The Option Investor Newsletter Sunday 01-26-2003 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: Preemptive Strike? Futures Market: Certainty Index Trader Wrap: MARKET SLAM NOT SUPER Editor’s Plays: War Priced In? Market Sentiment: Breakdown Ask the Analyst: Interpreting the VIX Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: History Repeats Itself... So Far 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 DOW 8131.01 -455.73 8586.74 -198.21 8784.95 +183.26 +297.91 Nasdaq 1342.14 - 34.06 1376.20 - 71.55 1447.75 + 60.67 + 38.62 S&P-100 436.14 - 21.22 457.36 - 13.05 470.41 + 11.21 + 16.14 S&P-500 861.40 - 40.38 901.78 - 25.79 927.57 +165.21 + 33.17 W5000 8175.74 -354.59 8530.33 -228.10 8758.43 +165.21 +287.59 RUT 375.06 - 13.04 388.10 - 8.34 396.44 + 6.13 + 6.15 TRAN 2163.33 -181.20 2344.53 - 49.14 2393.67 + 28.73 + 73.28 VIX 35.77 + 7.09 28.68 + 1.55 27.13 - 0.85 - 6.17 VXN 45.05 + 2.21 42.84 + 0.56 42.28 - 3.43 - 1.00 TRIN 1.69 1.60 0.80 1.32 Put/Call 0.83 0.83 0.75 0.76 ****************************************************************** Preemptive Strike? by Jim Brown Investors took the governments advice and fled to safety on Friday. The U.S. government sent a message to embassies and consulates around the world warning them to tell U.S. citizens to be ready to leave foreign countries on short notice. Investors heard the message and left the markets instead. It may not have been a smart bomb delivered by a B2 but the damage to the market internals was just as severe. Dow Chart Nasdaq Chart – Daily It was an ugly day and it started overseas. The London FTSE closed down for the tenth consecutive day breaking records dating back to the beginning of the index. The -370 point ten day loss was nearly a -10% drop and took the index to a seven year low. The selling was wide spread with only 10 of the 42 major world markets posting gains. The countdown to the war is producing a growing feeling of uneasiness on a global level. Feelings in other countries are polarizing and riots and demonstrations are growing. The warning for U.S. citizens to prepare to leave foreign countries on short notice was just another visible indication that the fuse on this powder keg is growing short. The state dept issued the warning due to feared retaliation and terrorist attacks against U.S. citizens and interests around the world. There was minimal stock news to power the market and all eyes were on the numerous press conferences and news channels along with a rumor mill that was running full speed. One of the major events of the day was the U.S. claim that Saddam was going to blow up his own oil fields when the attack began. Traders worried that a further reduction of global oil production by another -3%, which is Iraq's contribution, would drive prices up yet again. Expectations of +$2.00 gas were being fielded by petroleum analysts. Worse than that there was rumors that he was going to use "dirty" radiation bombs which would prevent a quick repair. While this is probably a rumor started by traders long oil and gold futures it was still a widespread rumor. The BBC reported that Iraqi soldiers and emergency personnel were being issued Nuclear/Biological/Chemical protection suits and crash instructions for their use. Japan issued orders for all Japanese nationals to be out of Iraq by next Wednesday. Syria issued orders to close its diplomatic offices in Iraq by Feb-15th. The U.S. issued orders to deploy another 20,000 troops to the Gulf. The press constantly replayed the tape of the Iraq minister saying the inspectors could not talk to scientists. Iraq says they asked all the scientists to talk freely to the inspectors and all the scientists refused. Sure, and I am looking for a bridge to buy too. Do you think the threat of death if they talked influenced their decision? One of Saddam's sons said on TV that should the U.S. attack they would retaliate in the U.S. and Americans would think that 9/11 was a picnic compared to the destruction they would cause. We all remember the "mother of all battles" comments from the last war and days after days of idle threats for political gain. However, after 9/11 proved how easy it is to attack America we can no longer shrug them off so easily. There was also several reports that Syria had taken delivery of tons of chemical and biological weapons and was storing them in Syria for Saddam. This report was covered on several different networks and was used as a further indication that he was willing to transfer or sell weapons that could be used by terrorists instead of destroy them. True or false we do not know but these rumors were the driving force behind the market on Friday. Next week has another round of earnings with 150+ companies reporting. Unfortunately nobody is going to be paying attention to any good news. Bad news could provide additional downside pressure but good news could be ignored. The big events on the calendar look like this. Monday: Hans Bliz reports to the UN and it is not expected to be pretty. He will have no smoking gun but according to the press he will cite numerous instances of outright lack of cooperation and blocked inspection attempts. The report will be debated by the UN Security Council on Wednesday. Tuesday: President Bush delivers his State of the Union speech and it is sure to include a strong push for the war based on the report. The FED begins a two-day FOMC meeting on economic policy. Wednesday: The UN Security Council begins debate on the Iraq problem. The Fed concludes it's meeting at 2:15 PM. Friday: President Bush and British Prime Minister Tony Blair will meet on Friday at Camp David to discuss a timetable for the war. That would be a tough week by itself but the economic calendar is also full. Monday will see Existing Home Sales again which is expected to be positive. Tuesday we see the Chain Store Sales for January, Durable Goods, Consumer Confidence and New Home Sales. Thursday has Jobless Claims, GDP, Employment Cost Index, Help Wanted Index and FOMC minutes. Friday is Personal Income/Spending, Consumer Sentiment and PMI. The key market moving reports will be the Confidence report on Tuesday, Thursday GDP and Sentiment on Friday. With the market down and war imminent the Confidence/Sentiment reports are not going to be exciting. The GDP could be the killer. Currently "official" estimates are for +0.9% but numerous economists are already predicting in public a negative number for the 4Q. This would be very detrimental to future confidence/sentiment and the current economic climate. With all the flat to down guidance due to restrained capital spending we could see another pull back wave if businesses think another recession is already upon us. I would seriously doubt the number will be negative. Maybe I am a conspiracy theorist after all but I could see the number being estimated higher in order to protect the fragile economy for another couple of months on the premise of national security. This is a preliminary number and is mostly estimates to begin with. This crush of coming economic news, war talk and weak earnings guidance has pushed the indexes into serious trouble. Several critical levels were breached on Friday and the Dow closed down -455 for the week. The first level breached was the December low at 8242 which held for about 12 minutes. The second level was the 50% retracement level from the October lows at 8120, which held for most of the afternoon. The Dow hit a low of 8112 in the last hour but rebounded to close just over the 50% level by +10 points. This is definitely not confidence inspiring. With more bad news ahead next week the Dow appears poised to move even closer to the October lows. The Nasdaq only dropped -34 points for the week and is much more technically sound than the Dow. The close at 1342 is still above the December lows of 1327 and above the 100 DMA at 1334. It is however developing some strong overhead resistance beginning at 1389. The Nasdaq was the strength that kept the markets out of real trouble this week but another -20 point drop could change that picture. Much of the selling is reported to be from Europe and Asia as traders who hoped for a quick rebound in the U.S. economy are deciding they need to cut their losses. The fall of the dollar and the weak U.S. economy along with negative feelings about the war are causing strong outflows of funds. AMG data reported a $3 billion outflow from stock funds last week. This is huge in a period normally know for an inflow of cash from retirement accounts. Remember the January barometer? January results have a remarkable 92% record of predicting odd numbered year direction for the full year since 1937. Since the Dow is -200 points down for the year it does not look good for the home team. But then streaks are made to be broken. For investors wanting to go long you have to ask yourself what the risks are going to be in the short term. One risk is a potential negative GDP. This could shock the markets into expecting a second recessionary dip. Another risk is that the Iraq war turns into quicksand and becomes much longer and more expensive in terms of lives and money. Fighting in sandy deserts with tanks and smart bombs is much different than house to house with rifles. Remember the battle in Mogadishu Somalia? You don't eliminate a rifle in every closet with smart bombs. Another risk is retaliation by terrorist groups or even worse alliances by major powers. With no smoking gun could Russia decide to help their business partner to solidify their position? With no smoking gun could OPEC decide to withhold oil? Will Saddam be able to follow through on his pledge to take out Israel if attacked? Nobody knows the answer to these questions but this is what tanked the market on Friday. It was not a major earnings miss by a Dow component or a worse than expected Semiconductor book-to-bill report. It was uncertainty about geopolitical events. I had a reader cancel last week because I said something about the coming war. "Quit writing about the Iraq war and write about the markets." Unfortunately they are connected. The amount of stock news on Friday would not have taken two paragraphs and had zero impact on the market. Trust me, I would much rather be discussing the coming PC replacement cycle, predicting the bursting of the housing bubble or celebrating the passing of the new tax cut package. Unfortunately none of those have appeared and none had any impact on the market on Friday. I have been predicting this market drop for several weeks based on my economic and geopolitical view. Maybe the reader should have been paying more attention to those events. Everyone needs to remember this is just a cycle. It is not the end of the world. The war will end and that is normally bullish for the market. The economy will recover with the Fed giving away money and that will be bullish for the market. Hopefully the market will recover before the Fed starts raising rates and that would remain bullish for housing. The key point is that this will not happen next week and probably not next month. When it does happen it could happen with a rush and there will be a lot of money to be made. Heck, there is a lot of money to be made now for traders on the downside! Chill out and just realize that the next 4-6 weeks could be rocky and plan your trading accordingly. Sit back and watch the game this weekend and worry more about excess calories than next weeks market direction. An instant on the lips, forever on the hips. Don't you wish it was that way for market profits, forever in your account? Unfortunately we have to work to make profits and then work again to keep them. Enter Very Passively, Exit Very Aggressively! Jim Brown "Every man is the architect of his own fortune." Appius Claudius ************** FUTURES MARKET ************** Certainty By John Seckinger jseckinger@OptionInvestor.com Events on the docket next week include Hans Blix reporting on Iraq, the State of the Union Address, an FOMC Meeting, and a 4Q Advance GDP report. Therefore, I am certain on one thing. Things will be exciting. Friday, January 24th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 8131.01 -238.46 8367.89 8112.43 YM03H 8117.00 -203.00 8334.00 8087.00 29,916 Nasdaq-100 996.18 -36.49 1027.70 992.85 NQ03H 1000.00 -26.50 1032.50 992.50 263,118 S&P 500 861.40 -25.94 887.34 859.71 ES03H 860.25 -22.75 885.50 857.50 770,236 Contract S2 S1 Pivot R1 R2 Dow Jones 7948.32 8039.67 8203.78 8295.13 8459.24 YM03H 7932.00 8025.00 8179.00 8272.00 8426.00 Nasdaq-100 970.73 983.46 1005.58 1018.31 1040.43 NQ03H 968.25 984.25 1008.25 1024.25 1048.25 S&P 500 841.85 851.62 869.48 879.25 897.11 ES03H 839.75 850.00 867.75 878.00 895.75 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7748.00 7933.00 8271.00 8456.00 8794.00 NQ03H 962.75 981.25 1011.25 1029.75 1059.75 ES03H 825.25 842.75 875.00 892.50 924.75 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: Long 873.75, exit 871.50, loss -2.25 Long 871.50, exit 868.50, loss -3.00 Short 865.50, exit 861.00, gain +4.50 Short 863.50, exit 860.00, gain +3.50 Short 858.50, exit 860.75, loss -2.25 Short 863.75, exit 862.25, gain +1.50 Short 860.50, exit 859.00, gain +1.50 Total for the day = +3.50 points Total for the week = +16.75 points Total for two weeks = +36.00 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) On Friday, the ES contract quickly fell underneath its daily pivot (882.75) as well as a solid area from 881.25 to 884.50; thus forcing longs to liquidate en masse. This area should now be solid resistance going forward. The extent of the weakness was impressive, and now places the contract just underneath the 50% retracement of the rise from October to December (769 to 953.50). This 861.25 level can be viewed as an important intermediate area. The pivot for Monday comes in at 867.75, and just underneath the December low of 868. Definitely not a coincidence, and should have solid short-term implications. As the chart below shows, the contract is at the bottom of its Bollinger Bands; however, MACD has gone negative and the Directional Index (ADX, in purple) is once again near 20 and close to signaling a market when traders will most likely sell support (opposite of range trading). If weakness continues, look for support from 839.50 to 842.75, but remember that the MONTHLY S1 comes in at 846.75. On the upside and above 868, resistance is felt from 874.25 to 878, as well as from 881.25 to 884.50. Chart of ES03H, Daily Weakness under the pivot and 881.25 took prices far underneath the objective of 870, and an opening on Monday under 861.25 will get bears to think about a move towards the next retracement area below at 850. With volatility expected on Monday and throughout the week, I (as always) recommend pulling up a five-minute chart and looking for a five-minute period close above/below these levels for confirmation. With uncertain times, bears should try to continue to prey on fears of bullish traders; however, I would not be surprised if short-covering takes place once above 868, as fear of losing profits takes hold. Chart of ES Contract, 90-minute Bullish Percent of SPX: 54.00% and still in column of O’s (Recent High at 66%, Low of current column at 58%). On Friday, the Bullish Percent fell to 54% and added a few more "O's" to the already bearish chart. There is slight support at current bullish percent levels, but risk still remains on the buy side. The March E-mini Nasdaq 100 Contract (NQ03H) The NQ contract closed exactly on the 1000 level, and still manages to hold up relatively well when compared to both the ES and YM contracts. Nevertheless, Friday's weakness was a "bearish engulfing" pattern; thus indicating more weakness to come. The next significant area of support is below at 982. Even if we do get a short-covering rally on Monday, there is good resistance at the 1011 to 1013 area. The intermediate resistance levels remain much higher (1040 to 1048), and are only brought up in case the reaction to Hans Blix sparks more than just a short-lived rally. Chart of NQ03H, Daily Looking at a 60-minute chart of the NQ contract, Friday's settlement was underneath Monday's pivot (1008); therefore, bulls will most likely wait for a bid before getting aggressive (or wait until the 980 area is reached). Since the 19.1% area (shown below) is also within the aforementioned 981-984 range; therefore, its significance should be increased. As with all trading sessions, keep an open mind and be prepared for anything. The bias and least resistance has to be lower; however, if traders can get the 1011 to 1013 area to act as support, I would then wait until a move back underneath the pivot before getting bearish once again. Chart of NQ03H, 60-minute Bullish Percent for NDX: This indicator fell 5% to 52% on Friday, adding three "0's" on Thursday. There could be support at the 50% area, but this indicator still portends bears will be selling rallies going forward. Note: The NDX will give a sell signal at 975, according to P&F charts. The March Mini-sized Dow Contract (YM03H) The YM contract not only hit the December 31st low of 8221 (which should become resistance), but also went under the 8100 area. This futures index also closed UNDERNEATH (unlike the Dow) the 50% retracement area of the move from October to December. When looking to line up levels for Monday, there are not a ton of correlations. The pivot comes in at 8179, while the aforementioned 50% level is at 8152. I would use this range as a short-term bearish channel. Intermediate resistance is higher at 8275, while support is seen below from 8025 to 8028, as well as at 7948. Chart of YM03H, Daily A 30-minute chart of the YM contract shows the retracement levels between S2 and R2, as well as an aggressive bearish regression channel. The levels listed below are nicely distributed; therefore, traders flat can wait until a five-minute period close above/below such levels and then expecting a move to the next listed retracement area. Aggressive, but usually effective. Chart of YM03H, 30-minute Bullish Percent of Dow Jones: 40.00% and in column of O’s (now 10 deep). The Bullish Percent indicator still has intermediate bearish implications. It does indicate that bears will look to sell rallies and be aggressive on weakness as well. Nothing has changed since Thursday, but a close underneath 30% should start to shift risk into the bears' camp. Stay tuned. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** MARKET SLAM NOT SUPER By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE: Those of looking forward to the super bowl may have wished that the market was equally super this past week and didn't get slammed again - option traders hopefully had puts to keep them warm. As I said last week which I hope was clear enough - "look for stock prices to head lower again" - as all the technical and fundamental tealeaves were saying that. Now, it's more earnings ahead and more drumbeats about war so while downside momentum may slow, I anticipate another down week. While there is some technical support at Dow 8000, stronger support looks more like it could surface around 7700-7750. In terms of the S&P 500 (SPX), the chart levels look support around 840, but better technical support comes in around 800-810. (Not forgetting either the double bottom around 775 as a possible ultimate retest.) FRIDAY'S TRADING ACTIVITY – Friday was the worst down day since mid-October as the Dow had a triple digit loss (-238 points). The main fundamental concern continues to be the fragile economic recovery and the impact of rising oil prices with the resulting possibility of putting the U.S. economy back into recession - as happened during the last big oil price rise (to well over $30) during the administration of President Bush's father. This of course during the period leading up to and after the last Gulf war. The specter of possible war hung heavy over the Market on Friday as traders followed the news about UN inspections and the drumbeat of the various statements of Administration officials in response. It appeared that the ante was upped last week as the U.S. now was emphasizing that the burden of proof is on Iraq to come clean on their weapons and NOT on the inspectors to find them. The raised level of rhetoric made investors and traders very nervous and the response to being nervous about the outlook ahead is ALWAYS the same - lighten up on stock positions. Hedge funds were shorting. The level of equities put volume relative to call volume was not overly lopsided which I'll show further on in my Call/Put chart. (Heavy put buying is when equities put volume is equal to or more than daily equities call volume - it's assumed that significant Index put activity is fund-related hedging so I use only the stock options volume numbers.) Of course simple disappointment that the market has now ZERO gain for the new year. Actually the market in terms of the Industrials is down 2.5%. The market for the week was off nearly 3% all around - Nasdaq (Composite - COMPX) was off 3.3%, SPX down by 2.9% - ditto the Dow. Some key Dow stocks were off by 5% or more on Friday; i.e., AXP, SBC, INTC, JPM, and AA. Trading volume was moderate, not heavy - many market participants of course waiting to see what Monday brings with the preliminary report by the UN weapons inspectors. Some of the financial stocks took it on chin as Morgan downgraded several property insurance stocks. Not the greatest business to be in these days - insuring business buildings and other commercial facilities. Defense was one of the few sectors bucking the sharp downward slid - a growth business these days I suppose. Raytheon for example reported Q4 earnings well above the year ago quarter. OTHER MARKETS - Oil prices rose on the week, with the nearby New York crude oil futures finishing over $33 (33.28) a barrel! yipes! - I've been filling up with my high octane for my high performance car but enjoying it less as, in California at least, high test prices are only a penny under $2.00 a gallon. $2 a gallon gas, while it may actually be cheap in European terms, is enough to get consumers attention - especially all those SUV owners where it seems to be the "state car" in places like Colorado. Of course the cold snap is a factor in the overall oil price rise also as heating oil demand picks up considerably. With the market down 3% the mirror image was played out in gold prices on the upside. On the same New York commodity exchange where oil futures change hands, the gold contract was UP 3%. February gold closed at 368.40, up substantially from the prior week's close at 356.70. As I have been discussing in prior columns, gold over $350 an ounce is bearish for stocks and this current rise suggests its heading for a test of the very important $400 level. However, of the financial assets, Bonds bucked the downtrend, as this asset class played its role as a safe haven in times of turmoil and political stress. The 10-year Treasury note - more almost considered to be the "long bond" or benchmark bond as the government has stopped issuing new 30-year bonds - was up 7/32nds, with the 30-year bond up 22/32nds, getting the 4.85% yield closer and closer to 5% which is level where bonds become quite attractive relative to stocks. Gold is being influenced greatly not only by Iraq war concerns and rising oil prices but also by a major fall in the value of the greenback on FOREX markets. Gold is generally priced in dollars and if the dollar's value falls, gold prices in dollar terms, goes UP. The DOLLAR fell against the Euro for the 9th straight day as the European currency rallied to $1.08. The Euro has gained some 10% in the past 3 months. As an aside, I was trying to get some euros converted starting nearly 3 months ago and it got held up until this past week - while I was very frustrated by the delay, it was more money in the bank in the end. WHY the fall in the dollar? - war is very expensive and notice that our key European allies (except England) won't have their high priced armies sharing the fight. And the war cost won't be bankrolled by others - unlike the prior Gulf War when almost the entire cost was underwritten by the Arab states and by Japan. Not so this time - I heard one estimate (one I think very inflated) of a $40 billion dollar price tag on the total restore and repair costs if Saddam sets his oil fields on fire like he had done in Kuwait - holy cow! Needless to say, U.S. based assets are down in popularity right now and this creates less demand for our currency. COMING UP (NEXT WEEK) – On the political front, besides the UN Weapons inspectors report on Monday, President Bush weighs in on the state of nation on Tuesday in his State of the Union speech before the usual joint session of Congress - wonder is security is TIGHT for that gathering that also includes the Supreme Court justices. No doubt the VP is a safe "undisclosed" location. On the Economy -existing home sales on Monday, durable goods, new home sales and January consumer confidence on Tuesday - I bet that figure is on a downward slope at least judging by recent polls. The Fed is supposed to issue a statement on the economy on Wednesday. GDP comes Thursday and personal income and spending, consumer sentiment survey and the Chicago purchasing managers' report on Friday. Lots of key stuff here - and as January goes so goes the year according to the historical tendency. Earning reports - More on the way of course. The earnings reporting season pretty well wraps up in the coming week. A bunch of Dow stocks are releasing - DIS, MO, DD, PG, SBC and MRK. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: My downside objective on the S&P 500 (SPX) is to around 840 and I would look to take at least partial profits on put positions in this area. 885, then 900, are key overhead resistances. I suggest selling rallies to the 880-885 area in terms of adding to put positions. This market is far from being oversold in terms of traders holding an extreme bearish view - at least in terms of option put buyers. S&P 100 Index (OEX) – Daily and Hourly charts: 420 is my downside objective in the OEX. Major support is assumed to be at the prior low in the 390 area and the Index could retest this level of course. However, I would see an oversold rebound from at or above 420 first. 460 is key resistance and an area, if reached, to again take out puts. The index is now oversold on a short-term basis. Any perceived positives from Bush's speech would play into the technical ability for an oversold rebound. If so, sell rallies back up to the aforementioned 460 area. Dow Industrials - Daily Chart: At a minimum I look for the Dow to get down to around 8000 before it is in a position to stabilize, then rebound. The market in terms of the Dow Industrials is far from oversold, and I would not have too much buying interest until/unless OEX gets fully oversold again. QQQ Hourly and Daily charts: The 24 area is my target for the Q's. 22 is more major support and may be an ultimate objective - or lower - but probably not without an intervening rally first. Suggest covering (exiting) some short stock around 24 and re- shorting in the 26 area if reached. You'll notice the use of the Nasdaq TRIN on the daily chart - by the way, the stochastic model is 14,3,3 - the notation of the "oversold" level is on the basis of the 10-day moving average, not on a single day. ------------------------------------------------------------ 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=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** Editor's Plays ************** War Priced In? Another tough week to find something interesting yet not over priced. After a -455 point Dow drop the put premiums were high and many stocks were already approaching support. No material risk/reward ratio. In keeping with the current events I got to thinking about the spike in gold prices. The market discounts events far into the future and gold has been on a rocket ride as we near the start of the war. The more I looked at it the more I decided that we could easily see a sell on the news event. There are multiple scenarios. The first is an extension of the deadline by the UN this week. An extension of more than 30 days could postpone the war until fall or even indefinitely depending on what transpires. Pressure is mounting for the U.S. to back off. Now that the anti-war coalition of France, Germany, Russia and China were joined by Canada it appears the spotlight has been brought to bear. This week will be the decision timeframe. Something is going to happen. We just do not know what. The U.S. government floated a trial balloon on Friday about extending the deadline and this shows the pressure is impacting their rush to war. What this means to me is that gold may be overpriced based on expectations that war will start in three weeks. To capitalize on this pricing we can use the Gold Index, XAU.X or a mining stock like ABX or NEM. The options on stocks are cheaper and should react better to good news than the XAU. The XAU at $82.20 has strong support at $75 and congestion between 75-79. Not a strong risk/reward for a $5 option. The stocks I like are ABX and NEM. ABX has been trading in a range between $15-$16 for several weeks as the war news increased. On Thr/Fri it spiked to the 200 DMA at $17.15 and looks very extended. However the range of movement is not exciting. The April $17.50 PUT is only $1.65 and a resolution or delay in the war could push the stock back to $15 which would raise the price to only $3.00 or so. NEM has spiked up to resistance at $30 after trading in the $27 range a week ago. The March $30 put is $2.15 and would go to something in the $3.50 range with a return to $27.50. The March $27.50 put is $1.10 and would rise to $2.15 with a drop back to $27. Based on the two stocks I think ABX is more overextended but the range of movement is small. NEM is currently at strong resistance and has the best chance of failure. Recognize that we could get bad news as well but since everyone assumes we are going to war anyway I think most of it is already priced in. Based on the risk/reward ratios and highly speculative nature of this play I am going to recommend the NEM March $17.50 put at $1.10. This offers very little risk in the form of premium. $110 is about the price of a good dinner for four people with wine. Just don't get crazy and try to buy the whole restaurant with 50-100 contracts. This is a speculative play and you could lose it all. ******************************** Play updates: AMZN Puts from Jan-19th Smoke and mirrors. That is what AMZN pulled out for its dog and pony show on Thursday. We made a profit, we are over the top, sales are increasing, etc. What they really said was that sales "could" increase +15% but that profits "could" drop by -8%. The CFO said profitable partner agreements that contributed to the 2002 success had expired and the next three quarters were going to be unfavorable to AMZN. They would not say how much money the clothing division made. They also shifted income around to disguise the losses in the partnership efforts like Target. They only lost $30 million with the free shipping bonus in the 4Q so they are going to make it permanent. They also said they were going to cut prices again to be more competitive. Ok, so let me get this straight. We are going to increase costs and lower prices and our profitable partnership agreements have expired. Sounds like a recipe for disaster but the spin patrol was out in force. AMZN gapped up to $23.28 from $21.72 on Friday on the news as shorts caught in the spin raced to cover. Bet they were really depressed to see AMZN close back at $22.11 at day's end. What to do now? Amazon played it really well. They did not disappoint on the surface and they did not get crushed the morning after earnings. Unfortunately the bloom is off the rose. Next week could be tough for the markets and AMZN "should" not benefit from any more news events. The excitement should be over and we should see a fade. We can never be guaranteed of the outcome and with the gap up instead of down the premium values were seriously degraded. We have four weeks until February expiration and I would give it at least two. I would set a stop loss of 22.75 for next week and trail it down. This stock traded for $18.50 a month ago and can trade there again soon. We just want it to be before Feb-21st. DJX Puts from Jan-5th. Yee Ha! Our patience paid off on this put play and the March $85 put closed on Friday at $6.00, up from $3.40 on Jan-5th. The Feb-$85 closed at $4.90, up from $2.85. The initial projection was for a drop under 8300 with a possible dip to 7700. That is still a very real possibility. Hang on or take profits. Powerball - From 12/29/02 The Powerball lottery play dropped another -$185 last week but that is about what you would expect for a -455 point Dow week. This is a 12-month play and we are only three weeks into it. It would have taken $1,135 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Breakdown by Steven Price We saw quite a breakdown today following yesterday's bounce off support in the major averages. The Dow not only closed below 8300 for the first time since October 17, but also took out the November 19 intraday low just below 8200 decisively on a closing basis. That November low was the last visible bastion of support in the 8200-8300 range that has served as a floor for the last three months. At the end of the day, we had seen massive bleeding across all sectors. The Dow dropped 238 points, the SPX lost 25.94 and the Nasdaq Composite lost 46.14. The Dow and SPX both completed what looks like a head and shoulders pattern, with neckline breaks at 8200 and 865. The downside measuring objective of those patterns are around Dow 7500 and SPX 787. Traders need to be careful, however, since much of today's sell- off was attributed to investor fear ahead of Monday's U.N. Weapons Inspector report, and the President's State of the Union address on Tuesday. The news-event related sell-off can be tricky to decipher, but there was nonetheless overpowering selling power today. Traders should be always be skeptical, however, when a news event triggers a move in one direction and use tight stops in case of a snap back when the fear abates. The general rule is that the longer support or resistance has been in place, the more significant will be the breakout or breakdown. That 8200-8300 level not only served as support over the last three months, but also served as a breakdown level in the July to September head and shoulders formation that fulfilled its measuring objective down to 7200. That support seems awfully significant and the breakdown should be, as well. Traders can see the similarities between the two patterns highlighted on the Dow chart in the latest Swing Trade Wrap. Thursday night's earnings reports were generally on the positive side, and the timing of the Friday sell-off seems more geo- political than stock related. Traders who want to avoid the whipsawing that might go on next week may have to sit on the sidelines until after Wednesday's U.N. meeting to discuss Iraq, before finding out just what the immediate future holds. It appears for the moment that it will be tough to get a resolution next week to invade the country, but the U.S. seems to be lobbying hard for one. Certainly a lot can happen during the week and we can expect some schizophrenic movement. We already know what the U.S. would like to do and next week's market activity will likely depend on the actions of the international community. The selling hit all sectors, unlike Thursday, when just a few stocks dragged down the Dow and S&P before a late day rally provided a bounce after what was then a 500-point sell-off from the year's high on January 14. Today showed either basic fear, or a combination of fear and the fact that investors were unimpressed with results from Amazon, Starbucks, PMC-Sierra, Broadcom, KLA-Tencor, Genesis Microchip and Nortel, all of which beat earnings estimates for last quarter. Of course, KLAC also gave disappointing orders and shipment guidance for the March 2003 quarter. On the positive side, however, Broadcom guided higher, in spite of the resignation of its CEO. The earnings beats were largely ignored in today's sell-off. While a few of those stocks (AMZN, SBUX, NT) finished the day higher, they couldn't rescue their sectors. The bleeding certainly fits the recent sentiment, during which we've seen selling in the face of decent results. This seems to be the opposite of what we got last fall, when we rallied significantly in the face of multiple warnings and earnings misses. Since it is impossible for the small trader to know how geo- political events will pan out, we are left with a "trade what you see" approach. Right now what we see is significant selling through longtime support and the completion of a bearish head and shoulders neckline break. Next week's trading is not for those with a conservative approach, but one thing is certain: the trend remains down. If we were going to get a bounce, it was most likely from the support level that was broken today. That didn't happen, and although we are likely to get a bounce from the 8000 level in the Dow, that round number does not have nearly the recent historical significance as the level we erased today. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8131 Moving Averages: (Simple) 10-dma: 8602 50-dma: 8584 200-dma: 8866 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 861 Moving Averages: (Simple) 10-dma: 903 50-dma: 906 200-dma: 940 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 996 Moving Averages: (Simple) 10-dma: 1046 50-dma: 1049 200-dma: 1047 ----------------------------------------------------------------- The Gold and Silver Index (XAU.X): The Gold and Silver Index has broken out to new relative highs, after rallying over the last four days. A sinking dollar, geo-political concerns and a fast dropping equity market have all combined to bring investors back into defensive gold stocks. After finding resistance between 320 and 340 for much of the year, gold futures have skyrocketed since the beginning of December as we have moved closer to war. The futures closed Friday at 368.4, which is a multi-month high. The slide in the U.S. dollar over the last four days, as it has now broken down below 100, coincides with gold futures breaking the 360 barrier and the helped the XAU finally break through the 80 barrier on a closing basis. The dollar is at its lowest level since October 1999. Traders looking to play gold stocks should keep a tight stop, as the XAU, while breaking out, has also gained 13.6% since the beginning of December and if it appears Iraq will get yet another chance to comply with UN guidelines, there is an awful lot of room to fall. 52-week High: 89 52-week Low : 54 Current : 82 Moving Averages: (Simple) 10-dma: 77.22 50-dma: 72.47 200-dma: 71.52 ----------------------------------------------------------------- The VIX, which has been a reliable indicator of both equity support on its rallies to the 100-ema and equity resistance on its drops to 26, broke the 100-ema decisively today. It also broke through horizontal resistance at 35 that had coincided with that 100-ema on the last three VIX spikes. The indication is that we are seeing plenty of downside fear ahead of the weekend and next week's geo-political ramifications. Of course, today's Dow drop through longstanding support coincided with the jump through VIX resistance and both are signaling a further drop in the equity markets. CBOE Market Volatility Index (VIX) = 35.77 +4.80 Nasdaq-100 Volatility Index (VXN) = 45.05 +1.78 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.83 564,561 468,281 Equity Only 0.64 411,506 263,970 OEX 1.11 24,805 27,460 QQQ 0.80 63,970 51,141 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 49.4 - 1 Bull Confirmed NASDAQ-100 52.0 - 5 Bear Confirmed Dow Indust. 40.0 - 3 Bear Confirmed S&P 500 54.0 - 2 Bull Correction S&P 100 50.0 - 4 Bear 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 1.61 10-Day Arms Index 1.37 21-Day Arms Index 1.34 55-Day Arms Index 1.29 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 684 2197 NASDAQ 844 2307 New Highs New Lows NYSE 107 85 NASDAQ 75 72 Volume (in millions) NYSE 1,838 NASDAQ 1,560 ----------------------------------------------------------------- Commitments Of Traders Report: 01/21/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added similar amounts to both sides, ending the period slightly less short, but not by a significant percentage. Small traders also added similar amounts to both sides, finishing the period with an additional 1,000 long contracts overall. Commercials Long Short Net % Of OI 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%) 01/21/03 415,028 456,885 (41,857) (4.8%) 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 12/31/02 139,383 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% 01/23/03 148,227 95,356 52,871 21.7% 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 decreased long positions by 1,000 contracts, while adding almost 5,000 contracts to the short side. Small traders added 5,000 contracts to the long side, while reducing shorts by 1,500. Commercials Long Short Net % of OI 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%) 01/23/03 37,174 49,789 (12,615) (14.5%) 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 12/31/02 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% 01/23/03 25,852 6,764 19,088 58.5% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials added 1,000 contracts to the long side, while reducing shorts by 1,400. Small traders added approximately 600 contracts to both sides, leaving the net virtually unchanged. Commercials Long Short Net % of OI 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% 01/23/03 16,901 11,031 5,870 21.0% 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 12/31/02 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%) 01/23/03 5,120 8,282 (3,162) (23.6%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ 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=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *************** ASK THE ANALYST *************** Interpreting the VIX Question: How should I use the VIX to predict future moves in the market? I have read that it is a contrarian indicator, but it seems to reflect current moves. Thanks, Gerard L. One of the market's most quoted indicators is the Market Volatility Index, or the VIX. It is also one of the hardest to decipher as far as what exactly it is telling us. The VIX is based on the implied volatility of eight at the money options in the first two months of the OEX. For instance, if the OEX were trading 442.50, the VIX would be calculated based on the implied volatility of both the call and put at the 440 and 445 strikes in the front month (February) and second month (March). As the index moves, the VIX is calculated based on the current at the money strikes, whatever those might be throughout the day. The general rule for implied volatility is that volatility goes up as the market goes down and goes down as the market goes up. The basic reason for this is that markets generally fall much faster than they rise (with the exception of the internet boom). Therefore, faster downside movement correlates to a higher percentage move and thus higher implied volatility. As the market falls, traders can see the VIX climb, as it has this week. The best recent example comes at market extremes on the dips in September 2001, when the VIX traded up to 57.31 following the September 11 attacks, and in July 2002, when it topped out at 56.74, as the markets bottomed during the July swoon. These are extremes, of course, but they demonstrate the contrarian nature of the VIX. Traders can see below how the VIX and Dow look like two ends of a rubber band stretching out on market drops, then snapping back after reaching their extremes. Weekly Chart of the VIX Therefore, an extreme high VIX reading can be bullish and many traders view it this way. However, a rising VIX and an extreme VIX represent two very different scenarios. An extreme high VIX represents a market that is very oversold after a big, continued drop or in the case of September 11, a catastrophic event that sends investors running to the sidelines. A rising VIX, on the other hand, represents growing bearish sentiment, as traders are willing to part with options only at higher implied volatility levels, representing the likelihood of a bigger move in the stock market. As we said earlier, the biggest moves are generally to the downside. The VIX also represents the supply/demand aspect of option trading. When there are more buyers, prices (and implied volatility) go up. There are generally more institutional buyers when the markets are on the way down. The opposite is true on the way up. Institutions generally sell out of the money calls to reduce the cost of equity purchases on the way up. This is called the covered write and it is the most common option trade in the world. Because market makers generally hedge their trades directionally by taking the opposite action with the underlying product, it makes little difference whether they buy calls or puts. In either case, if they have hedged their trades, they are in a position to make money if the underlying product moves and they are long (owners of) options on balance. As they purchase more options and hedge them, they lower the prices to reflect abundant supply. Since institutions mostly sell options in rising markets, implied volatility drops as market makers buy these options and lower the price. So as institutions begin to believe the market is heading down, they are either buying back options they've sold while the market was rising, or protecting positions with put purchases. Sometimes the put purchases are strictly proprietary ways to make money rather than protect a position, as well. In either case, they are buying on the way down, helping to drive the VIX up. On the other side, market makers are less willing to part with puts on the way down and therefore raise the price, reflecting downside fear and the abundance of buyers. They also raise the price of calls, since 1) As I explained earlier, it makes little difference whether a market maker trades a call or put as long as it is hedged; and 2) calls and puts are finitely related and the increase of premium levels in one must be duplicated in the other so as to avoid presenting arbitrage opportunities to outsiders. A more recent and applicable example of the VIX being used to predict future movement is the range of trading we have seen over the past three months. The VIIX has repeatedly tested the 26% support level as the market has risen. In fact, that level was tested in November, December and January, as the Dow topped out at 8800, 9043 and 8869. The sell-offs in between those levels have dropped the Dow into the 8200-8300 range, and taken the VIX to a high around 35 each time. Therefore, traders can see the rubber band stretching with the Dow stretching up into the 8800- 9000 range, while the VIX stretched down to 26. On the other end, the VIX stretched up to 35, while the Dow stretched down to 8200-8300. Each time we hit those levels, trades could predict a short-term reversal. That is until today, when the rubber band finally appeared to have broken. The Dow finally gave way at 8200 at the same time the VIX broke above 35. The VIX also broke through its exponential 100-dma, which had coincided with the 35 top the last few times, but fell to 32.85 over the last month. Daily Chart of the VIX The other strategy that would have worked nicely was the purchase of straddles at the VIX bottoms, as the Dow was reaching its tops. Traders expecting a reversal or a breakout and owning both a call and put at the money, with premiums at their low end, were virtually guaranteed a profit had they invested at those points. I talked about this possibility in the Market Volatility section of Market Sentiment a couple of weeks ago and undoubtedly there are both traders happy with the decision to make the investment and unhappy for passing on the strategy. Of course there is no such thing as free money and had the markets simply sat in one place, time erosion would have led to a significant loss. However, given the recent history of the stretching of the rubber band, that was unlikely. So my conclusion is basically that traders can use a VIX on the rise or fall to indicate current sentiment. However, as the band stretches and we reach our extremes, either short-term, as we have over the past three months between 26 and 35, or longer- term, with extreme highs between 50 and 60, traders can look for a reversal (or breakout in the case of shorter term limits) ahead. ************* COMING EVENTS ************* ========================================== Market Watch for the week of January 27th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- AAA Altana AG Mon, Jan 27 -----N/A----- N/A AXP American Express Co Mon, Jan 27 After the Bell 0.51 BOH Bank of Hawaii Corp Mon, Jan 27 Before the Bell 0.44 BEC Beckman Coulter Mon, Jan 27 Before the Bell 0.85 CP Canadian Pac Railway Mon, Jan 27 After the Bell 0.46 CNF CNF Inc. Mon, Jan 27 After the Bell 0.44 CTC Co de Telecom Chile Mon, Jan 27 -----N/A----- 0.03 DOV Dover Corporation Mon, Jan 27 After the Bell 0.30 ESA Extended Stay America Mon, Jan 27 After the Bell 0.10 FCNCA First Ctzens BncShrs Mon, Jan 27 -----N/A----- N/A FTI Fmc Technologies, Inc Mon, Jan 27 After the Bell 0.33 FRE Freddie Mac Mon, Jan 27 Before the Bell 1.28 HMY Harmony Gold Mining Mon, Jan 27 Before the Bell N/A HIG Hartford Finl Serv Mon, Jan 27 After the Bell 1.10 HLT Hilton Hotels Corp Mon, Jan 27 Before the Bell 0.10 IDXX Idexx Laboratories Mon, Jan 27 Before the Bell 0.36 KMB Kimberly Clark Mon, Jan 27 Before the Bell 0.74 LEA Lear Corp. Mon, Jan 27 Before the Bell 1.63 MDU MDU Resources Mon, Jan 27 -----N/A----- 0.49 WFR MEMC Electronic Mat Mon, Jan 27 After the Bell 0.08 MEOH Methanex Mon, Jan 27 -----N/A----- 0.48 NFG National Fuel Gas Co Mon, Jan 27 After the Bell 0.51 OGE OGE Energy Mon, Jan 27 Before the Bell N/A PKI PerkinElmer Mon, Jan 27 -----N/A----- 0.13 SAFC SAFECO Corp. Mon, Jan 27 -----N/A----- 0.55 SO Southern Company Mon, Jan 27 Before the Bell 0.16 SYK Stryker Mon, Jan 27 After the Bell 0.50 SYY SYSCO Corporation Mon, Jan 27 Before the Bell 0.28 SPC The St. Paul Co Inc. Mon, Jan 27 Before the Bell 0.83 TSN Tyson Foods Mon, Jan 27 -----N/A----- 0.16 UDI United Dfnse Ind Mon, Jan 27 Before the Bell 0.51 ------------------------- TUESDAY ------------------------------ AFCI Advanced Fibre Com Tue, Jan 28 After the Bell 0.05 ADVP AdvancePCS Tue, Jan 28 After the Bell 0.44 AME AMETEK Inc. Tue, Jan 28 After the Bell 0.63 AWE AT&T Wireless Tue, Jan 28 -----N/A----- -0.02 AVY Avery Dennison Corp Tue, Jan 28 During the Market 0.68 BGEN Biogen, Inc. Tue, Jan 28 Before the Bell 0.42 BOW Bowater Incorporated Tue, Jan 28 Before the Bell -0.78 BCR C.R. Bard, Inc. Tue, Jan 28 After the Bell 0.88 CECO Career Education Tue, Jan 28 After the Bell 0.59 GIB CGI Group Tue, Jan 28 Before the Bell N/A CNX CONSOL Energy Tue, Jan 28 -----N/A----- -0.01 CPO Corn Products Intl Tue, Jan 28 Before the Bell 0.38 CYMI Cymer, Inc. Tue, Jan 28 After the Bell -0.12 CYTC Cytyc Corporation Tue, Jan 28 After the Bell 0.13 DO Diamond Ofshre Drllng Tue, Jan 28 Before the Bell 0.04 DST DST Systems Tue, Jan 28 After the Bell 0.44 DUK Duke Energy Corp Tue, Jan 28 Before the Bell 0.29 DD DuPont Tue, Jan 28 Before the Bell 0.32 ENT Equant NV Tue, Jan 28 After the Bell N/A GLK Great Lakes Chemical Tue, Jan 28 After the Bell 0.15 IMN Imation Corp. Tue, Jan 28 Before the Bell 0.47 ISIL Intersil Corporation Tue, Jan 28 After the Bell 0.18 KSE KeySpan Tue, Jan 28 Before the Bell 0.93 KFT Kraft Foods Tue, Jan 28 After the Bell 0.52 LLL L-3 Comm Holdings Tue, Jan 28 Before the Bell 0.77 MRK Merck & Co., Inc. Tue, Jan 28 Before the Bell 0.83 MDP Meredith Corporation Tue, Jan 28 Before the Bell 0.38 MGG MGM MIRAGE Tue, Jan 28 Before the Bell 0.25 MLNM Millennium Pharms Tue, Jan 28 After the Bell -0.27 MUR Murphy Oil Corp Tue, Jan 28 After the Bell 0.55 NEU Neuberger Berman Tue, Jan 28 Before the Bell 0.39 NU Northeast Utilities Tue, Jan 28 Before the Bell 0.30 NOC Northrop Grumman Tue, Jan 28 Before the Bell 1.66 NVLS Novellus Systems, Inc Tue, Jan 28 -----N/A----- 0.10 OEI Ocean Energy, Inc. Tue, Jan 28 Before the Bell 0.39 ORI Old Republic Intl Tue, Jan 28 -----N/A----- 0.82 OI Owens Illinois Tue, Jan 28 After the Bell 0.34 PBG Pepsi Bottling Group Tue, Jan 28 Before the Bell 0.17 PAS PepsiAmericas Tue, Jan 28 After the Bell 0.08 PBI Pitney Bowes Inc. Tue, Jan 28 After the Bell 0.64 PMI PMI Group Tue, Jan 28 Before the Bell 0.97 PG Procter & Gamble Co Tue, Jan 28 -----N/A----- 1.12 PEG PSEG Tue, Jan 28 Before the Bell 1.14 PHM Pulte Homes Inc. Tue, Jan 28 Before the Bell 2.65 RJR R.J. Reynlds Tobacco Tue, Jan 28 Before the Bell 0.40 SBC SBC Communications Tue, Jan 28 Before the Bell 0.62 SEE Sealed Air Tue, Jan 28 -----N/A----- 0.66 SEPR Sepracor Tue, Jan 28 -----N/A----- -1.21 SKFR SKF AB Tue, Jan 28 Before the Bell N/A STJ St. Jude Medical, Inc Tue, Jan 28 08:00 am ET 0.39 SY Sybase Tue, Jan 28 Before the Bell 0.29 TECH Techne Tue, Jan 28 Before the Bell 0.25 MHP The McGraw-Hill Com Tue, Jan 28 Before the Bell 0.67 NYT The New York Tms Co Tue, Jan 28 Before the Bell 0.67 TRP TransCanada Pipelines Tue, Jan 28 -----N/A----- 0.24 TSM TSMC Tue, Jan 28 -----N/A----- 0.03 UPS UN PARCEL SERVICE INC Tue, Jan 28 Before the Bell 0.57 X Un States Stl Corp. Tue, Jan 28 -----N/A----- 0.57 VLO Valero Energy Corp. Tue, Jan 28 Before the Bell 0.71 VRTS VERITAS Sftwre Corp Tue, Jan 28 After the Bell 0.14 WDR Waddell & Reed Finl Tue, Jan 28 Before the Bell 0.26 WAT Waters Corporation Tue, Jan 28 Before the Bell 0.39 WWY Wm. Wrigley Jr. Co. Tue, Jan 28 -----N/A----- 0.46 WYE WYETH Tue, Jan 28 Before the Bell 0.64 XRX Xerox Corporation Tue, Jan 28 Before the Bell -0.10 ----------------------- WEDNESDAY ----------------------------- ABY Abitibi-Consolidated Wed, Jan 29 Before the Bell N/A AMG Affiliated Managrs GrpWed, Jan 29 -----N/A----- 1.10 AFFX Affymetrix Wed, Jan 29 After the Bell 0.06 ARG Airgas Wed, Jan 29 After the Bell 0.21 AGN Allergan Wed, Jan 29 -----N/A----- 0.53 ADS Alliance Data Systems Wed, Jan 29 -----N/A----- 0.18 AOL AOL Time Warner Wed, Jan 29 After the Bell 0.26 AJG Arthur J. Gallagher. Wed, Jan 29 After the Bell 0.42 BLL Ball Corporation Wed, Jan 29 Before the Bell 0.49 STD Bnc Sntndr Cntrl Hisp Wed, Jan 29 Before the Bell N/A BCE BCE Wed, Jan 29 Before the Bell 0.27 BOBJ Business Objects Wed, Jan 29 After the Bell 0.17 CHIR Chiron Wed, Jan 29 After the Bell 0.33 CCE Coca-Cola Enterprises Wed, Jan 29 Before the Bell 0.12 COP ConocoPhillips Wed, Jan 29 Before the Bell 1.11 CAM Cooper Cameron Wed, Jan 29 -----N/A----- 0.39 COCO Corinthian Colleges Wed, Jan 29 Before the Bell 0.31 TEU CP Ships Wed, Jan 29 Before the Bell 0.26 CUM Cummins Inc. Wed, Jan 29 Before the Bell -0.15 DL Dial Wed, Jan 29 Before the Bell 0.30 DBD Diebold Wed, Jan 29 Before the Bell 0.70 RDY Dr. Reddy's Labs Wed, Jan 29 -----N/A----- N/A DRE Duke Realty Corp Wed, Jan 29 -----N/A----- 0.59 ERTS Electronic Arts Wed, Jan 29 After the Bell 1.57 ENB Enbridge Inc. Wed, Jan 29 -----N/A----- N/A EGN Energen Wed, Jan 29 -----N/A----- 0.46 ESV ENSCO International Wed, Jan 29 Before the Bell 0.24 EXC Exelon Corporation Wed, Jan 29 -----N/A----- 1.17 FNF Fidelity National FinlWed, Jan 29 Before the Bell 1.54 FDRY Foundry Networks Wed, Jan 29 After the Bell 0.06 GGB Gerdau S.A. Wed, Jan 29 -----N/A----- 0.72 GSF GlobalSantaFe Corp. Wed, Jan 29 Before the Bell 0.27 HSY Hershey Foods Corp Wed, Jan 29 Before the Bell 1.02 ITW Illinois Tool Works Wed, Jan 29 Before the Bell 0.72 NDE IndyMac Bancorp, Inc. Wed, Jan 29 Before the Bell 0.63 KMT Kennametal Inc. Wed, Jan 29 Before the Bell 0.28 KMG Kerr-McGee Wed, Jan 29 -----N/A----- 0.62 LEG Leggett & Platt Wed, Jan 29 After the Bell 0.24 MAN Manpower Wed, Jan 29 Before the Bell 0.45 MXIM Maxim Integrated Prds Wed, Jan 29 After the Bell 0.23 MKC McCormick & Company Wed, Jan 29 Before the Bell 0.55 MWV MeadWestvaco Wed, Jan 29 Before the Bell 0.07 MEG Media General Wed, Jan 29 Before the Bell 0.87 NBL Noble Energy, Inc. Wed, Jan 29 -----N/A----- 0.33 NSC Norfolk Southern Corp Wed, Jan 29 Before the Bell 0.30 NBP Northern Border Part Wed, Jan 29 After the Bell 0.65 NCX Nova Chemical Wed, Jan 29 Before the Bell -0.24 OXY Occidental Petro Corp Wed, Jan 29 Before the Bell 0.78 PPDI Pharm Prod Devel Wed, Jan 29 After the Bell 0.36 PD Phelps Dodge Wed, Jan 29 Before the Bell -0.47 MO Philip Morris Co Inc. Wed, Jan 29 -----N/A----- 0.92 PX Praxair Inc Wed, Jan 29 Before the Bell 0.84 PLD ProLogis Trust Wed, Jan 29 After the Bell 0.61 RBK Reebok Wed, Jan 29 Before the Bell 0.25 SEIC SEI Investments Wed, Jan 29 Before the Bell 0.32 SSCC Smurfit-Stone Cont Co Wed, Jan 29 Before the Bell 0.12 SON Sonoco Products Wed, Jan 29 Before the Bell 0.37 SNE Sony Corporation Wed, Jan 29 -----N/A----- N/A HOT Starwood Htls & Rsrts Wed, Jan 29 Before the Bell 0.21 TRB Tribune Wed, Jan 29 Before the Bell 0.55 UGI UGI Wed, Jan 29 -----N/A----- 1.06 UMC United Microelec Co Wed, Jan 29 -----N/A----- 0.00 UCL Unocal Wed, Jan 29 Before the Bell 0.45 VVC Vectren Corporation Wed, Jan 29 After the Bell 0.64 VZ Verizon Wed, Jan 29 Before the Bell 0.79 GWW W.W. Grainger Wed, Jan 29 Before the Bell 0.66 WGL WGL Holdings Wed, Jan 29 After the Bell 0.79 WIN Winn-Dixie Stores Wed, Jan 29 After the Bell 0.41 XEL Xcel Energy Wed, Jan 29 -----N/A----- 0.32 ZMH Zimmer Inc. Wed, Jan 29 After the Bell 0.34 ------------------------- THURSDAY ----------------------------- AGRa Agere Systems Thu, Jan 23 Before the Bell -0.08 AFL AFLAC Incorporated Thu, Jan 30 After the Bell 0.41 AC Alliance Capl Mana Thu, Jan 30 -----N/A----- 0.48 AT ALLTEL Corp. Thu, Jan 30 -----N/A----- 0.82 AHC Amerada Hess Thu, Jan 30 -----N/A----- 1.56 ASD American Standard Thu, Jan 30 -----N/A----- 1.00 APA Apache Corporation Thu, Jan 30 Before the Bell 1.27 AZN AstraZeneca PLC Thu, Jan 30 Before the Bell 0.41 BBV Banco Blbo Vizcaya Thu, Jan 30 -----N/A----- N/A BCH Banco de Chile Thu, Jan 30 -----N/A----- 0.22 BOL Bausch & Lomb Thu, Jan 30 Before the Bell 0.55 BE BearingPoint, Inc. Thu, Jan 30 Before the Bell 0.10 BDK Black & Decker Corp Thu, Jan 30 -----N/A----- 1.02 BC Brunswick Corporation Thu, Jan 30 Before the Bell 0.20 CAJ Canon Thu, Jan 30 -----N/A----- N/A CTL CenturyTel, Inc. Thu, Jan 30 Before the Bell 0.53 CME Chicago Merc Exchange Thu, Jan 30 Before the Bell N/A COLM Columbia Sportswear Thu, Jan 30 -----N/A----- 0.63 CGI Commerce Group Thu, Jan 30 -----N/A----- 1.02 COT Cott Corporation Thu, Jan 30 Before the Bell 0.17 CSX CSX Thu, Jan 30 Before the Bell 0.57 DHR Danaher Thu, Jan 30 Before the Bell 0.77 DLX Deluxe Corporation Thu, Jan 30 Before the Bell 0.76 EMN Eastman Chemical Co Thu, Jan 30 After the Bell 0.02 EPN El Paso Energy Part Thu, Jan 30 Before the Bell 0.25 EN Enel S.p.A. Thu, Jan 30 -----N/A----- N/A EQT Equitable Res Thu, Jan 30 Before the Bell 0.67 XOM Exxon Mobil Corp Thu, Jan 30 -----N/A----- 0.50 FHR Fairmont Htl & ResortsThu, Jan 30 -----N/A----- 0.14 FLR Fluor Corporation Thu, Jan 30 After the Bell 0.55 GMT GATX Corporation Thu, Jan 30 -----N/A----- 0.32 GILD Gilead Sciences Thu, Jan 30 After the Bell 0.14 GFI Gold Fields Limited Thu, Jan 30 Before the Bell 0.17 GDT Guidant Thu, Jan 30 Before the Bell 0.61 HAR Harman Intl Ind Thu, Jan 30 -----N/A----- 0.77 HSC Harsco Corporation Thu, Jan 30 Before the Bell 0.56 HHS Harte-Hanks Thu, Jan 30 Before the Bell 0.26 HR Healthcare Realty TrstThu, Jan 30 After the Bell 0.68 ICOS ICOS Corporation Thu, Jan 30 After the Bell -0.75 IDPH IDEC Pharmaceuticals Thu, Jan 30 After the Bell 0.24 IGL IMC Global Thu, Jan 30 -----N/A----- -0.07 IP International Paper Thu, Jan 30 Before the Bell 0.27 JNS Janus Capital Group Thu, Jan 30 Before the Bell 0.15 JBLU JetBlue Airways Thu, Jan 30 Before the Bell 0.20 K Kellogg Co. Thu, Jan 30 Before the Bell 0.47 LANC Lancaster Colony Corp Thu, Jan 30 Before the Bell 0.72 LYO Lyondell Petrochem Thu, Jan 30 Before the Bell -0.34 MEDI MedImmune Thu, Jan 30 Before the Bell 0.33 MYL Mylan Laboratories Thu, Jan 30 Before the Bell 0.51 NBR Nabors Industries Thu, Jan 30 Before the Bell 0.12 NWL Newell Rubbermaid Thu, Jan 30 Before the Bell 0.48 NE Noble Corporation Thu, Jan 30 -----N/A----- 0.39 BTU Peabody Energy Corp. Thu, Jan 30 Before the Bell -0.09 PY Pechiney Thu, Jan 30 -----N/A----- 0.20 PNR Pentair, Inc. Thu, Jan 30 Before the Bell 0.55 PCZ Petro-Canada Thu, Jan 30 -----N/A----- 0.72 PIO Pioneer Corporation Thu, Jan 30 -----N/A----- N/A PXD Pioneer Natl Res Com Thu, Jan 30 Before the Bell 0.18 PII Polaris Industries Thu, Jan 30 Before the Bell 1.50 PVN Providian Finl Corp Thu, Jan 30 After the Bell 0.09 RGA Reinsurance Grp Am IncThu, Jan 30 After the Bell 0.72 RRI Reliant Resources Thu, Jan 30 Before the Bell 0.09 RCL Royal Caribbean Cru Thu, Jan 30 Before the Bell 0.01 DNY RR Donnelley Thu, Jan 30 Before the Bell 0.50 SAP SAP AG Thu, Jan 30 Before the Bell 0.31 SII Smith International Thu, Jan 30 Before the Bell 0.19 SFG StanCorp Finl Group Thu, Jan 30 Before the Bell 1.03 SEO Stora Enso Thu, Jan 30 Before the Bell 0.12 BA The Boeing Company Thu, Jan 30 Before the Bell 0.71 DOW The Dow Chemical Co Thu, Jan 30 Before the Bell 0.00 EL The Estie Lauder Co Thu, Jan 30 -----N/A----- 0.40 G The Gillette Company Thu, Jan 30 Before the Bell 0.34 MNI The McClatchy Company Thu, Jan 30 Before the Bell 0.80 RIG Transocean Inc. Thu, Jan 30 Before the Bell 0.26 UPM UPM-Kymmene Group Thu, Jan 30 -----N/A----- 0.59 DIS Walt Disney Thu, Jan 30 After the Bell 0.15 WPS WPS Resources Thu, Jan 30 Before the Bell 0.52 ------------------------- FRIDAY ------------------------------- APC Anadarko Petroleum Co Fri, Jan 31 Before the Bell 1.05 AU Anglogold Limited Fri, Jan 31 -----N/A----- 0.43 CVX ChevronTexaco Fri, Jan 31 Before the Bell 1.27 CEG Constellation Energy Fri, Jan 31 Before the Bell 0.38 DQE DQE Fri, Jan 31 After the Bell 0.28 EAS Energy East Corp Fri, Jan 31 -----N/A----- 0.36 HCR HCR Manor Care Fri, Jan 31 Before the Bell 0.33 HON Honeywell Fri, Jan 31 Before the Bell 0.50 TAC TRANSALTA CORP Fri, Jan 31 -----N/A----- N/A VRC Varco International Fri, Jan 31 Before the Bell 0.22 WEN Wendy's International Fri, Jan 31 After the Bell 0.44 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CWTR Coldwater Creek 3:2 Jan. 30th Jan. 31st -------------------------- Economic Reports This Week -------------------------- Wall Street is still stuck in the middle of Q4 earnings season but Iraq is casting such a strong shadow any light of a rally attempts have been lost. Not that earnings have been that great anyway. We have a two-day FOMC meeting this week along with a number of economic reports. Plus the markets will be holding their breath for the UN report on Monday and the President's state of the union speech on Tuesday. ============================================================== -For- Monday, 01/27/02 ---------------- Existing Home Sales(BB) Dec Forecast: 5.61M Previous: 5.56M Tuesday, 01/28/02 ----------------- Durable Orders (BB) Dec Forecast: 0.7% Previous: -1.5% Consumer Confidence(BB) Jan Forecast: 79.0 Previous: 80.3 FOMC Meeting (2-Day) (DM) Wednesday, 01/29/02 ------------------- FOMC Meeting (2-Day) (DM) Thursday, 01/30/02 ------------------ Initial Claims (BB) 01/25 Forecast: 385K Previous: 381K GDP-Adv. (BB) Q4 Forecast: 1.0% Previous: 4.0% Chain Deflator-Adv. (BB) Q4 Forecast: 1.4% Previous: 1.0% Employment Cost Index(BB)Q4 Forecast: 0.9% Previous: 0.8% Help-Wantes Index (DM) Dec Forecast: 40 Previous: 40 FOMC Minutes (DM) Friday, 01/31/02 ---------------- Personal Income (BB) Dec Forecast: 0.2% Previous: 0.3% Personal Spending (BB) Dec Forecast: 0.7% Previous: 0.5% Mich Sentiment-Rev.(DM) Jan Forecast: 83.7 Previous: 83.7 Chicago PMI (DM) Jan Forecast: 52.2 Previous: 51.3 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ 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=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************* SWING TRADE GAME PLAN ********************* History Repeats Itself... So Far The last bastion of support has fallen. We appear to be seeing a repeat of the September head and shoulders breakdown following a weak rebound attempt on Thursday. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Sunday 01-26-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: FRX Put Play of the Day: TDS Dropped Calls: CI Dropped Puts: ASD ------------------------------------------------------------ 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=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week CI 43.50 0.00 -1.06 -1.03 0.62 –2.98 Drop, trend end CTAS 41.37 0.00 -0.63 -0.07 0.14 –2.17 Nearing target FRX 52.01 0.00 -1.39 0.08 1.01 –0.99 Hold over dmas OCR 25.74 0.00 -0.34 0.00 0.11 –0.66 not giving much SYMC 43.91 0.00 -0.86 0.05 0.44 –1.35 Over 50-dma PUTS ASD 65.20 0.00 -0.80 -1.20 1.42 –2.20 Drop, profits CTSH 57.84 0.00 -0.97 -0.83 0.48 –2.27 Broke 200-dma KO 42.83 0.00 -0.48 -0.18 –0.66 –2.37 New, on verge KSS 53.75 0.00 -2.30 -0.75 1.74 –2.75 Sector drop PNRA 31.55 0.00 -0.79 0.12 –0.34 –1.70 New, reversal TDS 42.75 0.00 -0.34 -0.31 –1.05 –2.70 New, new break ------------------------------------------------------------ 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=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* FRX - Forest Labs $52.87 +1.01 (+0.68 for the week) See details in play list Put Play of the Day: ******************** TDS - Telephone and Data Systems, Inc. $42.75 (-2.45 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ CI $43.50 -1.36 (-2.73 for the week) CI broke out of its Inside Day formation on Friday, but not in the direction we hoped it would. At first glance it looks like the stock simply fell victim to the general bearish trend in the equity market. A closer examination of the insurance group, however, reveals that sector weakness was the primary culprit for Cigna's 3.0% decline. The IUX.X insurance index underperformed the Dow Jones with a loss of more than 5%. The source of this negativity was a Morgan Stanley downgrade of the entire property-casualty industry on Friday morning. The firm also slashed ratings on seven specific stocks, based on its belief that rates have maxed out. While the stock performed well to start the play, the breakout over $45 has rolled over and is now back into congestion in the $42-$44 range that held it through much of December. While the stock did not continue as we had hoped, there is certainly plenty of support between $42 and $43 that traders holding the play can use to judge its future movements. PUTS ^^^^ ASD $65.20 (-1.82) It's time to retire our ASD play this weekend, with the stock refusing to trade a new low on Friday, despite the broad market weakness. We've gotten a nice ride from the play, originally listed up near $69.50, and we'd like to keep those gains. Thursday's sharp gain gave us a bit of a scare, as it came right from the PnF bearish price target, so we're going to close it out this weekend as a success. In light of the broad market weakness on Friday (which is likely to continue next week), there are better candidates with more downside potential. *********** 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. ------------------------------------------------------------ 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=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** 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 01-26-2003 Sunday 3 of 5 In Section Three: New Calls: None Current Calls: FRX, OCR, SYMC New Puts: KO, PNRA, TDS ------------------------------------------------------------ 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=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ 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=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** FRX - Forest Labs $52.87 +1.01 (+0.68 for the week) Company Description: Forest Laboratories develops, manufactures, and sells ethical pharmaceutical products that are used for the treatment of a wide range of illnesses. Forest Laboratories' growing line of products includes: Lexapro(TM), indicated as initial as well as maintenance treatment of major depressive disorder; Celexa(TM), an antidepressant; Tiazac., a once-daily diltiazem, indicated for the treatment of angina and hypertension; Benicar(TM)*, an angiotensin receptor blocker indicated for the treatment of hypertension; and Aerobid., an inhaled steroid indicated for the treatment of asthma. (source: company press release) Why We Like It: The bullish momentum from Thursday's late-session rally carried over into FRX's early trading on Friday. Shares gapped slightly higher and quickly reached our entry trigger at $53.01. If you were watching the market today then you probably have a good idea of what happened next. Widespread weakness in nearly every sector (including pharmaceuticals) dragged FRX back to its 50-dma at $51.49. The subsequent rebound from this moving average is a positive development for the bulls. We're also encouraged by the fact that FRX outperformed both the DRG.X pharmaceutical index and Dow Jones with a loss of only 1.6%. This leads us to believe that shares will be able to move towards the $56.00 level if the market stabilizes. New entries could be gauged on a move above today's high of $53.39. We've attempted to limit downside risk with a stop at $49.74. More aggressive traders could use a stop slightly below $49.00. BUY CALL FEB-50*FHA-BJ OI= 1188 at $3.70 SL=1.85 BUY CALL FEB-52.50 FHA-BX OI= 2239 at $2.05 SL=1.00 BUY CALL MAR-50 FHA-CJ OI= 296 at $4.30 SL=2.15 BUY CALL MAR-55 FHA-CK OI= 331 at $1.70 SL=1.00 Average Daily Volume = 3.51 MIL --- OCR – Omnicare, Inc. $25.74 (-0.56 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: When the whole market is melting down around you, there's something to be said for relative strength. Sure OCR lost a bit more ground on Friday, but that 1% slide pales in comparison to the 3-4% losses seen across the major indices. Despite all the bearish pressures causing one stock after another to cave in last week, OCR has been admirably holding its ground above the $25 level. But just holding its ground isn't enough to generate profits - we need the stock to go up. On the intraday dips, the $25.50 level to prove to be solid support, and traders that took advantage of that mild weakness are sitting in a favorable position, with risk capped by our $25 stop, in anticipation of a rebound back towards the recent highs at $26.60. We're still expecting the stock to break those highs, but we're going to need to see the rest of the market show some signs of life for that to happen. The one point of concern from last week's action is that Thursday's broad-market rebound was unable to break the stock free of resistance near the $26 level. For those looking to establish new positions on strength, look for a volume-backed move through $26.25 or even last week's highs before playing. If OCR does cave in and head south, we'll be honoring our stop at $25. BUY CALL FEB-25*OCR-BE OI=5209 at $1.65 SL=0.75 BUY CALL FEB-27 OCR-BY OI= 105 at $0.55 SL=0.25 BUY CALL MAR-25 OCR-CE OI= 306 at $2.00 SL=1.00 BUY CALL MAR-27 OCR-CY OI= 25 at $0.85 SL=0.40 Average Daily Volume = 436 K SYMC – Symantec Corp. $43.92 (-1.13 last week) Company Summary: A world leader in Internet security technology, SYMC provides a broad range of content and network security solutions to individuals and enterprises. The company is a leading provider of virus protection, risk management, Internet content and e-mail filtering, remote management and mobile code detection technologies. The desktop battleground is where SYMC derives nearly 60% of its sales. Duking it out with Network Associates in this arena, the company is best known for its security software (Norton AntiVirus), desktop efficiency (Norton CleanSweep), and PC utility (Norton Ghost) products. Why We Like It: Our SYMC play certainly got off to a less-than-stellar beginning, as the anticipated support at $44 failed to halt the stock's slide on Friday. Part of the catalyst for the sharp slide was obviously the weak overall market, but there was another factor. ISSX, another security software company released earnings and got slammed for a 30% loss in Friday's session. In comparison, SYMC's 4.5% loss looks almost trivial. Probably the only thing that kept SYMC from heading further south was the strong earnings and forward guidance the company provided a little over a week ago. So the question we need an answer to is whether the stock will find solid support at the 50-dma (currently $43.41), or if we picked a bad play. Looking at the price action in late December, we can see where the stock traded a slightly lower low before running up strongly in the first couple weeks of the new year. We're betting on another rebound from support, partially because the PnF chart is still on a Buy signal, and partially because the ascending trendline from the October lows (also just above $43) has not been violated. Simply put, there is strong support just under current levels, that should keep SYMC from breaking down. With that said, the strong selling volume on Friday was discouraging, and we need to see corresponding strong volume on a rebound to consider new positions. While aggressive traders can look to enter on a rebound from support, those with a more conservative risk profile will want to see SYMC push back above the 20-dma ($44.53) and possibly even the $45 level before playing. We're maintaining our stop at $43. BUY CALL FEB-40 SYQ-BH OI= 209 at $4.90 SL=3.00 BUY CALL FEB-45*SYQ-BI OI=3822 at $1.60 SL=0.75 BUY CALL MAR-45 SYQ-DI OI= 114 at $2.75 SL=1.25 BUY CALL MAR-50 SYQ-DJ OI= 311 at $0.95 SL=0.50 Average Daily Volume = 3.20 mln ************* NEW PUT PLAYS ************* KO - Coca-Cola $42.82 -1.08 (-2.26 for the week) Company Description: The Coca-Cola Company is the world's largest beverage company and is the leading producer and marketer of soft drinks. Along with Coca-Cola, recognized as the world's best-known brand, The Coca- Cola Company markets four of the world's top five soft drink brands, including diet Coke, Fanta and Sprite. Through the world's largest distribution system, consumers in nearly 200 countries enjoy The Coca-Cola Company's products at a rate of more than 1 billion servings each day. (source: company release) Why We Like It: KO has been fighting its long time support since gapping down following an earnings warning back in October. The warning came just after the Dow began its climb from the 2002 low on October 9. However, while the broad markets were challenging the yearly highs over the next couple of months, KO remained stuck in its new lower range, with a bottom at $43 and a top at $47. that ceiling dropped from $47 to $46 following a downgrade to the stock and KO's announcement in mid-December that it would no longer give future guidance on a quarterly or yearly basis. In addition, after confirming the previously given 2003 outlook, the company said it will not update that outlook as the year progresses. KO's statement that, " We believe that establishing short-term guidance prevents a more meaningful focus on the strategic initiatives that a Company is taking to build its business and succeed over the long-run" didn't fool anybody and the stock has remained mired in the low end of its 2002 range and testing the 2001 lows. That is until now. KO finally broke its longtime support at $43 on a closing basis, trading down to $42.83. It was the first close below $43 since June 2001. The stock has traded just below $43 on an intraday several times, but has yet to crack the $42 barrier. A trade of $42 would both create a new point and figure sell signal and also be the first time below that level since 1996. A break below a support level more than 6 years old, combined with a stock market that recently broke down below a head and shoulders neckline, as the Dow did today, could be a recipe for a big drop. The Dow's measuring objective from the neckline break is more than 600 points below the current level and KO is likely to go along for the ride if it continues the current breakdown and gives us the long awaited sell signal at $42. For that reason, we will use an entry trigger on the short play of $41.90, with a target of $35 to start. However, with that support level being six years old, it may be an even steeper drop as buyers at that level are likely long gone. If we are triggered on the short entry, our stop will be placed initially at $45.10, just above the 21-dma ($44.52) and 50-dma ($45.02). A failed bounce at either of these levels, after giving a sell-signal at $42, could be viewed as an alternative entry point for more conservative traders, and certainly offers a more favorable risk reward if that scenario plays out. BUY PUT FEB-45 KO-NI OI= 7451 at $2.90 SL=1.45 BUY PUT MAR-45 KO-OI OI= 3775 at $3.50 SL=1.75 Average Daily Volume = 5.0 mil --- PNRA - Panera Bread Company $31.55 (-1.66 last week) Company Summary: Panera Brea Company, through its wholly owned subsidiary Panera LLC, operates bakery-cafes under the names Panera Bread and Saint Louis Bread Company. As of the end of 2001, the company had a total of 110 company-owned bakery-cafes and 259 franchise-operated units. The company specializes in meeting four consumer dining needs (breakfast, lunch, daytime and take home bread) through the provision of high quality food, including fresh baked goods, made-to-order sandwiches on fresh-baked bread, soups, salads, and custom roasted coffees. Why We Like It: One by one, the franchise names that demanded a premium in the market are losing their lustre. Combined with the weakness throughout the market, there are some attractive bearish trading opportunities to be found. PNRA is one of those franchise-related stocks that could seemingly do no wrong throughout most of 2002, with the two big selloffs in July and October only knocking the stock back to strong support near $24, before the buyers flooded back in. But things seem to be changing. The franchise king, McDonalds (MCD) has been pummeled to new multi-year lows as business is slowing and the company is having to scale back. Krispy Kreme (KKD) seems to be losing its appeal as well, with the stock getting pummeled on Friday after investors made it clear they don't favor the company's expansion plans. Things were looking alright for PNRA just over a week ago, as the stock was once again testing its all-time highs near $38, but then the first crack in the armor appeared on January 16th. The company released its same-store comps, which rose 3.5%, less than expectations of 4-5%. The resultant selloff dropped the stock back to strong support near $32 near the 200-dma by last Thursday, but that support couldn't hold in a strongly negative market, along with the negative action in KKD. PNRA dropped through that support level (which should now act as resistance) on Friday, and the $30 level looks like the next target on the downside. The PnF chart gave a Sell signal last week, and the bearish target from that vertical count is $26, right at the bullish support line, and just above strong support. A failed rebound early next week should provide for new entries, either at the 200-dma (currently $32.21) or near the $33.75 resistance level. If looking to enter on continued weakness, wait for PNRA to fall through the $31.40 level (just below Friday's low) in concert with continued broad market weakness. Initial stops are set at $34. BUY PUT FEB-32*UPA-NZ OI=641 at $1.95 SL=1.00 BUY PUT FEB-30 UPA-NF OI=906 at $0.90 SL=0.40 Average Daily Volume = 584 K --- TDS - Telephone and Data Systems, Inc. $42.75 (-2.45 last week) Company Summary: TDS is a diversified telecommunications service company with wireless telephone and wireline telephone operations. The company conducts substantially all of its wireless operations through United States Cellular Corporation and all of its wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corp. TDS, U.S. Cellular and TDS Telecom hold various investments in publicly traded companies, the majority of which were the result of sales or trades of non-strategic assets. Why We Like It: When AT&T released its dismal earnings report Wednesday night, it struck fear into the hearts of Telecom investors. Despite the broad market's ability to post a gain on Thursday, the North American Telecom index (XTC.X) got pressed right down to critical support at $450. That support didn't last long on Friday, as the broad market went into free fall at the open, slicing another 2.95% from the index and breaking support. While there is some more support near the 200-dma ($437), that won't hold for long if the rest of the market continues to behave as it did on Friday. It was just over a week ago that we were stopped out of our bearish play on TDS. And just to prove that Murphy is alive and well, the stock proceeded to roll over right at the 20-dma the very next day. Even after the AT&T earnings, it looked like the stock might hold support again at the $43.50 level, but those hopes were dashed on Friday as the stock broke to a new 52-week low. Turning to the PnF chart, Friday's decline generated another Sell signal, and we're still operating with a bearish price target of $30, quite a ways below current levels. Of course, in the heart of earnings season, the stock will likely continue to be weak ahead of the release of the company's quarterly report, currently scheduled for February 5th. That means we have about a week and a half for the bears to work their magic. Ideally, an oversold rebound next week will give us the best possible entry with a rally failure. There is now resistance at $44 and then $45.25. A rollover near either of those levels would give a solid entry into the play. But based on the action in the markets on Friday, we may not be so lucky and may have to content ourselves with entering on weakness. In that case, we'll look for a decline under $42.25 (just under Friday's intraday low) to trigger entry. Our initial stop is set at $45.50. BUY PUT FEB-45*TDS-NI OI=185 at $1.95 SL=1.00 BUY PUT FEB-40 TDS-NH OI=634 at $0.40 SL=0.20 Average Daily Volume = 215 K ------------------------------------------------------------ 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=oetics24 Note: Options involve risk. 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The Option Investor Newsletter Sunday 01-26-2003 Sunday 4 of 5 In Section Four: Current Put Plays: CTAS, CTSH, KSS Leaps: Deja Vu Traders Corner: New CPTI Position Activity – In & Out ------------------------------------------------------------ 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=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** 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: Ouch! It's starting to get rather ugly out there with investors cashing in some chips as Wall Street waits to hear the next step by Hans Blix and President Bush in this Iraqi inspired drama. CTAS suffered a 3% loss on Friday following similar losses in the Industrials and the Nasdaq Composite. Obviously, as bears in this play we're encouraged by the move, but the stock is so very short-term oversold we could see a big move up at any time. Therefore, we're adjusting our game plan a bit. First, we do not recommend any new shorts at this time. Second, we reiterate our exit price of $40.26. You may want to adjust yours to your liking. For you, the appropriate target may be $40.00 or $41.00. We are going to move our stop loss down to $42.27. This should protect a 5% gain in the play. Currently, OI has a 6.9% gain. Again, we stress that the stock looks very oversold despite the very bearish close under $42. In the news, Cintas Corp announced they were raising their annual dividend from 25 cents a share to 27 cents a share. The dividend is payable on March 14th to shareholders on record as of Feb. 7, 2003. BUY PUT FEB-50*NQQ-NJ OI= 829 at $9.10 SL=6.00 BUY PUT FEB-45 NQQ-NI OI= 762 at $4.30 SL=2.15 Average Daily Volume = 1.3 mil --- CTSH – Cognizant Technology Solutions $57.84 (-2.30 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: What was looking like it was going to be a rather rangebound end to the week, really resolved itself to the downside in a big way with Friday's big selloff. That selling pressure finally weighed on our CTSH play to give us the breakdown we were looking for. Well, sort of. The stock did break down below the 200-dma ($58.18) and Wednesday's low ($57.70), but it managed to squeak out a close above that intraday low, ending the day just below $58. What's a bear to do? Stick with the program. While we would have seen more follow-through to the downside with the broad market weakness, there's no arguing with the fact that there is little buying interest in the stock. And no wonder! There hasn't been so much as a blip in the PnF chart since the stock started sliding lower at the end of December. The high-volume (double the ADV) decline on Friday likely points to more downside ahead before we see a sustainable bounce, but we need to be careful about new entries on continued weakness with the ascending trendline at $55.50. Traders currently in the play may want to take some gains off the table on a drop to that level that fails to produce another breakdown. Should we get a rebound early next week, look for a failure of that rebound near the $60.75 level (failed support) to provide for new entries. Maintain stops at $61. BUY PUT FEB-60*UPU-NL OI=1433 at $4.80 SL=3.00 BUY PUT FEB-55 UPU-NK OI= 345 at $2.25 SL=1.00 Average Daily Volume = 572 K --- KSS - Kohl's Corporation $53.75 (-2.85 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: Investors looking for a continuation of Thursday's rebound on Friday were sorely disappointed with large losses across the board. While not even close to being at the top of the loser board, the Retail index (RLX.X) suffered some important technical damage with its drop through the $255 support level. Ending the week at $252.88, the RLX posted its lowest close since late 1998, and the selling looks likely to continue with expectations that the consumer is on the ropes. Our KSS play gave back nearly all of its Thursday gains, once again testing the early January lows, but not breaking them. In light of all the broken support levels in the market on Friday (even Retail giant WMT broke down below recent lows), it is somewhat puzzling that KSS didn't follow suit. Another point of concern is that selling volume was notably light, coming in at about two-thirds of the ADV. Another rebound from the $52.50-53.00 area next week would suggest harvesting at least partial gains on open positions and looking to see if the $55.50 level provides resistance once again. Traders looking to enter on a breakdown will want to see KSS falling under the $52 level on stronger volume, with the RLX index continuing to fall. We're keeping our stop at $56. BUY PUT FEB-55*KSS-NK OI=2851 at $3.20 SL=1.50 BUY PUT FEB-50 KSS-NJ OI=4624 at $1.30 SL=0.75 Average Daily Volume = 3.51 mln ------------------------------------------------------------ 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=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***** LEAPS ***** Deja Vu By Mark Phillips mphillips@OptionInvestor.com Apparently, I was a week early with last week's title of "Crash and Burn", as that is exactly what happened to the broad markets on Friday. Thursday's minor blip higher was reversed at the open and it was a steady bleed through numerous critical levels of support. Despite my skeptical attitude about the chart formation in recent weeks, the DOW and S&P indices solidly broke down through the necklines of their Head & Shoulders formation, setting the stage for another significant drop right in front of us. It feels like Deja Vu all over again, as the broad market action appears to be mirroring the breakdown we saw last September before the bottom fell out sending the major indices to new bear market lows. While most of the rest of the week's market action seems to have been driven by economic and earnings news, Friday's selloff was a clear reflection of war jitters. Rumors and warnings were flying furiously and prudent investors figured out that it was best to get out of the way rather than get caught unaware. While volume was nothing to write home about, it was severely tilted to the sell side by nearly 5:1 on the NYSE and nearly 7:1 on the NASDAQ. Giving form to this mass fear of the geopolitical unknowns that wait for us next week, the VIX soared more than 15% by the closing bell, ending the week at 35.77, falling back to close just above the December highs after rising to test major resistance near 37 during the day. Once again, we're zooming into the upper atmosphere on the VIX, without really getting anywhere near the lower edge of the historically normal range. In my mind, this is another data point that indicates the VIX is establishing a somewhat higher range. Whether it is permanent or temporary, I cannot say. But looking at the daily chart, it certainly appears that we are building a floor for this indicator near the 26 level, with the higher end of the range still to be determined. The top could be near the 37 level, where the VIX found a temporary top on Friday, or perhaps near the 40 level. The one thing I do know is that throughout the time period from 1998 through late 2002, the 200-dma of the VIX tended to oscillate around the 25-26 area, sometimes rising as high as 29-30, and sometimes dropping as low as 23.50. But throughout that period of time, it remained confined to this range. But something interesting happened in the latter half of the year we just closed out. The VIX soared above 30 in early July and it took nearly 4-1/2 months to come back under that level. In the intervening span of time, the 200-dma rose through the 30 level for the first time ever and continues to rise, now at 33.01. I looked at all the historical data for the VIX, and found that it has never been more than 8 points below its 200-dma. That occurred back in July of 2001, with the VIX at 20 and the 200-dma at 28. Doing a quick calculation from that difference, I come up with a minimum possible VIX (with the 200-dma at 33) of 25. Allowing for the increase in the baseline with the 200-dma now at 33 (a percentage increase of just under 18%, I come up with a maximum possible deviation from the 200-dma of 9.4. That means that with the 200-dma at 33, the absolute minimum VIX we could see would be around 23.5. Any number of explanations for the rising VIX can be put forward from increased hedge fund activity, to overall uncertainty about the economy and the geopolitical situation. But the reason is unimportant. In my mind, what is important is that the range of the VIX is rising, and I dare say it will be many years (if ever) before we see a VIX in the teens again. The reason I spent so much time on the VIX this weekend, is I believe it is one of the few things about which we can really draw any fresh conclusions. The market's broke down, but largely on rising geopolitical tensions. My gut feel is that the breakdowns are significant and we're headed lower over the near term. Clearly positive earnings and economic reports (rare as they may be) are having no influence in the marketplace. On the other hand, bad news is just adding one more reason to sell. I don't see this behavior changing until the whole Iraq situation is resolved, either through war or some peaceful (dare we hope?) solution to the apparent impasse. The past 2 weeks have been exceedingly frustrating for me with respect to the LEAPS Watch List and Portfolio. It seems that I've been stopped out of plays just before they reversed in my direction and then missed entries going the other way. Last week we were stopped out of our GM Put play when it closed at $40.50, just above our $40 stop. That was the high for the move, and GM is back down near the $37 level. How about the BBH Put play that stopped us out near $93, and has since proceeded lower, now back at support near $89.50. Don't get me wrong. I did the right thing by exiting the plays on the violated stops, but it is frustrating to be right and still lose. But that frustration pales in comparison to my chagrin at not being in the DJX and GS put plays that are still sitting idle on the Watch List. Two weeks ago, the market fooled me into raising the listed entry points on both of those plays, as it looked like we were going to test the December highs. At the same time, I neglected to list a lower entry point that would get us into the plays on a breakdown. The rest as they say is history, as the DJX and GS have been falling ever since, with the DJX now down $6-7 from our original listed entry and GS down $5-6 in the same period of time. As a result, both plays are deep into the 'profit' zone that I had originally expected, but they managed to do so without the Portfolio managing to take an official entry. Our new Put play on IBM last week suffered the same fate, refusing to give us so much as even a mild bounce near resistance to provide entry, instead falling throughout the week to close down more than $2 on the week. Three put plays where I was absolutely right on direction, but erred significantly on execution. Such are the frustrations of trying to manage plays on a weekly basis in such an uncertain market. It was my intention to better manage the plays through regular updates in the Market Monitor, but my initial attempts to do so have not come close to my aspirations. Between technical difficulties with my computer setup and other distractions, I failed to notice and point out those important inflection points when they did in fact occur. My only consolation is the significant number of emails I have received over the past week from some of you, telling me how you entered some of these plays and have actually done quite well so far. I think that is the real success story that lifts my spirits. Not just that many of you are profiting from some of the recommendations that I've been making, but that you've learned to fish for yourselves. If nothing else, this column is about education. I try to point out what to look for to pinpoint attractive plays, as well as how to manage entries and exits from those plays. The fact that many of you are currently in those plays even while the LEAPS Portfolio has remained on the sidelines, tells me that I'm actually doing some good. For those of you (like me) who are frustrated with not entering those plays, I offer two lessons that I hope will be useful. 1. It is possible to find attractive, profitable trades, even in such a schizophrenic market as we are currently faced with. 2. There will always be another trade lurking just around the corner. If you missed this one, don't chase it. Just wait for another decent entry into the play, or look for another one. Now that I've finished baring my soul, let's actually take a look at the current list of plays and see what we can find as possible action points in the week ahead. Portfolio: NEM - Well, how about that! Not only did Gold hold its ground last week, but with rising geopolitical tensions and the disastrous decline in the dollar, Gold shot higher throughout the week, dragging the shares of mining stocks with it. By the end of the week, the February Gold Futures contract (GC03G) came to rest just over $368, after testing the $370 level. That's a nice breakout from the $345-355 consolidation through much of the past month. For those of you keeping score at home, that's the best level for the yellow metal since January of 1997. The bull market here is very much alive and well. With such a stellar move, it may seem somewhat puzzling that NEM couldn't break out over the $30 level last week. In reality, we need to remember that despite being tied to the gold market, NEM is still a gold stock, and stocks are currently getting whacked. I see nothing on the price charts of NEM that suggest that it isn't going to break higher from here, but the geopolitical situation will be the key over the short term. If the expected conflict with Iraq is postponed, then look for weakness in gold and NEM following that development. If the situation escalates though, then gold should continue higher and NEM should very quickly follow, moving up to the next level of resistance in the $32-33 area. On the downside, the 200-dma ($27.28) is still the key line of defense, with the 50-dma ($26.99) rising to lend further support. Traders that don't want to give back their gains may want to consider taking some of those gains off the table either near current levels or on the first sign of weakness. I still think gold is headed significantly higher over the intermediate term so I don't want to exit without a technical violation. Official stops remain at $27. MO - It appears I spoke too soon last week, when I got excited about MO's ability to get over that ascending trendline. I should have taken the time to look at the PnF chart, which would have told me that the $43 level (bearish resistance line) was the more important level with which we need to be concerned. MO was firmly rejected from the $42 support level on Tuesday and a sharp and painful slide ensued, with the stock falling back to end just below $39 and not very far above where we initially entered the play back in the middle of November. To be honest, this week's decline concerns me, as it came in the absence of any company-specific news. It was just jitters in the broad market, but that could be the straw that breaks this camel's back. The real test will be to see what the company has to say in its earnings report on Wednesday morning. Good news could give us another bounce, while bad news likely breaks the $37 support level and stops us out of the play. Conservative investors may want to exit near breakeven before the report, but we're going to stay the course, keeping our stop at $37. If the market wants us out of this play, it's going to have to prove its intentions through price action. DELL - Ever have one of those decisions you wish you could have back? The entry into the DELL play up near the 200-dma is one of those for me. Quite honestly, I just got too impatient, as the stock is now down vacillating near the $24 level. The ascending triangle that had been building since September 2001 has been broken and the stock is resting precariously on the bullish support line ($24) on the PnF chart. There hasn't been the slightest hint of the fabled PC replacement cycle yet, and with the markets continuing to weaken, DELL is falling back into this area of major support. Entering the play near current levels is aggressive, but I think favorable on a risk/reward basis. With our stop set at $23 (which is the level at which the PnF chart generates a Sell signal), this play could still prove to be a significant winner, if DELL can hold support and then recover. Watch List: DJX - As I mentioned above, I've badly mismanaged this Watch List play, missing the solid entry provided with the rollover near $88. Friday's plunge through the H&S neckline seems to have sealed its fate, and I'm now looking for the DJX to fall back near the $75 level in the weeks ahead. That said, I don't think it makes sense to chase price lower for a longer-term play. It could head lower from here, but I'm looking for a relief bounce from either current levels (the 50% retracement of the October-December rally) or possibly $80. That rebound will provide the next attractive entry into the play, possibly with a rollover near the $83 level as support now becomes resistance. For those of you that entered when the DJX rolled over, I would recommend lowering stops to $84, as a rebound above that level would indicate a rejection of the H&S neckline break. BEAS - Showing amazing resilience last week, BEAS actually popped up from the $11.50 support level and briefly traded above $13 before sliding lower again on Friday. While that is actually a good sign, if the stock rolls over again, we'll be looking at another test of that support level, which could very well fail on the next test. Since the rest of the market is looking very weak, I don't want to get aggressive on entries here. Let's keep our entry nice and low. If the $11.50 level does fail as support, we could be looking at a minor H&S breakdown, with a measuring objective to the $9 level. That is the lower edge of our current entry target, and in my mind, much stronger support. Let's keep our entry target set at $9-10 for now. Those with a more aggressive approach can consider entering on another successful rebound from the $11.50 level, with additional support likely to be provided by the 50-dma ($11.29), but with the weekly Stochastics divergence in play, I think the more conservative approach is the better way to play. GS - Sometimes you can be right and still miss the boat. That was the case with our GS play, as I foolishly lifted the entry target last weekend and neglected to list a lower target as an alternative. GS continued to lose ground throughout the week, losing the battle with the $70 support level, and I would expect it to now act as resistance. For those of you that entered the play on the rollover from the $74 level, I would trail stops to the point of entry. There's no point in giving back those gains after getting such a good entry. Officially, GS is still on the Watch List and will remain there unless we can get another rally failure to allow us into the play. The best chance for a bounce-related entry looks to be the $71-72 area, with the 20-dma ($71.51) now likely to provide resistance. Note that the PnF bullish support line is currently at $68, and with the $67-68 level of the December lows likely to provide at least temporary support, I wouldn't want to consider new entries near current levels. QLGC - QLGC has been a rather interesting stock over the past week. I put in on HOLD after the dismal post-earnings price performance, but it has amazed me by holding above the $35 support level. Could we be looking at a favorable entry point here? I'm tempted to say yes, but only for aggressive traders. There is a lot of overhead resistance now in the $37-42 area, due to all those gaps and all of the moving averages in the $38-39 area. I'm going to err on the side of caution and keep the play on HOLD for one more week. Another rebound from the $35 level looks good for the bulls, while a breakdown will have this one making its way to the Drop list next weekend. For those aggressive players, look to enter on a bounce as near as possible to the $35 level, but only if the NASDAQ manages to hold above its late December lows. If the NASDAQ loses support, then QLGC is likely going to break support and we'll have to look down to the $30 level as the next possible support. IBM - IBM was looking awfully weak on the heels of its earnings report and it was. After adding the play last weekend, the stock has continued to drift lower and has now violated the ascending trendline from the October lows. Despite that weakness, I'm hesitant to chase it lower for new entries. Rather, I'm still hopeful for an oversold bounce to take the stock up to measurable resistance, where we can enter on that failure at resistance. Look for the $77-78 area to provide the support for that bounce, with our desired entry now in the $83-84 area. That's aggressive I know, but the bottom of the post-earnings gap should now provide strong resistance. I actually had two new Watch List plays already written up mid-week on the expectation that the broad market would hold support and stay in its recent range. Needless to say, the markets broke down and I pulled the new plays from the column this weekend. The over-riding factor influencing the market right now is geopolitical and I really can't see which way it is going to play out. Quite honestly, I don't think anyone can. That said, it is exceedingly risky to try to pick new plays that are more than a gamble on the near-term political developments. I've endeavored to make this column focus on education and preservation of capital. Once we've done those two jobs effectively, we will be in a much better position to tackle the secondary function of growing our respective trading accounts. Next week should provide us with much greater clarity and I'll share some new play candidates with you at that time. Depending on how things shake out mid-week, I may even give some early indication of what to expect in the Market Monitor Have a great weekend. Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None NEM 10/30/02 '04 $ 30 LIE-AF $ 3.90 $ 5.50 +41.03% $27 '05 $ 30 ZIE-AF $ 6.10 $ 7.80 +27.87% $27 MO 11/13/02 '04 $ 40 LMO-AH $ 3.90 $ 3.50 -10.26% $37 '05 $ 40 ZMO-AH $ 4.80 $ 4.90 + 2.08% $37 DELL 12/19/02 '04 $ 30 LDE-AF $ 3.70 $ 2.15 -41.89% $23 '05 $ 30 ZDE-AF $ 6.10 $ 4.30 -29.51% $23 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BEAS 12/22/02 $9-10 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 $ 40 KGM-AH CC JAN-2004 $ 35 KGM-AG JAN-2005 $ 40 ZBG-AH CC JAN-2005 $ 30 ZBG-AF PUTS: DJX 12/08/02 $83-84 DEC-2003 $ 80 DJX-XB DEC-2004 $ 80 YDJ-XB GS 12/22/02 $71-72 JAN-2004 $ 70 KGS-MN JAN-2005 $ 70 ZSD-MN IBM 01/19/03 $83-84 JAN-2004 $ 80 LIB-MP JAN-2005 $ 80 ZIB-MP New Portfolio Plays None New Watchlist Plays None Drops None ************** TRADERS CORNER ************** New CPTI Position Activity – In & Out By Mike Parnos, Investing With Attitude It was bound to happen sooner or later. We got into trouble. No, we don’t have to attend Lamaz classes. It was not BIG trouble, but even little trouble sometimes requires a shot or two of penicillin to make it better. The syringe is poised. Now, turn the other cheek. Let’s inject a little insight. We picked a damn direction and we were right. This just shows to go you that even picking a direction, and being right, can still get you into trouble. Our timing was off a little. In our XAU calendar spread position, we thought that this gold and silver index was going to work its way higher – not taking off like a bleeping NASA space shuttle. XAU moved up to the point where the deltas for the February $80 calls became higher than the deltas for the June $80 calls. That means we were about to start losing money. That’s a definite No- No at the Couch Potato Trading Institute (CPTI). We know when it’s time to get the hell out of Dodge – and that time was today. We’ll leave the shootout at the OK corral to the gunslingers and live to trade another day. Our cost to enter the XAU trade was $4.85. We were able to unwind the trade and took in $4.60. So, as traumatic as it may be for some, we incurred a loss of $.25 x 10 contracts = $250 plus a few commissions. (See the “how to” of how we exited this position in the letter below). What was the alternative? To sit tight and hope? That’s for the gamblers. ______________________________________________________________ Hi Mike, I've been trying to get out of the XAU all morning (Friday) with no success. I guess I'm trying to be too cheap and minimize loss (if any). My question is, do you use any interday time periods (i.e. 60-min charts etc.) to help time your entries? I noticed that timing your entries is important for stock trading and VERY important when trying to use puts or call on directional trades. Because of the frustration with trying to trade options on a directional basis, I've come to the sell premium side of the equation. Have a good day and I’m looking forward to this weekend’s article and suggestions. Response: 1. First, when I am legging into, or out of, a position, I will pay attention to the interday 2-minute charts. I look for trends, support or resistance levels, and volume spikes. It’s essentially the same process I use when looking for potential trades. It’s just basic charting. It’s a little risky, though. If a support or resistance line doesn’t hold, and you’ve entered into one leg of a spread, you may end up with a smaller credit, or larger debit than you desired. That’s why I recommend that newer traders, who have an online account and the ability to direct their orders to specific exchanges, to simply take the instant fill at the best bid and the best ask the respective exchange. 2. When trying to exit the XAU, remember that it only trades on the Philadelphia Exchange. That gives you a little flexibility in exiting the position. If you were to exit right now at the posted best bid and best ask, you would get $4.50. However, you notice that the spread on the Feb. $80 is $4.70/$5.20 (a $.50 spread). There's a similarly high spread on the June $80 of $9.70/$10.40 (a $.70 spread). Before you settle for the $4.50, let's try and snatch a little out of those huge spreads. To do this, you would have to place a spread order for a limit of $4.70. In essence, that would be taking an extra $.10 from each option for a total of $.20 higher than the posted $4.50. It's worth a try and might lessen the already small loss. If, after about 15 minutes, you don’t get filled, you can reduce your credit slightly and try again. There is a good chance that you’ll be able to improve upon the posted bid/ask spread. You should be able to get “between the spread” without first having to buy wine and dinner. ______________________________________________________________ New Position #1: BBB Iron Condor – A Narrower Range. An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The collected premium will come into your account the very next business day. The objective is for the underlying, at expiration, to finish anywhere within the spread. Since it worked so well in recent months, we’ll use BBH (Biotech Index) again. Friday it closed at $91.40. There is decent support at $85 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 (10 points) to bounce around for the next four weeks. So we will: Sell 10 contracts of the BBH Feb. $85 puts (BBHNQ) @ $1.55 Buy 10 contracts of the BBH Feb. $80 puts (BBHNP) @ $.70 Sell 10 contracts of the BBH Feb. $95 calls (BBHBS) @ $1.10 Buy 10 contracts of the BBH Feb. $100 calls (BBHBT) @ $.40 The credit for our bull put spread is $.85 and for the bear call spread is $.70. Total credit (and potential profit) for the position is $1.50. Risk is $3.45 ($5.00 - $1.55). Total margin requirement is $10,000 ($5,000 for each credit spread). The position is a little more aggressive than last month’s because the maximum profit range is 10 points compared to last month’s 15-point range. Our maximum profit potential, for 10 contracts, is $1,550. _____________________________________________________________ New Position #2: MMM Iron Condor – Let’s Try A Narrower Range. We’ve used MMM before successfully. Friday it closed at $126.35. The support at $120 once again seems strong, as does the resistance at $130. Enough. That should give MMM enough room (10 points) to bounce around for the next four weeks. So we will: Sell 10 contracts of the MMM Feb. $120 puts (MMMND) @ $.85 Buy 10 contracts of the MMM Feb. $115 puts (MMMNC) @ $.40 Sell 10 contracts of the MMM Feb. $100 calls (MMMBF) @ $.80 Buy 10 contracts of the MMM Feb. $105 calls (MMMBG) @ $.35 The credit for our bull put spread is $.55 and for the bear call spread is $1.05. Total credit (and potential profit) for the position is $1.60. Risk is $3.40 ($5.00 - $1.60). Total margin requirement is $10,000 ($5,000 for each credit spread). The maximum profit potential, for a 10-contract position will be $1,600. _____________________________________________________________ Close Is OK I realize that on Monday, due to stock movement and another two days of time erosion, the credit for the above spreads might be a little more or less. If you come within $.10 or $.15 of the projected credit amounts, it’s still an acceptable trade. _____________________________________________________________ Update On Other Current CPTI Portfolio Positions: Position #3 – SMH Straddle – Currently trading at $22.20 We bought the SMH May $22.50 puts and calls and spent $5,850 on 10 contracts. 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). 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. ______________________________________________________________ Position #4 -- QQQ ITM Strangle – Currently trading at $24.82. This is a 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. ______________________________________________________________ My Opinion – (Of Course! What Else Would You Expect?) The market seems to be shrugging off bits of good news and showing signs of weakness. Although I don’t particularly care which direction it goes, I’m obviously bearish. ______________________________________________________________ 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 ------------------------------------------------------------ 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=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** 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 01-26-2003 Sunday 5 of 5 In Section Five: Covered Calls: What is a Covered Call? Naked Puts: Position Adjustment Techniques Spreads/Straddles/Combos: The Path Of Least Resistance! Updated In The Site Tonight: Market Watch: Feeling Heavy Market Posture: KO’d ------------------------- 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 ----------------------------------------------------------------- ************* COVERED CALLS ************* Trading Basics: What is a Covered Call? By Mark Wnetrzak This week, we continue with our review of the fundamentals of option trading. Many investors view options as highly speculative, risky investments. However, there are several options strategies that are conservative and one such strategy is covered-call writing. Investors write covered-calls for several reasons: to realize additional income (cash flow) on the underlying stock by earning premium income; to provide a measure of downside protection against small declines in the price of the stock; and to yield a consistent monthly return even if the share price of the underlying stock remains unchanged. Covered call writing is usually considered to be a more conservative strategy than just stock ownership, because the investor's downside risk is reduced by the amount of the premium received for selling the call. Generally, the covered-call strategy requires a neutral to slightly bullish outlook as one must be willing to limit the upside potential of stock ownership in exchange for some downside protection. Any investor, using sound money management, can profit from the strategy. The covered call writer either buys stock and simultaneously sells calls against the shares purchased (a "buy-write" order), or sells calls against common stock that is already owned. Generally, 100 shares of the underlying stock "cover" one call-option contract at the stated exercise (striking) price. For example, if you owned 500 shares of XYZ stock, you could sell up to 5 contracts of an XYZ call option. If the share price of XYZ stock was $11.00: you might sell (write) an in-the-money (ITM) XYZ call option at the $10.00 or $7.50 striking price; or you could sell an out-of-the-money (OTM) XYZ call option at the $12.50 or $15.00, or higher striking price. You can also choose near-term option series such as the current month, or longer-term series such as a few months out to a year or more (LEAPS), depending on your outlook. Once an option series (strike price and expiration period) has been selected, the seller of the call option is "paid" for the obligation to provide the underlying stock at the striking price of the sold option, if assigned. An investor should be prepared to deliver the common stock shares, if assigned, at any time during the life of the option (early assignments are rare but do happen). To avoid losing the stock, an investor may cancel or remove the obligation by closing the short position (buying-back the sold call in the same series with identical terms). The primary disadvantage of the covered-write strategy is the limited profit potential. Remember, a covered-call writer is willing to give up share value increases above the sold option strike price in return for the money received from the sale of the call. Thus, an extremely bullish move in the underlying stock can be quite disheartening to a covered-call writer. At the same time, there is risk of loss in all forms of trading and although covered-calls "hedge" against downside movement in the stock, they are not a panacea for protracted bearish activity in the market. The main benefit of writing "covered" calls is that different approaches to the strategy can meet the needs of a wide range of investors and in addition, it is one of the few option trading techniques usable in retirement accounts (IRAs/KEOGHs). If you are considering using covered-calls in your portfolio, you simply need to ask yourself, "Do I want to get paid for trying to sell my stock at a predetermined price, which sacrifices upside potential in return for downside protection?" If the answer is "yes," then the strategy may be appropriate for you. 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 ORB 5.02 5.38 FEB 5.00 0.35 0.33* 6.1% EMIS 5.44 5.16 FEB 5.00 0.75 0.31* 5.7% MMR 7.92 7.35 FEB 7.50 1.00 0.43 5.4% ALA 5.76 7.03 FEB 5.00 1.10 0.34* 5.3% WEBM 10.89 11.63 FEB 10.00 1.55 0.66* 5.1% ALO 16.00 16.15 FEB 15.00 1.95 0.95* 4.9% MEDC 9.26 8.88 FEB 7.50 2.15 0.39* 4.8% REGN 21.27 20.63 FEB 20.00 2.30 1.03* 4.7% JDEC 13.86 12.83 FEB 12.50 2.05 0.69* 4.2% MEDC 9.31 8.88 FEB 7.50 2.20 0.39* 4.0% ALKS 8.07 7.38 FEB 7.50 1.00 0.31 3.8% GSPN 5.62 4.75 FEB 5.00 1.00 0.13 2.0% LMNX 5.16 4.60 FEB 5.00 0.60 0.04 0.8% * = Stock price is above the sold striking price. Comments: The major averages falter and threaten to test the October lows as the dogs of war begin to stir. I just have one question: What ever happened to finding Osama? Okay, enough politics. The covered-call portfolio has held up fairly well as the sky darkens, though a few issues are threatening to break support. Next week should be very interesting indeed, and a disciplined approach to money management could be the key to preventing a serious drain on one's portfolio. Identify your early exit or adjustment watch-list and then follow your plan. As I said last week, sitting on the sidelines can be a good thing. 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 ABMD 4.97 FEB 5.00 IBU BA 0.45 20 4.52 28 10.8% ADLR 13.45 FEB 12.50 UAH BV 1.45 2 12.00 28 4.5% CBST 7.63 FEB 7.50 UTU BU 0.70 392 6.93 28 8.9% EFII 17.46 FEB 17.50 EFQ BW 0.70 62 16.76 28 4.5% FTS 8.39 FEB 7.50 FTS BU 1.20 60 7.19 28 4.7% GFI 15.25 FEB 15.00 GFI BC 1.05 2576 14.20 28 6.1% LSS 15.01 FEB 15.00 LSS BC 0.80 19 14.21 28 6.0% 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 ABMD 4.97 FEB 5.00 IBU BA 0.45 20 4.52 28 10.8% CBST 7.63 FEB 7.50 UTU BU 0.70 392 6.93 28 8.9% GFI 15.25 FEB 15.00 GFI BC 1.05 2576 14.20 28 6.1% LSS 15.01 FEB 15.00 LSS BC 0.80 19 14.21 28 6.0% FTS 8.39 FEB 7.50 FTS BU 1.20 60 7.19 28 4.7% ADLR 13.45 FEB 12.50 UAH BV 1.45 2 12.00 28 4.5% EFII 17.46 FEB 17.50 EFQ BW 0.70 62 16.76 28 4.5% 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). ***** ABMD - Abiomed $4.97 *** Implants Resume *** Abiomed (NASDAQ:ABMD) is a developer, manufacturer and marketer of medical products designed to safely and effectively assist or replace the pumping function of a failing heart. The company's FDA-approved BVS is an advanced heart assist device used for temporary treatment of heart failure patients. ABMD is seeking to commercialize its AbioCor Implantable Replacement Heart and the Penn State Heart, two heart replacement systems that are under development. AbioCor is a battery-powered implantable replacement heart system, and the Penn State Heart is a smaller device intended to serve end-stage heart failure patients similar to those addressed by the AbioCor. The company is also in the early stages of research and development for other potential products for heart failure patients. Abiomed rallied this week after a second artificial heart was implanted; the second time this year after a nine-month pause. We simply favor the support area near the cost basis and this position offers a conservative way to speculate on the company's future. FEB 5.00 IBU BA LB=0.45 OI=20 CB=4.52 DE=28 TY=10.8% ***** ADLR - Adolor $13.45 *** New Drug Speculation *** Adolor (NASDAQ:ADLR) is a therapeutic-based biopharmaceutical company engaged in the discovery, development and commercialization of proprietary pharmaceutical products for the treatment of pain and the side effects that are caused by current pain treatments. The company has a portfolio of small-molecule product candidates that are in various stages of development. Adolor's lead product candidate, alvimopan (ADL 8-2698), is designed to selectively block the effects of narcotic analgesics on the gastrointestinal tract. The company's initial drug discovery and development activities focus on three aspects of pain management: reversal or prevention of gastrointestinal effects of narcotic analgesics administered during or following surgical procedures or for the treatment of pain; novel mu and kappa opioid receptor-based analgesics that act on peripheral opioid receptors and not in the central nervous system, and narcotic analgesic products with significantly reduced side effects. The company expects to announce results late in this quarter of its recently completed enrollment of the first Phase 3 trial of alvimopan. Two other Phase 3 clinical studies continue to accrue patients and the company expects their enrollment will be completed later this year. The chart of Adolor depicts a 5-month trading range with little movement expected until the trial results are released. Investors can use this position to profit on the current trend at the risk of owning ADLR stock. FEB 12.50 UAH BV LB=1.45 OI=2 CB=12.00 DE=28 TY=4.5% ***** CBST - Cubist $7.63 *** What's Up? *** Cubist Pharmaceuticals (NASDAQ:CBST) is a pharmaceutical company focused on the research, development and commercialization of novel anti-microbial drugs to combat serious and life-threatening bacterial and fungal infections. Cubist is conducting multiple Phase III trials for Cidecin, its lead product candidate in a new class of anti-microbial drug candidates called lipopeptides. The company is also conducting trials for oral formulations of ceftriaxone and daptomycin, and initiated a lipopeptide program aimed at discovering other clinically useful lipopeptides. There is no news out yet to explain the rally this week in Cubist. I first profiled this play on Thursday in the Market Monitor as the rally on increasing volume with a support area around $6.50 made for a reasonable risk-reward scenario. The current technical outlook is recovering and our position offers an excellent reward potential at the risk of owning this issue at a favorable cost basis. FEB 7.50 UTU BU LB=0.70 OI=392 CB=6.93 DE=28 TY=8.9% ***** EFII - EFI $17.46 *** Earnings Rally *** Electronics For Imaging (NASDAQ:EFII) designs and markets products that support color and black-and-white printing on a variety of peripheral devices. The company's products incorporate hardware and software technologies that transform digital copiers and printers from copier manufacturers into fast, networked printers. EFI's products include stand-alone servers, which are connected to digital copiers and other peripheral devices, and controllers, which are embedded in digital copiers and desktop color laser printers. EFI rallied this week after the company reported a slight rise in 4th-quarter earnings. The company reported net income of $7.9 million and revenues of $90.7 million and also said it was comfortable with earnings estimates for the next quarter. We simply favor the strong move on heavy volume and the solid support area near our cost basis. Market permitting, the stock will likely move higher and this play offers a method to participate in the future movement of the issue with relatively low risk. FEB 17.50 EFQ BW LB=0.70 OI=62 CB=16.76 DE=28 TY=4.5% ***** FTS - Footstar $8.39 *** Kmart Recovery Will Help *** Footstar (NYSE:FTS) is a holding company that directly and or indirectly, through its wholly owned subsidiaries, owns the capital stock of the subsidiaries that operate its discount and family footwear segment (Meldisco), athletic footwear and apparel segment (Footaction and Just For Feet) and its discontinued Thom McAn segment. The company is principally a specialty retailer conducting business in the discount and family footwear segment through its Meldisco business, and in the branded athletic footwear and apparel segment through its Footaction and Just For Feet businesses. The newly acquired J. Baker licensed footwear departments have been combined with and reported in the Meldisco segment. Footstar shares surged last week after Kmart said that it was closing fewer stores than Wall Street had expected. Kmart is Footstar's largest venue for sales of its shoes and the company had already downplayed the effect of the Kmart closings. Cheap speculation on a recovering stock with a cost basis near technical support. FEB 7.50 FTS BU LB=1.20 OI=60 CB=7.19 DE=28 TY=4.7% ***** GFI - Gold Fields $15.25 *** A Golden Hedge *** Gold Fields (NYSE:GFI) is a precious metals producer with annual attributable gold production of 4.1 million ounces and mineral resources of 187 million ounces, as well as mineral reserves of 79 million ounces. The company has operations in South Africa, Australia and Ghana, as well as gold and platinum group metals exploration projects in Africa, Australia, Europe, North America and South America. Gold Fields' operations are structured into two areas: South African Operations and International Operations. The South African Operations comprise the Driefontein, Kloof and the Free State divisions, while the International Operations encompass St. Ives and Agnew in the Australia Division and Tarkwa and Damang in the Ghana Division. Gold Fields continues to move higher and is near blue-sky territory (above all resistance). This position is a reasonable 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 15.00 GFI BC LB=1.05 OI=2576 CB=14.20 DE=28 TY=6.1% ***** LSS - Lone Star $15.01 *** A Crude Hedge *** Lone Star Technologies (NYSE:LSS) is a domestic manufacturer and marketer of welded "oil country tubular goods," which are steel tubular products used in the completion and production of oil and natural gas wells. Lone Star is a manufacturer of line pipe, which is used in the gathering and transmission of oil and natural gas. In addition, the company is a manufacturer of specialty tubing products used in power technology, automotive, construction, agricultural and industrial applications. Lone Star has been forging a Stage I base as the company has suffered from reduced demand and higher steel prices. With the IRAQ and Venezuelan situations pushing oil prices higher (and an expected drop in steel prices), demand for Lone Star's products should improve. Investors who expect oil exploration to increase under the current geopolitical environment can use this position to hedge against further erosion in the broader equity markets. FEB 15.00 LSS BC LB=0.80 OI=19 CB=14.21 DE=28 TY=6.0% ***** ***************** 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 SINA 10.38 FEB 10.00 NOQ BB 1.15 37 9.23 28 9.1% SEAC 7.64 FEB 7.50 UEG BU 0.70 58 6.94 28 8.8% LEXR 5.32 FEB 5.00 EQG BA 0.65 4 4.67 28 7.7% VRTS 18.30 FEB 17.50 VIV BW 1.75 15547 16.55 28 6.2% COF 31.52 FEB 30.00 COF BF 3.00 2950 28.52 28 5.6% AFC 13.50 FEB 12.50 AFC BV 1.60 120 11.90 28 5.5% EMIS 5.16 FEB 5.00 MTQ BA 0.40 195 4.76 28 5.5% CTLM 3.29 FEB 2.50 UUM BZ 0.90 0 2.39 28 5.0% RGLD 26.67 FEB 25.00 MJQ BE 2.75 966 23.92 28 4.9% KOSP 19.06 FEB 17.50 KQW BW 2.30 381 16.76 28 4.8% POWI 21.21 FEB 20.00 QPW BD 2.05 73 19.16 28 4.8% GLG 12.98 FEB 12.50 GLG BV 1.00 4103 11.98 28 4.7% ***************** NAKED PUT SECTION ***************** Option 101: Position Adjustment Techniques By Ray Cummins One of our readers with a losing position asked for some guidance on exit and adjustment strategies. Attn: Naked-Puts Editor Subject: Saving a "Losing" Naked-Put Hey Ray, The market sell-off has put me in a bad spot with one of my (not yours) naked puts. I sold some $15 puts on ISSX and the stock went below my strike price after they reported earnings. What can I do to get out of this one with my shirt on? Also, what about early assignment? Am I in danger of getting the stock before expiration since my puts are in the money? Any help is much appreciated! TG Hello TG, First, let me say this is a good example of why you shouldn't sell puts on stocks you don't want to own. In fact, most of the stocks I have been assigned in the past were not the best choices for my long-term portfolio. The idea of selling excess "premium" simply overcame my good judgment during the decision-making process. At this point, there are no magic answers to your situation. Any action relative to an exit or roll-out strategy is best initiated before the issue moves through the sold strike price. Obviously, that was not possible in this case due to the sharp decline. Now the alternatives are based simply on your outlook for the stock. The most obvious choices options are: close the put for a loss, roll down to a lower strike and/or forward to a future expiration date, or plan to accept assignment of the underlying shares in anticipation of future upside potential (which may also include writing covered-calls). Of course there are other, more complex adjustment strategies but they usually include too much downside risk to warrant their use. As far as simple roll-outs (forward/downward adjustments) in a bullish (short) put position, it is probably best to transition to the closest available month, so that you can sell the highest relative premium and not commit to a long-term position. If you do not want to take a loss in the near term, roll-out as far as necessary to achieve a credit in the trade. However, I caution against using this technique on issues that are not high quality (long-term) portfolio companies, as you can quickly run out of downside margin if the stock declines further. When the issue has moved well below the sold strike, this technique is not viable (you have waited too long to act) and another form of loss control is necessary. Most importantly, you should understand that the success of a limited risk strategy such as selling naked puts is based (in the long run) on limiting losses to a minimum. There are never any big winners to offset the big losers, so there can't be any big losers. Occasionally, a losing trade will wipe out a large portion of your gains and there is nothing you can do about it. But, at the same time, you must attempt to manage every other play in your portfolio effectively or there will be no profits to offset the rare (catastrophic) losers. As far as early assignment, only in rare cases will the stock be "put" to you prior to expiration. Beyond the occasional random assignment, the underlying issue for a sold put would have to be "deep" in the money before there was a significant probability of early exercise and by that time, adept position management would have forced you to exit (or cover) the play to avoid large losses. Of course, there is always the occasional "gap-down" issue which simply can't be avoided, and that is why you are required to have a specific amount of money in your account; for the obligation of purchasing the stock if it becomes necessary. In reality, you are more likely to use the funds to close the position under adverse circumstances. There are other ways of offsetting a short stock position (if you are assigned). For example, you might buy some lower strike puts and exercise them -- still a loss, but generally cheaper than actually buying and selling the stock on paper. That method is just one of the many ways a (personal) broker might help you resolve a condition that requires additional funds to close a particular "play gone bad." Regardless of the approach you favor, make sure you completely understand the manner in which your broker handles early exercise and assignment. This will allow you to make timely decisions, before the price of the underlying issue changes for the worse. 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 SEPR 12.99 12.21 FEB 10.00 0.35 0.35* 10.3% 3.2% TVX 15.08 16.98 FEB 12.50 0.40 0.40* 9.0% 2.9% IMPH 21.53 20.84 FEB 20.00 0.75 0.75* 8.3% 3.4% FEIC 18.94 15.30 FEB 15.00 0.45 0.45* 7.7% 2.2% SEPR 13.20 12.21 FEB 10.00 0.30 0.30* 7.4% 2.2% CURE 17.49 17.06 FEB 15.00 0.40 0.40* 7.1% 2.4% VECO 15.39 14.50 FEB 12.50 0.35 0.35* 7.0% 2.1% CVC 19.44 17.65 FEB 15.00 0.40 0.40* 6.8% 2.0% FTE 24.40 25.50 FEB 20.00 0.45 0.45* 6.7% 2.0% XLNX 25.75 20.86 FEB 20.00 0.50 0.50* 6.4% 1.9% GTRC 19.63 19.19 FEB 17.50 0.45 0.45* 6.3% 2.3% COF 39.00 31.52 FEB 30.00 0.65 0.65* 5.6% 1.6% ANF 27.11 26.29 FEB 22.50 0.40 0.40* 5.2% 1.6% NET 20.18 15.55 FEB 15.00 0.30 0.30* 5.0% 1.5% * = Stock price is above the sold striking price. Comments: Friday's slump confirmed a renewed downward trend in the equity markets and with the gloomy outlook for the economy, the slump could continue long into the future. With that viewpoint in mind, traders are warned to be very selective when considering bullish positions and extremely diligent in their portfolio management. Network Associates (NYSE:NET) would likely have been closed by conservative traders on Thursday's drop and positions in Xylinx (NASDAQ:XLNX), Capital One (NYSE:COF), and FEI Co. (NASDAQ:FEIC), all of which were recently posted on the watch-list, demand high priority for potential exit trades in the coming sessions. Positions Closed: Quest Software (NASDAQ:QSFT), which is currently positive. 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 APPX 24.18 FEB 22.50 AQO NX 0.55 90 21.95 28 7.0% 2.7% CKFR 19.53 FEB 17.50 FCQ NW 0.45 2227 17.05 28 7.8% 2.9% CURE 17.06 FEB 15.00 QCW NC 0.25 46 14.75 28 5.4% 1.8% FTE 25.50 FEB 22.50 FTE NX 0.70 23 21.80 28 9.6% 3.5% MATK 23.93 FEB 20.00 KQT ND 0.35 20 19.65 28 6.3% 1.9% MEDC 8.88 FEB 7.50 MQH NU 0.30 138 7.20 28 13.2% 4.5% REGN 20.63 FEB 17.50 RQP NW 0.50 124 17.00 28 9.7% 3.2% RGLD 26.67 FEB 22.50 MJQ NX 0.35 402 22.15 28 5.6% 1.7% TVX 16.98 FEB 15.00 TVX NC 0.40 192 14.60 28 8.3% 3.0% VRTS 18.30 FEB 15.00 VIV NC 0.30 1631 14.70 28 7.5% 2.2% Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield MEDC 8.88 FEB 7.50 MQH NU 0.30 138 7.20 28 13.2% 4.5% REGN 20.63 FEB 17.50 RQP NW 0.50 124 17.00 28 9.7% 3.2% FTE 25.50 FEB 22.50 FTE NX 0.70 23 21.80 28 9.6% 3.5% TVX 16.98 FEB 15.00 TVX NC 0.40 192 14.60 28 8.3% 3.0% CKFR 19.53 FEB 17.50 FCQ NW 0.45 2227 17.05 28 7.8% 2.9% VRTS 18.30 FEB 15.00 VIV NC 0.30 1631 14.70 28 7.5% 2.2% APPX 24.18 FEB 22.50 AQO NX 0.55 90 21.95 28 7.0% 2.7% MATK 23.93 FEB 20.00 KQT ND 0.35 20 19.65 28 6.3% 1.9% RGLD 26.67 FEB 22.50 MJQ NX 0.35 402 22.15 28 5.6% 1.7% CURE 17.06 FEB 15.00 QCW NC 0.25 46 14.75 28 5.4% 1.8% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MY-Maximum Yield (monthly basis - using margin), SY-Simple Yield (monthly basis - without margin). ***** APPX - American Pharmaceuticals $24.18 *** Bullish Outlook! *** 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). APPX recently raised its fourth quarter and 2002 guidance due to strong demand for recently launched, higher margin products. The company expects fourth-quarter earnings of $0.33 to $0.37 a share, above its previous guidance and the consensus estimate of $0.21 a share. Investors who want to own a relatively new company in the drug manufacturing group can use this position to establish a low risk cost basis in the issue. FEB 22.50 AQO NX LB=0.55 OI=90 CB=21.95 DE=28 MY=7.0% SY=2.7% ***** CKFR - Checkfree $19.53 *** Earnings Surprise *** Checkfree (NASDAQ:CKFR) is a provider of electronic billing and payment services. The company operates its business through 3 independent but inter-related divisions including Electronic Commerce, Investment Services and Software. CKFR's electronic commerce services are primarily targeted to consumers through financial institutions and Internet portals. Checkfree is also a provider of electronic commerce and financial applications software and services for businesses and financial institutions. Shares of CKFR rallied last week after the company raised its earnings outlook for the rest of the fiscal year. A number of analysts upgraded the stock after the report and based on the bullish fundamental outlook, a cost basis near $17 appears to be a reasonable price at which to own the issue. FEB 17.50 FCQ NW LB=0.45 OI=2227 CB=17.05 DE=28 MY=7.8% SY=2.9% ***** CURE - Curative Health Services $17.06 *** 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. On January 13, 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 use this conservative position to profit from continued upside activity in the issue. FEB 15.00 QCW NC LB=0.25 OI=46 CB=14.75 DE=28 MY=5.4% SY=1.8% ***** FTE - France Telecom $25.50 *** 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 22.50 FTE NX LB=0.70 OI=23 CB=21.80 DE=28 MY=9.6% SY=3.5% ***** MATK - Martek Biosciences $23.93 *** Entry Point? *** Martek Biosciences (NASDAQ:MATK) develops and sells products made from microalgae. Microalgae are microplants. The firm is engaged in the commercial development of microalgae into a portfolio of high value products and new product candidates consisting of Nutritional Products, Advanced Detection Systems and Other Products, primarily Algal Genomics. Their nutritional products include nutritional oils for infant formula, dietary supplementation and other products. Advanced Detection Systems products include fluorescent dyes from various algae for use in scientific applications for detection of certain biological processes. In mid-December, MATK shares rallied after a bullish Q4 report and the firm received more attention when it announced a deal with Abbott Labs to create an infant formula supplemented with Martek's DHA and ARA oils. The near-term outlook remains favorable and investors who are interested in adding this unique biotechnology company to their portfolio can use this position to establish a relatively conservative cost basis in the issue. FEB 20.00 KQT ND LB=0.35 OI=20 CB=19.65 DE=28 MY=6.3% SY=1.9% ***** MEDC - Med-Design $8.88 *** 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. MDCO shares rallied sharply after the company said it had settled its royalty dispute with Becton Dickinson. The "break-out" on high volume is bullish 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 NU LB=0.30 OI=138 CB=7.20 DE=28 MY=13.2% SY=4.5% ***** REGN - Regeneron $20.63 *** Premium Selling! *** 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. The fast-track designation means the FDA has expedited the review of a product for life-threatening illnesses for which there's a shortage of effective treatments. With the favorable technical outlook for REGN, traders should consider using this conservative "premium selling" position to participate in the future movement of the issue with relatively low risk. FEB 17.50 RQP NW LB=0.50 OI=124 CB=17.00 DE=28 MY=9.7% SY=3.2% ***** RGLD - Royal Gold $26.67 *** For Gold Bulls Only! *** Royal Gold (NASDAQ:RGLD) is the largest U.S.-based royalty firm engaging in the acquisition and management of precious metal royalty interests. Royal Gold seeks to acquire existing royalties or to finance projects that are in production or near production in exchange for royalty interests. The firm, to a reduced extent, also explores and develops properties thought to contain precious metals and seeks to obtain royalty and other carried ownership interests in these properties through the subsequent transfer of operating interests to other mining companies. Substantially all of the firm's revenues are and can be expected to be derived from royalty interests, rather than from mining operations conducted by the company. During 2001, the company focused on the acquisition of royalty interests, rather than the creation of such interests through exploration, followed by further development and property transfers to larger mining companies. RGLD is a good candidate for investors who are bullish on gold and the position should profit if the major equity averages continue to decline. FEB 22.50 MJQ NX LB=0.35 OI=402 CB=22.15 DE=28 MY=5.6% SY=1.7% ***** TVX - TVX Gold $16.98 *** Another 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 another good choice for a market "hedge" and traders who think equity values will continue to slump in the coming weeks can profit from a resultant rise in gold stocks with this position. FEB 15.00 TVX NC LB=0.40 OI=192 CB=14.60 DE=28 MY=8.3% SY=3.0% ***** VRTS - Veritas $18.30 *** More Premium Selling! *** Veritas Software (NASDAQ:VRTS) is an independent supplier of storage software products and services. Their products include storage management and data protection software, as well as clustering, replication and storage area networking software. The company offers solutions to help solve the problems of data intensive business environments by providing essential storage software and storage virtualization solutions that enables its customers to protect and access their business-critical data. The company's products operate across computing environments ranging from the desktop computer to the large enterprise data center, including storage area networks, to protect critical data, to provide high availability and to guard for disasters. On Friday, Veritas Software said it expects its Southeast Asia sales to post double-digit growth in 2003, with 40% growth from Malaysia and 30% from Singapore. Sales growth in Thailand and the Philippines, where it has a smaller base, is expected to be "rapid and double-digit" as well. Traders who like the outlook for VRTS can speculate on its near-term share price activity with this position. FEB 15.00 VIV NC LB=0.30 OI=1631 CB=14.70 DE=28 MY=7.5% SY=2.2% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield MVL 10.05 FEB 10.00 MVL NB 0.65 41 9.35 28 15.3% 7.6% SEPR 12.21 FEB 10.00 ERQ NB 0.30 606 9.70 28 11.0% 3.4% FFIV 13.94 FEB 12.50 FLK NV 0.40 496 12.10 28 9.6% 3.6% AMZN 22.11 FEB 20.00 ZQN ND 0.50 24991 19.50 28 7.5% 2.8% ANF 26.29 FEB 22.50 ANF NX 0.45 394 22.05 28 6.8% 2.2% S 27.34 FEB 25.00 S NE 0.55 3370 24.45 28 6.5% 2.4% COF 31.52 FEB 25.00 COF NE 0.40 5868 24.60 28 6.5% 1.8% GTRC 19.19 FEB 17.50 UGR NW 0.35 120 17.15 28 6.0% 2.2% CVD 26.59 FEB 25.00 CVD NE 0.35 34 24.65 28 4.0% 1.5% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Path Of Least Resistance! By Ray Cummins Stocks plummeted Friday with little buying support to break the fall as investors continued to worry about flagging corporate earnings, the declining dollar, and the impending war with Iraq. The blue-chip Dow industrial average plunged 238 points to 8,131 amid weakness in American Express (NYSE:AXP), Honeywell (NYSE:HON), J.P. Morgan (NYSE:JPM) and Alcoa (NYSE:AA). The NASDAQ Composite Index dropped 46 points to 1,342 led by bellwethers such as Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT). The Standard & Poor's 500 index slid 25 points to 861, its lowest level since October of last year, as investors flocked to safe-haven instruments such as gold and bonds. Declining stocks pounded advancers more than 3 to 1 on both the NYSE and the NASDAQ. Trading volume on both the Big Board and the technology exchange were almost equal with roughly 1.5 billion shares changing hands. The treasury market was upbeat as stocks declined. The benchmark 10-year bond closed up 1/32 at 100-16/32, yielding 3.93%. ***************** 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 MYL 36.74 39.35 FEB 30 35 0.65 34.35 $0.65 Open XAU 79.51 82.20 FEB 65 70 0.75 69.25 $0.75 Open BHE 35.30 33.19 FEB 25 30 0.45 29.55 $0.45 Open CHIR 40.18 37.93 FEB 35 38 0.40 37.10 $0.40 Open INTU 50.40 46.70 FEB 40 45 0.60 44.40 $0.60 Open AET 43.86 43.95 FEB 35 40 0.45 39.55 $0.45 Open HCA 43.75 41.89 FEB 37 40 0.30 39.70 $0.30 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Intuit (NASDAQ:INTU) and Chiron (NASDAQ:CHIR) are at the bottom of their respective near-term trading ranges, thus conservative traders should consider closing both positions on any further downside movement. Benchmark Electronics (NYSE:BHE) and HCA Inc. (NYSE:HCA) are on the "early exit" watch-list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ABK 57.56 53.40 FEB 70 65 0.55 65.55 $0.55 Open KBH 44.01 46.02 FEB 55 50 0.55 50.55 $0.55 Open BZH 61.98 60.80 FEB 75 70 0.50 70.50 $0.50 Open ITW 65.70 62.80 FEB 75 70 0.60 70.60 $0.60 Open BGEN 37.93 35.52 FEB 45 42 0.25 42.25 $0.25 Open PIXR 53.76 53.85 FEB 65 60 0.55 60.55 $0.55 Open RE 51.70 50.60 FEB 60 55 0.50 55.50 $0.50 Open ROAD 36.43 32.82 FEB 45 40 0.30 40.30 $0.30 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 SNPS 40.00 39.16 FEB 50 45 4.50 45.50 0.50 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status SYMC 46.12 43.92 FEB 35 40 4.50 39.50 0.50 Open PHSY 29.19 28.42 FEB 25 27 2.00 27.00 0.50 Open OCR 25.03 25.74 FEB 25 27 1.00 26.00 (0.26) Open EBAY 73.36 75.28 FEB 60 65 4.45 64.45 0.55 Open UOPX 38.08 33.77 FEB 30 35 4.40 34.40 (0.63) Closed University of Phoenix Online (NASDAQ:UOPX) was hammered last week after an article in Barron's offered some negative comments on the outlook for the issue. Conservative traders should consider an early exit in the position. Pacificare (NASDAQ:PHSY), Omnicare (NYSE:OCR) and Symantec (NASDAQ:SYMC) are on the "watch" list for signs of bearish technical indications in the coming sessions. 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 VAR 50.38 51.10 FEB 55 45 0.10 0.00 Open? WPI 29.22 29.67 MAY 35 22 (0.10) 0.50 Open ANF 26.39 26.29 FEB 30 22 0.05 0.60 Open UPL 10.11 9.76 MAR 10 10 0.10 0.00 Open PXD 26.11 24.56 MAR 30 23 0.10 0.20 Closed The best performer this week was Abercrombie and Fitch (NYSE:ANF) and the bullish synthetic position offered conservative traders a favorable near-term profit. Watson Pharmaceuticals (NYSE:WPI) has also achieved acceptable gains and Varian Medical (NYSE:VAR) has moved higher since our selection of the bullish issue. Pioneer Resources (NYSE:PXD) has retreated to a recent trading range from $24-$25 and since it is unlikely the stock will rally in the near future, the position has previously 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 36.10 APR 30 40 0.15 0.00 Closed AMZN 18.86 22.11 FEB 15 22 0.10 0.00 Closed The rally in early January stalled the bearish trends in Imation (NYSE:IMN) and Amazon.com (NASDAQ:AMZN), and both positions have been closed prior to expiration. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status GISX 20.21 18.00 FEB-22C DEC-22C 0.95 0.75 Closed COF 29.65 31.52 FEB-25P JAN-25P 1.00 0.90 Closed HSY 67.76 66.02 FEB-65C JAN-70C 3.25 3.75 Closed RTN 30.47 30.16 FEB-30C JAN-32C 1.65 2.20 Closed AMAT 15.70 13.27 J04-17C J03-17C 2.40 2.00 Open? APPX 20.94 24.18 APR-20C FEB-22C 2.50 2.50 No Play The volatility play in Capital One (NYSE:COF) did not benefit from the recent bullish activity and the position was closed for a minor loss. The diagonal spread in Raytheon (NYSE:RTN) yielded a small profit and the Hershey (NYSE:HSY) position finished the January expiration period with a respectable gain. The LEAPS/covered-calls play in Applied Materials (NASDAQ:AMAT) will be closed swiftly if the issue moves below technical support near $13. The new position in American Pharmaceutical Partners (NASDAQ:APPX) was not available, due to the "gap-up" opening on Monday after news of raised earnings guidance. SHORT-PUT COMBOS **************** Stock Pick Last Short Long Initial Max Play Symbol Price Price Option Option Credit Profit Status AES 2.92 3.38 J04-7.5P J03-2.5P 4.50 0.40 Closed EDS 19.64 16.95 J04-25P M03-17P 6.50 0.25 Closed As noted last week, 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. AES Corp. (NYSE:AES) is also a candidate for exit, now that the recovery rally in utility stocks has reached a short-term apex. CREDIT STRANGLES **************** No Open Positions DEBIT STRADDLES *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* READERS WRITE ************* Attn: Spreads/Combos Editor Subject: Position Selection Process I have not looked at your section in the past, but I scanned it tonight and I see a long list of put & call straddles and other combo plays. I want to do more of them, but don't see enough details. My question - the list shows lots of open positions, but no reco's [recommendations]. How did the stocks get on your current plays list - do you make actual reco's? Thanks, PM Hello PM, To generate the majority of plays, I search through lists of spread candidates and evaluate each position and its potential return based on the technical outlook of the underlying issue, its sector and the overall market. If I feel the chart fits the strategy and there is an acceptable risk/reward ratio, the position is placed on a list of final candidates. After I have all of the possible plays for a specific day, I simply choose those which, in my opinion, appear most favorable. On some days, I also list positions on candidates (or indexes/sectors/groups such as HOLDRS) that readers have requested or submitted, so they can see what type of play a more experienced trader might use, based on the reader's outlook for the underlying issue, industry or market segment. These plays include the heading "Reader's Request" to differentiate between my picks and those coming from subscriber's candidates. To be successful with these sections, remember that they are written for relatively new traders (about 80% of our readership). Most of the spread/combination plays offered in the OIN are high probability, low profit positions. This approach works well for new traders as the majority of plays are winners and the need for an adjustment (or exit) occurs on a limited basis. In addition, the issues/indexes I target usually have fairly well-defined price support (or resistance), trend-lines, and/or trading ranges to help identify any significant changes in technical character. With that strategy in mind, I strive for capital preservation in any (potentially) losing position and try to minimize its impact on our overall portfolio balance. The actual ratio of winners to losers, while very favorable, is not as important as position management, which involves timely adjustments and when necessary, closing a play early for a (small but acceptable) loss. As far as potential profits, I generally focus on a target return of 10-15% per month on the basic spread strategies and that is how the "target profit" (or return on investment) numbers are derived. I try to construct positions that will achieve that goal, but not every play is a winner so again, the primary objective is to limit losses and close losing plays before they become very costly, preserving capital for the next success. Hope that helps... ************* 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. ***** CERN - Cerner $37.31 *** Earnings Top Estimates! *** Cerner Corporation (NASDAQ:CERN) designs, develops, markets, installs, hosts and supports software information technology and content solutions for healthcare organizations and other consumers. Cerner implements these solutions as individual, combined or enterprise-wide systems. Cerner solutions are designed to provide the appropriate health information and knowledge to care givers, clinicians and consumers and the appropriate management information to healthcare administration on a real-time basis. The company provides the following: enterprise-wide systems, clinical systems, decision support systems and knowledge solutions, consumer systems and solution suites. PLAY (moderately aggressive - bullish/credit spread): BUY PUT FEB-30.00 CQN-NF OI=55 A=$0.35 SELL PUT FEB-35.00 CQN-NG OI=130 B=$0.95 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$34.40 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=72% ***** PRX - Pharmaceutical Resources $31.50 *** Bullish Trend *** Pharmaceutical Resources (NYSE:PRX) is a holding company that, through its subsidiaries, is in the business of developing, manufacturing and distributing a broad line of generic drugs in the United States. PRX operates primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc., a manufacturer and distributor of generic drugs. PRX's product line consists of prescription and, to a lesser extent, over-the-counter generic drugs consisting of approximately 119 products representing various dosage strengths for 51 drugs. The company also has strategic alliances with several pharmaceutical and chemical companies. PRX markets its products primarily to wholesalers, retail drug store chains, drug distributors and repackagers. PLAY (conservative - bullish/credit spread): BUY PUT FEB-25.00 PRX-NE OI=62 A=$0.20 SELL PUT FEB-30.00 PRX-NF OI=111 B=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$29.55 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=65% ***** ATK - Alliant Techsystems $54.75 *** Big Down Day! *** Alliant Techsystems (NYSE:ATK) is a supplier of aerospace and defense products to the U.S. government, America's allies and major prime contractors. ATK also is a supplier of ammunition to federal and local law enforcement agencies and commercial markets. ATK designs, develops and produces rocket propulsion systems for a wide variety of U.S. Government and commercial applications. The firm is also the sole supplier of the reusable solid rocket motors used on NASA's Civil Manned Space Launch Vehicles. ATK designs, develops and manufactures small, medium and large caliber conventional munitions for the U.S. and allied governments as well as for commercial applications. The company manufactures and develops small-caliber ammunition for the U.S. military and its allies, federal and local law enforcement, and commercial markets. PLAY (conservative - bearish/credit spread): BUY CALL FEB-65.00 ATK-BM OI=619 A=$0.25 SELL CALL FEB-60.00 ATK-BL OI=869 B=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$60.50 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=82% ***** CAT - Caterpillar $43.92 *** Lower Earnings Ahead! *** Caterpillar (NYSE:CAT) manufactures and markets construction, mining, agricultural and forest machinery; engines for on-highway and locomotives, and electrical power generation systems and other applications, and provides financing to customers for the purchase and lease of its equipment. The company operates three principal lines of business: machinery, engines and financial products. The firm designs, manufactures, markets, finances and provides support for its Caterpillar brads: Cat, Solar, MaK, Perkins, FG Wilson and Olympian. PLAY (conservative - bearish/credit spread): BUY CALL FEB-50.00 CAT-BJ OI=2888 A=$0.15 SELL CALL FEB-47.50 CAT-BW OI=1732 B=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$47.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=81% ***** IBM - Intl. Business Machines $78.94 *** Big Blue's Blues! *** International Business Machines Corporation (NYSE:IBM) makes and sells computer services, hardware and software. The firm also provides financing services in support of its computer business. The company's major operations comprise a Global Services segment; three hardware product segments (Enterprise Systems, Personal and Printing Systems, and Technology); a Software segment; a Global Financing segment; and an Enterprise Investments segment. IBM offers its products through various global sales and distribution organizations. The company operates in more than 150 countries worldwide and derives more than half of its revenues from sales outside the United States. In October 2002, the company completed the acquisition of PwC Consulting, the global management consulting and technology services unit of PricewaterhouseCoopers. The firm also sold most of its hard disk drive operations to Hitachi, a global electronics company. PLAY (conservative - bearish/credit spread): BUY CALL FEB-90.00 IBM-BR OI=14685 A=$0.30 SELL CALL FEB-85.00 IBM-BQ OI=20695 B=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$85.60 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=74% ***** MER - Merrill Lynch $36.18 *** Brokerage Sector Sell-Off! *** Merrill Lynch (NYSE:MER) is a holding company that, through its subsidiaries and affiliates, provides investment, financing, advisory, insurance, banking and related products and services on a global basis. Services include securities brokerage, trading and underwriting investment banking; strategic services and other corporate advisory activities; asset management origination, brokerage, dealer and related activities in swaps, options, forwards, exchange-traded futures, other derivatives and foreign exchange products; securities clearance and settlement services equity, debt, foreign exchange and economic research; private equity investing activities, banking, lending and trust services; insurance underwriting and sales, and investment advisory and related record-keeping services. Merrill Lynch has three primary business segments: the Global Markets & Investment Banking Group, the Private Client Group and Merrill Lynch Investment Managers. PLAY (conservative - bearish/credit spread): BUY CALL FEB-42.50 MER-BV OI=9216 A=$0.15 SELL CALL FEB-40.00 MER-BH OI=7423 B=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$40.25 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=81% ************* 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. ***** VIA - Viacom $38.72 *** Media Industry Slump! *** Viacom (NYSE:VIA), together with its subsidiaries, is a widely diversified worldwide entertainment company. The company owns and operates advertiser-supported basic cable television program services through MTV Networks and BET: Black Entertainment TV and and premium subscription television program services through the Showtime Network in the United States and internationally. The Television segment consists of the CBS & UPN television networks. Infinity's operations are focused on "out-of-home" media with operations in radio broadcasting. The Entertainment segment's principal businesses are Paramount Pictures, which produces and distributes motion pictures. The company operates in the home video retail business, which includes both rental and sale of videocassette and DVD products. The company also publishes and distributes consumer hardcover books. PLAY (conservative - bearish/debit spread): BUY PUT FEB-45.00 VIA-NI OI=355 A=$6.50 SELL PUT FEB-42.50 VIA-NV OI=813 B=$4.20 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=11% B/E=$42.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=82% **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial costs and large potential profits. ***** AXP - American Express $33.70 *** New Downtrend Underway! *** American Express (NYSE:AXP) is engaged primarily in the business of providing travel-related services, financial advisory services and international banking services throughout the world. American Express provides charge and credit cards, travelers checks, travel services, financial planning, investment products, insurance and international banking. American Express Travel Related Services Company provides a global card network, issuing and processing services, the American Express Card, the Optima Card, a number of co-brand Cards, other consumer and corporate lending and banking products, a network of automated teller machines, the American Express Travelers Cheque, stored value products, business expense management products and services, corporate and consumer travel products and services, tax, accounting and business consulting services, magazine publishing, merchant transaction processing and point of sale and back office products and services. PLAY (conservative - bearish/calendar spread): BUY PUT APR-30.00 AXP-PF OI=3803 A=$1.45 SELL PUT FEB-30.00 AXP-NF OI=511 B=$0.65 INITIAL NET DEBIT TARGET=$0.70-$0.75 TARGET PROFIT=$0.50-$1.00 ******************* 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. ***** BGEN - Biogen $35.52 *** Same Stock - Different Week *** 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 (very speculative - bearish/synthetic position): SELL CALL FEB-40.00 BGQ-BH OI=1503 B=$0.45 BUY PUT FEB-30.00 BGQ-NF OI=1229 A=$0.50 INITIAL NET CREDIT TARGET=$0.05-$0.10 INITIAL TARGET PROFIT=$0.35-$0.60 Note: Using options, the position is similar to being short the stock. The minimum initial margin/collateral requirement for the sold put is approximately $1,025 per contract. 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