital Advisors and OakBrook Investments serve as a subadvisor on at least six of the funds, adding management style diversity. Some of the AmSouth equity funds can serve a "core" role in one's long-term equity portfolio, while other funds may better serve a supporting role such as the AmSouth small-cap and international equity funds. AmSouth's Strategic Portfolios hold various proportions of stock, bond and money market securities to achieve various combinations of capital growth and income. Each portfolio invests its assets in AmSouth mutual funds in different combinations to achieve the fund's desired asset mix. Moderate Growth & Income Portfolio is the least risky of the four strategies. It seeks current income with some growth potential by investing mostly in AmSouth income funds and, to a lesser degree, in AmSouth equity funds. AmSouth Growth & Income Portfolio invests in a mixture of AmSouth equity and income funds to achieve capital appreciation, plus favorable dividend yields. The Growth Portfolio pursues long-term capital growth by investing in a mix of AmSouth equity funds, as well as one AmSouth income fund. AmSouth Aggressive Growth Portfolio is the most risky of the four strategies; it includes small-cap and international funds to increase potential appreciation over time. The six AmSouth Income Funds invest in both the taxable and tax- exempt fixed income markets. The AmSouth Bond Fund, subadvised by Five Points Capital Advisors, seeks current income by holding a diversified portfolio of high-quality fixed income securities. The Limited-Term Bond Fund is similar, except that it limits its holdings to debt securities with stated maturities of five years or less. AmSouth Government Income Fund seeks current income by investing in debt obligations issued or guaranteed by the United States Government or its agencies. Three tax-exempt "muni" bond funds round out the AmSouth income fund lineup. AmSouth's Money Market Funds consist of four retail money market funds and one money market fund for institutional investors only. The Prime Money Market Fund seeks current income consistent with liquidity and stable principal by investing in high-grade market instruments with ultra short-term maturities of 90 days or less. AmSouth Funds are offered in Class A, Class B, and Trust Shares, which differ in their fee structure and availability. The Trust Shares, now known as Class I Shares, are geared to institutional investors. Class A shares have front-end loads; B shares carry back-end loads. For our purposes, we'll use the Class A shares of the AmSouth funds for performance comparison purposes, since Class A shares generally have lower expenses, hence better fund performance and ratings. For more information or to download a prospectus, go to the AmSouth Funds site at www.amsouthfunds.com. Fund Ratings and Performance A number of AmSouth's equity funds and strategic portfolios are currently rated either 4 stars (above average) or 5 stars (high) by Morningstar for risk-adjusted performance relative to similar funds. The three AmSouth equity funds that are 5-star rated for relative risk-adjusted performance are AmSouth Large Cap (ILCAX), AmSouth Select Equity (ASECX), and AmSouth Strategic Portfolios: Growth Portfolio (AGMAX). The $457 million AmSouth Large Cap Fund (ILCAX) has been run by Ronald Lindquist since fund inception on August 3, 1992, and is described by Morningstar as a classic growth value that sticks with established blue-chip growth stocks. In comparison to his large-cap growth peer group, Lindquist has earned above-average returns with low relative risk, for a Morningstar 5-star rating overall. The fund has exhibited below average risk relative to its large-cap growth category peers over the past three years. Peter Jankovskis, Janna Sampson and Neil Wright are members of the OakBrook Investments team that has sub-advised the AmSouth Select Equity Fund since its start on September 1, 1998. This fund has a large-cap blend style according to Morningstar, and over the past three years has produced high returns with below average risk relative to its large-blend peers. This strategy, which has been used since 1981 in managing institutional money, relies on fundamental research to identify quality stocks with good long-term potential that are undervalued. The other 5-star rated fund, AmSouth Strategic Growth Portfolio (AGMAX) is team managed and seeks to generate consistent growth over time by investing in a mix of AmSouth equity funds and one AmSouth fixed income fund. It doesn't yet have a 5-year rating but is 5-star rated for trailing 3-year performance, generating high returns, with low risk, relative to other large-cap blend funds. Below is a performance summary as of January 21, 2003 for the three 5-star rated AmSouth equity funds using Morningstar data. Trailing 3-Year Annualized Total Return: -12.8% AmSouth Large Cap Fund A (ILCAX) 7th percentile -21.7% Morningstar Large-Cap Growth Fund Average + 4.8% AmSouth Select Equity Fund A (ASECX) 2nd percentile - 6.1% AmSouth Strategic Growth Port (AGMAX) 7th percentile -13.1% Morningstar Large-Cap Blend Fund Average Trailing 3-Year Average Standard Deviation (Volatility): 16.5% AmSouth Large Cap Fund A (ILCAX) 20.3% Morningstar Large-Cap Growth Fund Average 15.2% AmSouth Select Equity Fund A (ASECX) 11.0% AmSouth Strategic Growth Portfolio (AGMAX) 17.0% Morningstar Large-Cap Blend Fund Average You can tell that these three AmSouth equity funds have done a good job of minimizing volatility and losses compared to their respective category peer group. The result has been good risk- adjusted performance results in relation to similar funds over the past three years. AmSouth Select Equity Fund has averaged 4.8 percent a year over the past three years, per Morningstar, compared with annualized losses of 13.1 percent for the average large-cap blend fund and 13.7 percent for the S&P 500 large-cap index benchmark. Investors seeking a traditional balanced fund may be interested in the AmSouth Balanced Fund A (AOBLX), which has a Morningstar 4-star overall rating based on above average returns with below average risk relative to other domestic hybrid funds. Over the past 10 years, the fund has produced an average total return of 8.7 percent, lagging the S&P 500 index by only 0.7 percent over that period, with significantly less risk than the stock market. The fund's 10-year returns rank in the category's top quartile; 5-year returns rank in the top quintile of the category; and 3- year returns rank in the category's top decile. Income-seeking investors also have some good AmSouth bond funds to choose from. The AmSouth Bond Fund A (AOBDX), subadvised by Five Points Capital Advisors, has produced an annualized return of 10.4 percent the past three years, ranking in the top decile of the Morningstar intermediate-term bond category. The AmSouth Limited Term Bond Fund A (AOLMX) sports an average annual return of 7.8 percent for the trailing 3-year period ranking in the top quintile of the Morningstar short-term Bond fund category. Both funds are 4-star overall by Morningstar for risk-adjusted return performance. Morningstar says AmSouth Bond Fund's risk level is above average compared to other intermediate-term bond funds but you can see that fund shareholders have been amply rewarded here for incurring additional risk. Conclusion The AmSouth Funds may not be as well recognized as Fidelity or Vanguard, but overall their funds have performed competitively, and in many cases better than average compared to similar funds on a risk-adjusted basis. Good choices can be found in each of the major fund groupings (growth, growth and income, and income) giving investors various ways to meet their long-term investment goals. For more information or to download a prospectus, you can go to the AmSouth Funds website, located at www.amsouthfunds.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org *********** OPTIONS 101 *********** Interpreting Volatility by Mark Phillips mphillips@OptionInvestor.com Traders dreading another treatise on the VIX will be pleasantly surprised to learn that broad-market volatility is not our topic for today, while those looking for another dose can look forward to a lively discussion on the topic in this weekend's LEAPS column. I actually had intended to deal with a completely different topic today, but reader requests always come first, especially when I think they can be of benefit to all. This reader is fairly new to the OI fold and to option trading as well, but he brings up a great point. How does the saying go about there are no dumb questions except the one that doesn't get asked? Alright, let's get to it. I've edited the question for brevity, but other than that, you get to read it just as I received it. Dear Mark, The site you recommended, www.ivolatility.com, is as you said. There is a wealth of information that should prove helpful. While investigating some of the calculators, I noticed, for example, that the historical volatility of XMSR was about 140, while the implied volatility of the $5 Feb. call was about 114. I first looked at this option's volatility and thought it to be extreme. Am I correct in assuming that, when compared to the historical volatility of XMSR, it isn't all that volatile? Is there a ratio an option trader should see between the two kinds of volatilities in order to view the option as not too expensive....assuming the trader is buying a call? I realize that certain types of trades are better suited to expensive options and vice/versa. But in any event, wouldn't knowing how to compare the two volatilities provide valuable information to the successful trader? I wasn't able to find an explanation of this relationship at either of the two sites and thought you may be able to provide an answer or direct me to a source. Thank you very much for your time. Regards, Ken You see, it isn't enough to be able to find or calculate (for those masochists out there) a stock or option's volatility. We need to know how to interpret and use that information to improve our odds of success in this profession. But before I get to the meat of Ken's question, I know there are plenty of readers that are asking what is volatility, and how do I get one of these nifty calculators. Pardon me for taking the easy way out, but I'm going to point you to some of the articles I've written in the past that help to detail these tools and how to use them. Varying Views on Volatility A Primer on Online Volatility Tools - Part I A Primer on Online Volatility Tools - Part II Now that everyone is up to speed on option calculators and stock-specific volatility, let's delve into the details of Ken's question. The first question has to do with the difference between historical and implied volatility. The distinction is actually pretty simple, as one deals with the underlying stock and the other refers to the volatility of the options. Historical volatility (HV) represents the volatility of the underlying stock, while Implied volatility (IV) is a measure of the volatility of a particular option. When looking at volatility charts, the IV is a calculated mean implied volatility. Of course, the ivolatility.com site gives us the ability to use the IV for calls, for puts, or a composite of puts and calls. Most of the time, there isn't enough difference between these different measures to warrant our attention, and we certainly don't want to get into that fine of detail here today. How these values are derived is really unimportant to this discussion. We want to know how to drive the car, not how to build one. As you can tell by looking at a chart of just about any stock's volatility chart, the HV and IV values don't line up right on top of one another. Sometimes HV is higher, and sometimes IV is higher, but they tend to follow the same trend over time. What causes the discrepancy is when a stock trades in a rather narrow range (causing HV to drop) while the options still retain most of their volatility premium, likely due to other factors. For instance, a stock that trades rather flat while the rest of the market goes in the tank will see its HV drop due to the tight price action. But concern that the stock could join the rest of the market in free fall will keep option premiums inflated, and hence IV will remain high. The result is that HV will drop while IV remains high. An easing of these concerns will then have the IV drop back towards lower levels, and this can even happen with the daily price swings in the stock increasing and HV on the rise. The two measures are definitely linked, but not rigidly so. In simple terms, I use HV to tell me how the daily range of a stock's price now relates to how it has traded in the recent past. IV tells me whether a stock's options are cheap or expensive (in volatility terms) relative to where it has been over the past 6 months, year or 2 years. As an option trader, I tend to focus almost exclusively on the IV reading, as it is a direct measure of the option I want to trade. Gaps in price can create large jumps in the HV calculation, while IV remains more of a continuous function, giving a smoother curve, making it easier to use. Not only that, but it is a more accurate representation of the vehicle I wish to trade. So, for the remainder of our discussion, I'm going to focus exclusively on IV. The real power of volatility analysis comes in comparing current readings to where volatility has been in the past. Looking at a volatility chart of IBM, I can see IV is currently near 33%, with a 52-week range of 28%-64%. IBM 1-Year Volatility Chart This chart tells me that relative to the past year, IBM options are cheap relative on a volatility basis. The first piece of information this provides, is that it indicates the stock will represent a favorable candidate for strategies employing option purchases, whether puts or calls. On the other hand, a stock whose volatility is near the top of its 52-week range would present favorable trading opportunities for traders that prefer to sell option premium, whether covered or naked. Coming back to Ken's question about XMSR, our first place to start is with the volatility chart. With IV ranging between 71%-218% over the past year, it doesn't take a rocket scientist to determine that XMSR is far more volatile than IBM. But that doesn't necessarily mean that the options are expensive on a volatility basis. Let's take a look, shall we? XMSR 1-Year Volatility Chart Basically, the bottom for IV over the past 6 months has been about 125%, making IV readings near that level attractive for option buyers. Take a look at a daily chart of XMSR and look at that tight consolidation action between mid-December and mid-January. That tight range allowed the volatility premium to bleed out of the XMSR options and I'm willing to bet that call purchases in the first week of January have fared rather well. In fact, even a straddle position (buy a put and a call at the same strike) using the February $2.50 strike would have fared rather well. The call could have been purchased in the first week of January for $0.60 and the put could have been purchased for only $0.30. While the put is now worthless, the recent price rise has inflated the value of the call to $2.45. A 3-week trade that yields a 172% gain is certainly nothing to sneeze at! Certainly we didn't know whether the stock would rally or fall, but the IV chart gave us the clue that something was likely to happen in the near term when IV dropped near its 6-month lows. It doesn't always work out that way, but that's how we use volatility to help skew the odds in our favor. Take another look at that volatility chart above. Don't you think the option sellers had a field day in early August when IV began peeling off from above 200% as the stock held support near $2.70? We've only scratched the surface here on how to use volatility in planning trades, but hopefully it gives you another tool to place in your arsenal. Questions are always welcome. Mark ------------------------- Advertisement ------------------------- VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oinvest22 Note: Options involve risk. 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The Option Investor Newsletter Wednesday 01-22-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates Dropped Calls: None Dropped Puts: None Play of the Day: Put - GS Big Cap Covered Calls & Naked Puts: Another Dreary Day For Investors! Updated on the site tonight: Market Posture: Market Watch: Feed the Bears ------------------------- Advertisement ------------------------- We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oinvest23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ***************** STOP-LOSS UPDATES ***************** ASD - put Adjust from $68.50 down to $67.50 CTSH - put Adjust from $62.50 down to $61 KSS - put Adjust from $57.00 down to $56.00 GS - put Adjust from $75 down to $74 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------- Advertisement ------------------------- Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oinvest24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ********************* PLAY OF THE DAY - PUT ********************* GS – Goldman Sachs Group $70.25 -0.75 (-2.33 this week) Company Summary: The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Why We Like It: The first day of the holiday-shortened trading week didn't get off to a very good start for the bulls, and the bearish tone was helped along by less-than-stellar results from Citigroup before the opening bell. While the company reported earnings a penny ahead of consensus estimates, it was the forward guidance that gave the bulls indigestion and the whole Brokerage group, as measured by the XBD index fell throughout the day in response. The index got slammed for a 3.82% loss, crashing through the 200-dma ($419.17) and came to rest right at pivotal support in the $410-412 area. We've played GS several times over the past few months without success, but this time things look different. Earnings (whether positive or negative) aren't having the positive effect bulls would like to see. Combine that with broad market weakness and technical weakness in the sector (not to mention the looming threat of class action lawsuits), and the XBD index seems destined for a big breakdown. GS most recently rolled over from just above $75 and since then has violated its 200-dma ($74.10), 50-dma ($73.80), 10-dma ($73.21) and then today the 20-dma ($71.54), all of which will present solid resistance on any rebound attempt. With daily Stochastics still in free fall, MACD rolling and back in negative territory and the big SELL signal on the PnF chart still in effect, GS appears to have a confluence of bearish factors lining up in its favor. The big drop in December from the $80 level to $67 generated that PnF Sell signal, along with a bearish price target of $53. Obviously, an entry on this morning's rollover near $73 would have made for a great entry into the play, but with the market near-term oversold, we just might get another shot at that entry level over the next day or two. On a failed rally, we want to target a rollover in the $73-74 area for new entries. We're initiating coverage with our stop at $75, although more conservative traders may want to consider a tighter stop, say just above $74. Those looking to enter on a breakdown will want to wait for a break under the $70 level in conjunction with the XBD index breaking its December lows near $408. Why This is our Play of the Day After several attempts throughout the day to hold positive ground, the broad markets finally gave up and closed in the red on Wednesday. Leading the bearish parade from the opening bell were the Brokerage stocks as measured by the XBD index, off 3.36% by the close. While there wasn't much downside action in our GS play today, with the XBD index breaking the venerable $400 level, it looks like the stock should follow suit to the downside later this week. The $70 support level is an important line in the sand, and a drop below that level tomorrow with continued weak action in the XBD can be used for initiating new bearish positions. In the event of a bounce, the stock has some formidable resistance to deal with, first at the 20-dma ($71.46) which provided resistance during Wednesday's session, and then $73, which happens to coincide with the declining 10-dma. Adding further credence to the bearish case is the 50-dma ($73.72) rolling just below the 200-dma ($74.03), which should stop any bullish rebound in its tracks. Traders looking to enter on a failed bounce will want to look for weakness first at the 20-dma and then up at $73. We're lowering our stop to $74, as any move through that level would demonstrate a significant technical improvement. BUY PUT FEB-75 GS-NO OI=3580 at $5.90 SL=4.00 BUY PUT FEB-70*GS-NN OI=1474 at $2.80 SL=1.50 Average Daily Volume = 3.66 mln ------------------------- Advertisement ------------------------- optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oinvest25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ----------------------------------------------------------------- ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Another Dreary Day For Investors! By Ray Cummins Blue-chip stocks moved lower again Wednesday amid bearish earnings news and concerns over the struggling U.S. economy. The Dow Jones Industrial Average plummeted 124 points to 8,318 on weakness in Kodak (NYSE:EK), General Motors (NYSE:GM) and J.P. Morgan (NYSE:JPM). Networking stocks helped the technology group limit its losses with the NASDAQ ending down only 4 points at 1,359. Chip stocks rallied briefly after Applied Materials (NASDAQ:AMAT) said that orders for North American-based makers of semiconductor manufacturing equipment rebounded in December after leveling off in November. In broader market sectors, financial and airline stocks were among the worst performers while gold, drug and utility shares saw limited buying pressure. The S&P 500-stock index fell 9 points to 878, a new low for 2003. Trading volume hit 1.56 billion shares on the NYSE and 1.48 billion on the NASDAQ. Declines beat advances 7 to 4 on the Big Board and 3 to 2 on the technology exchange. The bond market enjoyed safe-haven buying interest as tensions over the impending war with Iraq persisted. The 10-year Treasury note moved up 16/32 at 100 23/32 to yield 3.91%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 1/21/03 *************** 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. MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with new option selling plays) 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 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 trade. Naked Puts Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ASA FEB 35 34.45 39.45 $0.55 4.44% 1.60% COF FEB 25 24.35 31.98 $0.65 7.31% 2.67% IGEN FEB 35 34.05 42.60 $0.95 8.27% 2.79% INVN FEB 22 22.05 27.90 $0.45 6.32% 2.04% PHM FEB 45 44.05 51.65 $0.95 5.39% 2.16% ACDO FEB 33 31.45 38.28 $1.05 7.73% 3.34% AMGN FEB 47 46.30 50.87 $1.20 5.40% 2.59% BSTE FEB 35 33.85 38.38 $1.15 7.51% 3.40% CEPH FEB 45 44.15 51.03 $0.85 5.04% 1.93% GENZ FEB 30 29.40 35.07 $0.60 5.18% 2.04% Naked Calls Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield EXPE FEB 75 76.25 63.61 $1.25 6.84% 1.64% MBG FEB 30 30.65 26.50 $0.65 6.68% 2.12% QCOM FEB 43 43.05 36.96 $0.55 5.07% 1.28% CCMP FEB 60 61.15 47.24 $1.15 6.10% 1.88% KLAC FEB 45 45.80 35.73 $0.80 6.83% 1.75% LLTC FEB 33 33.25 26.81 $0.75 6.68% 2.26% QLGC FEB 48 48.40 35.61 $0.90 6.19% 1.86% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status FRX 53.03 51.61 FEB 45 48 0.00 47.50 $0.00 Open PFCB 37.96 36.25 FEB 30 35 0.50 34.50 $0.50 Open SLM 106.71 108.91 FEB 90 95 0.50 94.50 $0.50 Open AGN 60.51 58.72 FEB 50 55 0.50 54.50 $0.50 Open BRL 77.63 77.41 FEB 65 70 0.40 69.60 $0.40 Open FIC 44.63 42.80 FEB 35 40 0.45 39.55 $0.45 Open P.F.Chang's (NASDAQ:PFCB) has slumped in recent sessions and a close below the sold strike at $35 will signal our exit in the position. Fair Isaac & Company (NYSE:FIC) is in a similar situation and conservative traders should consider an early exit if the stock closes below near-term technical support at $42. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status HET 37.47 36.90 FEB 42 40 0.40 40.40 $0.40 Open PHA 42.00 41.58 FEB 50 45 0.60 45.60 $0.60 Open ZBRA 57.32 57.05 FEB 70 65 0.50 65.50 $0.50 Open ATK 59.65 59.12 FEB 70 65 0.50 65.50 $0.50 Open GS 73.51 71.00 FEB 85 80 0.40 80.40 $0.40 Open PDX 34.40 36.35 FEB 45 40 0.65 40.65 $0.65 Open Credit Strangles No Open Positions Synthetic Positions: No Open Positions 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 new 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. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. *************** BULLISH PLAYS - Premium Selling All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. *************** ACDO - Accredo Health $38.96 *** Healthcare Sector *** Accredo Health (NASDAQ:ACDO) provides specialized contract pharmacy services on behalf of biopharmaceutical manufacturers to patients with chronic diseases. The company's services help simplify the difficult and often challenging medication process for patients with a chronic disease and help ensure that patients receive and take their medication as prescribed. The company's services benefit biopharmaceutical manufacturers by accelerating patient acceptance of new drugs, facilitating patient compliance with the prescribed treatment and capturing valuable clinical information about a new drug's effectiveness. The company's services include contract pharmacy services, clinical services, reimbursement services and delivery services. ACDO - Accredo Health $38.96 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 33.3 AEZ NW 184 0.30 33.08 3.0% 0.9% TS SELL PUT FEB 35 DZU NG 77 0.50 34.50 4.2% 1.4% * SELL PUT FEB 36.6 AEZ NX 79 1.00 35.63 7.1% 2.8% ************** AMGN - Amgen $52.50 *** Break-Out Coming? *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and sells human therapeutic products including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. The company has research facilities in the United States and has clinical development staff in the United States, the European Union, Canada, Australia and Japan. Amgen has acquired Immunex, a biopharmaceutical firm dedicated to developing immune system science to protect human health. Immunex has developed two major products, Enbrel and Leukine, and has two other products, Novantrone and Thioplex, which can be used in treating multiple indications. AMGN - Amgen $52.50 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 45 AMQ NI 4,336 0.35 44.65 2.6% 0.8% TS SELL PUT FEB 47.5 AMQ NW 3,289 0.60 46.90 3.7% 1.3% * SELL PUT FEB 50 AMQ NJ 4,712 1.10 48.90 5.7% 2.2% ************** AU - AngloGold $35.35 *** For Gold Bulls Only! *** AngloGold Limited (NYSE:AU) conducts gold mining operations in Africa, North America, South America and Australia. The firm owns or has interests in 21 operations around the world. In 2001, AngloGold produced approximately six million ounces of gold. AngloGold's production base spans four continents, with its mixture of underground and open-pit operations and interests in Argentina, Australia, Brazil, Mali, South Africa, Tanzania and the United States of America. The firm's global exploration programs encompass 10 countries on four continents. AU - AngloGold $35.35 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 30 AU NF 341 0.45 29.55 4.9% 1.5% * SELL PUT FEB 35 AU NG 363 2.10 32.90 13.4% 6.4% ************** CEPH - Cephalon $51.78 *** Solid Biotech! *** Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting a very active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. Cephalon's United States products are comprised of Provigil, for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management, and Gabitril for the treatment of partial seizures associated with epilepsy. CEPH - Cephalon $51.78 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 40 CQE NH 2,617 0.30 39.70 2.9% 0.8% TS SELL PUT FEB 45 CQE NI 5,287 0.75 44.25 5.2% 1.7% * SELL PUT FEB 50 CQE NJ 3,897 1.65 48.35 8.1% 3.4% ************** SYMC - Symantec $45.55 *** Demand Spurs Revenue Growth! *** Symantec (NASDAQ:SYMC) provides a broad range of content and network security solutions to individuals and enterprises. The company is a provider of virus protection, firewall, virtual private network, vulnerability management, intrusion detection, remote management technologies and security services to various consumer groups and enterprises around the world. The company currently views its business in five primary operating segments: Consumer Products, Enterprise Security, Administration, Services and Other. SYMC - Symantec $45.55 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 40 SYQ NH 587 0.55 39.45 4.2% 1.4% * SELL PUT FEB 45 SYQ NI 1,913 2.00 43.00 10.3% 4.7% ************** BULLISH PLAYS - Credit Spreads These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** AET - Aetna $44.21 *** Healthcare 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. AET - Aetna $44.21 PLAY (conservative - bullish/credit spread): BUY PUT FEB-35.00 AET-NG OI=274 A=$0.20 SELL PUT FEB-40.00 AET-NH OI=1071 B=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$39.55 ************** BR - Burlington Resources $42.71 *** Oil Sector *** Burlington Resources (NYSE:BR) is a holding company that is engaged, through its principal subsidiaries, Burlington Resources Oil & Gas Company LP, The Louisiana Land and Exploration Company, Burlington Resources Canada, Canadian Hunter Exploration and their affiliated companies, in the exploration for and the development, production and marketing of crude oil, NGLs (natural gas liquids) and natural gas. The company's asset base is dominated by North American natural gas properties and its extensive North American lease holdings extend from the Gulf of Mexico to the Mackenzie Delta region in the Northwest Territories of the Canadian Arctic and Alaska's north slope. The company also has operations in the Northwest European Shelf, North Africa, Latin America, the Far East and West Africa. BR - Burlington Resources $42.71 PLAY (conservative - bullish/credit spread): BUY PUT FEB-37.50 BR-NU OI=1464 A=$0.25 SELL PUT FEB-40.00 BR-NH OI=3254 B=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$39.75 ************** MMM - 3M Corporation $127.50 *** Solid Earnings! *** 3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an integrated enterprise characterized by intercompany cooperation in research, manufacturing and sale of products. 3M's business has developed from its research and technology in coating and bonding for coated abrasives, the company's original product. Coating and bonding is the process of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper (repositionable notes). The company conducts business through six operating segments: Industrial Markets; Transportation, Graphics and Safety Markets; Health Care Markets; Consumer and Office Markets; Electro and Communications Markets, and Specialty Material Markets. MMM - 3M Corporation $127.50 PLAY (conservative - bullish/credit spread): BUY PUT FEB-115.00 MMM-NC OI=7853 A=$0.55 SELL PUT FEB-120.00 MMM-ND OI=2675 B=$1.05 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$119.45 ************** BEARISH PLAYS - Naked Calls Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** CDWC - CDW Computers $44.01 *** Range-Bound? *** CDW Computer Centers (NASDAQ:CDWC) is a direct marketer of various brands of computers and related technology products and services. CDW's extensive offering of products, including hardware, software and accessories, combined with its service offerings, provide comprehensive solutions for its customers' technology needs. The company offers more than 80,000 products, which include a wide range of product types from manufacturers such as Cisco, Compaq, Hewlett-Packard, IBM, Intel, Microsoft, Sony and Toshiba, among others. The company's value-added services include its ability to custom-configure multi-branded solutions for its many customers and offer technical support 24 hours a day, seven days a week. The company has two main operating segments, corporate, which is comprised of business customers, but also includes consumers, and public sector, which is comprised of federal, state and local government and educational institutions who are served by CDW Government, a wholly owned subsidiary. CDWC - CDW Computers $44.01 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 50 DWQ BJ 1,477 0.50 50.50 4.2% 1.0% * SELL CALL FEB 45 DWQ BI 339 2.15 47.15 11.6% 4.6% ************** CTSH - Cognizant Technology $58.22 *** Downtrend Intact! *** Cognizant Technology Solutions (NASDAQ:CTSH) 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. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. CTSH - Cognizant Technology $58.22 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 65 UPU BM 1,491 0.65 65.65 3.8% 1.0% TS SELL CALL FEB 60 UPU BL 1,478 2.05 62.05 8.8% 3.3% ************** NVLS - Novellus Systems $31.05 *** Pure Premium Selling! *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $31.05 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 37.5 NLQ BU 2,913 0.35 37.85 5.4% 0.9% * SELL CALL FEB 35 NLQ BG 2,765 0.75 35.75 8.2% 2.1% SELL CALL FEB 32.5 NLQ BZ 1,356 1.55 34.05 12.6% 4.6% ************** BEARISH PLAYS - Credit Spreads All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** ABK - Ambac Financial $55.74 *** Sell-Off In Progress! *** Ambac Financial Group (NYSE:ABK) is a holding company that, through its subsidiaries provides financial guarantee products and other financial services to clients in both the public and private sectors around the world. The firm provides financial guarantees for municipal and structured finance obligations through its principal operating subsidiary, Ambac Assurance Corporation. Through its financial services subsidiaries, the company provides financial and investment products, including investment agreements, interest rate swaps, funding conduits, investment advisory and cash management services, principally to its financial guarantee clients, which include municipalities and their authorities, school districts, healthcare organizations and asset-backed issuers. ABK - Ambac Financial Group $55.74 PLAY (conservative - bearish/credit spread): BUY CALL FEB-65.00 ABK-BM OI=2566 A=$0.25 SELL CALL FEB-60.00 ABK-BL OI=1374 B=$0.75 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$60.50 ************** FITB - Fifth Third Bancorp $56.49 *** Mediocre Earnings! *** Fifth Third Bancorp (NASDAQ:FITB) is a diversified financial services company headquartered in Cincinnati, Ohio. The company has $75 billion in assets, operates 16 affiliates with 917 full service Banking Centers, including 133 Bank-Mart locations open seven days a week inside select grocery stores and 1,856 Jeanie ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida and West Virginia. The financial strength of Fifth Third's affiliate banks continues to be recognized by rating agencies with deposit ratings of AA- and Aa1 from Standard & Poor's and Moody's Rating Service, respectively. Also, Fifth Third Bancorp continues to maintain the highest short-term ratings available at A-1+ and Prime-1, and was recently recognized by Moody's with one of the highest senior debt ratings for any U.S. bank holding company of Aa2. Fifth Third operates four primary businesses: Commercial, Retail, Investment Advisors and Midwest Payment Systems, the Bank's electronic payment processing subsidiary. FITB - Fifth Third Bancorp $56.49 PLAY (conservative - bearish/credit spread): BUY CALL FEB-65.00 FTQ-BM OI=4238 A=$0.10 SELL CALL FEB-60.00 FTQ-BL OI=2302 B=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$60.50 ************** HAR - Harman International $55.62 *** Premium Sellers Only! *** Harman International Industries (NYSE:HAR) is a manufacturer of high-fidelity audio products for the consumer and professional audio markets. The firm offers two types of products: consumer products and professional products. Consumer products include loudspeakers, consumer audio electronics, audio systems for both personal computers and automotive audio systems. Professional products include professional sound systems for such venues as stadiums, opera houses, concert halls, recording and broadcast studios, theaters, churches, cinemas and performing artists who are on tour. The company's quarterly earnings are due 1/30/03. HAR - Harman International $55.62 PLAY (less conservative - bearish/credit spread): BUY CALL FEB-65.00 HAR-BM OI=500 A=$0.15 SELL CALL FEB 60.00 HAR-BL OI=30 B=$0.70 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$60.60 ************** SEE DISCLAIMER *************** ************** MARKET POSTURE ************** After Shocks... To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_012203.asp ************ MARKET WATCH ************ Feed the Bears To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_012203.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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