The Option Investor Newsletter Sunday 02-02-2003 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: Window Dressing Wins Futures Market: Pivotal Times Index Trader Wrap: WHAT, ME WORRY! Editor’s Plays: In-e or Out-e? Market Sentiment: Alan in Wonderland Ask the Analyst: How or when to get out of the market Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Looking for Clues Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 01-31 WE 01-24 WE 01-17 WE 01-10 DOW 8053.81 - 77.20 8131.01 -455.73 8586.74 -198.21 +183.26 Nasdaq 1320.91 - 21.23 1342.14 - 34.06 1376.20 - 71.55 + 60.67 S&P-100 432.57 - 3.57 436.14 - 21.22 457.36 - 13.05 + 11.21 S&P-500 855.70 - 5.70 861.40 - 40.38 901.78 - 25.79 +165.21 W5000 8125.07 - 50.67 8175.74 -354.59 8530.33 -228.10 +165.21 RUT 372.17 - 2.89 375.06 - 13.04 388.10 - 8.34 + 6.13 TRAN 2173.35 + 10.02 2163.33 -181.20 2344.53 - 49.14 + 28.73 VIX 35.78 + 0.01 35.77 + 7.09 28.68 + 1.55 - 0.85 VXN 46.81 + 1.76 45.05 + 2.21 42.84 + 0.56 - 3.43 TRIN 0.89 1.69 1.60 0.80 Put/Call 0.84 0.83 0.83 0.75 ****************************************************************** Window Dressing Wins by Jim Brown Mixed economic reports and warnings from the chip sector could not hold back the markets at the open on Friday as buyers came off the sidelines. After the initial bounce the war fears took hold again but buyers were not to be denied. Even a concentrated selling attempt at 3:PM which pushed the Dow back under 8000 was overrun by window dressing buyers at the close. Dow Chart – Daily Nasdaq Chart – Daily The economic reports surprised traders on Friday and except for Consumer Sentiment they surprised to the upside. Personal Income rose +0.4% in December and twice the expected rate. Spending rose +0.9% and more than twice the +0.4% November rate. It appears that despite the lackluster holiday sales the consumer was alive and well. This suddenly bullish explosion of consumer data was definitely not expected by analysts. The NAPM-NY report also surprised analysts at 51.9 and up strongly from December's 42.4. The six-month outlook rose from 41.0 to 61.1! This rebound in the New York business conditions index was also not expected and could indicate the worst is over in the financial sector. Even more good news came from the Chicago PMI, which exploded to 56.0 and well over the 52.5 consensus. This is the highest level since June and well above last months number which was also revised upward to 51.7. Production and new orders continued to expand but order backlogs fell by -3 points. Excess capacity is still a problem and inventory levels are still dropping. There is no real capital expenditure effort yet and very few companies are committing to any purchases. The only negative economic news was the Consumer Sentiment, which fell to 82.4 from 86.7 in December. Consensus was for 83.2 but the whisper number was below 80. The markets cheered that the number was not worse. The majority of the drop was related to a -8 point drop in future expectations due mostly to the war and market outlook. Only dropping to 82.4 was actually bullish in my opinion. The only major factor still holding back the markets is the "Iraq ate my earnings" excuse from companies guiding lower for the year. Last year it was recession then corporate governance followed by high energy prices as earnings shortfall excuses. How they can blame current shortfalls on Iraq is beyond me. "Customers have put capital expenditures on hold pending the outcome of the war." Are we going to lose? The current tally of announcers has 62% beating seriously reduced estimates. Only around 20% have missed estimates. Guidance going forward is where the Iraqnaphobia comes into the picture. Companies that are still giving guidance are using the Iraq excuse for lower expectations due to uncertainty for the future. You could build a bullish case for entering the market before the war if you were careful about your purchases. If you knew for sure the market was going to rally in four weeks would you buy now? Chips would probably not be on the top of a cautious investors list after the AMAT warning on Friday. They said that orders for the first quarter were worse than expected and -35% below the 4Q. AMAT had previously guided to a -20% drop. They said customers were either delaying or canceling orders for equipment due to lack of demand and budget cuts. They also warned on Thursday that they were cutting -165 employees and rumor has it that they will close for two weeks to cut even more costs. ZRAN, a maker of chips for consumer electronics, warned it would miss estimates for the quarter and full year due to weak sales of consumer items. They estimated they would earn 1-3 cents in Q1 and the analyst consensus was for 14 cents. The SOX gapped down to a new low at 261 but rallied back to close flat after trading positive late in the afternoon. Yes, positive. I was as dumbfounded as anyone why chips would rally back to positive territory after two major earnings warnings. I am sure it was some brave bottom fishers who feel all the bad news is priced into the sector and some of these chips are so cheap there is not much risk left. On Friday the Dow held the Nasdaq up or maybe the Nasdaq held the Dow back depending on how you look at it. The Dow is down -800 points over the last two weeks and the last five trading days looks like an EKG on the 10 min chart. It has traded in a 200-point range between 7950 and 8150 on almost a daily basis. The 8100-8150 level is proving as tough to break as the 7950 level is on the downside. It appears there are plenty of willing buyers at the right price and plenty of happy sellers at 8150. Despite the morning black hole in the chip sector the Nasdaq managed to trade in positive territory most of the afternoon. This amazing resilience ran head first into serious resistance at 1330 and ended up closing right on critical support from November at 1320. If it were not for the end of month window dressing on the broader markets I think the outcome would have been significantly different. With the market dropping as expected over the last three weeks to three month lows many mutual funds and hedge funds were holding cash while waiting for the bottom. When the Dow appeared to refuse to break/hold under 7950 on three different days this week those funds decided to dress up their month end statements with stocks instead of cash. There were three separate buying spurts on Friday ending with one at 3:30 when the Dow rebounded vertically from the effects of a 3:PM sell off. The break under 8000 once again triggered another buy program and the Dow gained +60 points into the close despite substantial event risk over the weekend. There is also a tendency for the last day of the month and the first four trading days of the next month to be bullish due to the influx of monthly retirement deposits. Jane Fox wrote an excellent review of several of these different trading cycles in this weekends newsletter. While I am starting to lean less bearish due to improving economic reports I am still not in the bullish camp. I think the "fear" of impending war will continue to pressure the markets until the shooting starts. We Americans tend to tire of new events quickly and once the shooting starts and there are no unforeseen responses from the Iraq defenders it should not take more than a couple days before investors will be back to business as usual. If it is over quick we could see a very strong ramp due to the estimated $5 trillion in cash on the sidelines. Still the uncertainty remains. I do not see cash coming into the market because the Russell-2000 usually outperforms the big cap averages when funds are buying. It hit a new 3-month low on Friday of 366.61 before recovering on window dressing. Small caps are suffering identically with big caps. Techs are at critical support levels at 1320 but the January bullishness has evaporated. While I am less bearish due to economics I still expect further weakness ahead. Almost every talking head on TV today repeated the January barometer history of only wrong four times in 52 years. They were pointing to the markets being down this year as evidence they would close lower in December. This may well be and the track record is very strong BUT there were three times the indicator was thrown off by world events, two were wars and one was the World Trade Center attack. 1966 and 1968 were influenced by events in the Vietnam war. Other than that the indicator has been very successful. In 1991 the start of the first Iraq war in February depressed the markets but January still finished slightly positive. Once the war started the markets forgot about it and the economic troubles of 1989/90 and began the ramp into the last economic boom with a +26% gain for the year. Ladies and gentlemen I think we are getting ready for that same cycle to start again. The parallels are too close. Start the war and let the buying begin. The major flaw I have yet to overcome is the driving force behind the next bull market. I have discussed over and over the lack of impact the next PC upgrade cycle may have. Compared to the Y2K replacement cycle and the Internet bubble the next one will be much smaller. With tens of thousands of dot.coms and startups no longer in existence the demand will just not be there. Sure we will see a surge but equipment costs 25% of what it did five years ago and comparisons will be tough. Computers are more of a commodity today than ever and profits will be harder and harder to achieve. In my opinion the circumstances are setup to duplicate the 1991 post war rebound but after the initial bounce what will be the force driving demand? If we get a 2Q post war bounce and earnings continue to drop then what will power investor desires? Numerous analysts have suggested we could be range bound for years. Perish that thought please! Unfortunately they could be correct. Cycles tend to come in near decade increments and that puts the next peak well into the future. This brings up another worry. Investors initiated to Internet investing with the huge profits of the 1999-2000 boom are losing money and interest in stocks in general with week after week of negative news and negative markets. Some of these investors will be back with a new bounce over 9000 but they might not stay if that bounce fails or moves sideways. Without new money constantly flowing into the ponzi scheme we call the market it makes it very hard to maintain momentum. That brings us full circle and back to markets that our fathers would understand. That is a stock pickers market. It will not be like 1999 where you could buy any stock with a four character symbol and be a winner. I believe that after the post war bounce we will return to the stock picker scenario. In any market there are stocks that are moving up and good research will be rewarded. This is what investors should be expecting. A slightly trending market where superstars are rewarded. Remember the historical trend for the market is between +8% to +12% annual return. There is another market trend that nobody is discussing. Since 1919 there has only been three times that the 3rd year of a presidential term has finished in the red. 18 of 21 times the markets rose. The last time it fell was in 1939. That sounds like a bullish trend to me. That trend may not assert itself until after the war but with re-election politics in full swing by fall you can bet the bulls will be excited. The Dow only has to gain +289 points over the next eleven months to technically produce a winning year. Heck, I bet we get that in one week when the war is over. Let's just hope we don't need a lot more points than that to breakeven when that time comes. The next three trading days are typically bullish except they end on Wednesday with Powell's speech at the UN. This could be good for the market if he proves his case and everyone joins the coalition or bad for the market if it is seen as smoke and mirrors. Monday investors will look for the ISM report to confirm Friday's bullish economic numbers. Tuesday has Factory Orders and another ISM for Services on Wednesday. The big report will be the Nonfarm Payrolls on Friday. Plenty of potholes left in the road and plenty of chances for negative news events. If the bulls want to climb a wall of worry next week they will need to bring ropes because it could easily turn into that slippery slope of hope that makes bear markets. Enter Very Passively, Exit Very Aggressively! Jim Brown "I measure what's going on and I try to adapt to it. I try to get my ego out of the way. The market is smarter than I am so I adapt to the market." Martin Zweig ************** FUTURES MARKET ************** Pivotal Times By John Seckinger jseckinger@OptionInvestor.com With all three futures contracts trading near the 50% retracement of the move from October to December, risk/reward for both bullish and bearish camps are enticing. Which camp has the edge? Friday, January 31st at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 8053.81 +106.68 8089.66 7917.16 YM03H 8047.00 +147.00 8074.00 7848.00 31,622 Nasdaq-100 983.05 -2.46 996.04 968.34 NQ03H 984.50 -2.50 997.50 965.00 279,987 S&P 500 855.70 +11.09 858.33 840.34 ES03H 854.75 +14.75 857.75 836.50 803,774 Contract S2 S1 Pivot R1 R2 Dow Jones 7847.71 7950.76 8020.21 8123.26 8192.71 YM03H 7764.00 7905.00 7990.00 8131.00 8216.00 Nasdaq-100 954.78 968.92 982.48 996.62 1010.18 NQ03H 949.75 967.00 994.50 999.75 1014.75 S&P 500 833.47 844.59 851.46 862.58 869.45 ES03H 828.50 841.50 849.75 862.75 871.00 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7719.00 7883.00 8012.00 8176.00 8305.00 NQ03H 930.00 957.25 992.25 1019.25 1054.25 ES03H 821.00 838.00 852.75 869.75 884.50 Monthly Levels (January's High, Low, and Close) Contract S2 S1 Pivot R1 R2 YM03H 7237.00 7642.00 8253.00 8658.00 9269.00 NQ03H 875.75 930.25 1019.25 1073.75 1162.75 ES03H 775.00 814.75 876.00 915.75 977.00 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. ================================================================= For information on the Futures Monitor and Jim Brown's posts, 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) Let us first put things in perspective for traders with a more intermediate-term horizon. The ES contract closed at 854.75, and is well underneath its Monthly pivot of 876; a bearish sign. Moreover, the December 31st low is at 868 and can be used as the barometer when gauging sentiment (below 881, bearish; above 881, bullish). How low could this contract go in the near term?. A projection of the low-end of this current range comes in at 782.50. This number was derived from taking the range from 953.50 to the December 31st low, and then subtracting this difference from the 868 level. The Monthly S2 reading comes in at 775; therefore, this logic appears to have some merit. It is very rare that the ES contract will trade straight to this level, and a trade back above 868 should nullify this objective; therefore, we once again have to use long-term retracement areas to define risk. The 854.75 close is above the daily pivot, and two-points above the weekly pivot as well. Short-term least resistance may in fact be higher, and it makes sense to begin to establish "zones of support and resistance" that can be used to see if either bullish or bearish traders are gaining or losing strength. When putting together these "zones," let us start with a daily chart. As a disclaimer: I was unable to find any trades at or near the October 10th low of 769 (using a five-minute chart); however, market participants appear to be trading based off this imaginary low. Therefore, I will use the 769 low as well. With that said, we can see support at 839.50 and resistance at 861.25. The daily R1 is 862.75, and weekly R1 is 869.75. Weekly S1 is 838. Looking at the chart below, the ES contract is in an interesting situation. Bears will like to see the 861 to 862.75 area hold, while bulls will be looking for move above the December 31st low and back to the Weekly pivot. More aggressive traders can look for a move back inside the regression channel, which would definitely be the case once the pivot is taken out. The objective would be for a move back to 839. If the 837-839 area fails, bears should go for the jugular once more (down to 829). Chart of ES03H, 120-minute Turning to a chart of the S&P 500 Index, I constructed a few retracement areas from short- and long-term timeframes; coming up with some "small zones" that a trader can follow going forward. Note that on Friday the SPX contract did not fall underneath the 839 area and give a clear sell signal. Going forward, traders can look for failure from within the 861 to 870 area, or back underneath 839. A move above 870 should significantly shift sentiment, since this is the 50% zone. Note: An ES trader can use price action in the SPX contract for confirmation purposes, especially when trading near a key relative high or low. For more information of this chart, please see link: http://www.OptionInvestor.com/futurescorner/fc_013003_1.asp Chart of SPX (CBOE), Daily Bullish Percent of SPX: 45.69% and down 1.80% percent on Friday. The column of O’s now resides at 10. There is still a solid chance the bullish percent will move to the 40% level. Note: In order to really look for a bottom, I would like to see a move under 30%, followed by a row of "X's" that takes the indicator back above this 30 area. Looking at P&F analysis, the SPX contract reversed back into a column of O's on Thursday, and more weakness should be seen underneath the 840 area. The low on Friday was 840.34, and did not reach the 840.00 bearish level. As noted before, I will use 839 for confirmation. The March E-mini Nasdaq 100 Contract (NQ03H) Before I get into the NQ contract, it is noteworthy that the NDX Index gave a sell signal via P&F figure analysis when it traded at 975. The objective for the NDX is now at 825. With that backdrop, let us look at the NQ contract. Friday's high was unable to test the pivot at 1000, but still managed to close above Monday's pivot as the session came to an end. Fortunately for traders, Monday's pivot is basically right on top of the 50% retracement area of the move from October to December. This gives a great risk/reward trade for either style of trader. However, since the NDX did give a sell signal, I would prefer a move under 982 and then have this area become strong resistance. Looking at a 120-minute chart of the NQ contract, if this 982-83 area does become resistance, look for a move to the Weekly S1 level at 957.25. The daily S2 comes in at 949.75, so this level could be hit in the near term. If bullishness takes over, look for a move to 1000 and then 1014 - the monthly pivot AND R2 for Monday. Chart of NQ03H, 120-minute Bullish Percent for NDX: This indicator fell 1% to 47% on Friday, and continues to portend bears will be selling rallies going forward. There column of "O's" remains at nine. Note: The NDX gave a sell signal, according to P&F charts, as the 975 area was penetrated. The bearish objective now stands at 825. The March Mini-sized Dow Contract (YM03H) Price action on Friday in the YM contract started out bearish, but as soon as the contract's Weekly S1 of 7933 was cleared to the upside, bulls took over and bears were forced to cover. It was a surprising rally, but that is why we have levels. The Monthly levels should hold the most significance, followed by the weekly and then daily areas. Looking at a weekly chart below, resistance can be seen at the 8143 area. Note that weakness underneath the 'zone of support' from 7936 to 7946 was rejected. Since we didn't get a weekly CLOSE above 8143, least resistance should be lower still. Chart of YM03H, Weekly Dissecting a 90-minute chart of the YM contract, Friday's close looks more neutral than anything else. The YM did close ABOVE Monday's pivot, but is in-between a solid range from 8143 to 7936. I would wait until either one of these areas are cleared. If 8143 is cleared, resistance before 8350 is felt at 8253. On the other hand, a move under 7936 will give us a bearish objective of 7850. Chart of YM03H, 90-minute Bullish Percent of Dow Jones: The bullish percent for the Dow was fell 6.57% on Friday to the 'magical' 30.00% level, and the column of O’s now stands at 15. This is significant relative weakness, and note that the bullish percent of the NYSE has just turned into a column of "O's," and could be a sledgehammer of the Dow. Nevertheless, this is a very narrow indicator (only 20 stocks), but can be a good leading indicator for other sectors. Remember, a close underneath 30% should start to shift risk into the bears' camp. Stay tuned. Note: The DJIA, on a P&F chart, is currently in a row of "X's", and the bearish objective will now stay at 7000. Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** WHAT, ME WORRY! By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE: There is plenty to go around – worry that is. The see-saw market of last week appears likely to continue. January was mostly a down month in stocks and the old market pundits will say that so goes the rest of the year. In the near term, the market is oversold and appears to be finding some technical support after retracing fully 62% (S&P 500)and 50% (Nasdaq) of the last advance. At a minimum the overall rate of downside momentum may slow and the market “mark time” by moving sideways overall – or, by only drifting slowly lower. Best characterization of traders: jumpy. For options traders who worry about how SOON a given move will unfold, it could be a tough February (if you buy and hold rather than trade short-term). Market participants lack much conviction due to war worry and must wait and see as the aftermath of a Gulf conflict can’t be known until after it develops. FRIDAY'S TRADING ACTIVITY – Economic data that was better than forecast gave a lift to stocks, with the Dow rallying 108 points to 8053. The Nasdaq was not following the Dow’s lead however, as the Composite (COMPX) was off a fraction but closed above support in the 1300 area – at 1320. For the week the Industrials were down 1% and the COMPX by 1.6%. For the full month, it was pretty dismal in the blue chips, with the Dow off 3.5 percent, although the Nasdaq was actually up slightly from December. The DATA – the Chicago Purchasing Managers report showed a rise in business activity for this key Midwest region as its January index rose from 56, from around 52 in December. Expectations are always the benchmark and expectations were for a more modest rise to 53. The Commerce Dept. reported December personal income was up 4 tenths of a percent versus a pre-report estimate for a rise of 0.2%. Now, for those who have calculators handy, 0.4% X 12 = 4.8% for the year. If your income is rising by 5% a year, that’s not bad – assumes you’re working of course. For those with jobs, it would be a better than average year. This figure of course reflects the overtime that employers are paying rather than hiring NEW employees. This kind of statistic does not mean that the overall economy will experience the stronger growth that would be suggested by putting some unemployed folks back to work – there’s always significant catch up spending that comes from that. And speaking of spending, there was a reported increase in December personal spending that outstripped the income growth – 0.9%. Blessed credit, where we would be without it - Mr. Banker, keep those special offers coming! The University of Michigan of my home state, came out with its final January reading on consumer sentiment and its showed a decline from 82.4 from 86.7 at the end of December. Consumers were reported to be mildly upbeat about their current financial condition – they must continue to NOT open their 401k statements where they have stock but do watch the vastly increase value of their real estate holdings; i.e., their house. However EXPECTATIONS are not so hot. There is an actual index for this and it fell to a 9 year – count em, 9-year low. The reports from our fellow Americans are that they are mainly concerned about their jobs and incomes – but war worries are building. A quick and decisive victory by the coalition would likely restore consumer confidence almost immediately. By the way, the coalition is the UK and the US period. The Italians, the Danes, and the Spanish are behind us lending moral support but not much else. The Czechs had a unit of 250 on hand in the area, but when their President visited, some 30 or so said they didn’t want to be there and some of them left on the plane with him to go back home. A little different over here! If economic conditions do NOT improve after even quick and decisive victory, confidence would sink lower still, as it did after the first Gulf War. There was little confidence reported (in the U of M survey) in government policies to impact the economy, as Consumers believe that tax cuts are not going to boost hiring or incomes. Guess you can’t even fool some of the people even some of time anymore. Well, the outcome is unknown so we’ll see if President Bush’s optimism on this front proves correct in the end. The economic numbers have been good and the earnings reports have also reflected this – but this has not ruled the market, as nervousness abounds about war and the lack of faith in corporate America stemming from the accounting scandals and its continued fallout; e.g., last week’s charges against Xerox’s accounting firm. Every week there is some more of this kind of news at least in the business press. However, with new heads of the Commerce department and the SEC finally in place, renewed economic stewardship may help. The feeling that someone is in charge will be a plus here. On the EARNINGS front – Disney (DIS) was a big part of the Dow gain, rallying strongly (+7%) after the company indicated an expectation of an earnings growth of 25-35% - in the current environment, this is smoking! Never mind that that it comes off from a pretty depressed 2002. Micky Mouse may make us happy in fantasyland, but techland can still disappoint – Applied Materials (AMAT) fell over 7% after stating that it expected a drop of in Q1 orders of some 35%, rather than the 20% forecast earlier. The further decline was attributed to the continued weak economy and war and oil supply uncertainties causing the chip maker’s customers to put off capital expenditures – and so it goes and the word for the economy is “spotty”. No rest for the downtrodden – UAL posted a Q4 loss of nearly 1.5 billion dollars, compared with “only” losing about 300 mil a year earlier. This report sent the stock down another 5%. Love the name – Boots & Coots International (WEL) said after the close on Friday that one of its lenders declared the company on default of a 1 million dollar credit agreement. This company is gearing up to possibly fight major oil well fires in Iraq, if Saddam decides to have the wells blown up rather than surrender them to the U.S. Come on baby light my fire – try to set the world on fire! Not to make “light” of such a potential environmental disaster, but it keeps the boys from Texas busy and should be a big earnings windfall for the company. Such is the way that analysts think on the Street of Dreams. Tyco (TYC) said late Friday that it got a new 1-year $1.5 billion credit line with Banc of America and Morgan Stanley. Combined with a new issue of $4.5 in corporate bonds, the company indicated that it has closed a gap in needed liquidity for the coming year. Nothing speaks louder than being a big revenue generating business, even if you went through the mud in the year before because of executive level excesses. Time to buy the stock for a long-term play? Another dip under 15, say to 12 and I’m there. Way down from the 60 area, but recent highs at 18 are one nice move from last summer’s $10. OTHER MARKETS - Bonds made no strong move in either direction on Friday with the 10-year T-Note up a sixteen on Friday. Yields on the 10 year ended the day at 3.9%. Wish the bank would pay me that much on my balances instead of the fraction of a percent I’m seeing lately. Such is the nature of short versus long rates. The dollar rebounded a bit against the Euro and the Yen. The Euro fell to 1.076 from 1.081. Gold ended the week up slightly as nearby New York Comex gold futures closed at $371 on Friday versus 369.5 in the previous week. COMING UP (NEXT WEEK) – Big on the political front next week, and war politics largely “rule” these days, is Wed. (5th) as Secretary of State Colin Powell goes before the (UN) Security Council to present U.S. evidence that Iraq is developing mass weapons of destruction. If his arguments sway the member states, this may relieve the market some as it suggests a quicker timetable to go in. Sooner we go in, the sooner we know the fallout related to the economy and get it behind us. There will be a couple of key reports relating to the state of our economy – unemployment data and numbers from the Institute of Supply Managers or ISM which gives some reading on the future level of manufacturing. Oh CISCO! – yep, it brings up the rear of reporting earnings for the big bellwether type stocks, as the company reports its fiscal year Q2 results on Monday after the close. CSCO is expected to see an earnings rise to 13 cents a share, from 9 cents. And last but not least – the market takes in the shock of the destruction of space shuttle Columbia, the oldest of the 4- shuttle fleet, with some specific effects being felt by Boeing (BA) and Lockheed Martin (LMT) – joint partners that together serve as NASA’s prime contractor for shuttle operations. The two companies manage a third potion of the yearly space shuttle budget accounting for slightly more than a billion dollars. The loss is a tragedy for these men, their families and our country. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily chart: My downside objective on the S&P 500 (SPX) has been for 840-845 and I suggest taking some put profits in this area – if you are one of the ones who was on the right side of a trade at higher levels. On the upside, I would like to sell a rally back up to the 900 area - wouldn’t we all? I can’t see what would get us back up there in the week ahead or even the month ahead. I put some stock in “filling in” prior upside chart gaps as an indication that an index (or stock) has gotten back to an area of technical support and I noted with interest that this occurred last week as noted on the SPX chart above. Moreover, SPX completed a “fibonacci” 62% retracement, which I also put some trust in as a possible turnaround point or completion of decline – pullbacks tend to be either 50 to 62% OR a full 100%, in a retracement back to a rally starting point. More on chart retracements and why they can be useful in trading can be found in my Trader’s Corner article at – http://www.OptionInvestor.com/traderscorner/100302_2.asp S&P 100 Index (OEX) – Daily and Hourly charts: 420 was my downside objective in the OEX and the Index got near this level last week. The 420 area is more or less the low end of the downtrend channel that I am estimating for OEX currently. We could drop further of course with all the bearish influences out there, but my best guess is we’ll next see a sideways to higher move first to at least “throw off” the oversold condition. 440 is the key overhead resistance and I suggest selling rallies (buy puts) in this area but exiting if the Index goes much above this level, especially on a closing basis – both hourly and daily. Tougher resistance or heavier selling pressure can be anticipated in the 450-454 area, then around 460, at the top of the channel and near to where the 50-day average is currently. The index is now fully oversold on a short-term basis – that and your subway fare will get you on the train. Oversold is an “OVER” rated idea, but does have meaning when combined with chart analysis such as an approach to prior lows or completion of a 62% retracement of the prior advance, etc. Last week, I mistakenly labeled the recent peak of the 10-day TRIN (Richard Arms’ TRading INdex) as the “overbought” level, demonstrating that it’s hard to think of a HIGH number on an indicator as suggesting an “oversold” condition. The way the Arms Index or TRIN is constructed, a series of high daily readings is showing heavy selling – in the world of “contrary” theories about the markets, heavy selling usually occurs sometime ahead of an actual bottom as everyone who was going to sell finally gets all or most of their selling done. Once selling dries up, it doesn’t take a huge amount of buying for a rally. S&P 100 (OEX) Daily Chart: During many periods of trading, the use of moving average “envelopes” a useful way to highlight the market being both oversold AND the (price) AREA where that occurs. 420 is approximately 6% under the OEX 21-day moving average and this percentage under tends to be EITHER where the Index rebounds OR where it just begins to gradually drift lower (lacking a further quick, steep downswing). If a rebound develops, I look for a move back up TO and not beyond the 21-day moving average, currently at 454.30 as noted on the chart. It’s generally valuable to have some measure of estimating that trend MOMENTUM may slow – one way is suggested by the use of moving average envelopes. It is at this point that you need to start calculating how fast the (time) premium erosion might be in your further risk to reward calculation - at least on long options. Can we fall to 400 in the next couple of weeks? – sure, we could get there in a couple of days – but, absent an invasion that goes badly, uncertainties about the outcome of an Iraq conflict seem mostly priced into the index. And we won’t likely get much further resolution until March. Nasdaq Composite (COMPX) Daily Chart: The composite completed a 50% retracement on a closing basis after rebounding from an approach to key technical support around 1300. Recently the Nasdaq TRIN got to near, but didn’t quite reach, what is usually a definitive “oversold” or climax selling level as measured on a 10-day basis. (High readings in the 10-day TRIN is almost never a short-term timing indicator however, as peak readings can occur days and even 2-3 weeks ahead of an actual bottom.) We could have bottomed with only a 50% price retracement as the Nasdaq has been more oversold on a long-term basis. Time will tell. QQQ Daily chart: I suggested covering short positions (and long puts) on moves to near 24, which was seen on Friday – this strategy is still my suggestion, as this area has been the low end of the recent trading range – not that the Q’s cannot also go lower of course, but trading is a matter of playing the odds and the probability of a rebound increases in my estimation. Especially also given that the Nas 100 tracking stock is registering an oversold reading on the various oscillators. If there is a decisive downside break of 24 and a couple of consecutive closes under this level, the next significant support looks to be in the 22 area. QQQ Hourly chart: The top end of the trading range of the past few weeks has been in the 26-27 area. There is near resistance also apparent around 25.50, but I consider 26 more the beginning of where the strongest selling will show up. 26 or higher (26-27 zone) is a definite area to re-short the stock. Especially so as long as the administration still appears to be on a straight-line march to an invasion of Iraq. ------------------------------------------------------------ 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 ------------------------------------------------------------ ************** Editor's Plays ************** In-e or Out-e? I picked up a couple of interesting tidbits this week that contributed to this column. I am going to profile a call and a put with the emphasis on cheap. I get the most email wanting cheap option plays from those investors on a budget. Just remember you normally get what you pay for. Out-e, as in out of favor. You were thinking of something else? Monster.com had a great Super Bowl ad but with many more applicants than jobs it must be tough making a living. The Chairman dumped 270,000 shares this month and that does not say much for immediate future prospects. Maybe he needed the money for tuition. He claims he holds an executive MBA degree from Harvard, a degree the school does not offer. Enquiring minds want to know if Jeff Taylor has his application for another chairmanship posted online. The company also said it was cutting a lot of high profile job categories from its offerings and would take a $100 million restructuring charge. They announce earnings on Feb-13th and the conference call should be fun. TMPW closed at $11.05 on Friday. Really gutsy (crazy) traders could consider the Feb-$10 put for $.60 cents but it expires the day after the conference call. You do not need a degree from Harvard to question the wisdom of that strike. The March $10 put is $1.10 and if the conference call torpedoes the support at $10 we could be looking at something below $8 really easy. Very high risk play because any positive news could stimulate the gazillion shorts to cover. The company has other businesses besides Monster.com like MonsterMoving.com which is a portal for everything connected with buying, selling and moving to a new home. In-E, our in favor stock, is EMC. They reported earnings last week inline with estimates and it expects to report positive earnings growth for the next four quarters. EMC is concentrating on new products like their long term archive storage systems. Their Centera Content system saw a revenue increase of +258% in the fourth quarter. Not bad for a slow tech environment. Storage system companies have been reporting sales growth when other techs have not. EMC is the biggest and has marketing agreements with other major companies. They are widely expected to do great when the recovery comes and do well if it doesn't. The stock has been stuck below $8 since May of last year. It has been on a steady uptrend since $4 in October. I could see it breaking that $8 barrier in the next earnings cycle. I think it would produce significant short covering and we could see a quick run to next resistance at $12. The rest is up to the recovery. The July $7.50 call (stock at $7.70) is $1.45 and would cover two earnings cycles. The Jan-2004 $10.00 call is only $1.10 and would cover four earnings cycles and it is only $2 out of the money. Personally I would go for the January option. I know it is a long time but for $110 it could be very profitable. It may never get back to the $105 share price from Sept of 2000 but $20 is a definite goal if the market returns. Also a high risk play but for the price of a good dinner and a movie for a couple you could be richly rewarded. No guarantees of course. EMC Daily EMC Weekly ******************************** Play updates: NEM Put from Jan-26th ABX sold off just like we expected and traded back down to $16.45 but also as expected there was not enough movement to make a profit. NEM also sold off from $30.15 to $28.95 but has yet to break enough to be profitable either. Both stocks did exactly as expected and that was fail to make it over resistance in their already extended state. I recommended March and June $27.50 puts on NEM and both are up just fractionally over last weeks prices but primed for a fall once the war starts. If Powell is successful in adding to the coalition next week the fall could begin then. March $27.50 Put NEM-OY $1.25 June $27.50 Put NEM-RY $2.40 AMZN Puts from Jan-19th What can I say? Fundamentals still do not matter. AMZN has traded in a tight range between 22.40 and 21.60 except for the gap down with the market on Tuesday. The good news is we are not seeing any bullish movement. The bad news is there is no movement in our direction. With the potential for a further Nasdaq drop next week I am still hopeful. We have a stop set at $22.75 and we are looking for a break under $21.50 to get the ball rolling. We just want it to be before Feb-21st. DJX Puts from Jan-5th. The Dow continued to drop this week and the Feb-85 put traded as high as $6.20 from the $2.85 price when recommended. The March-$85 put traded as high as $7.00, up from $3.40. We are getting very close to the secondary target of 7700 on the Dow and I would plan on exiting if we hit that level. There is always the possibility that something bullish will happen and hold the market in the current range while premium decays. With strong gains on either strike I would be very careful about giving it back. Set a stop loss and exit with a profit on a bounce. Powerball - From 12/29/02 The Powerball Lottery play for December-2003 dropped another -$100 to a loss of -$485 is closed today. This is a 12-month play and we are only four weeks into it. Be patient. If you are not in it I would consider it a buying opportunity. It would cost you about $700 to buy one contract of each today. Any one contract could repay that $700 by 12/31/04 leaving the rest as profit. It is a high risk "LOTTERY" play but then $700 is not much risk. 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 **************** Alan in Wonderland by Steven Price Any trader watching the intraday moves in the major indices today is most likely wearing a neck brace by now. While we still appear to be in breakdown territory, the bulls are not giving in easily and continue to buy dips. Those dips, however, are getting slightly lower each day, as are the rally highs. Ever since breaking down from support in the Dow 8200-8400/SPX 870-900 ranges, it seems like everyday has been an adventure, with each one harder to predict than the day before. Traders listening to the television analysts know that each day brings a dramatically different tone. Most of the action has been pinned on unpredictable war developments relating to Iraq. However, we are also in the heart of earnings season and there has been plenty of additional information to digest. Some of that information came by way of a warning from the world's largest chip manufacturing equipment maker Applied Materials (AMAT) this morning. AMAT said it expects a 35% drop in orders for its latest quarter, instead of the previously expected 20% drop. That announcement sent a pre-open bullish market into the tank early on, with all major indices continuing Thursday afternoon's slide to new relative lows. That's when the schizophrenia began. The university of Michigan Consumer Sentiment results came out at 82.4, versus expectations of 83.5. That was worse than expected, but the market rallied strong, with the Dow running almost 100 points following the data. Then came the good news. The Chicago PMI report came out at 56% versus 53%, with any number over fifty indicating manufacturing expansion in the region. The good news sent the Dow lower by almost the 100 points that it rallied on the worse than expected Sentiment number. Feel like you just fell down the rabbit hole? The Wonderland scenario (I can just see Alice Greenspan navigating the chessboard trying to figure out ways to prop up a sinking market?) continued to play out as the markets rallied all the way back into the green, including the techs, which had received the brunt of the bad news from AMAT. In fact, for those of you that have followed along with my head and shoulders analysis, we finally got the breakdowns in the COMP and NDX that I identified as the last straw holding us from truly caving in. I should say we got those breakdowns on an intraday basis, which is important given the closing prints. The breakdown in the COMP occurred below 1319, which was the support level of the November pullback after what so far looks like a left shoulder up at 1419. The corresponding NDX level was 972. Both of those levels held over the last several days, even with the Dow/SPX /OEX all giving up their November "neckline" support last week. However, in spite of the AMAT news that sent those indices reeling, they bounced hard, turning green for much of the afternoon. By the end of the day, they had once again sunk, but finished yet again just over those breakdown levels. Actually the COMP sat right on top, while the NDX had more than 10 points of breathing room. The last four lows in the COMP had been 1320, 1321, 1320 and 1322. While today's low dropped all the way to 1303, the end of the day saw a close at 1320.91. I'd love to say we got the breakdown, but with bulls defending that support with so much tenacity, it is hard to call the intraday move a defining one. After all, if the world's largest chip equipment maker is going to see a 35% reduction in orders and we still can't get a breakdown, I'm not sure what will finally cause one. Tuesday brings Cisco's earnings release, so if we can get the company to beat forecasts of 13 cents per share, maybe we'll finally get a "Wonderland" breakdown (GRIN). In reality, the company is already predicted to see its number rise from 9 cents to 13 cents, so the accompanying comments about what it sees for 2003 will likely control market reaction. After all, IBM and Microsoft both beat earnings, as well, but both stocks have dropped precipitously on cautious 2003 guidance. So far, the Dow, SPX and OEX are all bouncing around beneath their head and shoulders breakdown levels. They are setting slightly lower lows and slightly lower highs, but mostly moving sideways by the end of the week. Those averages closed slightly lower for the week, but it looks more like consolidation after dropping hard from January 15-27. With the Iraq situation heating up and the markets swinging wildly, we are likely to see more tough to predict movement, but right now the overall trend remains down. However, consolidation can also mean we are setting a floor. That seems unlikely, but if Saddam Hussein heads into exile (which is becoming a frequently discussed possibility) or the international community (and Democratic Congressional leadership) puts up enough opposition to an Iraqi invasion to stall the process, we could see a big relief rally. If Cisco gives cautious guidance on Tuesday, similar to that from Microsoft and IBM, we could see another big leg down. The VIX still reflects plenty of downside fear from possible developments. The 35% level that had served as resistance over the last several months, but was broken on the breakdown below Dow 8200/OEX 440/SPX 870, has begun to act as support, even on subsequent rallies. When downside concerns finally abate, expect the VIX to breakdown below 35 and re-test 30. If we finally put the Iraq situation behind us, it is even possible that it will breakdown below the support at 26 that was in place for about the same time period as the 35 resistance. For now, however, the support is telling us that there may be further downside in the immediate future. Traders can brace for another wild week, with those risk-averse souls on the sidelines. Even aggressive traders may want to stick with risk capital only, as even the most accurate forecasters' crystal balls are a little cloudy these days. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8053 Moving Averages: (Simple) 10-dma: 8203 50-dma: 8542 200-dma: 8802 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 855 Moving Averages: (Simple) 10-dma: 868 50-dma: 901 200-dma: 933 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 983 Moving Averages: (Simple) 10-dma: 1003 50-dma: 1044 200-dma: 1037 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX recovered impressively from the morning drop to the minor support level at 260 I pointed out in Thursday's Market Sentiment. Following the warning from AMAT that it would see a 35% drop in first quarter orders, the recovery from this morning's 13-point drop was actually quite amazing, but we remain below the previously strong support at the 280 level and have not broken the trend of lower highs since topping out on January 13. The PnF bearish vertical count (standard 4-point box over 200) is actually all the way down at 200. While that may seem extreme, it actually coincides with October support at 209 and is an eventual target. The 412 bullish count on the way up also seemed out of reach when we were below 300, but we came pretty close at 393. 52-week High: 657 52-week Low : 214 Current : 271 Moving Averages: (Simple) 21-dma: 307 50-dma: 319 200-dma: 352 ----------------------------------------------------------------- Market Volatility As mentioned above, the VIX is holding its newfound support at the former 35% resistance level, suggesting another move lower in stocks. The last VIX spike on the way down in equities found resistance at 40, however that is still well short of the recent extreme highs in the upper 50s. The VIX did cluster around 40 throughout October and that level can be viewed as resistance, but if we breakout above it, then look out below in the equities. CBOE Market Volatility Index (VIX) = 35.78 –0.59 Nasdaq-100 Volatility Index (VXN) = 46.81 +0.59 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.84 539,534 451,735 Equity Only 0.67 402,956 268,299 OEX 1.05 20,806 21,748 QQQ 1.36 44,727 60,829 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 45.2 - 0 Bull Correction NASDAQ-100 47.0 - 1 Bear Confirmed Dow Indust. 30.0 - 7 Bear Confirmed S&P 500 46.0 - 2 Bull Correction S&P 100 43.0 - 2 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 1.36 10-Day Arms Index 1.49 21-Day Arms Index 1.23 55-Day Arms Index 1.26 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 2068 776 NASDAQ 1809 1321 New Highs New Lows NYSE 76 53 NASDAQ 57 67 Volume (in millions) NYSE 1,760 NASDAQ 1,554 ----------------------------------------------------------------- Commitments Of Traders Report: 01/28/02 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 increased long and short positions, ending up with a net short increase of 4,500 contracts. Small traders took the opposite approach, reducing both positions, but ending up with a net increase of 4,300 long contracts. Commercials Long Short Net % Of OI 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%) 01/28/03 422,232 468,586 (46,354) (5.2%) 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 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% 01/28/03 142,734 85,567 57,167 25.0% 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 left positions virtually unchanged, with a net reduction of 1,300 short contracts. Small traders Small traders left the long side unchanged, while reducing shorts by 800 contracts. Commercials Long Short Net % of OI 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%) 01/28/03 37,955 49,321 (11,366) (13.0%) 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 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% 01/28/03 25,814 7,576 18,238 54.6% 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 reduced the overall long position by 1,400 contracts, while small traders reduced the net short by 200 contracts. Commercials Long Short Net % of OI 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% 01/28/03 16,013 11,574 4,439 16.1% 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 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%) 01/28/03 4,838 7,836 (2,998) (23.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ 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 ------------------------------------------------------------ *************** ASK THE ANALYST *************** How or when to get out of the market Have you ever written a piece on how/when to get out of the market (especially medium term, two to three month trades). Your guidance is so superb re: managing risk and monitoring levels, I would guess that you offer some pretty sound advise on the subject of taking profits. If you ever get time or interest, I, for one, would gobble up every tidbit. Answer: From the perspective of an options trader/investor there is only one time to be fully out of the market, and that is when you are so uncomfortable with the risking of cash that being in the market will adversely impact your thinking, or sleep habits. However, it is my opinion, that an investor or trader should never be fully out of the market. As an equity trader/investor that only trades underlying equities/securities, there are times to be out of the market, or at least limiting your cash exposure, but this is also one reason why derivatives like options were "invented." Options allow exposure to markets with MINIMAL CAPITAL. It is my guess that the above question posed by a subscriber comes from the "uncertainty" that currently roils the equity, bond and currency markets here in the U.S. as well as those abroad. I say "uncertainty" as I don't believe there is anyone, with major influence over the equity, bond or currency markets that has full knowledge of "war with Iraq," or the impact on potential "tax relief," or just how the U.S. or global economy is going to be doing in the next month, quarter or year, or the going into exile of Iraq's president Saddam Hussein, or the capture of key terrorism figures, or knowledge of future terrorism activities here in the U.S. or other parts of the world. This is a brief list of potential "events" or "scenarios" that could influence market price action (up or down). In my initial answer, I do state a difference between options and equities when addressing the issue of being in or out of the markets. I will address this later, but it is simply tied to "capital at risk" as it relates to your trading/investing account. My thoughts on the "difference" between the two is risk, or capital exposure. Again, there does seem to be a general perception among traders that options are "risky," but when utilized properly, the perception of "risky" is so misunderstood not only by traders and investor, but also compliance officers at brokerage firms. So misunderstood, that I find it alarming, especially from the compliance level. Lets talk quickly about the current market environment, where it does seem to be generally thought that a U.S-lead war with Iraq is growing more "certain." This "war with Iraq" thought creates uncertainty, and for the most part, MARKET participants "dislike uncertainty," take all or the bulk their cards off the table and sit things out. This type of thought isn't only for BULLISH traders, but for BEARISH traders as well. The taking of "cards off the table," or sitting in cash does two things. By withdrawing from the markets (equity, bond, currency, etc., etc.,) that action protects the investor's cash, but also removes the opportunity to make money above a stated rate of interest from some type of short-term money market fund. These are the facts are generally weighed as to "opportunity cost." One could argue, as I would, that even during times of economic bliss and world peace, there are those traders/investors that should struggle with "should I be in the market?" as valuations may be getting stretched (if you're a fundamental-based investor) or individual stocks/indexes become extended and carry greater price risk to a support level. So why might I (Jeff Bailey) agree with limiting underlying equity exposure (buying or shorting an underlying stock) during times of "uncertainty?" I would answer this as follows. If I buy 100 shares of a $25.00 stock, then my maximum risk is $2,500.00. If I short 100 shares of a $25.00 stock, my potential maximum risk is unknown. While I generally feel that I can control both long and short risk in a stock with a protective stop, I've traded long enough to see stocks fall or jump significantly below or above stop loss levels where my trading account can be severely damaged. From the bearish, or short side, I've seen stocks that closed at $12.00 per share, open for trading at $82.00. (EntreMed (ENMD) $0.98, 05/01/1998-05/04/1998). While this is an extreme example (myself and clients were "lucky" as I had shorted the stock near $15 based on "knowledge" that their cancer cure wasn't viable and covered on some "bad news" on 04/27/98 at/near $13.00). It was the action on May 4, 1998 that despite my "knowledge" the stock opened for trading at $82.00 that now has be cautious of NEVER shorting a biotech stock, just in case the MARKET believes a cure for cancer has been found (or any other life-threatening disease). Arguably, I can control my RISK in a trade by reducing trade size. However, for some traders, even if on the "right side of the trade, a 10% price move on what might be deemed a "not comfortable risk exposure" simply has the investor/trader measuring the potential gain against "market uncertainty" and deciding that the opportunity of gains, does not outweigh the perceived risk due to various scenarios at play in the market that are creating uncertainty. The example above (100 shares of $25.00 stock) is to show a value of $2,500, which I will now compare to an option. In times of "uncertainty," it becomes somewhat difficult for a trader/investor in an underlying equity to "know for certain" or have any type of true degree of confidence in risking their capital. It makes little sense to be short or long the same security with equally weighted dollars amounts as any price fluctuation of the underlying stock finds the trader/investor seeing no net gain in the trade's value. However, options are different. A trader and play the bullish and bearish side of the same security, limit capital exposure (by not OVER LEVERAGING) and still be "in the market" and having opportunity to capitalize on price actions. In fact, options traders "LOVE" uncertainty and the volatility that often comes from the uncertainty. While there's two option strategies "straddle" and "strangle" that allow the investor/trader to take a rather "neutral" position in a security and have predetermined and FINITE knowledge of cash risk. Let me pose some questions to you as it relates to the current market environment and you tell me if you should be out of the market. The main question posed is "when do I get out of the market." While I hate to throw the answer back on you the trader/investor, it comes down to YOU, when you answer that question with "the money invested (risk) becomes too great for the potential opportunity of gain (reward)." I may answer this question different than you, and you might answer this question different than your spouse, or the next-door neighbor. EVERY investor has a different degree of risk tolerance. But here's an option strategy in the NASDAQ-100 Index Tracking Stock (AMEX:QQQ) $24.44 that allows the trader/investor to be in the market, have a "neutral" stance toward price direction due to the greater degree of uncertainty that appears to be roiling the markets, and based on one contract bullish (call) and one contract bearish (put) for a cost of $505.00 (excluding commissions) has the trader/investor keeping some exposure to the market, even during a time of uncertainty, until June 20, 2003. Straddle trades are "neutral" trades, where the trader/investor looks to profit from volatility away from a price level. Often times, periods of uncertainty can create the volatility as investors begin to speculate on price direction, or make buy/sell decisions under higher degrees of emotional distress or greed. The trader than implements a "neutral" type of trade in his/her account REMOVES any type of direction bias, or emotions that might come from distress or greed. NASDAQ-100 Index Tracking Stock - Option Montage In "blue" if highlighted a June $25 straddle, whereby a trader buying 1 call option (QAVFY) for $2.30 and 1 put option (QAVRY) for June expiration takes on a "market neutral" position and would be risking a MAXIMUM of $505.00 (excluding commission). If I were to divide that $505.00 by the 100 shares each contract ($505 / 100 = $5.05) covers, I KNOW FOR FACT, that I would need a MINIMUM $5.05 price gain or decline from $25.00 on or before expiration to achieve a break-even or gain. So, range becomes $20.00-$30.00. For some, depending on what degree of "uncertainty" the current market environment holds for you, the $505.00 risk may be deemed "not worth the opportunity" if you don't think the QQQ can trade much outside of this range between now and June expiration. But, don't forget about TIME and the potential impact that market volatility can have on premiums when considering a straddle as part of your trading strategy. A "common mistake" made by options traders is that they don't "buy enough time" in a trade, and will try to "pinpoint" a date where everything comes together. Few traders or investors are able to predict such occurrences as so many variables are in play. A trader that "buys as much time as he/she can afford and is comfortable with" is giving more time (yes more time means more incremental cost), but TIME is a variable that is good to have on your side. A trader that implements a June $25 straddle may see his/her straddle trade become quite profitable a week from now, should the QQQ fall to $22.50 as premium in the call portion of the trade still exists, compared to a month from now, when the trade might still be at a $505.00 loss should the QQQ be trading $22.50 as some time premium begins to erode. Again, market volatility will also impact option pricing, but that's a variable I can't predict. Now... a June $25 straddle might not be for everyone, as $505.00 of risk is simply deemed inappropriate. Perhaps it doesn't meet your risk/reward profile even under a market environment that appears to be uncertain. I've also highlighted in "pink" a QQQ strangle trade in the June $26 calls and June $24 puts. This is still a "neutral" trade toward the market, but now were not only looking for price action away from current levels, but OUTSIDE a range of $24-$26. Again, I can add the two prices of this strangle ($1.85 + $2.25 = $4.10) and understand my maximum risk for 1 contract each is $410.00 (excluding commissions). I can add the $4.10 to $26 and understand I need something above $30.10 to become profitable by expiration, or something below $19.90 by expiration to become profitable by expiration. Again, the sooner I get price action the better as I shouldn't expect much time premium erosion. Do you see what's going on here? The $25 straddle costs more than the 26/24 strangle doesn't it? Why do you think that is? Because of the QQQ were to close either side of $25, there's still something left. A trader may want to think about this when deciding on a straddle or strangle, whereas the 26/24 strangle needs the QQQ to close above $26 or $24 or the trade to have anything left of value at expiration. Still.... depending on the TOTAL amount of $ risk a trader/investor is comfortable with, a strangles does expose less risk of capital to the market under times of uncertainty, but still allows for potential to profit. In "red" I've also highlighted another strangle at the $23/$27 June expiration. Total cost here (excluding commission) for equally weighted 1-contract exposure is $2.30, or $230.00. Managing a straddle, or strangle trade is rather "easy," and isn't necessarily a trade that needs to be watched like a hawk eyeballing a mouse, especially under times of uncertainty. It is when there's either some type of resolution to the uncertainty or level of profitability achieved when the trade is closed. Using the $25 straddle as an example. Let's suppose a trader's goal is to achieve a 20% in 1 month (by Feb exp.), 40% gain in 2 months (March exp.), 60% gain in 3 months (April exp.), 80% gain in 4 months (May Exp.), and 100% gain in 5 months (June expiration). These types of "goals" and "time line" become a trader's measuring stick for the trade. After all, using June expiration and capital risk of $505, if looking for minimum risk/reward profile of 1:2 from our trader's business plan an set of rules, I don't want to be putting on any trade that doesn't offer at least a $2 reward for every $1 of risk type of trade. Let's say that I put on a June $25 straddle and one month from initiating the trade, I look that my put and call options combined. Total value from this "neutral" trade is now $750 dollars, representing a 48% gain, with the calls being worth $7.25 and puts seeing "sympathy" bid of $0.25. What might you do? I'd probably close out the whole trade, or at least close out the call portion and say "good trade" I'm glad I had some money in the market. Admittedly, I'd be "surprised" if a June $25 straddle were profitable by 48% in one month. After all, this is a "neutral" type of trade, but with "uncertainty" in the markets, then this may be the time for straddle trading. Remember, a straddle/strangle traders looks for volatility away from a price level. The volatility away from a price level is thought to be influenced by "fear" or "greed." Don't necessarily equate "fear" or "greed" with "bullish" or "bearish." I've seen just as many "greedy" bulls and I have "greedy" bears. I've also witnessed market environments where a "fearful" bull in a declining market has the bear expressing equal emotions of "fear" when his/her scenario never plays out as planned and a BIG bet on the WRONG side begins to evaporate as losses build. Now.... that you have a "neutral" type of trading strategy and can assess risk of capital before you EVERY RUN THE TRADE in an "uncertain" market environment, is there ever a time to be out of the markets? Questions related to "war with Iraq" What if Saddam Hussein goes into exile, or is overthrown by the people of Iraq? What impact might that have on the QQQ? What if the U.S. and Britain are the only two countries that decide to form their own coalition and declare war on Iraq. What if "World War III" were to come from a U.S.-Britain initiative against Iraq were to find strong opposition from other countries? What impact might that have on the QQQ? What if Saddam Hussein suddenly gives into U.N. weapons inspection, fully discloses and accounts for destruction or possession of weaponry? (This may be more far-fetched, but one never knows). What impact might that have on the QQQ? What if Saddam Hussein has sabotaged oil wells in Iraq and upon being attacked by a U.S.-lead initiative against his country decides to blow up sabotaged oil wells? Launch any chemical weapons he may have (if he has any)? What impact might that have on the QQQ? Jeff Bailey ************* COMING EVENTS ************* ========================================= Market Watch for the week of February 3rd ========================================= ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ACDO Accredo Health Mon, Feb 3 Before the Bell 0.34 CPT Camden Property Trust Mon, Feb 3 After the Bell 0.83 CRL Charles River Lab. Mon, Feb 3 After the Bell 0.36 EW Edwards Lifesciences Mon, Feb 3 After the Bell 0.34 EPD Entrprise Prdcts Part Mon, Feb 3 Before the Bell 0.24 ERICY Ericsson LM Telephone Mon, Feb 3 -----N/A----- -0.16 FSH Fisher Sci Intl Mon, Feb 3 After the Bell 0.45 GGP General Growth Prop Mon, Feb 3 -----N/A----- 1.84 HPT Hospitality Prop Trst Mon, Feb 3 -----N/A----- 1.00 HUM Humana Inc. Mon, Feb 3 -----N/A----- 0.33 JP Jefferson-Pilot Mon, Feb 3 After the Bell 0.83 MAT Mattel Mon, Feb 3 Before the Bell 0.38 NFS Nationwide Finl Serv Mon, Feb 3 After the Bell 0.74 NFS Nationwide Finl Serv Mon, Feb 3 After the Bell 0.74 RSG Republic Serv Mon, Feb 3 After the Bell 0.35 RMD ResMed Mon, Feb 3 After the Bell 0.30 SPP Sappi Limited Mon, Feb 3 Before the Bell 0.25 SRA Serono S.A. Mon, Feb 3 Before the Bell 0.14 TMX Telefonos de Mexico Mon, Feb 3 After the Bell 0.87 VMC Vulcan Materials Mon, Feb 3 After the Bell 0.36 WFT Weatherford Intl Mon, Feb 3 After the Bell 0.26 ------------------------- TUESDAY ------------------------------ NDN 99 CENTS Only Tue, Feb 4 Before the Bell 0.28 ALA Alcatel Tue, Feb 4 Before the Bell -0.12 LNT Alliant Energy Tue, Feb 4 Before the Bell 0.49 APCC Am Power Conversion Tue, Feb 4 After the Bell 0.21 AVZ AMVESCAP PLC Tue, Feb 4 Before the Bell 0.19 AVP Avon Products Inc. Tue, Feb 4 -----N/A----- 0.79 BOX BOC Group PLC Tue, Feb 4 -----N/A----- N/A BWA BorgWarner, Inc. Tue, Feb 4 -----N/A----- 1.49 BSX Boston Scientific CorpTue, Feb 4 After the Bell 0.31 CHRW C.H. Rbnsn Worldwide Tue, Feb 4 After the Bell 0.29 CBL CBL & Associates Prop Tue, Feb 4 After the Bell 1.12 CB Chubb Corporation Tue, Feb 4 Before the Bell 1.08 CSB CIBA SPECIALTY CHEM Tue, Feb 4 -----N/A----- 0.50 CSCO Cisco Systems Tue, Feb 4 After the Bell 0.13 CL Colgate-Palmolive Tue, Feb 4 -----N/A----- 0.58 CSC Computer Sci Corp Tue, Feb 4 After the Bell 0.60 CVS CVS Corporation Tue, Feb 4 Before the Bell 0.47 EDMC Education Manag Corp Tue, Feb 4 Before the Bell 0.69 EMR Emerson Electric Tue, Feb 4 -----N/A----- 0.54 EC Engelhard Corporation Tue, Feb 4 Before the Bell 0.44 ETR Entergy Tue, Feb 4 Before the Bell 0.26 EOG EOG Resources Tue, Feb 4 -----N/A----- 0.33 GYI Getty Images Tue, Feb 4 After the Bell 0.11 HCA HCA - The Health Comp Tue, Feb 4 Before the Bell 0.60 HEW Hewitt Associates Tue, Feb 4 Before the Bell 0.28 N Inco Tue, Feb 4 -----N/A----- 0.21 LAF Lafarge North America Tue, Feb 4 -----N/A----- 1.12 LVLT Level 3 Comm Tue, Feb 4 -----N/A----- -0.67 LZ Lubrizol Tue, Feb 4 -----N/A----- 0.48 MFC Manulife Finl Corp Tue, Feb 4 During the Market 0.46 MKL MARKEL CORP Tue, Feb 4 -----N/A----- 2.20 MBI MBIA Inc. Tue, Feb 4 Before the Bell 1.12 OOM MMO2 Tue, Feb 4 -----N/A----- N/A MCO Moody's Corporation Tue, Feb 4 After the Bell 0.42 OHP Oxford Health Plans Tue, Feb 4 Before the Bell 0.94 PCAR Paccar Tue, Feb 4 -----N/A----- 0.64 PTEN Patterson-UTI Energy, Tue, Feb 4 Before the Bell 0.01 PFGC PERFORMANCE FOOD GRP Tue, Feb 4 Before the Bell 0.38 PNW Pinnacle West Cptl Co Tue, Feb 4 Before the Bell 0.56 IQW Quebecor World Tue, Feb 4 -----N/A----- 0.66 RGC Regal Enter Grp Tue, Feb 4 Before the Bell 0.23 RNR RenaissanceRe Holding Tue, Feb 4 After the Bell 1.31 ROH Rohm and Haas Company Tue, Feb 4 Before the Bell 0.23 RYAAY Ryanair Holdings Tue, Feb 4 -----N/A----- 0.30 CAKE The Cheesecake Factry Tue, Feb 4 After the Bell 0.26 PFG The Principal Finl GrpTue, Feb 4 After the Bell 0.53 JOE The St. Joe Company Tue, Feb 4 Before the Bell 0.22 VRTX Vertex Pharm Inc Tue, Feb 4 After the Bell -0.40 WPI Watson Pharm, Inc. Tue, Feb 4 -----N/A----- 0.44 WSTC West Corporation Tue, Feb 4 After the Bell 0.21 ----------------------- WEDNESDAY ----------------------------- ATVI Activision Wed, Jan 22 -----N/A----- 0.61 ACE ACE Limited Wed, Feb 5 After the Bell -0.06 ADO Adecco SA Wed, Feb 5 -----N/A----- N/A BUD Anheuser-Busch Co Inc Wed, Feb 5 -----N/A----- 0.32 ARI Arden Realty Inc Wed, Feb 5 -----N/A----- 0.68 AVE Aventis Wed, Feb 5 Before the Bell N/A BPO Brookfield Properties Wed, Feb 5 -----N/A----- 0.61 CLU Canada Life Financial Wed, Feb 5 -----N/A----- 0.52 CSL Carlisle Companies Wed, Feb 5 After the Bell 0.45 CD Cendant Corporation Wed, Feb 5 After the Bell 0.29 EXBD Corp Exec Board Co Wed, Feb 5 After the Bell 0.21 CTMI CTI Molecular Imaging Wed, Feb 5 After the Bell 0.05 DNB D&B Wed, Feb 5 After the Bell 0.85 ELN Elan Corporation, PLC Wed, Feb 5 Before the Bell -0.17 EOP Eq Office Prop Trst Wed, Feb 5 Before the Bell 0.77 EQR Equity Residential Wed, Feb 5 Before the Bell 0.59 EXPE Expedia, Inc Wed, Feb 5 After the Bell 0.41 GXP Great Plains Energy Wed, Feb 5 After the Bell N/A HNI HON INDUSTRIES, Inc. Wed, Feb 5 Before the Bell 0.39 ROOM Hotel Res Network Wed, Feb 5 Before the Bell 0.38 JNY Jones Apparel Group Wed, Feb 5 Before the Bell 0.50 KB Kookmin Bank Wed, Feb 5 Before the Bell N/A LIN Linens 'n Things Inc. Wed, Feb 5 Before the Bell 0.87 MGM Metro-Goldwyn-Mayer Wed, Feb 5 -----N/A----- 0.07 MX Metso Corporation Wed, Feb 5 -----N/A----- N/A MON Monsanto Company Wed, Feb 5 Before the Bell 0.29 IX Orix Corporation Wed, Feb 5 Before the Bell N/A PNP Pan Pac Retail Props Wed, Feb 5 Before the Bell 0.76 PSC Philadelphia Suburban Wed, Feb 5 Before the Bell 0.22 PP Prentiss Properties Wed, Feb 5 After the Bell 0.82 QTRN Quintiles Trans Wed, Feb 5 -----N/A----- 0.18 REG Regency Centers Corp Wed, Feb 5 After the Bell 0.84 RHA Rhodia S.A. Wed, Feb 5 During the Market N/A SPI Scottish Power Wed, Feb 5 Before the Bell N/A PCS Sprint Corp Wed, Feb 5 Before the Bell -0.22 FON Sprint FON Group Wed, Feb 5 Before the Bell 0.38 TDS Telephone Data Wed, Feb 5 Before the Bell 0.39 TDS Telephone Data Wed, Feb 5 Before the Bell 0.39 ALL The Allstate Corp Wed, Feb 5 After the Bell 0.77 TMO Thermo Electron Corp Wed, Feb 5 After the Bell 0.29 TM Toyota Motor Corp Wed, Feb 5 -----N/A----- N/A TXU TXU Corp. Wed, Feb 5 Before the Bell 0.27 UNM UnumProvident Corp Wed, Feb 5 After the Bell 0.64 WHR Whirlpool Corporation Wed, Feb 5 Before the Bell 1.64 ------------------------- THURSDAY ----------------------------- TW 21st Century Ins Thu, Feb 6 -----N/A----- 0.14 RKY Adolph Coors, Co. Thu, Feb 6 -----N/A----- 0.75 AG AGCO Thu, Feb 6 -----N/A----- 0.28 AMH AmerUs Group Co. Thu, Feb 6 After the Bell 0.91 RMK Aramark Corporation Thu, Feb 6 Before the Bell 0.30 ASN Archstone-Smith Trst Thu, Feb 6 Before the Bell 0.51 AN AutoNation Thu, Feb 6 Before the Bell 0.23 CINF Cincinnati Finl Corp Thu, Feb 6 Before the Bell 0.45 CFB Commercial Federal . Thu, Feb 6 Before the Bell 0.56 CTB Cooper Tire & Rubber Thu, Feb 6 Before the Bell 0.29 CVH Coventry Health Care Thu, Feb 6 Before the Bell 0.66 DASTY Dassault Systemes SA Thu, Feb 6 -----N/A----- 0.43 DVN Devon Energy Corp Thu, Feb 6 Before the Bell 1.13 DPL DPL Inc. Thu, Feb 6 After the Bell 0.23 EDS Electronic Data Sys Thu, Feb 6 After the Bell 0.48 GCI Gannett Thu, Feb 6 Before the Bell 1.28 GR Goodrich Corporation Thu, Feb 6 After the Bell 0.65 HB Hillenbrand Inds Thu, Feb 6 Before the Bell 0.75 ICI Imperial Chemical Ind Thu, Feb 6 -----N/A----- N/A IDC Interactive Data Corp Thu, Feb 6 Before the Bell 0.17 SFI iStar Financial Thu, Feb 6 Before the Bell N/A JHF John Hanck Finl Serv Thu, Feb 6 After the Bell 0.73 MTD Mettler-Toledo Intl Thu, Feb 6 After the Bell 0.68 MHK Mohawk Industries Thu, Feb 6 -----N/A----- 1.21 NVO Novo-Nordisk Thu, Feb 6 Before the Bell N/A NUS Nu Skin Thu, Feb 6 Before the Bell 0.22 NUE Nucor Thu, Feb 6 -----N/A----- 0.45 OVER Overture Services Inc Thu, Feb 6 After the Bell 0.22 POC P & O Prncss Cruises Thu, Feb 6 -----N/A----- 0.15 PPE Park Place Enter Thu, Feb 6 Before the Bell 0.03 PEP Pepsico Thu, Feb 6 Before the Bell 0.50 PIXR Pixar Animation Stu Thu, Feb 6 After the Bell 0.22 RL Polo Ralph Lauren CorpThu, Feb 6 Before the Bell 0.47 POT Potash Corp of Saskat Thu, Feb 6 Before the Bell 0.31 O Realty Income Corp Thu, Feb 6 -----N/A----- 0.72 RD Royal Dutch Petroleum Thu, Feb 6 Before the Bell 0.84 R Ryder System, Inc. Thu, Feb 6 Before the Bell 0.54 SWY Safeway, Inc. Thu, Feb 6 Before the Bell 0.78 SC Shell Trnsprt Trdng CoThu, Feb 6 During the Market 0.68 SHW Sherwin-Williams Thu, Feb 6 -----N/A----- 0.39 SHU Shurgard Strge Cnters Thu, Feb 6 After the Bell 0.75 SPG Simon Property Grp Thu, Feb 6 After the Bell 1.15 SUP Superior Industries Thu, Feb 6 Before the Bell 0.80 MNY The MONY Group Inc. Thu, Feb 6 Before the Bell 0.03 TBL The Timberland Co Thu, Feb 6 Before the Bell 0.61 TMK Torchmark Thu, Feb 6 Before the Bell 0.91 USAI USA Interactive Thu, Feb 6 Before the Bell 0.11 WSH Wlls Grp Hldngs Lmtd Thu, Feb 6 Before the Bell 0.47 ------------------------- FRIDAY ------------------------------- BLC Belo Fri, Feb 7 During the Market 0.38 CRE Carramerica Realty Co Fri, Feb 7 -----N/A----- 0.86 FUN Cedar Fair LP Fri, Feb 7 -----N/A----- -0.32 CI CIGNA Fri, Feb 7 Before the Bell 1.20 DB Deutsche Bank Fri, Feb 7 -----N/A----- N/A GRP Grant Prideco Inc Fri, Feb 7 Before the Bell 0.02 HTV Hearst-Argyle TV, Inc Fri, Feb 7 Before the Bell 0.39 PL Protective Life Corp Fri, Feb 7 Before the Bell 0.50 SNN Smith & Nephew Fri, Feb 7 During the Market 1.13 TIN Temple-Inland, Inc. Fri, Feb 7 Before the Bell 0.32 VSH Vishay Intertech, Inc Fri, Feb 7 Before the Bell 0.09 VOLVY Volvo AB Fri, Feb 7 Before the Bell N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CBI ChicagoBridge 2:1 Feb. 13th Feb. 14th MSFT Microsoft 2:1 Feb. 14th Feb. 18th -------------------------- Economic Reports This Week -------------------------- The earnings flood is slowly starting to ebb. While Wall Street will focus on the Bush-Saddam conflict, analysts will be watching the vehicle sales numbers and ISM index on Monday and the ISM Services number on Wednesday. Friday also has a number of economic reports. ============================================================== -For- Monday, 02/03/02 ---------------- Auto Sales (NA) Jan Forecast: 5.8M Previous: 6.1M Truck Sales (NA) Jan Forecast: 7.5M Previous: 8.7M ISM Index (DM) Jan Forecast: 53.0 Previous: 54.7 Constructin Spending(DM)Dec Forecast: 0.3% Previous: 0.3% Tuesday, 02/04/02 ----------------- Factory Orders (DM) Dec Forecast: 0.8% Previous: -0.8% Wednesday, 02/05/02 ------------------- ISM Services (DM) Jan Forecast: 54.0 Previous: 54.7 Thursday, 02/06/02 ------------------ Initial Claims (BB) 02/01 Forecast: N/A Previous: 397K Productivity-Prel (BB) Q4 Forecast: 0.5% Previous: 5.1% Friday, 02/07/02 ---------------- Nonfarm Payrolls (BB) Jan Forecast: 50K Previous: -101K Unemployment Rate (BB) Jan Forecast: 6.0% Previous: 6.0% Hourly Earnings (BB) Jan Forecast: 0.3% Previous: 0.3% Average Workweek (BB) Jan Forecast: 34.2 Previous: 34.1 Wholesale Invntories(DM)Dec Forecast: 0.2% Previous: 0.2% Consumer Credit (DM) Dec Forecast: $4.3B Previous: -$2.2B Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ We got trailing stops! 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The Option Investor Newsletter Sunday 02-02-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: EBAY Put Play of the Day: CEPH Dropped Calls: COF Dropped Puts: KSS, TDS ------------------------------------------------------------ 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 ******************************************* For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week COF 31.05 -0.78 1.24 0.38 -0.76 –0.15 Drop, EBAY 75.16 -0.34 -0.56 1.69 –0.81 1.13 New, FRX 51.75 -0.87 0.37 0.11 –0.47 –0.15 Still holding SYMC 46.68 0.21 1.90 1.07 –0.40 2.69 Rel. strength PUTS AT 46.87 -0.21 -0.40 0.10 –1.40 –0.79 200-dma failure CCMP 43.89 -1.24 1.53 0.57 –2.67 –2.41 Good start CEPH 46.53 -0.66 -0.14 -0.90 –0.81 –3.25 New,no strength KO 40.46 -0.56 -0.69 -0.55 –1.35 –1.89 Weak bounce KSS 52.37 -1.00 0.39 0.03 –0.16 –1.13 Drop, profits PNRA 29.51 -0.74 0.44 0.71 –2.70 –1.89 broken down TDS 42.90 -0.75 -0.08 0.54 –0.99 0.15 Drop, bounce ------------------------------------------------------------ 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 ------------------------------------------------------------ ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* eBay Inc. - EBAY - 75.16 (+0.95 last week) See details in play list Put Play of the Day: ******************** CEPH - Cephalon, Inc. $46.53 (-3.55 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 ^^^^^ COF $31.05 (-0.47) Everything seemed lined up for a snapback rally in shares of COF. All we needed was some participation from the Financial sector, and COF would likely have rebounded strongly from that gradually ascending trendline. Sadly, the Banking sector (BKX.X) just wasn't able to clear that pesky resistance near $745, and COF just drifted along its trendline for most of the week. Fortunately, we placed a trigger on the play at $32.25, and Wednesday's high of $32.15 failed to trigger the play. With Friday's intraday violation of that trendline and both the stock and the sector still looking weak, we're dropping the play this weekend to make way for stronger candidates. PUTS ^^^^ KSS $52.37 (-1.38) As the broad market has weakened over the past couple weeks, the deterioration in the Retail sector (RLX.X) has been a boon to our KSS play. Originally listed at $56.60, the stock did as we expected, falling to break the early January lows. But the past few days have been rather disconcerting as sector weakness has been unable to drive the stock down towards our $49-50 level. We still think the stock is headed lower, but with the descent slowing, we need to be mindful of time decay. Rather than hang on and hope for another drop, it seems prudent to harvest those gains and look to deploy cash elsewhere. Traders willing to stay in the play, waiting for one more drop, will want to keep stops tight, no higher than $53.65. That level is just above Thursday's intraday high and the 10-dma (now at $53.62). --- TDS $42.90 (+0.15) The third time was a charm, but not for us. We've been looking for TDS to breakdown again, but today was the third day in a row that the stock traded exactly $41.25 before rebounding. Fridays rebound was the strongest of all, coming on volume 50% above the ADV. At the close, TDS came to rest right at Thursday's intraday high, after briefly testing the 10-dma, which fortunately provided resistance. Given the strength of today's move and the fact that daily Stochastics are trying to turn bullish, the smart move is to get out while the getting is good. We're dropping coverage of TDS this weekend and would recommend using any intraday weakness on Monday to gain a more favorable exit. *********** 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. ------------------------------------------------------------ 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 02-02-2003 Sunday 3 of 5 In Section Three: New Calls: EBAY Current Calls: FRX, SYMC New Puts: CEPH ------------------------------------------------------------ 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 ------------------------------------------------------------ ************** NEW CALL PLAYS ************** eBay Inc. - EBAY - close: 75.16 change: +0.95 Company Description: eBay is the world's online marketplace(TM). Founded in 1995, eBay created a powerful platform for the sale of goods and services by a passionate community of individuals and businesses. On any given day, there are millions of items across thousands of categories for sale on eBay. eBay enables trade on a local, national and international basis with customized sites in markets around the world. (source: company press release) Why We Like It: On January 16th EBAY reported strong quarterly earnings of 28 cents/share (analysts were expecting only 24 cents) and then proceeded to raise their full-year 2003 EPS forecast to $1.27. The previous consensus estimate was $1.17. Those were some amazing numbers, especially considering the dismal earnings that most of the other high-profile tech companies were reporting. Wall Street must've seen it coming. In the three months prior to this announcement EBAY had already risen sharply from the $50.00 area. By mid-January shares were trading at 52-week highs. In the aftermath of the earnings report shares quickly moved to a multi-year high of $76.43. The past eight trading days have seen the stock slowly unwind from these levels as the broader market trended lower. Interestingly, EBAY has been firming up above its 21-dma. This moving average previously provided support when the stock was hit with selling ahead of the earnings report. The rising daily stochastics (5,3,3) are signaling that shares could build on their latest gains. Bulls can also be encouraged by the recent pattern of relative strength versus the NASDAQ. For instance, EBAY shrugged off a tepid NASDAQ performance on Friday and moved to a 1.2% gain. Another intriguing development can be seen on the point-and-figure chart. The stock has reversed into a column of "O" but has not yet produced a sell signal. Since October, three-box reversals have offered bullish entry points. If this trend continues EBAY could soon move back into a column of "X" and produce another buy signal at $77.00. In addition to the improving technical picture, investors might also be lured by the prospect of a forthcoming 2-for-1 stock split. The company split its stock near $75 in 1999 and 2000. With the fundamentals looking strong and shares holding near multi-year highs, it looks like another split announcement might not be far behind. As for upside potential, we'll be initially aiming for a move to the $80.00 region. Our exit strategy will be re-evaluated if/when shares approach this level. Further upside would not be out of the question if the overall tech sector were trading strong. Our entry point for this play is at $75.51, one cent above today's high. If trigged, we'll use a stop at $72.50, just under the relative low. In breaking news after the bell today, EBAY announced that in order to bolster its automotive auctions it had acquired an online auction management service called CARad.com and also entered into an agreement with Kelley Blue Book. We don't expect that this news will have any material impact on how EBAY trades on Monday. BUY CALL FEB-70 QXB-BN OI= 5719 at $6.20 SL=3.10 BUY CALL FEB-75 QXB-BO OI= 12410 at $2.65 SL=1.30 BUY CALL MAR-70 QXB-CN OI= 2130 at $7.90 SL=4.00 BUY CALL MAR-75 QXB-CO OI= 685 at $4.30 SL=2.15 Average Daily Volume = 5.75 mln ------------------------------------------------------------ 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 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: Although FRX had been showing some signs of technical strength, we had a pretty good hunch that continued broad market weakness would send the stock back to support at $50.00. That's exactly what happened on Friday morning when shares dropped with the Dow Jones and tagged an intraday low of $49.90. Our stop at $49.74, which was designed to give us a small cushion if support was broken, was not violated. It didn't take long for buyers to take advantage of this decline. FRX quickly regained the $50.00 level before rallying into positive territory. A slight uptrend manifested itself as the session wore on, and shares closed only 5 cents off the best levels of the day. FRX also closed above its 50-dma at $51.45. A similar reversal earlier this week did not result in a sustainable multi-day bounce. Will today's rebound be any different? We think odds are good as long as the market continues to stabilize. The rising daily stochastics and MACD (which is leveling out above the baseline) are positive signs for the bulls. On Monday we'll be looking for shares to rally towards short-term resistance at $53.00. A move above this level would open the door to a possible test of the all-time highs. BUY CALL FEB-50*FHA-BJ OI= 1044 at $3.30 SL=1.55 BUY CALL FEB-52.50 FHA-BX OI= 1526 at $1.70 SL=0.85 BUY CALL MAR-50 FHA-CJ OI= 378 at $4.10 SL=2.05 BUY CALL MAR-55 FHA-CK OI= 799 at $1.50 SL=0.75 Average Daily Volume = 3.51 MIL --- SYMC – Symantec Corp. $46.68 (+2.77 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: Still knocking on the door, SYMC actually had a pretty impressive week, considering the carnage in the rest of the market. It was however, rather interesting that the $47 level (exactly) marked the high for the stock on each of the past 3 days. Looking at an intraday chart, it appears that there has been a fair amount of stock for sale at that level, as each time it is tested, the price falls back. Not by a large amount, but enough to keep the buying surge in check. What has been most impressive is the way the stock has continued to find support near the $45 level, and the 20-dma (currently $45.49) continues to come into play. SYMC is continuing its pattern of higher lows and if the logjam at $47 breaks next week, we ought to see a new high in fairly short order. Traders that took advantage of the dip below $44 early in the week have really been rewarded over the past few days, and those positions will look even better on a breakout over $47. Traders still looking to enter the play have a couple of choices. Entering on another intraday bounce from the vicinity of $45 looks attractive, especially on a risk/reward basis with our stop now sitting at $44. While we've avoided trading a breakout move up to this point, after so much time spent bumping into the $47 resistance level, a breakout there can be used for momentum entries, as that breakout ought to have some energy behind it. If support at $45 fails though, we'll have one last line of defense at the ascending trendline (currently $44.40). A break of that trendline (which began with the October lows) would be a bad omen and likely lead to a violation of our $44 stop and an end to the play. BUY CALL FEB-45 SYQ-BI OI=6326 at $2.95 SL=1.50 BUY CALL FEB-50 SYQ-BJ OI=3767 at $0.70 SL=0.25 BUY CALL MAR-45*SYQ-CI OI= 237 at $4.20 SL=2.50 BUY CALL MAR-50 SYQ-CJ OI= 788 at $1.70 SL=0.75 Average Daily Volume = 3.30 mln ************* NEW PUT PLAYS ************* CEPH - Cephalon, Inc. $46.53 (-3.55 last week) Company Summary: Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting an active research and development program, the company markets three products in the United States and a number of products in various countries throughout Europe. CEPH's United States products comprise Provigil for the treatment of excessive daytime sleepiness associated with narcolepsy, Actiq for cancer pain management and Gabitril for the treatment of partial seizures associated with epilepsy. Why We Like It: Biotechnology stocks were not the place to be last week if you were bullish, as the BTK index lost ground every day. While there were some intraday rally attempts, every one of them failed. The failed rallies on Thursday and Friday were particularly disheartening to the bulls, as they were completely reversed by the close, resulting in a couple of big "doji" candle patterns. There were several pockets of weakness in the sector, and our new play, CEPH was one of the biggest. Beginning the week with a breakdown under the 200-dma (currently $49.03) was just the beginning and the slide continued right up to the closing bell on Friday, with the stock coming to rest at the low of the day. This level is significant because it is the 62% retracement of the advance from the October lows to November highs. CEPH is under distribution, and the strong volume underscores that fact. The company's admission on Wednesday that it would face generic competition on its Provigil product by 2006 (rather than the prior statement of 2014) certainly didn't help, and apparently investors are selling first and asking questions later. Perhaps there is the expectation that the company will have more bad news when they release earnings on February 19th. Whatever the root cause, the PnF chart confirmed the bearish picture on Friday, when the stock traded the $46 level. That trade generated a double-bottom Sell signal, and will have the bears focusing on the prior vertical count of $38 as an eventual target. With some significant support near $46, an oversold bounce early next week would seem to be in order. Looking at the strength of that bounce will tell us a lot about the viability of the play. As long as it fails below the 200-dma, that rollover should provide a solid entry opportunity. Momentum traders can enter on a breakdown under $46, but need to keep in mind the bullish support line, currently $44, which will likely produce at least a temporary rebound. Initial stops are in place at $49.10, just above both the 50% retracement ($48.78) and the 200-dma. BUY PUT FEB-50*CQE-NJ OI=4268 at $4.50 SL=2.75 BUY PUT FEB-45 CQE-NI OI=5374 at $1.80 SL=1.00 Average Daily Volume = 1.93 mln ------------------------------------------------------------ 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 02-02-2003 Sunday 4 of 5 In Section Four: Current Put Plays: CCMP, KO, AT, PNRA Leaps: Volatility Reigns! Traders Corner: Sitting Bull Ain’t Gettin’ Up Real Soon Traders Corner: Seasonality Brokers Corner: Hedge Your Bets ------------------------------------------------------------ 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 PUT PLAYS ***************** CCMP - Cabot Microelectronics - 44.83 -2.67 (-1.77 for the week) Company Description: Cabot Microelectronics, headquartered in Aurora, Illinois, USA, is the world leader in the development and supply of high- performance polishing slurries used for chemical mechanical planarization (CMP), a process that enables the manufacture of the most advanced integrated circuit (IC) devices and hard disk drive components. (source: company press release) Why We Like It: The difficulties facing the chip equipment sector were underscored on Friday morning when Applied Materials warned that it expects to see a 35% reduction in first-quarter orders. Previous guidance was for a decline of only 20%. The company cited "ongoing economic weakness and geopolitical uncertainties (and) deferred capital expenditures" as the reasons for the slippage in expectations. Just about any business can blame poor sales and orders on the poor economy and Iraq-related war concerns. The poor capex spending also comes as no surprise. As we said last night, Intel had already made it clear that companies such as AMAT would be receiving less of their money for equipment upgrades. Investors were nonetheless disappointed with this morning's news. The SOX.X gapped lower and quickly reached a relative low of 261. CCMP joined the sector in the downward gap and opened below our entry trigger at $44.69. This play was activated at the initial trade of $43.70. Short-covering then took the stock into positive territory before the bears reasserted themselves. CCMP finished with a 2.0% loss, easily underperforming the SOX.X. That relative weakness is understandable when you consider that the stock is trading well above its next clear level of support on the daily chart. Now that the $45.00 support region has given way we think chances are good that shares could soon test psychological support at $40.00. However, because our entry point is lower than we'd anticipated, we need to make an according adjustment to our stop-loss. Our stop is now set at $46.93, two cents above the rising 100-dma. More conservative traders could use a stop slightly above the 200-dma at $45.75. New entries can be targeted on a move under today's low of $43.30 or on another failed rally at $45.00. BUY PUT FEB-50*UKR-NJ OI=1400 at $6.70 SL=3.35 BUY PUT MAR-45 UKR-OI OI= 186 at $4.70 SL=2.35 Average Daily Volume = 1.04 mil --- 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: In our last write-up, we mentioned the possibility that KO was due for a bounce after dropping 14% since January 16. We got that bounce today, as the Dow tacked on over 100 points, helping this component to a gain of $1.26. That gain fell well short of what would amount to a point and figure reversal from the current bearish column of "O" at $43. While we would have loved to see $40 act as round number resistance, the move back above that level amounts to a correction of less than 20% of the recent loss. Still, the hold over that round number is something for bears to watch and there is always a possibility of that level acting as support. We lowered our stop loss to lock in a gain on the play and the stock did not approach that new stop of $41.55. The company announced this morning that it would be cutting 1,000 jobs to supposedly "simplify" its North American structure. Nice spin, but companies don't often trim employees unless they are looking to cut costs. Of course, that can be seen as bullish, as well. After the big drop and relatively slight bounce, we would recommend momentum traders wait for a break below $39 for new entries. Our stop will remain in place, just above Wednesday's high. Put holders also need to be aware that the Dow has been seeing some wild swings and even a component that has underperformed the average, such as KO, can catch fire if the market continues Friday's bounce. BUY PUT FEB-45 KO-NI OI= 7451 at $4.80 SL=2.40 BUY PUT MAR-45 KO-OI OI= 3775 at $5.30 SL=2.65 Average Daily Volume = 5.0 mil --- AT - Alltel Corporation $46.87 (-0.79 this week) Company Summary: Alltel is a customer-focused technology company that provides communications and information services. The company's communications operations consist of its wireless, wireline and emerging business segments. AT also sells telecommunications products and publishes telephone directories. The company owns a majority interest in wireless operations in 69 Metropolitan Statistical Areas, and a majority interest in 132 Regional Service Areas. Long-distance services are provided on both a facilities-based and resale basis by the company's subsidiaries. Why We Like It: When we initiated bearish coverage of AT on Thursday, we did so with the understanding that after such a long slide since early January, an oversold bounce was sure to be lurking just around the corner. Thursday's breakdown under the 200-dma (currently $47.39) provided the impetus to begin coverage, as once broken, the 200-dma should provide resistance on an oversold bounce. Sure enough, when the broad market got moving north on Friday, that was enough to drag AT along for the ride and the 200-dma did its job to perfection. After trading a mere 2-cents over the 200-dma, AT dropped sharply in the final hour before some short-covering into the close. Today's bounce made perfect sense too, based on the bullish support line at $45, a possibility we pointed out in the initial write-up. Going into next week, the market is still likely to be dominated by knee-jerk reactions to the geopolitical situation, but with the PnF chart solidly bearish, any relief rallies ought to be short-lived. Traders looking for new entries should find what they're looking for in a failed rally either at the 200-dma again, or perhaps a bit higher, near $47.50. With that strong support resting in the $44-45 area, entering on a breakdown is only for those willing to assume greater risk in the play. Our stop remains at $48.60, as a rally through that level would clearly indicate that the 200-dma violation was a bear-trap. BUY PUT FEB-50*AT-NJ OI=1732 at $4.10 SL=2.50 BUY PUT FEB-45 AT-NI OI= 81 at $1.15 SL=0.50 Average Daily Volume = 1.25 mln --- PNRA - Panera Bread Company $29.51 (-2.04 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: Much like the action in the broad markets, PNRA had a pretty wild week. Wednesday's rally to and halt at the 200-dma provided a solid entry for those bold enough to take it. They were certainly well-rewarded on Thursday, when the stock gapped sharply lower on news that the company's CFO would be leaving at the end of March. Following an initial bounce in the morning, PNRA continued lower, breaking the $29 level and closing near the low of the day. As mentioned in the Market Monitor on Thursday, harvesting some gains made sense, as an oversold bounce could come at any time. After probing just a bit lower this morning, the stock actually saw some pretty good bullish action, moving up throughout the afternoon to close at its high of the day on volume just about double the ADV. So where do we go from here? The stock came to rest right at the bottom of yesterday's gap and could be setting up for a real rebound. It will probably depend to a large degree on the direction of the broad market early next week, but we'll be looking for another rally failure to provide for another entry. If the bulls are unable to push through the $30.40 level (Thursday's intraday resistance), a rollover from that area will provide the best entry. Given the fact that there is some decent support near $28, trading a breakdown does not seem to be a favorable entry strategy at this time, although more aggressive traders might give it a shot with a volume-backed move under $28. Our eventual target for the play remains at $26, which is strong support, as well as the site of the PnF bullish support line. Keep stops tight at $30.55. BUY PUT FEB-30 UPA-NF OI=953 at $1.65 SL=0.75 BUY PUT MAR-30*UPA-OF OI=119 at $2.45 SL=1.25 Average Daily Volume = 621 K ------------------------------------------------------------ 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 ------------------------------------------------------------ ***** LEAPS ***** Volatility Reigns! By Mark Phillips mphillips@OptionInvestor.com Was anyone else as befuddled as I was with all the whipsaws and knee-jerk reactions to each news item last week? Especially on Friday, it seemed that good news was cause to sell and bad news motivated the bulls to buy. Such is the nature of a pre-war, recession-bound economy (yes, I still think we're in a recession) in the heart of earnings season. I won't waste your time restating any of the specific news items, as I'm sure Jim will handle that quite well in his Wrap this weekend. With all the daily news on the economy, various earnings reports, and the rapidly escalating situation with respect to Iraq, it makes the market really difficult to decipher. But stepping back to the major pieces of the puzzle certainly enhances the clarity. We're going down, but not forever. There will be another bottom in our fairly near future, and my expectation is that it will likely commence as soon as it becomes clear that we aren't getting into a protracted morass in the Mid-East. If it does start to look like the U.S./U.N. has gotten attached to a tar baby, then all bets are off. But over the near-term, we're headed further south. Friday's oversold bounce may carry over a bit into early next week, but I expect it to fail and take the DOW down into the 7500-7700 area, with the SPX likely testing the 800 level before those bullish percent readings start to really improve. Bullish percents are a big reason I think we're still headed substantially lower, with the DOW, OEX and the NDX in bear confirmed status, with the SPX still holding onto Bull Correction and the COMPX miraculously still in Bull Confirmed. Remember my commentary near the first of the year where I stated that the NASDAQ should perform better than the rest of the market in the year ahead? I think we're starting to see that played out by the resilience of the COMPX, both in terms of price performance and the Bullish Percent. Time will tell whether I'm on target or off my rocker, but I think 2003 actually has the potential to provide some solid bullish plays in the technology arena. We just have to pick the right targets. I've added a couple of new plays this weekend that fit in nicely with my longer-term market view, after this current decline has run its course. Check them out down below. I've been rather brief in my commentary this weekend, and the primary reason is that I don't have a lot to say, other than what I wrote just above. The primary trend is in control and will likely remain so until we reach a level where risk shifts to the upside. The one other issue that I think is worthy of noting right now is the VIX. If you missed my article on it last Wednesday, definitely take the time to check it out in the Options 101 archives. I think there are some important issues to consider there. Note how after challenging that descending trendline just over 40, the VIX softened somewhat, but still found strong support at 35 on the intraday rallies. This tells me that the options writers are not at all convinced that the current market decline is close to running its course. Keep an eye out for higher VIX readings in the fairly near future. I'll try to comment on this indicator in the Market Monitor over the next couple weeks, as I expect it to be increasingly important. There's still time to jump aboard for the bearish express down to DOW 7500, but don't expect it to last forever. The bulls are likely to come back with a vengeance when risks become easier to manage, just like in July and October. Check out the details below. Portfolio: NEM - Considering some of the carnage that occurred in the broad markets last week, I still like what I'm seeing in the price of gold and in the price performance of our NEM play. Does it still look near-term extended? Yes. Does it still look like it could work substantially higher? Yes. The big picture is that the PnF chart currently has a bullish price target of $45. On the other hand, gold is looking very extended on its PnF chart. The current market behavior is actually very interesting because of the competing schools of thought. There are those that believe the strength is due to geopolitical concerns, with pending war with Iraq. While that's a convenient excuse to explain the near-term strength, it doesn't even begin to explain why gold has already been in a secular bull market for close to 2 years now. The big picture for this area of the market is directly tied to currency weakness (particularly the dollar) and the ongoing debate over inflation/deflation. If you want to get a good understanding of the underlying forces at work, be sure to check out the past few installments of Buzz Lynn's Thursday column. In fact, I have it on good authority that he's going to tackle the topic of gold next Thursday. Be sure to tune in, if you're following this play. Simply put, NEM is consolidating near its recent highs, unable to decisively clear the $30 level, but also not showing any significant weakness. New entries don't make sense at this point, as our next opportunity for a solid long entry will likely come after the post-Iraq invasion selloff. Keep stops set at $27. DELL - If only I could have that original entry back, I'd certainly be a lot happier right now! While that rebound from the 200-dma looked good for a couple weeks, the major slide over the past 3 weeks proves the fallacy of that entry. After breaking the $25 level, DELL is now at a very critical juncture, as it moves ever closer to testing the $23 support level (PnF bullish support). Despite the poor price performance, I still like the play, especially for new entries near current levels provided the $23 level is not hit. We came perilously close to it on Friday with an intraday low of $23.25, but I like the rebound that followed, as it came on strong volume (40% above the ADV). While trades taken near this level are aggressive, I like them due to the risk/reward ratio. So long as DELL does not print $23 or below, the PnF Buy signal remains intact, with a price target well above the recent high of $30. Keep stops at $23. Watch List: DJX - Watching the continued slide in the DJX has been an exercise in "what might have been", but for those of you that are in the play, the picture continues to favor the bears. An ideal scenario would be for a drop all the way to the $75 level (the target predicted by the H&S breakdown), but I would recommend that more conservative traders begin to harvest gains on a trade/rebound from the $77 area. The market appears to be consolidating the first leg of its downward move in preparation for another leg down. For positions opened before the neckline break, I would recommend tightening stops to $82, which would be a rally through last week's intraday highs, as well as a new PnF Buy signal. Another rally failure below $82 can be used for opening new positions with the understanding that the resultant drop will be limited to the $75-77 area. BEAS - Little changed last week, BEAS is continuing to demonstrate impressive resilience with respect to the rest of the Technology sector. That said, I'm starting to see signs of weakness with Friday's close under $11.50, and importantly below the 50-dma. That tells me that our chances of getting an entry near our target are improving, especially with the continued deterioration in the rest of the NASDAQ. The weekly Stochastics are now plunging towards oversold, so now is clearly not the time to look for new entries. Patience is the watchword for now. GS - With a lack of bullish activity in Financial stocks again last week, GS obediently rolled over at the $70 level and headed down to test $67 support by week's end again. There's little for the bulls to hope for here, except for a potential double bottom at this level, but reading the PnF chart tells me the stock has the potential to trade substantially lower in the weeks ahead. But with the highly charged geopolitical environment, things are likely to be rather volatile. Traders already in the play should now trail stops to $70, the site of last week's intraday high (actually $70.01) and just above the 10-dma, which has been providing resistance since the rollover in mid-January. With a PnF bearish price target of $53, I still favor new entries on another failed rally below $70, which is the new location of our entry target. Since we are already well into this downward move, new entries carry greater risk at this point, as the most logical place for a stop is still just above the 50 and 200-dmas at $74. IBM - Close, but no cigar. We were looking for Big Blue to test the bottom of the post-earnings gap, but there just wasn't enough bullish interest to get the job done. It was interesting to note that the 50-dma, $82.10 wasn't even challenged, and looking at the PnF chart tells us why. It would take a trade of $82 to generate a fresh Buy signal and in the current environment, that seems unlikely. We still don't have a PnF Sell signal, and that will come with a trade at $77. The ideal scenario would be for a bounce from the 200-dma (just above $76) followed by another rollover below the 50-dma, so long as we don't get a trade above $82. I'm lowering the entry target to $81.00-81.99 and we'll enter on any failure in that area, setting initial stops at $84, just above the bottom of that gap. As Steve has pointed out on numerous occasions in the past week or so, the current market environment is one filled with risk. Traders that aren't comfortable with that risk should either be sitting on the sidelines or playing with much smaller position sizes. The turmoil that currently has investors confused as to which way is up will soon pass, and provide more stable trading opportunities. Remember, there are three possible positions: Long, short, or flat -- flat IS an honorable position to take. I was just starting with my commentary when I heard the news of the Space Shuttle disaster and I must say I've had a hard time keeping my mind on the market today. I remember the Challenger disaster as though it were yesterday. While I wasn't really involved with the space program during the decade I spent working for NASA, I did come to regard the entire agency as one large family. What happens in one area of endeavor, affects all areas. While this sort of tragedy is the risk accepted by those that take it, my heart goes out to their families, as they may not have come to terms with the potential for disaster. I urge each of you to take a moment this weekend to say a prayer for these families. Then take the time to show your gratitude and appreciation that your family is safe and sound with you. See you next week. Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None NEM 10/30/02 '04 $ 30 LIE-AF $ 3.90 $ 4.80 +23.08% $27 '05 $ 30 ZIE-AF $ 6.10 $ 7.70 +26.23% $27 DELL 12/19/02 '04 $ 30 LDE-AF $ 3.70 $ 1.85 -50.00% $23 '05 $ 30 ZDE-AF $ 6.10 $ 4.10 -32.79% $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 NVDA 02/02/03 $8 JAN-2004 $ 10 KMF-AB CC JAN-2004 $ 7 KMF-AU JAN-2005 $ 10 XMF-AB CC JAN-2005 $ 7 XMF-AU QCOM 02/02/03 $33, $35 JAN-2004 $ 40 LLU-AH CC JAN-2004 $ 35 LLU-AG JAN-2005 $ 40 ZLU-AH CC JAN-2005 $ 35 ZLU-AG PUTS: DJX 12/08/02 $81.50-81.99 DEC-2003 $ 80 DJX-XB DEC-2004 $ 80 YDJ-XB GS 12/22/02 $70 JAN-2004 $ 70 KGS-MN JAN-2005 $ 70 ZSD-MN IBM 01/19/03 $81-81.99 JAN-2004 $ 80 LIB-MP JAN-2005 $ 80 ZIB-MP New Portfolio Plays None New Watchlist Plays NVDA - NVIDIA Corporation $10.32 **Call Play** Bottom fishing anyone? To be sure, this isn't the time to be entering a bullish play in the Semiconductor space, with the SOX leading the NASDAQ lower again on Friday. And NVDA seems an unlikely candidate, given the bearish news related to Xbox sales late last week. Apparently sales of the game unit have been slower than anticipated, and since NVDA makes the graphics chips for the game units, that's not a good sign. So let's be clear: The SOX is headed lower, NVDA is headed lower and I don't expect that the company's earnings report on February 13th is going to hold any great gifts for the bulls. However, I don't think the stock is headed a lot lower and I expect the lows from last October will not be broken. On a purely fundamental basis, the stock actually is starting to look attractive with a P/E ratio of about 17 (that's right, real earnings) and nearly $6 in cash per share. I think a drop into the $8-9 range is a gift for the bulls, as it will likely come about the same time that the bullish percent readings on the major indices are reaching deep into oversold and risk begins to shift to the upside. Not only that, but weekly Stochastics are already into oversold territory and should be rounding and turning up around the same time that all of the bad news is factored into the stock, making it a prime candidate for a rebound in the Semiconductor sector. So how did I pick my entry target? How about from the PnF chart, which is still in Sell mode, with a downside target of $7.50. We all know those targets can be exceeded, but in this case I don't think so. Patience is the key for this play as we don't want to jump the gun, as I did on the DELL play. After entry, we'll place stops at $7, just below the October lows. BUY LEAP JAN-2004 $10 KMF-AB BUY LEAP JAN-2004 $ 7 KMF-AU **Covered Call** BUY LEAP JAN-2005 $10 XMF-AB BUY LEAP JAN-2005 $ 7 XMF-AU **Covered Call** QCOM - QUALCOMM Inc. $37.66 **Call Play** While certainly not cheap just yet, QCOM is starting to look pretty attractive from where I sit. Sure the PE ratio is still north of 60, but did anyone else notice the strength of the company's earnings last quarter. It was their best quarterly revenue since Q1 of 2000 and their best EPS (albeit pro-forma) since Q4 of 1999. The company's CDMA technology is looking like a winner, and especially in Asia, I expect it to be a huge cash-cow in the years to come. From a technical perspective, I think the smart money has already figured this out, as the stock has been trading very well with respect to the rest of the Technology sector. While still holding above the early January lows, I really expect one more downdraft before the next recovery begins. Based on the vertical count from the PnF chart and historical support, $33 looks like a firm base, especially with the flattening 200-dma just above $32. Those of you that like to identify chart patterns will note that QCOM appears to be in the latter stages of forming a cup-and-handle bottom, which began almost a year ago. The handle began to form in early December, and has taken place on rather light volume. The breakout will come with a sustained push through the $44-45 area, but I'm getting ahead of myself. Although the stock is still above the ascending trendline ($35) from the August lows, with the bearishness in the rest of the market, I expect at least a temporary violation of that level before firm support makes its presence known near $33. Aggressive traders can target entries on a successful defense of the $35 level, those with more patience will want to wait for a successful test of the $33 support level. Another approach would be to enter a half position on a rebound from $35 and round out to a full position on a rebound from $33. After entry, stops will be placed at $32, just below the 200-dma BUY LEAP JAN-2004 $40 LLU-AH BUY LEAP JAN-2004 $35 LLU-AG **Covered Call** BUY LEAP JAN-2005 $40 ZLU-AH BUY LEAP JAN-2005 $35 ZLU-AG **Covered Call** Drops MO - $37.00 Am I frustrated about getting stopped out this week only to see MO trade up on Friday? Not a bit. This is a perfect example of a play that just didn't work out. Oh sure, it moved a bit in our favor, but after being unable to break the $42 resistance level, MO sold off ahead of earnings, but interestingly enough, MO's earnings were not the problem. The stock got slammed down below $36 early Wednesday morning in response to Kraft's earnings (still majority owned by MO) coming in a penny below estimates. MO announced earnings later in the day, and the positive tone was enough to lift MO back to exactly $37 at the close. Up until the most recent plunge, MO looked like it was going to stage a bullish breakout from the neutral triangle on the PnF chart, but any hope of that occurring is now long gone. With trade at $37, the stock is back on a PnF Sell signal and we don't want to waste any more time with it. If still holding open positions, take advantage of any continued rebound next week to exit those positions. A trade in the $39-40 area would be a gift. QLGC - $33.28 So long to this possible call candidate. After the poor price performance following the company's earnings report earlier this month, I put it on hold in anticipation of the $35 support level providing a solid base. Bad news on Friday sealed the stock's fate though, and it looks like the bears are completely in control. In retrospect, I should have just dropped the play with the breakdown under $39, but fortunately we never took an entry into the play. Discipline pays off again. In looking once again at the long-term and PnF charts this weekend, I can clearly see where the appropriate play would have been as a Put, rather than a call, as the stock rolled over right at major resistance near $44, also the site of the long-term descending trendline. I'm dropping the play this weekend, and we'll look to revisit it again in the future when the technicals look more favorable. ************** TRADERS CORNER ************** Sitting Bull Ain’t Gettin’ Up Real Soon By Mike Parnos, Investing With Attitude Once upon a time there were three bulls. Momma bull, papa bull and baby bull. Now, if you ask me, that’s a lot of bull. As we all know, the only bull that remains is what is shoveled regularly by wishful thinking talking heads on CNBC. If you’re a papa bull, and you think you’re going to wake up and find a nubile young Goldilocks next to you, think again. All that’s next to you is undoubtedly a bulimic brokerage account that keeps upchucking your money. How’s that for a mental image? There are still some CPTI students who have a bullish outlook on the market – not now, but perhaps for a year from now. (They’re in therapy, but that also takes a while). In the meantime, how can we take advantage of that projected scenario and risk very little? _________________________________________________________________ The “Oldies But Goodies” Portfolio The market leaders of years past have been beaten down. It’s been brutal. Even at these “bargain basement” prices, they still have huge market caps. They’re still functioning and making money. Some analysts believe they are undervalued. While a small army of eternal optimists are waiting for the genie to pop out of a bottle (usually of Jack Daniels) and grant three wishes, here’s how you can participate in a market rebound in a few of these companies. A positive aspect of this strategy is that CPTI students, who cannot do spreads in their brokerage accounts, will be able to participate in this strategy – in both regular brokerage and many IRA accounts. Let’s start with an old favorite – SUNW (Sun Microsystems) – currently trading at $3.10. Buy 1,000 shares of SUNW @ $3.10 Buy 10 contracts of SUNW January 05 $5.00 put at $2.55 Your total out of pocket investment is $5.65. For the next 22 months, your total risk is only $.65. Let’s look at a few “what if” scenarios which will show you why your risk for two years is only $.65 and how you can profit. What if . . . in 10 months SUNW is 7.50? The January 2005 $5 put would still have a value of about $.50 and the stock would be worth $7.50 – for a total of $8.00. Your cost was $5.65, so your profit would be $2.35 with 12 more months until January 2005 expiration. What if . . . in 10 months SUNW is $2.50? The January 2005 $5 put would have a value of about $2.70 and the stock would be worth $2.50 – for a total of $5.10. With a cost of $5.65, you would have a paper loss of $.55 with 12 more months until January 2005 expiration. What if . . . at January 2005 expiration SUNW is $4.25? The January 2005 $5 put would have a value of $.75 and the stock would be worth $4.25 – for a total of $5.00. With a cost of $5.65, you would have incurred the maximum loss of only $.65. What if . . . at January 2005 expiration SUNW is $10? The January 2005 $5 put will expire worthless, but the stock would be worth $10. With a cost of $5.65, your profit is $4.35. Take a look at the SUNW January 2005 $5 call options. You could buy it for just $.80. Is that a better deal? After all, you be tying up only $800 for two years instead of $5,600 (for 10 contracts). Well, if you’re right – and that’s a big “if” – owning the stock enables you to participate penny for penny as SUNW moves up. The delta on the January 2005 $5 call is only 52%. It’s your call. Below is a list of a few other “Oldies But Goodies(?)” that could rise from the ashes and put some bucks in your pocket. NT (Nortel). Trading at $2.37. The January 2005 NT $2.50 put is $.90. Total cost is $3.27. Risk is $.77. LU (Lucent). Trading at $1.86. The January 2005 LU $2.50 put is $1.30. Total cost is $3.16. Risk is $.66. GTW (Gateway). Trading at $2.62. The January 2005 GTW $5.00 put is $3.00. Total cost is $5.62. Risk is $.62. AMR (American Airlines). Trading at $2.90. The January 2005 AMR $5.00 put is $3.40. Total cost is $6.30. Risk is $1.30. MOT (Motorola). Trading at $7.98. The January 2005 MOT $10 put is $3.70. Total cost is $11.68. Risk is $1.68. COMS (3 Com). Trading at $4.23. The January 2005 COMS $5.00 put is $1.90. Total cost is $6.13. Risk is $1.13. A lot can happen in two years – good and bad. These beaten down companies were among those that led the markets higher during the tech bubble of a few years ago. There still may be some wind in their sails, some bananas in their split, some pings with their pongs, some stiff in their upper lips. Then again, maybe not. So, if you’re one of those glass is “one-quarter full” as opposed to “three-quarters empty,” you can put your money where your milk should be. You may end up with a delicious milkshake or some two-year-old cottage cheese. Dairy products can be tricky. They’re not for the meek, though the risk is small. If you believe in mama bull, papa bull and baby bull, go for it! If you believe that the only bull we’re going to see for a long time is what is served between the buns at Burger King, this is not for you. ______________________________________________________________ CPTI PORTFOLIO POSITION UPDATE Position #1: BBB Iron Condor – Closed Friday at $88.70. 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 $85-$95 range. Position #2: MMM Iron Condor – Closed Friday at $124.55. 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. Position #3: SMH Straddle – Closed Friday at $21.50. 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). We’re looking for a big move for the semiconductors and we don’t care which way. Position #4: QQQ ITM Strangle – Closed Friday at $24.44. 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. Position #5A: XAU Condor – Closed Friday at $77.00. This is a longer term trade expiring in March. There is a $20- point range and we took in a credit of $1.40. We want XAU to finish anywhere between $70 and $90. Position #6A: MMM Condor – closed Friday at $124.55. This is a longer term more conservative trade expiring in March. There is a $20-point range and we took in a credit of $1.20. We want MMM to finish anywhere between $115 and $135. Position #7A: QQQ 2-Month Baby ITM Strangle – closed Friday at $24.44. Bought March QQQ $26 puts & Buy March QQQ $24 calls for total debit of $4.20. There is $2 of intrinsic value and only $2.20 of risk. We’re looking for a 3-4 point move in the QQQs. After the move, we want the successful long option to pay for both options. Then we’re left with a “free” long option and waiting for the market to reverse. ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************** TRADERS CORNER ************** Seasonality By Jane Fox You've all heard the axiom "Buy in October and sell in April." But do you know if this saying has any validity to it? How about the Santa Claus rally? Is there really such a thing? Recently Jay Kaeppel, author of "The Option Trader's Guide to Probability, Volatility and Timing", published an article called the "The Stock Market, The Calendar and You." It addressed seasonality in the market and set about to statistically find if there indeed is a season or time of the year that produces more bullish profits than at other times. Mr. Kaeppel used extensive data he complied from the NASDAQ Composite for the years 1972 to 2002 and compared each seasonal tendency to a buy and hold strategy. He also used the NASDAQ as his benchmark instead of the S&P500 because of it's more pronounced moves, which proved to give a greater profit in this seasonal timing system. Turns out there are four seasonal tendencies: 1. Two days before an exchange holiday - this strategy would have you go long the NASDAQ at the close on the 3rd day before an exchange holiday and sell your position at the close two trading days later. The exchange holidays used in the study were: New Year's Day, President's Day, Easter, Memorial Day, July 4th, Labor Day, Thanksgiving, and Christmas. Here's an example; New Year's Day was an exchange holiday so you would have gone long on the close of December 27th and sold at the close of December 31st. This seasonal tendency produced an annualized return of 2.8% over the 28 years included in the study. Whereas a buy and hold strategy would have shown an annualized return of 9.93%, this strategy produced the 2.8% return with only a 9.9% draw down. The buy and hold strategy had a 71.8% drawdown. A large part of the reason for the small drawdown is that it is only in the market 6.3% of the time compared to the buy and hold strategy, which has you in the market 100%. This, of course, gives much less time to stumble. 2. The last trading day of the month and the first four days of the next month – this strategy would have you go long the NASDAQ at the close of the next to last trading day of each month and sell at the close on the 4th trading day of the next month. An example would be you go long on January 30th and sell at the close on February 6th. This seasonal tendency produced an annualized return of 8.65% compared to the buy and hold return of 9.93% but did it with only a 23.5% drawdown compared to the buy and hold drawdown of 71.8%. The strategy has you in the market only 24% of the time, once again giving less time to stumble. 3. November 1 through the third trading day of May - this strategy would have you go long the NASDAQ at the close of the last trading day of October and sell at the close on the 3rd trading day the next May. With this one would have had you go long October 31st 2002 and selling the position on May the 5th 2003. This seasonal tendency produced an annualized return of 10.14% but a higher drawdown of 64.3% because you are in the market 50% of the time. 4. The 14 months previous to an election year - this strategy would have you go long the NASDAQ at the close of the first trading day in October two years prior to an election and sell December 31st the following year. We are currently in this time frame, which began last October 1st and will extend to December 31st of this year. This seasonal tendency produced an annualized return of 9.35% but with a drawdown of only 36.1% because it is in the market only 32% of the time. Now you could trade each of these strategies on its own merit and do fine but what's so useful about this study is when you combine all the tendencies into one Index. Jay Kaeppel called it the seasonal index. Here's how it works. Now this is hard so pay attention. Give each tendency one point and when the calendar shows that you have +2 or greater, trade it. By combining the seasonal tendencies the annualized return jumps to 13.1% and the drawdown stabilizes at 24.4%. Here's a table of all the data: Tendency Annualized Drawdown Time in Return the Market #1 2.8% 9.9% 6.3% #2 8.65% 23.5% 24% #3 10.14% 64.3% 50.6% #4 9.35% 36.1% 32% 2 or more 13.1% 24.4% n/a Now compare this data with a buy and hold that gave you an annualized return of 9.93% but with a 71.8% drawdown. Remember the huge move we had at the beginning of the year? The seasonal index was at +4. Every one of the tendencies were in place. We had two days before an exchange holiday (New Year's Eve), we had the end of the month, we are currently in the "winter" months and we were in the 14 months before an election year. As a matter of fact we will be in a 2 or more mode until the 3rd trading day of May. Sounds pretty promising! I must admit it is tempting to go long and just hold on for the duration but ... There is always a "but" isn't there? The data used in this study was from 1972 to 2002 and 18 years of it (1982-2000) was a raging bull so bullish strategies did quite well. But we are no longer in a raging bull, actually quite the opposite. With this in mind I took a look at only the last three years of the combined seasonal data and here is what I found. Year Index +/- NASDAQ +/- Difference 2000 7.8% -39.3% 47.1% 2001 6.6% -21.1% 27.7% 2002 -1% -25% 24% So although the seasonal index didn't do as well as previous years it still outperformed a buy and hold strategy. (Mind you everything out performs a buy and hold strategy but that is another story). So there you have it, the stats to back up some axioms that we all knew had some validity but just never knew how much. Until May 5th, each time we encounter an exchange holiday or an end of month the index will jump to +3 since every day from now until May 5th is a +2. Could be fun to watch and see how this plays out. Enjoy Jane Fox ************** BROKERS CORNER ************** Hedge Your Bets Robert Norman Many people that I talk to throughout the course of the month ask me what resources I use. How do you determine the trend of the market, to know whether you are looking for short ideas or long ideas? My immediate answer is always the same Option Investor! In addition to this website I also use Investor's Business Daily and Dorsey, Wright and Associates. Dorsey Wright has done a good job with technical analysis especially with the indices! In October and November the market looked good his traffic light was GREEN! In December the light went to flashing YELLOW as his short term indicators reversed down into O's. Then the Optionable Bullish Percent reversed down into O's and then the OTC Bullish Percent reversed down into O's changing the traffic light to flashing red. Well on Thursday January 30th the NYSE Bullish Percent reversed down into O's which means the traffic light is RED and the DEFENSE is on the field! This doesn't mean that the market can't go up, as we all know the market will do whatever it wants to do! It just means the risk in the market has greatly increased and as a trader you should act accordingly! In my opinion that means different things to different people. It might mean you go to cash, maybe it means you sell calls on your stocks, or maybe it means look for PUT ideas! It always depends on your investment objectives, risk tolerance level, and time frames. The thing I always tell people is you have insurance on the things you own that you value, right? So if you value your portfolio why not buy insurance on that too? Do you know how to purchase insurance for your portfolio? If you own a group of S&P 500 stocks and your portfolio is valued at $100,000 you could buy 1 Jun 850 put for 58.70 or $5,870,and be hedged till June, you could be wrong on the hedge but still make money once you've recovered the cost of the option or cost of insurance! When you feel the market is risky protect your assets! Your portfolio in this example would be about 2/3rd's hedged. Robert L. Norman Wunderlich Securities, Inc. RNorman@Wundernet.com ------------------------------------------------------------ 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. 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The Option Investor Newsletter Sunday 02-02-2003 Sunday 5 of 5 In Section Five: Covered Calls: Q&A With The Editor Naked Puts: "Naked" Puts -- A Simple Approach! Spreads/Straddles/Combos: A Terrible Month Indeed! Updated In The Site Tonight: Market Watch: Something For Everyone Market Posture: Where We Began ------------------------------------------------------------ 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 ------------------------------------------------------------ ************* COVERED CALLS ************* Trading Basics: Q&A With The Editor By Mark Wnetrzak This week's discussion concerns position selection and assessing risk-reward with "out-of-the-money" covered-calls. Attn: Covered-calls editor Subject: Choosing the right option Mark, I [would] like to improve portfolio return (relative to the market) with writing "out-of-money" covered-calls. There is a trade-off between rolling short-term calls (1-2 month) with high trading costs and writing longer-term calls with lower option premium (annualized). What are your opinions on this trade-off? Thanks, JS Hello JS, The covered-call writer is always striving to find positions that offer a balance between acceptable returns and downside protection. A conservative covered-call portfolio should contain a variety of plays that provide yields of 1%-2% per month (based on the stock price remaining unchanged) and a downside margin of at least 10%. Using these criteria, a covered-call writer is usually going to be limited to at-the-money (ATM) or in-the-money (ITM) positions. In addition, the uncertain outlook for equity values suggests a fairly short-term approach to this strategy, where a trader is not really interested in stock ownership, but rather in a consistent monthly yield. Remember, a covered-write strategy requires a neutral to slightly bullish outlook on the underlying stock (as well as the market in general) to increase the probability of a successful outcome. A conservative investor would transition to longer-term positions only when rolling forward and/or down in an attempt to rescue a "losing" position. Of course, more aggressive traders may prefer out-of-the-money (OTM) covered-writes in situations where the technical outlook or the available cost basis warrants additional risk. According to Larry McMillan, noted option guru and author of "Options: As a Strategic Investment," there is some mathematical basis to believe, in the long run, that moderately OTM covered-writes will perform better than ITM writes. Though both ITM and OTM covered-call positions will outperform outright stock ownership in a flat or down market, the OTM writer has far more risk than an ITM writer. Obviously, the allure of an OTM position is that in a rising market, the OTM writer doesn't limit his upside potential as much as an ITM writer, but his his yield still depends on favorable stock movement. Also, the OTM covered-call will, by virtue of its dependence on stock movement, be more volatile on a regular basis. When comparing different time frames and strikes in a covered-write position, it is important to calculate the yield based on the stock remaining unchanged. Using this method, there is no assumption on stock movement and a more accurate month-to-month annualized return can be calculated (and compared). Some investors prefer to placate the desire for higher yields by writing a combination of ITM and OTM covered-calls. However, this approach generates higher transaction costs and very complex adjustments if the position does not perform as expected. In the end, determining the most appropriate strategy for a covered-write is simply a matter of identifying your personal risk-reward tolerance. Regardless of which method is eventually employed, success depends more on maintaining a disciplined approach and using proven money-management techniques to keep the losses (when they occur -- and they will) as small as possible. 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 ABMD 4.97 5.00 FEB 5.00 0.45 0.48 11.5% ORB 5.02 5.45 FEB 5.00 0.35 0.33* 6.1% MMR 7.92 7.38 FEB 7.50 1.00 0.46 5.8% EMIS 5.44 5.90 FEB 5.00 0.75 0.31* 5.7% ALKS 8.07 7.68 FEB 7.50 1.00 0.43* 5.3% ALA 5.76 7.26 FEB 5.00 1.10 0.34* 5.3% WEBM 10.89 11.19 FEB 10.00 1.55 0.66* 5.1% ALO 16.00 16.53 FEB 15.00 1.95 0.95* 4.9% LSS 15.01 14.85 FEB 15.00 0.80 0.64 4.9% MEDC 9.26 8.60 FEB 7.50 2.15 0.39* 4.8% FTS 8.39 8.53 FEB 7.50 1.20 0.31* 4.7% ADLR 13.45 13.06 FEB 12.50 1.45 0.50* 4.5% JDEC 13.86 12.53 FEB 12.50 2.05 0.69* 4.2% EFII 17.46 17.40 FEB 17.50 0.70 0.64 4.1% MEDC 9.31 8.60 FEB 7.50 2.20 0.39* 4.0% LMNX 5.16 4.55 FEB 5.00 0.60 -0.01 0.0% REGN 21.27 18.73 FEB 20.00 2.30 -0.24 0.0% CBST 7.63 6.57 FEB 7.50 0.70 -0.36 0.0% GFI 15.25 13.13 FEB 15.00 1.05 -1.07 0.0% * = Stock price is above the sold striking price. Comments: Another week and really no change in the outlook: sitting on the sideline watching the game appears to be the best (least harmful) strategy as the market bounces up and down. There is no resolution on the geopolitical front and the economic front is stabilizing at best, except maybe in Tech land (it keeps getting worse?). Ok, can I wake up now? Globespan- Virata (NASDAQ:GSPN) offered an excellent opportunity to exit or adjust the position this week. Another issue to consider adjusting or exiting is Regeneron Pharmaceuticals (NASDAQ: REGN) -- horrid action over the last 2 days (earnings related) on increasing volume doesn't bode well for the near-term. A bounce off the 150-dma may offer a favorable exit or adjustment, depending on your long-term outlook. Another issue, Cubist Pharmaceuticals (NASDAQ:CBST) is testing a key support area around $6.50 and should be monitored closely next week. Earnings for Cubist are due February 19. Gold Fields (NYSE: GFI), a new candidate for this week (JAN-26), offered little incentive for an entry on Monday when there was no follow through to Friday's rally and it moved lower into Thursday's earnings report. A mine fire reported on Friday doesn't help either. The position will be removed from the summary. All that is Gold doesn't necessarily glitter! Positions Closed: Globespan-Virata (NASDAQ:GSPN) 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 ASKJ 5.36 FEB 5.00 AUK BA 0.65 7 4.71 21 8.9% MSTR 20.78 FEB 20.00 EOU BD 1.85 35 18.93 21 8.2% MVK 15.34 FEB 15.00 MVK BC 0.80 246 14.54 21 4.6% NFLX 13.20 FEB 12.50 QNQ BV 1.15 393 12.05 21 5.4% OSUR 7.85 FEB 7.50 QTP BU 0.65 55 7.20 21 6.0% RCOM 5.71 FEB 5.00 RAU BA 0.90 1035 4.81 21 5.7% SPN 7.95 FEB 7.50 SPN BU 0.75 46 7.20 21 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 ASKJ 5.36 FEB 5.00 AUK BA 0.65 7 4.71 21 8.9% MSTR 20.78 FEB 20.00 EOU BD 1.85 35 18.93 21 8.2% OSUR 7.85 FEB 7.50 QTP BU 0.65 55 7.20 21 6.0% SPN 7.95 FEB 7.50 SPN BU 0.75 46 7.20 21 6.0% RCOM 5.71 FEB 5.00 RAU BA 0.90 1035 4.81 21 5.7% NFLX 13.20 FEB 12.50 QNQ BV 1.15 393 12.05 21 5.4% MVK 15.34 FEB 15.00 MVK BC 0.80 246 14.54 21 4.6% 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). ***** ASKJ - Ask Jeeves $5.36 *** Earnings Rally! *** Ask Jeeves (NASDAQ:ASKJ) is a provider of natural language question answering technologies and services. The company's proprietary technology creates an interaction centered on understanding users' specific needs and interests and connecting them to the most relevant information, products and services. Specifically, its natural language technology allows users to ask a question in plain English (or another language) and receive a response pointing to relevant answers. The company serves its customers through its two divisions, Web Properties and Jeeves Solutions. On January 23rd, ASKJ posted higher 4th-quarter profits on revenues that jumped 48% from the year-earlier, and boosted its outlook for 2003. The stock soared on the news to a new 2-year high. This position offers an excellent entry point for investors who are willing to own ASKJ at a reasonable cost basis. Try target-shooting a lower net-debit to increase the potential yield and lower the cost basis in the issue. FEB 5.00 AUK BA LB=0.65 OI=7 CB=4.71 DE=21 TY=8.9% ***** MSTR - MicroStrategy $20.78 *** Earnings Rally: Part II *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via Web, wireless, and voice. Shares of MSTR soared Friday after the maker of business software reported better than expected profit and rising software sales. A number of analysts also raised their 2003 outlooks for the company and bullish traders can profit from continued upside activity in the issue with this position. FEB 20.00 EOU BD LB=1.85 OI=35 CB=18.93 DE=21 TY=8.2% ***** MVK - Maverick Tube $15.34 *** Oil Services Hedge *** Maverick Tube (NYSE:MVK) is a producer of tubular steel products used in energy and industrial applications. Maverick manufactures oil country tubular goods, which are steel tubular products used in the completion and production of oil and natural gas wells, and line pipe products for use in newly drilled oil and gas wells and for transporting oil and gas. The company also serves the energy industry by manufacturing line pipe, which is used primarily in the transportation of oil and natural gas. For industrial applications, Maverick manufactures structural tubing and standard pipe. With the sustained increase in crude oil prices, it is only a matter of time before there is an improvement in drilling levels and Maverick should also benefit from a drop in steel pricing. Our outlook is also bullish due to the recent technical strength and this position offers a low risk cost basis in a recovering issue. FEB 15.00 MVK BC LB=0.80 OI=246 CB=14.54 DE=21 TY=4.6% ***** NFLX - Netflix $13.20 *** "Screening Out" The Competition *** Netflix (NASDAQ:NFLX) is an online entertainment subscription service in the U.S. that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have 3 titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month. Subscribers select titles at the company's Website (www.netflix.com) aided by its proprietary CineMatch technology, receive them on DVD by first-class mail and return them to the company at their convenience using its prepaid mailers. Once a title has been returned, the company mails the next available title in a subscriber's queue. Netflix appears to be beating the competition as the company reported a narrower 4th-quarter loss than expected on a surge in revenues for its online DVD rentals. We simply favor the bullish technical indications and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. FEB 12.50 QNQ BV LB=1.15 OI=393 CB=12.05 DE=21 TY=5.4% ***** OSUR - OraSure $7.85 *** OraQuick Waiver Approved! *** OraSure Technologies (NASDAQ:OSUR) develops, manufactures and markets oral fluid specimen collection devices using proprietary oral fluid technologies and diagnostic products, including immunoassays and other in-vitro diagnostic tests and other medical devices. These products are sold in the United States and certain foreign countries to government agencies, clinical laboratories, physicians' offices, hospitals, commercial and industrial entities and various distributors. The company's products include an oral fluid collection device, the OraQuick Rapid Test, the UPT and UPlink detection platforms, the Histofreezer portable cryosurgical system and Auto-Lyte liquid reagents. OraSure rallied sharply on Friday after the company announced that the U.S. FDA had approved a waiver for their OraQuick. Rapid HIV-1 Antibody Test. With this waiver, the OraQuick. test can now be used by a larger number of sites in the United States, including outreach clinics, community-based organizations and physicians' offices. Investors can use this position to gain an entry point and speculate on OSUR's future. FEB 7.50 QTP BU LB=0.65 OI=55 CB=7.20 DE=21 TY=6.0% ***** RCOM - Register.com $5.71 *** Buyout Candidate? *** Register.com (NASDAQ:RCOM) is a provider of global domain name registration and Internet services for businesses and consumers that wish to have an address and branded identity on the Internet. Domain names serve as part of the infrastructure for Internet communications, including Websites, e-mail, audio, video and telephony. Register.com has over three million domains under management. The company registers domain names across generic Top Level Domains (TLD) such as .com, .net, .biz and .info and in over 250 country code TLDs, such as .ca (Canada), .de (Germany) and .jp (Japan). Register.com has now hired a financial and legal advisor to help consider merger opportunities after receiving "two" unsolicited takeover offers earlier this month. An offer by IWB Acquisitions for $5.55 a share recently expired. Traders can speculate on a potential buyout or merger with this conservative position. FEB 5.00 RAU BA LB=0.90 OI=1035 CB=4.81 DE=21 TY=5.7% ***** SPN - Superior Energy Services $7.95 *** Oil-Fire Fighters *** Superior Energy Services (NYSE:SPN) is a provider of specialized oilfield services and equipment focused on serving the production- related needs of oil and gas companies in the Gulf of Mexico. The company is one of the few companies in the Gulf of Mexico capable of providing most of the post-wellhead products and services necessary to maintain offshore producing wells, as well as plug and abandonment services, at the end of their life cycle. Superior provides a full range of products and services for its customers, including well intervention services, marine services, rental tools, field management services and environmental and other services. Firefighting firms are gaining some attention as the U.S. and Iraqi governments move closer to war and increase the potential threat to oil-producing wells in Iraq. We simply favor the strong support near our cost basis and investors can use this position to profit from future bullish movement in the issue. FEB 7.50 SPN BU LB=0.75 OI=46 CB=7.20 DE=21 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 DIGE 11.47 FEB 10.00 QDG BB 1.95 286 9.52 21 7.3% FEIC 15.91 FEB 15.00 FQE BC 1.60 39 14.31 21 7.0% BONZ 7.61 FEB 7.50 QBN BU 0.45 23 7.16 21 6.9% ANF 27.84 FEB 27.50 ANF BY 1.55 4435 26.29 21 6.7% PLCE 10.66 FEB 10.00 TUY BB 1.10 153 9.56 21 6.7% TMPW 11.05 FEB 10.00 BSQ BB 1.45 74 9.60 21 6.0% EP 8.44 FEB 7.50 EP BU 1.20 5153 7.24 21 5.2% BCGI 12.73 FEB 12.50 QGB BV 0.65 136 12.08 21 5.0% EMC 7.70 FEB 7.50 EMC BU 0.45 28672 7.25 21 5.0% AYE 8.40 FEB 7.50 AYE BU 1.15 655 7.25 21 5.0% PTEN 30.51 FEB 30.00 NZQ BF 1.50 2568 29.01 21 4.9% RMBS 15.50 FEB 12.50 BNQ BV 3.40 6237 12.10 21 4.8% VECO 14.00 FEB 12.50 QVC BV 1.85 121 12.15 21 4.2% ***************** NAKED PUT SECTION ***************** Option 101: Selling "Naked" Puts -- A Simple Approach! By Ray Cummins This week's narrative offers new readers a basic explanation of writing puts, including the reasons we use "out-of-the-money" options in our approach to this popular strategy. Put writing (selling) is designed to complement a conservative investing portfolio because it offers two different methods for generating profits with relatively low risk: earning consistent (small) returns with portfolio collateral by selling out-of-the- money put options, or using in- and at-the-money puts to acquire stocks at a reduced price, which are eventually sold for a gain. The basic strategy involves selling a put against funds or other collateral held in your brokerage account. The sole purpose of the collateral is to assure that money is available to purchase the stock should the put be assigned to the account. Generally, the buyer of the put will exercise the option if the underlying stock is more than $0.25 below the sold strike price at option expiration. If the share value is above the sold strike price at expiration, the put will expire worthless and the option premium retained by the seller constitute a profit. One benefit of selling options, as opposed to buying them, is the benefit of time decay; the time-value or "premium" of option falls as it approaches expiration. Unlike stocks, where an investor can hold on to a stagnant issue indefinitely in the hope that it will rebound, the value of an option eventually declines if the underlying stock fails to move in the correct direction. This premium erosion allows a put writer to profit without having to correctly predict the future movement of the underlying issue, as long as it remains above the strike price of the sold option. In contrast to option buying techniques, short-term option selling strategies are even more favorable because the time-value (premium), which decays at a predictable rate, declines rapidly in the final month of an option's expiration period. Writing put options for monthly income generally involves selling "out-of-the-money" positions on a stock that the investor expects to finish above the sold strike price. With careful selection of the underlying issue, most of the sold puts will expire worthless, allowing the investor to keep the premium and receive a reasonable profit without ever having to buy the underlying stock. Of course, there is still the mandatory margin requirement but this commitment of collateral funds is almost always less costly than the outright purchase of an equivalent number of shares. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf An investor who is interested in buying a stock may also consider selling a cash-secured put as another means of acquiring the issue. Generally, when a person wants to buy a stock at a specific price, he will use some type of "limit" order. The problem is, after the initial order is placed, the stock will not be purchased until it trades at or below the limit price. Instead of waiting for that movement to occur, he could simply write an "in-the-money" put. A premium (the bid price of the option) will be paid to his account for the obligation to buy the stock. If the stock price is below the strike price of the sold option at expiration, the option will be "assigned" and the investor will be obligated to purchase the stock. Keep in mind, the investor must believe that the cost basis (the sold put strike price minus the option premium received) is an acceptable price at which to own the underlying stock. Since the greatest amount of time-value (premium) exists in "at-the-money" options, most investors who use this approach sell puts with strike prices that are equal to or slightly below the current price of the stock. This technique balances the premium received for the sold option with the probability of being assigned. It is used by fund managers, as well as large corporations, because it pays them for assuming the obligation to buy a particular stock that they intend to eventually add to their portfolios. Our preferred approach involves the sale of deep-out-of-the-money options, where the probability of a successful outcome is very high. Generally, we try to achieve a 4-8% monthly profit (based on the minimum collateral/margin requirements) with at least 10-15% downside protection. That can be a difficult task when the market is in a bearish trend but there are always a few candidates with favorable technical indications, regardless of the current outlook. Despite the fact that we publish 7-10 plays weekly, writing puts for income is not a viable strategy unless the overall trend is neutral or bullish. At the same time, if we don't have confidence in what we have to offer, it won't be listed, and that is the overriding measure of any candidate we provide in this section. 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 MEDC 8.88 8.60 FEB 7.50 0.30 0.30* 13.2% 4.5% SEPR 12.99 11.27 FEB 10.00 0.35 0.35* 10.3% 3.2% REGN 20.63 18.73 FEB 17.50 0.50 0.50* 9.7% 3.2% FTE 25.50 25.98 FEB 22.50 0.70 0.70* 9.6% 3.5% TVX 15.08 15.45 FEB 12.50 0.40 0.40* 9.0% 2.9% TVX 16.98 15.45 FEB 15.00 0.40 0.40* 8.3% 3.0% IMPH 21.53 20.05 FEB 20.00 0.75 0.75* 8.3% 3.4% CKFR 19.53 19.23 FEB 17.50 0.45 0.45* 7.8% 2.9% FEIC 18.94 15.91 FEB 15.00 0.45 0.45* 7.7% 2.2% VRTS 18.30 18.25 FEB 15.00 0.30 0.30* 7.5% 2.2% SEPR 13.20 11.27 FEB 10.00 0.30 0.30* 7.4% 2.2% CURE 17.49 19.20 FEB 15.00 0.40 0.40* 7.1% 2.4% VECO 15.39 14.00 FEB 12.50 0.35 0.35* 7.0% 2.1% APPX 24.18 25.51 FEB 22.50 0.55 0.55* 7.0% 2.7% CVC 19.44 17.41 FEB 15.00 0.40 0.40* 6.8% 2.0% FTE 24.40 25.98 FEB 20.00 0.45 0.45* 6.7% 2.0% MATK 23.93 24.35 FEB 20.00 0.35 0.35* 6.3% 1.9% GTRC 19.63 19.48 FEB 17.50 0.45 0.45* 6.3% 2.3% COF 39.00 31.05 FEB 30.00 0.65 0.65* 5.6% 1.6% RGLD 26.67 27.29 FEB 22.50 0.35 0.35* 5.6% 1.7% CURE 17.06 19.20 FEB 15.00 0.25 0.25* 5.4% 1.8% ANF 27.11 27.84 FEB 22.50 0.40 0.40* 5.2% 1.6% XLNX 25.75 19.79 FEB 20.00 0.50 0.29 3.7% 1.1% * = Stock price is above the sold striking price. Comments: The market's recent demise continued this week and the stair-step pattern of lower highs and lower lows may be a common trend for the foreseeable future. Given the ongoing geopolitical concerns and the lack of recovery in corporate earnings, there is little catalyst for a significant change of character in equities. With that outlook in mind, traders are warned to be ever mindful of the inherent risks in this strategy and the need to be diligent in portfolio management. Positions in Capital One (NYSE:COF), Xylinx (NASDAQ:XLNX), and FEI Co. (NASDAQ:FEIC) should be closed by conservative traders in the interest of capital preservation. Impath (NASDAQ:IMPH), Sepracor (NASDAQ:SEPR), TVX Gold (NYSE:TVX) and Regeneron (NASDAQ:REGN) have joined the early exit watch-list. Previously Closed Positions: Network Associates (NYSE:NET) and Quest Software (NASDAQ:QSFT), both of which are 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 ANF 27.84 FEB 25.00 ANF NE 0.50 713 24.50 21 8.2% 3.0% AVCT 25.10 FEB 22.50 QVX NX 0.35 179 22.15 21 6.5% 2.3% EASI 37.00 FEB 33.38 RUF NX 0.40 22 32.98 21 5.0% 1.8% FTE 25.98 FEB 22.50 FTE NX 0.40 44 22.10 21 7.9% 2.6% MRCY 32.11 FEB 30.00 QYR NF 0.45 35 29.55 21 5.8% 2.2% MSTR 20.78 FEB 17.50 EOU NW 0.45 85 17.05 21 11.9% 3.8% QCOM 37.66 FEB 35.00 AAW NG 0.75 17992 34.25 21 8.3% 3.2% S 26.45 FEB 22.50 S NX 0.30 1666 22.20 21 6.3% 2.0% 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 MSTR 20.78 FEB 17.50 EOU NW 0.45 85 17.05 21 11.9% 3.8% QCOM 37.66 FEB 35.00 AAW NG 0.75 17992 34.25 21 8.3% 3.2% ANF 27.84 FEB 25.00 ANF NE 0.50 713 24.50 21 8.2% 3.0% FTE 25.98 FEB 22.50 FTE NX 0.40 44 22.10 21 7.9% 2.6% AVCT 25.10 FEB 22.50 QVX NX 0.35 179 22.15 21 6.5% 2.3% S 26.45 FEB 22.50 S NX 0.30 1666 22.20 21 6.3% 2.0% MRCY 32.11 FEB 30.00 QYR NF 0.45 35 29.55 21 5.8% 2.2% EASI 37.00 FEB 33.38 RUF NX 0.40 22 32.98 21 5.0% 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). ***** ANF - Abercrombie & Fitch $27.84 *** Bullish Retailer! *** Abercrombie & Fitch Company (NYSE:ANF), through its subsidiaries as specialty retailers, operates stores selling casual apparel, personal care and other accessories for men, women and kids under the Abercrombie & Fitch, abercrombie and Hollister Co. brands. As of February 2, 2002, the company operated 491 stores in the United States. A&F's stores and point-of-sale marketing are designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are carefully planned and coordinated to create a shopping experience that is consistent with the A&F lifestyle. This week, USB Piper Jaffray reiterated their "strong buy" rating on shares of Abercrombie & Fitch and investors responded by pushing the stock to a recent high. The announcement comes on the heels of an upgrade by Credit Suisse First Boston, which said that, "sales at the core are stabilizing with continued strong margins." Traders who believe the rally will continue can speculate on that outcome with this position. FEB 25.00 ANF NE LB=0.50 OI=713 CB=24.50 DE=21 MY=8.2% SY=3.0% ***** AVCT - Avocent $25.10 *** Solid Earnings! *** Avocent Corporation (NASDAQ:AVCT), together with its wholly owned subsidiaries, designs, manufactures and sells analog and digital KVM (keyboard, video and mouse) switching systems, as well as serial connectivity devices, extension and remote access products and also display products for the computer industry. The firm's switching and connectivity solutions provide information technology managers with access and control of multiple servers and network data centers from any location. Last Thursday, Avocent reported higher sales, operating income and net income for the fourth quarter and the company achieved sequential and year over year sales growth in both their domestic and international markets. Avocent also has a sound fundamental base with $216 million in cash and investments and no long-term debt. Investors who like the outlook for the company can use this position to speculate on its future share value. FEB 22.50 QVX NX LB=0.35 OI=179 CB=22.15 DE=21 MY=6.5% SY=2.3% ***** EASI - Engineered Support $37.00 *** New Contracts! *** Engineered Support Systems (NASDAQ:EASI) along with its various subsidiaries, designs and manufactures military support equipment and electronics for the United States armed forces. The company also engineers and manufactures air handling and heat transfer equipment, material handling equipment and custom molded plastic products for commercial and industrial users. Engineered Support Systems' six wholly owned subsidiaries are Systems & Electronics (SEI), Engineered Air Systems (Engineered Air), Keco Industries, (Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered Electric Company (d/b/a Fermont) and Engineered Specialty Plastics. EASI recently received orders valued at $19.7 million for the production of its Field Deployable Environmental Control Units (FDECU) and a five-year contract with a maximum value of $75 million from the U.S. Army for a variety of technical services. Analysts say the company is poised to benefit from any military conflict and traders who want to hedge against war-related slump in the broader markets should consider this position. FEB 33.38 RUF NX LB=0.40 OI=22 CB=32.98 DE=21 MY=5.0% SY=1.8% ***** FTE - France Telecom $25.98 *** European Telecom Leader! *** France Telecom is a (NYSE:FTE) telecommunications operator with 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 last week, France Telecom reported that its revenue rose 8% in 2002, and said it expects to surpass expectations for a key measure of earnings for the year. Traders who believe the upside bias in the stock will continue in the near future can profit from that outcome with this position. FEB 22.50 FTE NX LB=0.40 OI=44 CB=22.10 DE=21 MY=7.9% SY=2.6% ***** MRCY - Mercury Computer Systems $32.11 *** DEFENSive Issue! *** Mercury Computer Systems (NASDAQ:MRCY) manufactures and markets real-time digital signal and image processing computer systems. The company offers three classes of hardware systems to meet the full range of requirements in various signal and image processing applications: high-performance class, VME class and industrial class. Mercury has developed a comprehensive line of software products that enable accelerated development and running of digital signal and image processing applications on its hardware. The MC/OS Multicomputing run-time environment is bundled with each system. The company separately licenses software products and licenses a development software package that includes a development version of the MC/OS operating environment, scientific algorithm libraries, debugging tools and compilers. In mid-January, MRCY reported a sharp rise in quarterly profit on Thursday, driven by growth in its military and defense operation. Traders who believe a war with Iraq will boost the company's future earnings should consider this position. FEB 30.00 QYR NF LB=0.45 OI=35 CB=29.55 DE=21 MY=5.8% SY=2.2% ***** MSTR - MicroStrategy $20.78 *** Rally Mode! *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via Web, wireless, and voice. Shares of MSTR soared Friday after the maker of business software reported better than expected profit and rising software sales. A number of analysts also raised their 2003 outlooks for the company and bullish traders can profit from continued upside activity in the issue with this position. FEB 17.50 EOU NW LB=0.45 OI=85 CB=17.05 DE=21 MY=11.9% SY=3.8% ***** QCOM - Qualcomm $37.66 *** Entry Point! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM shares enjoyed new buying interest in mid-January after the firm beat analysts' expectations for earnings and revenue and raised its full year guidance. Investors who want a long-term portfolio position in QCOM can use this position to establish a low risk cost basis in the issue. FEB 35.00 AAW NG LB=0.75 OI=17992 CB=34.25 DE=21 MY=8.3% SY=3.2% ***** S - Sears, Roebuck and Co. $26.45 *** Bottom-Fishing! *** Sears, Roebuck and Co. (NYSE:S) is a North American retailer. The company is organized into four principal business segments: Retail and Related Services, Credit and Financial Products, Corporate and Other, and Sears Canada. The domestic business segments are Retail and Related Services, Credit and Financial Products and Corporate and Other. The Sears Canada segment consists of similar retail, credit and corporate operations conducted through a majority-owned subsidiary in Canada. Retail and Related Services consist of 867 full-line stores located primarily in malls nationwide. The firm's Credit and Financial Products segment manages a domestic portfolio of credit card receivables. Sears' Corporate and Other operations include activities that are of an overall holding company nature. The company conducts similar retail, credit and corporate operations in Canada through Sears Canada, majority-owned subsidiary of Sears. This issue emerged in a scan for blue-chip stocks with favorable technical indications. The fundamental condition of Sears is not overwhelmingly positive but it appears the current outlook has been priced into the value of the stock with the shares stabilizing at $23-$25. Investors who wouldn't mind owning the issue at a cost basis near $22 should consider this position. FEB 22.50 S NX LB=0.30 OI=1666 CB=22.20 DE=21 MY=6.3% SY=2.0% ***** ***************** 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 POWI 21.61 FEB 20.00 QPW ND 0.55 25 19.45 21 10.5% 4.1% WEBM 11.19 FEB 10.00 UUW NB 0.25 210 9.75 21 10.2% 3.7% CGNX 21.27 FEB 20.00 QCG ND 0.45 30 19.55 21 8.5% 3.3% BA 31.59 FEB 30.00 BA NF 0.55 5130 29.45 21 6.9% 2.7% PRX 32.44 FEB 30.00 PRX NF 0.30 112 29.70 21 4.0% 1.5% AFFX 27.14 FEB 25.00 FIQ NE 0.30 872 24.70 21 4.8% 1.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Terrible Month Indeed! By Ray Cummins Investors held high hopes for the New Year after the first week of trading but if the month of January is any indicator, stocks are in for some rough times in 2003. The Dow Jones Industrial Average rebounded 108 points to end at 8,053, only 78 points below the previous Friday's close as upbeat reports from Honeywell International (NYSE:HON) and Walt Disney (NYSE:DIS) helped restore investor confidence in the outlook for blue-chip stocks. The NASDAQ was far less positive, ending almost unchanged at 1,320. The technology index was hampered by a profit warning from Applied Materials (NASDAQ:AMAT), which said it now expects orders for the quarter to come in below previous targets. The bellwether chip company also said demand would decline in the near-term due to economic weakness, geopolitical uncertainties, and customers deferring capital spending. The S&P 500-stock index added 11 points to close at 855 amid strength in water utilities, broadcasting and chemical companies. Advancing issues outnumbered decliners 5 to 2 on the New York Stock Exchange and almost 3 to 2 on the NASDAQ. Volume was 1.50 billion on the Big Board and 1.58 billion on the technology exchange. In the treasury market, the ten-year note was unchanged with its closing yield at 3.96%. The 30-year U.S. Treasury bond rose 10/32 to yield 4.84%. Trim Tabs said $1.7 billion flowed into equities in the week ending January 29, while bond funds had inflows of $2 billion. ***************** 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 24.50 26.72 FEB 20 23 0.40 22.60 $0.40 Open XAU 79.51 77.00 FEB 65 70 0.75 69.25 $0.75 Open BHE 35.30 32.50 FEB 25 30 0.45 29.55 $0.45 Open CHIR 40.18 37.52 FEB 35 37 0.40 37.10 $0.40 Closed INTU 50.40 44.10 FEB 40 45 0.60 44.40 ($0.30) Closed AET 43.86 43.49 FEB 35 40 0.45 39.55 $0.45 Open HCA 43.75 42.74 FEB 37 40 0.30 39.70 $0.30 Open CERN 37.31 36.87 FEB 30 35 0.55 34.45 $0.55 Open PRX 31.50 32.44 FEB 25 30 0.45 29.55 $0.45 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss As noted last week, Intuit (NASDAQ:INTU) and Chiron (NASDAQ:CHIR) are at the bottom of their respective (near-term) trading ranges and conservative traders should consider closing both positions. Benchmark Electronics (NYSE:BHE) and HCA Inc. (NYSE:HCA) remain on the "early exit" watch-list. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ABK 57.56 53.57 FEB 70 65 0.55 65.55 $0.55 Open KBH 44.01 44.71 FEB 55 50 0.55 50.55 $0.55 Open BZH 61.98 57.55 FEB 75 70 0.50 70.50 $0.50 Open ITW 65.70 60.82 FEB 75 70 0.60 70.60 $0.60 Open BGEN 37.93 38.25 FEB 45 42 0.25 42.25 $0.25 Open PIXR 53.76 54.99 FEB 65 60 0.55 60.55 $0.55 Open RE 51.70 50.47 FEB 60 55 0.50 55.50 $0.50 Open ROAD 36.43 34.44 FEB 45 40 0.30 40.30 $0.30 Open ATK 54.75 54.36 FEB 65 60 0.40 60.40 $0.40 Open CAT 43.92 43.98 FEB 50 48 0.20 47.70 $0.20 Open IBM 78.94 78.20 FEB 90 85 0.60 85.60 $0.60 Open MER 36.81 35.02 FEB 43 40 0.25 40.25 $0.25 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 38.67 FEB 50 45 4.50 45.50 0.50 Open VIA 38.72 38.55 FEB 45 42 2.25 42.75 0.25 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 46.68 FEB 35 40 4.50 39.50 0.50 Open PHSY 29.19 28.53 FEB 25 27 2.00 27.00 0.50 Open OCR 25.03 25.83 FEB 25 27 1.00 26.00 (0.17) Open EBAY 73.36 75.16 FEB 60 65 4.45 64.45 0.55 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Although currently positive, the bullish position in University of Phoenix Online (NASDAQ:UOPX) has been closed to limit losses. Pacificare (NASDAQ:PHSY) and Omnicare (NYSE:OCR) remain on the watch-list for additional bearish technical indications. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status VAR 50.38 52.26 FEB 55 45 0.10 0.20 Open? WPI 29.22 30.28 MAY 35 22 (0.10) 0.50 Open ANF 26.39 27.84 FEB 30 22 0.05 0.60 Open UPL 10.11 9.50 MAR 10 10 0.10 0.00 Open Abercrombie and Fitch (NYSE:ANF) has been an excellent performer 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 we identified the bullish issue. The position in Pioneer Resources (NYSE:PXD) has previously been closed. SYNTHETIC (BEARISH) ******************* Stock Pick Last Expir. Long Short Initial Max Play Symbol Price Price Month Put Call Credit Value Status BGEN 35.52 38.25 FEB 30 40 0.10 0.40 Closed The bearish position in Biogen (NASDAQ:BGEN) offered an excellent short-term gain, achieving our target exit profit after only one day in the play. Positions previously closed include: Amazon.com (NASDAQ:AMZN) and Imation (NYSE:IMN). CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status AMAT 15.70 11.97 J04-17C J03-17C 2.40 2.00 Closed AXP 33.70 35.53 APR-30C FEB-30C 0.75 0.65 Open As noted last week, the LEAPS/covered-calls position in Applied Materials (NASDAQ:AMAT) was closed when the issue dropped below recent technical support near $13. The move came after Applied Materials announced that it expected orders in the first quarter to fall well below previously expected levels. Closed positions include: Capital One (NYSE:COF), Global Imaging (NASDAQ:GISX), Raytheon (NYSE:RTN), and Hershey (NYSE:HSY). SHORT-PUT COMBOS **************** No Open Positions CREDIT STRANGLES **************** No Open Positions DEBIT STRADDLES *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any 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. ***** APA - Apache Oil $62.41 *** Testing All-Time Highs! *** Apache Corporation (NYSE:APA) is an energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. The company has interests in seven countries including the United States, Canada, Egypt, Australia, China, Poland and Argentina. Technical Outlook: Friday's rally put the issue at a multi-year high and within $4 of its "all-time" high. Robust volume in recent sessions and heavy buying pressure suggests the bullish trend will continue. Potential Catalysts: Higher crude oil prices; solid earnings with fundamental improvements in the company's balance sheet including lower debt-to-capitalization ratio. PLAY (less conservative - bullish/credit spread): BUY PUT FEB-55.00 APA-NK OI=1012 A=$0.20 SELL PUT FEB-60.00 APA-NL OI=1709 B=$0.80 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$59.40 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=75% ***** FRX - Forest Labs $51.75 *** Consolidation Complete? *** Forest Laboratories (NYSE:FRX) develops, manufactures and sells both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. The company's most important U.S. products consist of branded ethical drug specialties marketed directly, or "detailed," to physicians by its Forest Pharmaceuticals, Therapeutics and Specialty sales forces. Technical Outlook: Post-split consolidation; near-term lateral trend with support near $50; 150-day EMA near sold strike ($47). Potential Catalysts: New Drug Application (NDA) for Memantine, first of a new class of Alzheimer's agents, was accepted for filing by the U.S. Food and Drug Administration on Friday. PLAY (conservative - bullish/credit spread): BUY PUT FEB-45.00 FRX-NI OI=1459 A=$0.45 SELL PUT FEB-47.50 FRX-NW OI=6116 B=$0.70 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$47.25 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=87% ***** NBR - Nabors Industries $36.85 *** On The Rebound! *** Nabors Industries (NYSE:NBR) is a land drilling contractor, with over 550 land drilling rigs. The company conducts oil, gas and geothermal land drilling operations in the lower 48 states, Alaska and Canada, and internationally, primarily in South and Central America, the Middle East and Africa. Nabors also is a land well-servicing and workover contractor in the United States. Technical Outlook: Short-term "bullish" with resistance near $38; recent trading range from $35-$38 provides an old "comfort zone" when the upside activity ends. Potential Catalysts: Fourth-quarter profit exceeded consensus expectations; "much improved" outlook for first quarter and 2003; Lehman Brothers upgrade. PLAY (conservative - bullish/credit spread): BUY PUT FEB-32.50 NBR-NZ OI=2033 A=$0.40 SELL PUT FEB-35.00 NBR-NG OI=870 B=$0.65 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$34.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=70% ***** LXK - Lexmark International $60.54 *** Trading Range? *** Lexmark International (NYSE:LXK) is a developer, manufacturer and supplier of common printing solutions, including laser and inkjet printers, multifunction products and various associated supplies and services for offices and homes. The company also sells dot matrix printers for printing single and multi-part forms for business users and the company develops, manufactures and markets a broad line of office imaging products. Lexmark International is the surviving entity of a merger between itself and its former parent holding company, Lexmark International Group. Technical Outlook: Near-term lateral trend with resistance near $64; slightly oversold conditions with 150-day EMA near current price; historically a volatile issue. Potential Catalysts: Favorable quarterly earnings with Merrill upgrade. Pending litigation concerning replacement cartridges from competing manufactures such as Static Control. PLAY (conservative - bearish/credit spread): BUY CALL FEB-70.00 LXK-BN OI=1929 A=$0.20 SELL CALL FEB-65.00 LXK-BM OI=1720 B=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.60 POTENTIAL PROFIT(max)=9% B/E=$65.45 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=75% ***** QLGC - QLogic $33.28 *** Downside Break-Out? *** QLogic Corporation (NASDAQ:QLGC) designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers. The company's products are based on SCSI, iSCSI, Fibre Channel and Infiniband standards. The company is the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Their products include its SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool Kit management software. Technical Outlook: Friday's slump put the issue at a 3-month low with little support above $30. Heavy volume during the sell-off suggests further downside activity in the near-term. Potential Catalysts: Disappointing earnings in mid-January, poor fundamental outlook for the data storage industry. PLAY (conservative - bearish/credit spread): BUY CALL FEB-40.00 QLC-BH OI=5802 A=$0.30 SELL CALL FEB-37.50 QLC-BU OI=3506 B=$0.55 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$37.75 STATISTICAL PROBABILITY OF PROFIT (100-day HV)=73% ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** AFFX - Affymetrix $27.14 *** Record Revenue = Upgrade! *** Affymetrix (NASDAQ:AFFX) develops and commercializes systems that help scientists alleviate human suffering and improve the quality of life by applying the principles of semiconductor technology to the life sciences. The company's integrated GeneChip platform consists of disposable DNA probe arrays containing gene sequences on a semiconductor chip, certain reagents for use with the probe arrays, a scanner and instruments to process the probe arrays as well as software to analyze and manage genetic information from the probe arrays. The company's related micro-array technology includes instrumentation, software and licenses for fabricating, scanning and collecting and analyzing results from low-density microarrays. AFFX sells its products directly to pharmaceutical, biotechnology, agrochemical, diagnostics and consumer products firms, as well as academic research centers, government research laboratories, private foundations and various clinical reference laboratories in the United States and Europe and Asia Pacific. Technical Outlook: Short-term "bullish" trend with robust volume; resistance near $28; previous trading-range support near $24-$25. Potential Catalysts: Record fourth quarter profits; an agreement with Roche for AFFX's patented GeneChip technologies to develop and commercialize diagnostic products in a broad range of human disease areas. PLAY (very speculative - bearish/synthetic position): BUY CALL MAR-30.00 FIQ-CF OI=628 A=$0.95 SELL PUT MAR-25.00 FIQ-NE OI=207 B=$1.00 INITIAL NET CREDIT TARGET=$0.15-$0.25 INITIAL TARGET PROFIT=$0.45-$0.75 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $975 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($25). ***** CTMI - CTI Molecular Imaging $26.24 *** Technical Break-Out! *** CTI Molecular Imaging (NASDAQ:CTMI) is a manufacturer of positron emission tomography imaging equipment and related products used in the detection and treatment of cancer, cardiac disease and various neurological disorders. CTI provides a complete and integrated product line for positron emission tomography (PET), including scanners, cyclotrons, radiopharmaceuticals, detector materials and support services. The firm's products and services can be broadly classified into four principal categories: PET and PET/CT scanners; detector material products; radiopharmaceuticals, and other PET products and services. The company manufactures and distributes a broad line of sophisticated PET and PET/CT scanners through CTI PET Systems, which the Company markets as ECAT scanners. The company also manufactures the detection materials utilized in PET scanners including its proprietary LSO technology. Technical Outlook: Volume-supported break-out to 3-month high, next level of resistance at $28; nothing but "blue-sky" above that price. Potential Catalysts: Upcoming earnings report on 2/5/03; possible deal with Toshiba (rumor only) for CTI's PET services or merger of certain technologies with Toshiba. PLAY (very speculative - bearish/synthetic position): BUY CALL MAR-30.00 QPQ-CF OI=778 A=$0.60 SELL PUT MAR-22.50 QPQ-OX OI=21 B=$0.55 INITIAL NET CREDIT TARGET=$0.05-$0.15 INITIAL TARGET PROFIT=$0.40-$0.65 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $675 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($22.50). *********************** STRADDLES AND STRANGLES *********************** Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. ***** ROOM - Hotels.com $40.14 *** Reader's Request! *** Hotels.com (NASDAQ:ROOM) is a provider of discount hotel rooms and other lodging accommodations, allowing customers to select and book hotel rooms in major cities through the company's Websites and its toll-free call centers. The firm contracts with hotels in advance for volume purchases and guaranteed availability of hotel rooms and vacation rentals at wholesale prices and markets these rooms to consumers, often at discounts to published rates. In addition, its hotel supply relationships allows Hotels.com to offer its customers hotel accommodation alternatives for otherwise unavailable dates. The company has room supply agreements with over 4,000 lodging properties in 178 major markets in North America, the Caribbean, Western Europe and Asia. One of our readers suggested this issue for a speculative straddle and a quick review confirms that the stock has relatively "cheap" options, a history of adequate price movement and the potential for volatility after the company's earnings report in early February. Technical Outlook: Intermediate-term "bearish" trend; support near the current price based on Jun-Aug 2002 trading range. Potential Catalysts: Quarterly earnings report due 2/5/03. PLAY (speculative - neutral/debit straddle): BUY CALL MAR-40.00 URD-CH OI=206 A=$3.40 BUY PUT MAR-40.00 URD-OH OI=287 A=$3.30 INITIAL NET-DEBIT TARGET=$6.50-$6.60 INITIAL PROFIT TARGET=$1.25-$1.75 ***** ------------------------------------------------------------ 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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