The Option Investor Newsletter Sunday 02-09-2003 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: Orange? I See Red Futures Market: Free-falling Index Trader Wrap: COLOR ME ORANGE Editor’s Plays: Boom or Bust? Market Sentiment: Confirmation Ask the Analyst: I wouldn't change a thing Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: All Fall Down Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 02-07 WE 01-31 WE 01-24 WE 01-17 DOW 7864.23 -189.58 8053.81 - 77.20 8131.01 -455.73 -198.21 Nasdaq 1282.47 - 38.44 1320.91 - 21.23 1342.14 - 34.06 - 71.55 S&P-100 418.79 - 13.78 432.57 - 3.57 436.14 - 21.22 - 13.05 S&P-500 829.69 - 26.01 855.70 - 5.70 861.40 - 40.38 - 25.79 W5000 7873.42 -251.65 8125.07 - 50.67 8175.74 -354.59 -228.10 RUT 358.78 - 13.39 372.17 - 2.89 375.06 - 13.04 - 8.34 TRAN 2139.97 - 33.38 2173.35 + 10.02 2163.33 -181.20 - 49.14 VIX 38.80 + 3.02 35.78 + 0.01 35.77 + 7.09 + 1.55 VXN 48.26 + 1.45 46.81 + 1.76 45.05 + 2.21 + 0.56 TRIN 1.57 0.89 1.69 1.60 Put/Call 0.94 0.84 0.83 0.83 ****************************************************************** Orange? I See Red by Jim Brown The Homeland Defense Dept raised the terrorist threat level to orange on Friday but all I see is red ink across the board. The Jobs numbers blew out estimates but traders recoiled in terror. Is there any end to this nightmare on Wall Street? Dow Chart – Daily Dow Chart - 60 min Nasdaq Chart – Daily It was a blowout! Over 143,000 jobs were created in January according to the nonfarm payroll report but wary traders were quick to discount the numbers. The jump in numbers was primarily in the retail sector and was predicated on a lack of hiring in December. Let me see if I can explain it. The jobs number is the net of the new jobs created and existing jobs eliminated. Say in any given month 500,000 jobs were created and 450,000 jobs were eliminated. The net result would be a jobs number showing a +50,000 new jobs. These numbers are adjusted for seasonality as well. If there are typically an additional 250,000 retail jobs created in November/December for holiday overload then those 250,000 jobs are eliminated in January. Instead of having the jobs number for November show an increase of +250,000 jobs when everybody knows they are just 60 day temps, they adjust the Nov/Dec/Jan numbers by 250,000 to remove this bump from the reporting process. Now assume in 2002 there were only 100,000 jobs created for the holidays. After deducting the 250,000 expected jobs you get a -150,000 negative job number for December. Fewer jobs created minus the average number of jobs that should have been created based on historical norms. We saw this in the December number when it came in at -101,000 instead of the +37,000 expected. A net difference of -148,000. Now that the holidays are over there are normally 250,000 jobs eliminated so the bean counters adjust the actual numbers by +250,000 again to keep things level. The problem is the reverse of Decembers. Since only 100,000 were actually created only the same 100,000 were eliminated. That is 150,000 under the normal adjustment so the jobs number shows a gain of +150,000 when there was actually no jobs created. It was a historical adjustment by the bean counters only. No jobs! Since they were never hired the job loss number in December was wrong and since they were no jobs to be eliminated the January number is wrong. They also revised the December Jobs lost down to -156,000 from -101,000. When netting the two "adjustments" together -156,000 and +143,000, the phantom gain for January, you get an actual loss of -13,000 or -6,500 for each month. This realization of reality is what took the bloom off the markets at the open on Friday. Smoke and mirrors, although well intentioned, bit them in the end. A big talking point from the report was the drop in the unemployment rate to 5.7% from 6% and how it was such a large improvement. Wrong again. You cannot lower the real unemployment rate without creating jobs. Jobs were not created as we saw above. The UNP numbers changed from 8,711,000 to 8,302,000 due to workers unable to find jobs, tiring of the process and dropping out of the system. It was not due to 409,000 or nearly 5% of the total suddenly finding jobs in January. Remember the Challenger layoffs for January soared +42% to -132,222? Five percent of the workforce did not suddenly find work when mass layoffs alone grew to 132K and this does not count normal business reductions. The Challenger report only tracks mass layoffs where a company cuts say 10% of its total workforce. Speaking of layoffs Goldman Sachs announced it was cutting 20% of its traders in its derivatives group due to lack of volume and the declining markets. GS also cut -908 jobs in the 4Q or 4% of its staff. Wholesale Trade numbers came back to earth on Friday with a -0.8% drop in December. Analysts claim sales are improving with inventory levels up slightly but with a headline number three times lower than the expected +0.4% increase it would be tough to convince me. The warning news on Friday was thick and I am talking about earnings and not terrorists. After the bell on Thursday Dell and EDS made cautious comments and those were followed on Friday by TECD who warned profits for the current year would be off as much as -25% due to slipping demand an falling prices. PIXR warned that earnings would be half of analyst's estimates. PCTY warned that economic and political uncertainty was hurting business and they said earnings could come in -30 cents under analyst's estimates of $1.09. PCTY is the largest party goods chain. Clothing and shoe retailer Genesco warned that weak sales in its Johnston and Murphy shoe business and slowing apparel sales overall would push earnings -10 cents under estimates. Mohawk warned that earnings would slip on waning demand for carpet and earnings would be well below estimates. Lack of demand for carpet? Have you looked at the home builders stocks lately? I could go on but you get the picture. Slow sales, lack of demand, sound familiar? Want real proof? Consumer credit for December dropped by -$4 billion when analysts expected a gain of +$4.3 billion. This was the second consecutive decline. Think about it. A -$4 billion decline in the biggest spending month of the year. There are multiple reasons from high unemployment and fear of being unemployed causing consumers to spend less especially on credit. Secondly the mortgage-refinancing boom has provided cash to pay off these debts and reduce monthly payments for cash strapped consumers. Low sales? You bet and according to who you listen to the future is likely to get worse. 95,000 retired workers and dependents for Bethlehem Steel found out after the bell on Friday that their health and life insurance benefits were going to be terminated. The steel company says it cannot pay the obligations now or in the future. Considering the cost in health insurance and the risk of not having it, this is going to be a major blow to this group. The sad thing is we are going to see more of this type of scenario if the economy continues to struggle. About one year ago LTV began the cycle by ending benefits to 85,000 retired workers. The markets attempted to rally off the Jobs numbers but right at the open the government raised the threat level for terrorist attack to orange or high. According to John Ashcroft the government has received "specific and credible" information regarding the possibility of multiple large attacks next week involving chemical, biological or radiological agents. They said there were indications the terrorists were going to attack unprotected targets like high rise apartments, office buildings, hotels and/or places were regular people congregate in large numbers. This warning about attacks next week was repeated over and over in the press and the markets appeared to drown in the negativity. I am actually surprised we did not close lower as traders went flat for the weekend to avoid the event risk. The events were supposed to be staged to match the close of the Muslim holy days which end on Feb-14th. The Feds said the amount of communication traffic referring to a large attack in America had mushroomed to the same levels seen just before the 9/11 attack. The markets never had a chance. With the mixed to bad economic numbers, a continued parade of lowered earnings guidance, more Iraq worries and now the heightened terrorist alert. The Dow only dropped -65 points but closed under several levels of critical support. The most critical was the close below the 61% retracement level at 7902. This sets up the Dow for a fall to 7600 or below. It has clearly fallen out of its consolidation range between 7950-8150. The Nasdaq also broke convincingly under the 1300 support level and now has a high risk of retracing to 1200. It was an ugly day all around. The SOX sank to a four month low of 260, the banking index $BIX.X fell to a low not seen since October. Hardest hit was the Russell-2000 which fell -3.6% for the week. This should send up red flags for everyone. If small caps are getting smaller then funds and retail investors are moving to the sidelines in volume. Funds stash cash in large caps for liquidity in times of stress and they invest in small caps when expecting better times ahead. This reversal of fortunes is a serious red flag. The oversold conditions are increasing but not at an alarming rate and that alone points to an additional drop. The Put/Call ratio closed Thursday at 1.53 and Friday at 98. These are high numbers but not off the scale. The TRIN is chalking up some high numbers as well but far short of climax bottoms. The VIX edged even closer to 40 on Friday but is well off the 50-56 ranges reached last July and October. The bottom line is more potholes ahead. Next week starts out with a quiet period in regards to economic reports with nothing material for the first three days. Thursday and Friday will regain this week's intensity. Greenspan will take center stage on Tuesday at 10:AM when he delivers the first of his semiannual reports to congress on monetary policy. With the recent negative economic news this is going to be a heavily watched event. He will be hard pressed to convince the panel the economy is recovering nicely. He has always warned lawmakers about budget deficits and the need for fiscal discipline and that is not what is happening in the current environment. The general consensus of opinion is that the economy can withstand a quick 4-6 week war but a longer engagement of 2-3 months would plunge the country into a deep recession. Panel members will likely quiz him on his impressions. Mondays have been positive lately as traders who went flat for safety on Friday reenter on Monday. Assuming nothing happens over the weekend this trend should continue but after 10:AM all bets are off. The terrorist warnings are likely to increase the closer we get to next weekend. The inspectors will report to the UN again on Friday but while we don't know the answers already we know the conclusion. The US is set to push for a resolution calling for military force to disarm Saddam the following week and that would actually be bullish. It would mean a coalition to share expenses and blame and a final global sanction to the war. That resolution is two weeks away or more and plenty of time for some major swings in the market. Find your airsick pills and fasten your seatbelts. Enter Very Passively, Exit Very Aggressively! Jim Brown "The worst trades are generally when people freeze and turn to prayer and hope rather than take action." Robert Mnuchin ************** FUTURES MARKET ************** Free-falling By John Seckinger jseckinger@OptionInvestor.com All three futures contracts fell under significant support levels during Friday's sell-off; however, what is the risk/reward for being short at current levels? Could a bear trap still materialize? Friday, February 7th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7864.23 -65.07 8001.08 7830.02 YM03H 7853.00 -87.00 8021.00 7809.00 29,581 Nasdaq-100 957.05 -13.50 983.36 951.67 NQ03H 959.50 -15.50 987.50 951.50 240,296 S&P 500 829.69 -8.46 845.73 826.70 ES03H 830.50 -10.00 849.50 825.25 685,741 Contract S2 S1 Pivot R1 R2 Dow Jones 7727.38 7795.80 7898.44 7966.86 8069.50 YM03H 7682.00 7768.00 7894.00 7980.00 8106.00 Nasdaq-100 932.34 944.70 964.03 976.39 995.72 NQ03H 930.25 944.75 966.25 980.75 1002.25 S&P 500 815.01 822.35 834.04 841.38 853.07 ES03H 810.75 820.50 835.00 845.00 859.25 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7608.00 7730.00 7932.00 8054.00 8256.00 NQ03H 921.50 940.50 970.50 989.50 1019.50 ES03H 801.25 815.75 840.00 854.50 878.75 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. Before we begin, let us take a look at Jim Brown's day in the Futures Monitor. Recapping his signals: Short 842.25, exit 844.50, change -2.25 Short 842.00, exit 833.00, change +9.00 Short 834.50, exit 833.50, change +1.00 Short 833.50, exit 835.75, change -1.75 Short 830.75/830.25, exit 830.25, change +0.25 Short 830.00, exit 830.25, change -0.25 Long 830.25, exit 828.75, change -1.50 Short 829.00, exit 827.00, change +2.00, no warning- not in total Total for the session: +4.50 Total for the week: +14.25 Total for four weeks: +41.25 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) The ES contract rose Thursday night and just missed testing the 'resistance zone' from 850 to 852.75. Moreover,the high from 9:30 on was fractionally above the profiled 843-845 before the "orange" alert hit the markets and strong selling pressure took over. The 836 area was cleared, and both 829 and the daily S2 at 835.75 came into play (low 835.25). Friday's settlement of 830.50 is well underneath Monday's pivot of 835, so least resistance should remain lower until this level is tested. Looking at the chart below, I have compiled retracements on a weekly and monthly timeframe. For the NQ and YM contracts, I have cleared these charts up and just put in trading bands. I do want readers to undertand my thinking behind these 'strong areas,' so excuse all the retracement lines. The levels below should have more weight than the daily areas, but of course it would be preferable if all the timeframes lined up. As the chart signifies, the next area of strong support is seen from 814.50 to 816.25. Below 815.50, and the next level isn't reached until 805. If buying does materialize, resistance is seen at 839, and then above from 849 to 852.25. I label these areas as "strong areas" because if 852.25 is cleared, there is a good chance this area will become support (at least until the lower end of the range is taken out at 849). Note: If the ES contract closes above 839, bears should be slightly less aggressive until weakness picks up again and prices fall back under 839. Chart of ES03H, 120-minute A 60-minute chart of the ES contract shows the recent long liquidation pattern (lowercase "b" formation), and subsequent breakdown under the daily retracement levels of 839. Until longs can get the ES back above 839 and the most recent channel, least resistance appears lower. The apex of this liquidation pattern comes in at 850, and a rise above this area (would use 852.75) should spark a short-covering rally. Aggressive traders look for slight support near 820 area, which is 4-points above the 'strong area' listed above, but is the daily S1 level. Monday's S2 is at 810.75. Chart of ES03H, 60-minute Bullish Percent of SPX: 41.80% and down 1.20% on Friday. The column of O's is now at 11. I still expect a move in the bullish percent to the 30% level. Note: In order to really look for a bottom, I would like to see a move under 30%, followed by a column of "X's". This would put the indicator in "Bull Alert" status. This indicator is currently in "Bull Correction" status. Looking at P&F analysis, the SPX contract is underneath its quadruple bottom at 845 and continues to have a bearish price objective at 750. Support is seen from 805 to 810. The March E-mini Nasdaq 100 Contract (NQ03H) The NQ contract barely rose above the 983 area before selling pressure began to materialize. With that said, I didn't look for more weakness until the 978.50 area was broken (since zone was from 978.50 to 983). Traders then got the move under the daily pivot and down to 960. The objective still stands at the 941 area ("support zone" from 940 to 941.50). Instead of showing all the retracement areas below, I have cleaned up the chart and did bands instead. Looking at the chart below, the NQ is below the daily pivot of 966.25, and there isn't much support until the 940-941.50 area. The daily S1 area comes in at 944.75. If the daily AND weekly pivot area is cleared to the upside, then look for a move back to the range of 982 to 986.50. If the weekly pivot of 970.50 IS cleared, I will not look for weakness until the daily pivot of 966.25 is taken out. The risk/reward at Friday's settlement isn't great; therefore, I would wait until the NQ either breaks through one of the bands or fails from a significant area. Least resistance is still lower, and if the NDX hits 950, we should get another wave down. Chart of NQ03H, 60-minute Bullish Percent for NDX: This indicator fell 4% to 39% on Friday, and continues to portend bears will be selling rallies going forward. The column of "O's" grew to 13. Therefore, in the NDX, least resistance is still lower. This indicator is in "Bear Confirmed Status". Note: The NDX, according to P&F charts, has a bearish price objective of 825 and just missed adding another "O" on Friday by 1.67-points. The low was 951.67. If 950 is reached before a column of X's is seen, the bearish price objective will fall to 775. The March Mini-sized Dow Contract (YM03H) The YM contract continued to trade weak on Friday, and is now below the bottom a bear flag formation (see chart below). I have looked at retracements on a monthly, weekly, and daily basis, and have outlined some critical zones below. The contract is below its daily pivot, and the next objective lower is at its daily S1 at 7768. Slight support is also seen at 7735. Much stronger support is below from 7608 to 7634. Aggressive traders can use a move underneath Friday's low of 7809 as a reason to get short once more. A roll at the daily pivot would be a better entry, though; however, a very tight stop should be used. If the YM closes above 8015, look for shorts to start covering en masse. This is the apex in the recent bear flag formation, and really should not be tested going forward. As with the NQ contract, we are more in 'no-man's land' than anywhere else. I would be nervous short above 7900, and bearish traders should monitor trailing stops very closely on Monday. If short and a noted area is cleared, look to place a stop roughly 10-points above the significant level. Chart of YM03H, 60-minute Bullish Percent of Dow Jones: A P&F chart now shows a bearish price objective of 7500. The column of O's is now at six. Support is seen at 7800. As far as the bullish percent is concerned, it fell 6.67% to 20 percent. The column of O's is now at 20. Note: The last column of O's ended at 10%. Least resistance is still lower, albeit with trepidation. The next column of X's will put this indicator in "Bull Alert" status. It is the bullish percent of the NYSE that gives the impression of more weakness, and is a much broader indicator. This indicator is still only in a column of O's four-deep, ending at 44. Risk is for a fall to 30% (its October reading). Good Luck. Questions are welcomed, John Seckinger ******************** INDEX TRADER SUMMARY ******************** COLOR ME ORANGE By Leigh Stevens lstevens@OptionInvestor.com THE BOTTOM LINE: War and terrorism jitters (Friday’s condition “orange”) continue to undermine any positive fundamentals relating to the economy and earnings. General uncertainty can’t be “priced” into the Market as it is not a definable risk. Momentum is again accelerating to the downside - the weekly MACD indicator is very close to a sell signal and suggests that any seasonal tendency for strength may be over. The oversold condition and the recent extremes in sentiment (bearishness) may not result in more than temporary rallies, which can be used as put buying opportunities on rebounds to the identified resistance areas. FRIDAY'S TRADING ACTIVITY – The country’s terrorism alert status from our new Department of Homeland Security rose to “orange” on Friday coloring the market blue. Orange alert being a possible imminent threat or “high risk”, just under the red alert which is the highest possible color code. Color me orange seems to be an increase in “chatter”, movement and intention - that kind of activity - and red I suppose is that they’re on the other side of the hill. A positive January employment report generated some early buying and gains in stocks. But another report, on U.S. inventories, which showed a substantial increase – stuff piling up in warehouses – plus the aforementioned terror alert status, put a real damper on the market and the indices ended the week on a weak note. The Dow fell to 7864, which was its lowest close since October. Nasdaq fell some 19 points to 1282, which was also its lowest close since mid-October. EMPLOYMENT – it’s the jobs stupid. January non-farm payrolls were reported by the Labor Department to have increased by 143,000 – this compared to a drop of 156,000 jobs in December. The January increase was the largest 1-month gain in over 2 years. Normally this would be very good news to the market which is fearful about the tepid recovery being stopped in its tracks. Mitigating the good number on the face of it was the fact that about 2/3 of the increase (101,000 jobs) was in the retail sector, which largely offset a 99,000 decline in December as seasonal help went away. A fear has been that a rebound in the economy could be a so- called jobless recovery. This is where the economy improves but industry makes due with existing employees – working more hours – rather than hiring NEW workers. Newly hired or re-hired workers make for an increase in spending, which the unemployed have put off; i.e., “pent-up” demand. Since consumer spending is also the hope for a pick up in corporate revenues and earnings – it ain’t coming from business spending – you can see that job growth is a key event. Since all bets are off if a war goes badly, there is more terrorism, oil prices continue to rise and so on, the uncertainty effect is keeping a real lid on the market and leading to still more selling. It does not take a LOT of selling to drive the market lower if there is such little buying interest. And investors are more attuned to their local real estate pages than they are to the stock section. In addition to the nonfarm payroll growth, which is the most important number, unemployment fell for January to 5.7% versus the forecast that the rate would hold steady at 6%. We can assume that laid off workers were a significant number of the recipients of the payroll increase and not new hamburger flippers at MacDonald’s. We have also seen a drop in consumer sentiment and that there is a pick up in paying down debt. The jobs data took some focus off the Iraq situation and provided some hope that consumers might not cut back their spending if they were not so worried about their jobs. The rise in wholesale inventories tended to dampen that hope. There is also an anemic trend in wage growth overall although some recent figures did provide a ray of hope. The bears have plenty of reason for their winter hibernation and lack of buying interest. There are now plenty of super-bears out there that are being heard from more and more – actually, its perhaps more that the media goes to them to hype this side of the story. The bulls are mostly waiting for an Iraqi invasion to play out before committing. There was ONE kind of buying this past week – PUT buyers last week finally showed the kind of enthusiasm that had been missing in what usually sets up before there is a market bottom; i.e., a high level of bearishness. However good this might be as a technical indicator, the charts have a lean and hungry look (bearish!) and politics or “fundamental” factors rule. There is fear of the oil “weapon” being used but times appear to have changed quite a bit in the last decade. With oil producers more dependant on maintaining a high level of production and income as they run deficit spending of their own and with Russian and North Sea oil more of a factor in the global oil market, this may be a fake phantom. Moreover Kuwait last week announced that they will increase production as needed – OPEC appears to be of the same mind basically. Also, not to be forgotten, President Chavez of Venezuela has apparently weathered the oil strike there and oil production is slowly coming back on line. EDS (Electronic Data Systems) spooked tech watchers by announcing a more dismal outlook than they had previously stated. The company reported a 5% drop in revenue and weaker profits and warned that weak tech spending will hold down their earnings this year. The stock rose however – the latest company outlook seemed to be not quite as dismal as was already priced into the stock. OTHER MARKETS - Bonds were flat and the dollar up a bit. The Euro fell against the greenback to 1.0823 from 1.0833. No big deal but the fact that the dollar has stabilized is the key thing. Gold ended the week up virtually unchanged in terms of the nearby gold futures contract on the New York Commodities Exchange (Comex) at $370 but down substantially (-$17) from the week’s high. The Philly gold & silver index futures closed at 75.19, - 15 on the week – the key XAU gold stock index has marked time with highs under 80 for some weeks now. The gold bulls attribute this to analyst downgrades as gold prices have risen closer to $400 and by the tendency for gold producers to forward sell or hedge substantial portions of their production in the futures markets, thereby putting a cap on their potential upside in a rising market like this. Could it be that the gold producers know that gold trades in a certain range and doesn’t make big moves above that range unless driven by unusual trends like strong inflation? But they have other reasons to be bullish - I am not that convinced, but stay tuned. The heaviest trading action was in the oil patch commodities, where natural gas and heating oil hit two-year highs on cold weather and tightening supplies. Heating oil rose to just a few pennies shy of its 1981 all-time high of $1.11. Nearby crude oil futures advanced to a 3-week high, near $35, perhaps putting the lie to my more bullish supply assessment that I laid out. COMING UP THIS WEEK – It seems a shame to possibly spoil Saint Valentine’s Day, but unless Iraq evidences a serious change of HEART, the UN report at the end of the week (on Feb. 14th) is a likely milestone on the road to a U.S. war on Iraq. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Weekly & Daily charts: Well my downside for the S&P 500 (SPX) for 840 was MORE than realized. Had I made more of a focus on the weekly chart last week, I might have been more bearish than I was even. Technically, we could say that the key chart event was the decline to below the 865 level 2 weeks ago, putting this key index below the low end of the prior 13-week (1/4 of a year) trading range. Sure enough last week, what was a line of support had “become” key resistance as you can see by the green, then red, arrows. Major momentum now has shifted down as suggested by the weekly MACD, about which I also have something to say (about this indicator) in my current Trader’s Corner article. It appears that there is another down leg that is underway here based on the weekly chart. The daily chart is looking bearish as well as we’ll see next. The most bullish that can be said about SPX daily chart action right now is that the rate of downside momentum has slowed somewhat from the freefall prior to the several days of sideways price action prior to Thursday. That sideways move now shows itself for what a “consolidation” most often is – a pause before another move in the direction of the dominant trend. Given that recent lows are following the downtrend channel line lower plus the oversold RSI levels, holders of S&P index puts ought to be aware that there could be either just a slow downward creep (that keeps lows hugging the low end of the downtrend channel) or to be alert to the potential for a short-covering rebound - Over time an ultimate chart objective is to the area of the prior lows and below psychological support around 800 – in the 775-780 area. The longer that SPX trades under its 62% retracement, the more likely is its retracement to be back to the prior (down) swing lows – this is the “ultimate” retracement so to speak – back to the starting point or a 100% retracement. Regarding oversold levels in terms of the RSI – note that SPX got much more oversold in the July period when it registered an intraday low at 776 and established a low end of a broad trading range. Markets that are oversold can get more oversold still. Bearish sentiment now is as extreme as it tends to get - or, almost so, according to my CBOE equities options Call/Put ratio (takes out the index option daily volume). This has been the missing “ingredient” in terms of what we normally see on final down legs. I don’t usually apply moving averages to my daily CBOE equities C/P option figure but here employ a 5-day average for comparing prior extremes – in September the equities call to put figure was more extreme than currently. In a very bearish environment longer extremes of put buying can be seen or “needed” before it suggests that the market is in a condition for a rebound. If a technical bounce does occur, key resistance is at 860-862 and is another put buying opportunity in my opinion, at the area of the highs of last week. S&P 100 Index (OEX) – Daily and Hourly charts: 420 been my downside objective in the OEX and the Index dipped under this level last week of course. Potential minor support now looks to next show up at 415 at the low end of the hourly downtrend channel. However, having come down this far and given the bearish influences, we have to anticipate the possible retest of the prior low at 390. Resistance or areas of expected selling interest begins at 433 and extends to 437 and 440. 440 looks to me to be key technical resistance, at the prior low – support “becomes” resistance as you’ve heard from me frequently. I would be a renewed OEX put buyer in the 440 area. This sounds like a repeat of last week – it IS! – the OEX is now fully oversold on a short-term basis. And I’ll say again, oversold does not necessarily mean that a bottom is at hand, especially in an extreme situation where very bearish influences are driving the market. On the other hand you have to take account of it (being oversold) as this condition also signals the potential for sharp rallies based on some combination of better news and/or short-covering that comes in all at once. Last week, I had a 21-day moving average showing on the same Arms Index or TRIN chart above (for the NYSE), my “default” moving average length - instead of the 10-day average which is shown above and this is why the 10-day TRIN is showing at a prior recent “oversold” extreme. The TRIN chart is different in that it’s an INVERSE image of the LOW readings that usually suggest an oversold reading on indicators like stochastics or RSI. At the risk of again repeating myself about the TRIN, a series of high daily readings is showing heavy selling – in the world of “contrary” views about the market, heavy selling often of course occurs ahead or WELL ahead of an actual bottom. Based on the idea that 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. Right now it doesn’t take much SELLING to drive the indices lower as there are so few buyers willing to step up to plate – I don’t blame them! Nasdaq Composite (COMPX) Daily Chart - The price area where the Nasdaq Composite tends to be an “extreme”, or overextended on either the downside or upside is when the close is (or exceeds) 8% above or below its 21-day moving average. This would suggest the 1250 area as a next downside objective. And, if the lower envelope line is reached, this is not necessarily a sign that a tradable bottom is at hand – only that, very often, the rate of downside MOMENTUM will slow. Its then often the second, or third, “touch” to this envelope line that marks the spot to reverse positions. QQQ Daily chart - I am revising my downside target slightly to 23.50 for QQQ. QQQ has nearly completed a 62% retracement of its last advance – if 23.5 gives way, it provides a target to 22; then back to the 19.5-20 area. A trendline comes in around the 23.5 area also, which may be meaningful, maybe not – but, an area to watch. The Q’s are oversold now but can get still more extreme – however I would like to protect put profits from options bought at higher levels in case there is a short-covering rebound. I don’t expect much “good” news but if there was just the absence of bad news for a few days might be enough – although, ahead of the UN report at the end of the week I don’t expect much. Saddam may agree to some things this week (over-flights, etc.) that he didn’t last week, in order to continue to bide for time. However, time seems to be running out. QQQ Hourly chart - As you can see, the Q’s are nearing the low end of its broad hourly downtrend channel which comes in around 23.50 as does a prior closing low (not shown) from some time back. I think the shorts are also too nervous to do a lot more selling this week so QQQ may not slip much further. Much of a rally is another story – if one (a rally) does develop, then selling is suggested in the 24.5-25.50 zone, with stop protection on a close above 25.75. ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** Editor's Plays ************** Boom or Bust? This is a simple plan. Buy high, sell low. Everyone keeps talking about the housing bubble and how home sales are so strong. The record low mortgage are supposed to be attracting buyers by the millions. This HAS been true in the past but I have gotten a record number of unsolicited mortgage applications in the last three weeks. Something stinks. When every other email is mortgage spam and every fifth letter in my mailbox is a mortgage ad it seems to me the buyers have dried up. On local cable TV the mortgage ads have replaced the 1-800-WE-ARE-18 type phone sex ads. You know how many of those there were. When mortgage ads replace sex ads there is a change in the wind. Profits for mortgage brokers are no longer falling from the sky like rain. Add to this thought process the warning from Mohawk, Warren Buffet's favorite carpet manufacturer and you might be seeing the leading edges of a bursting bubble. Every house requires carpet and appliances. Maytag said 2003 was going to be a challenging environment. Whirlpool said 1Q earnings were going to be flat to up modestly although economic uncertainties in almost every market would make comparisons difficult. While the appliance makers are not going broke they are not setting the world on fire either. I may be building a house of cards here but as we all know reality is immaterial. It is the perception of future reality that drives stocks. Remember last summer when homebuilding stocks out performed everything else over and over? Guess what? The bloom is off the rose. Perception has changed. A quick glance over the leaders and most of them are trending down. HOV, which continually blows away earnings by strong double digits is very close to a breakdown at $28. BZH, the second highest priced homebuilder stock at $54.93 is very close to breaking a triple bottom formed over the last seven months. BZH just beat earnings with $2.75 vs estimates of $2.67 but CSFB downgraded it to neutral. They said they were not impressed compared to others in the group. They had a declining return on capital at 13.3% and a large percentage of goodwill included as equity. They said the company was entering a period of decelerating pricing power and a more competitive environment. I have beat this puppy to death but I think long term the housing killer will be rising interest rates. We are already running out of buyers and the first hint of a rate hike will pull the plug on the sector. I am going with the May-$50 put for $3.30 only because the August series does not have a $50 strike. If we are going to have another recessionary dip we should know by May and that will not be favorable to housing. We will have a much clearer picture of the unemployment by then as well. This is a high-risk play based on speculation but the trend is definitely in our favor. ******************************** Play updates: EMC Call from Feb-2nd We did not get any movement from EMC this week and it slipped from $7.70 to $7.43. Considering what the market did I would consider that a win. This is a long term play and it is still a strong recommendation. I am considering adding it to the powerball play in place of one of the entries that did not have a January strike. TMPW Put from Feb-2nd The TMPW earnings conference call is still scheduled for February 13th and the stock has dropped from the $11.05 price last week to $10.08 and still one week to go. The March $10 put rose slightly to $1.35 from $1.10. I mistakenly said that the February options expired the day after the conference call. They expire a WEEK after the conference call. Thanks to the alert readers who pointed out my error. It is heck when you get old. First the eyes, then the mind or something like that. (grin) NEM Put from Jan-26th Isn't that amazing. Gold soared to a six year high at $390 this week and NEM dropped to a new relative low and closed the week at $28.42. This is down from $30.15 when this play started. It was all about expectations and the fact the war was already priced into the stock. Things are going our way and no reason to think different. The March-$27.50 put is now $1.55 and the June-$27.50 is $2.85. Both are up from the recommendation price and plenty of time to go. AMZN Puts from Jan-19th I would like to think we finally got our break on AMZN but the stock still has support at $21.25 that must break to get out alive. The Feb-$22.50 put is currently $1.45 and down from the $2.25 when recommended. The $20.00 put is $.35 cents and well under the $1.10 staring price. At this point I would hope for a break of that support and with two weeks until expiration I would still hold the options. Next support is $20.75 and then it is a big drop to $18.00. Keep your fingers crossed that investors will decide to buy a stock with potential and drop this bubble holdover. DJX Puts from Jan-5th. It just keeps going and going and going just like the energizer bunny. With the Dow's close at 7864 the DJX puts continued to increase in value. The Feb-85 put is now $6.70 from the $2.85 price when suggested. The March $85 put is $7.50, up from $3.40. With these puts almost totally intrinsic value I would be looking to exit this position soon. The target of 7700 from Jan-5th is likely to be hit this week. Take the money and run. Keep those stop losses active and don't let these slip away. Powerball - From 12/29/02 The Powerball Lottery play for December-2003 dropped another -$100 to a loss of -$595 at the close today. This is a 12-month "lottery" play and we are only five weeks into it. Be patient. If you are not in it I would consider it a buying opportunity. It would cost you about $540 to buy one contract of each today. Any one contract could repay that $540 by 12/31/03 leaving the rest as profit. It is a high risk "LOTTERY" play but then $540 is not much risk. I am planning on replacing IDTI with EMC next week. I am planning on replacing VTSS with GLW next week. Both of the stocks replaced did not have January options. This will standardize the portfolio with all January strikes. 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 **************** Confirmation by Steven Price It's beginning to look like the technical breakdowns we saw on Thursday were for real. Thursday's trading took us briefly out of the range that we've traded in for the last week and a half, giving us some sell signals, but by the end of the day, we were back in the range. Not anymore. This morning started out positive following better than expected jobs data, giving the impression that we'd see more of the same range bound activity that has been staple of recent sessions. For the second day in a row however, Dow 8000 put a lid on the market and left us squarely in the 7000s by the end of the day. Over the past several days I've discussed the point and figure chart patterns that first signaled indecision with almost daily reversals from bearish columns of "O" to bullish columns of "X" each time giving contrarian indications as to which way a trader should enter. In Thursday's column I identified the triple bottom sell signals we got intraday in the Dow, SPX and OEX. However, the SPX was the only index to give us yet another move below that triple bottom sell signal, reducing the possibility of a bear trap. Today, we got not only additional confirmation with the Dow and OEX also adding another box to the downside, but also closing levels beneath the bottom of last week's support levels. After forming a rectangular consolidation pattern over the previous eight to nine sessions, the bottom of that pattern should theoretically now act as resistance, keeping a lid on further rallies and providing short entry points at rally failures. The other important level that finally gave way today was the 1300 support level in the Nasdaq Composite (COMP). The COMP has been ratcheting down over the past couple of weeks, first holding support at the 1319 level, which was the pullback level in early November, following what appears to be the left shoulder of a head and shoulders pattern. After breaking down below that level, it then held steady at 1300, with recent closes of 1306, 1306, 1301 and 1301 on four of the last five sessions. It did dip below that level intraday, but always found enough dip buyers to maintain closing support. That was not the case today, as it dropped almost 20 points to close at 1282, below even the intraday dips of recent sessions. If the major indices are going to get rolling downhill, a breakdown in the COMP was a necessary component of any slide. Now that the 1300 level has been cracked, the next significant support levels below appear to be 1251 and 1200. In October, we bounced off 1100, but the bears have a little work cut out for them before reaching that plateau. There was a dip on October 29 down to 1279, where the COMP got a bounce from its 50-dma. That 50-dma was breached a few weeks ago, but we did bounce from about the same horizontal level today. While a one-day support level does not seem significant in the grand scheme, we can't argue with what we saw today and conservative bears may want to wait to enter positions for a more decisive move below that October 29 low. The bullish percent of the COMP has also reversed, catching up to the Dow, OEX, SPX and NDX. The sell signal does not officially come until 1100, but we are in a sinking column of "O" and by the time we get down to 1100, we may miss an awfully big bearish opportunity. The NDX gave its sell signal at 960 today, which for those readers following the pivot analysis in the Index Trader Wrap also coincides with a breakdown below the weekly and daily S1 levels. With the bullish percents all heading lower, along with decisive sell signals in the broader indices, the stars certainly seem aligned for shorts. Now that we've looked at the technical picture, we still have to consider the world around us. A national security alert certainly did nothing to help matters, with the government raising the national terror threat level from yellow to orange. This was only the second time we've hit that level since the September 11 attacks and the markets reflected an increased level of fear. Attorney General John Ashcroft said, "This decision for an increased threat designation condition is based on specific intelligence received and analyzed by the full intelligence community... This information has been corroborated by multiple sources." The security alert throws up a red flag for any pattern we see, as other geo-political events have over the past few weeks. We are left wondering what kind of market action we would have seen if not for that alert. After all, we did head higher to start the day. If Saddam Hussein heads into exile, will we get a big rally as the threat of immediate war suddenly ends. Will that rally be a short entry point before traders re-focus on the economy? Will it relieve much of the uncertainty surrounding the market drop, leading to a run at the January or December highs? After all, the possibility of war has been hanging over the market since last summer. Oil prices are likely to drop in that scenario, reducing the cost of doing business for almost every company. While that possibility seems remote, it does not appear Hussein can win a war against either a U.N. coalition, or just the U.S. if that ends up being the case. Certainly he has considered the possibility in spite of all the tough talk. My point is that it is difficult to determine just how much of what we are seeing is economy related and just how much difference the geo-political issues are factoring into both the economy and traders' behavior. I haven't even begun to analyze North Korea (which Bill Clinton recently said posed a much larger threat than Iraq). We need to be nimble and realize that any position we have on can is subject to a big gap in the opposite direction than we are playing. I've certainly pointed out these risks before, but now that the market has given us multiple signs of a breakdown, bears are likely feeling their oats and considering upping the stakes. That is certainly what my emotions are telling me. Keep it in perspective and know the risks, but most importantly, don't play with anything you're not willing to subject to these kinds of risks. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 7864 Moving Averages: (Simple) 10-dma: 8009 50-dma: 8467 200-dma: 8746 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 829 Moving Averages: (Simple) 10-dma: 848 50-dma: 893 200-dma: 926 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 957 Moving Averages: (Simple) 10-dma: 982 50-dma: 1032 200-dma: 1027 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX just about confirmed the breakdown in the Nasdaq Composite and NDX. The SOX bottomed out at 261, getting a bounce following the AMAT warning on January 31. It has held steady above that level, bucking the trend in the broader markets. That's not to say it hasn't slowly worked its way down, it has just moved much more slowly than traders are used to seeing. Nevertheless, it cracked 260 to the downside briefly today, but watching this sector has been akin to watching paint dry. Still, without a failure in this group, we are unlikely to see the rest of the tech sector gain downside speed. Look for a decisive move below 260 to end up testing support in the 235-240 range. The COMP is below 1300 and the NDX below 960 and if we can get some action in the chips, bears should be gleaming. 52-week High: 641 52-week Low : 209 Current: 260 Moving Averages: (Simple) 21-dma: 294 50-dma: 310 200-dma: 344 ----------------------------------------------------------------- Market Volatility This is the one piece of the puzzle that seems to indicate we may not yet be in store for an immediate drop. At least that was the indication today. The VIX has found sellers at the 40% level for the second straight day as the market has dropped. Today it topped out at 39.79, after testing 39.64 on Thursday. It could be weekend sellers attempting to collect a higher daily decay level at the higher VIX, or it could be institutions taking advantage of a temporary dip in the markets to sell premium. Either way, it indicates that there are sellers on the spikes, rather than panic covering of short option positions in case of a continued market drop. If the VIX breaks through 40 decisively, look for a continued drop in equities, however, a VIX up against resistance could indicate the rubber band is simply stretched and ready for a pullback as the market bounces. For an illustration of the concept, see Ask the Analyst from January 26. CBOE Market Volatility Index (VIX) = 38.80 +0.38 Nasdaq-100 Volatility Index (VXN) = 48.26 –0.36 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.94 479,551 449,323 Equity Only 0.70 344,830 241,263 OEX 1.02 29,034 29,553 QQQ 2.13 27,171 57,764 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 43.9 - 0 Bull Correction NASDAQ-100 38.0 - 5 Bear Confirmed Dow Indust. 20.0 - 7 Bear Confirmed S&P 500 42.0 - 2 Bull Correction S&P 100 38.0 - 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 1.60 10-Day Arms Index 1.48 21-Day Arms Index 1.38 55-Day Arms Index 1.33 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 890 1960 NASDAQ 1034 2043 New Highs New Lows NYSE 65 131 NASDAQ 59 121 Volume (in millions) NYSE 1,472 NASDAQ 1,214 ----------------------------------------------------------------- Commitments Of Traders Report: 02/04/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials reduced long positions by 8,000 contracts and shorts by 3,000, for a net increase of 5,000 shorts. Small traders increased long and short positions by about 8,000 contracts, keeping the net relatively unchanged. Commercials Long Short Net % Of OI 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%) 02/04/03 414,543 465,678 (51,135) (5.8%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 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% 02/04/03 151,174 93,439 57,735 23.5% 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 increased long positions by approximately 2,000 contracts and shorts by 1,600. Small traders increased short positions by 1,000 contracts, leaving the long side close to unchanged. Commercials Long Short Net % of OI 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%) 02/04/03 40,934 50,992 (10,058) (10.9%) 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 01/14/03 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% 02/04/03 25,573 8,648 16,925 49.5) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials increased long positions by 1,500 contracts, while reducing shorts slightly. Small traders increased shorts by 1,600, while seeing a slight reduction to the long side. Commercials Long Short Net % of OI 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% 02/04/03 17,596 11,232 6,364 22.1% 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 01/14/03 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%) 02/04/03 4,583 9,424 (4,841) (34.6%) 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 *************** I wouldn't change a thing When I put a position into play I automatically place a trade to close that position out at a 30% ROI & 50% SL. I have read that one needs to let their profit plays "run". With the service I am using, I can place a "trailing stop", but the stop is triggered on the "ask" and filled at market on the "bid" and I don't want a MM turning a normal spread of .2 into 5. Is what I am doing a sound strategy, or am I missing out on more gains? Thanks again for your service you have a subscriber for life. Every trader has a "style" or a "discipline" that tends to fit their comfort level. In fact, some traders have multiple trading styles that seem to "fit" their business plan that we've discussed recent Ask the Analyst columns like "Your account is your business" (11/17/02) and "Plan the trade and trade the plan" (11/24/02). The question above regarding a systematic approach to closing a position out at a 30% gain with a 50% stop loss is something I wouldn't disagree with, as long as it fits your business plan. Now, I'm guessing that those that have read the article "Your account is your business," may say, "How can you (Jeff Bailey) condone risking 50% of capital, to make 30%?" I would say it is "OK" to risk 50% of capital to make 30%, as long as the trade has at least 100% or 150% potential in the direction of the trade (put or call). There are a couple of things this trader's "system" will do. For one, it creates DISCIPLINE. DISCIPLINE is created by placing a stop loss order immediately after the trade is initiated and this immediately removes any emotion from the trade should it begin working against the trader. The second thing I like is the "stated discipline" of selling at the target of 30% also creates discipline and if followed diligently removes any emotion from the trade as the stock/option achieves the stated objective. A third thing I like about this type of disciplined approach to trading options is this. Let's say I'm a BELIEVER IN THE BULLISH % indicator (which I am). As the bullish % is falling in a more bearish market environment, I'm constantly adding put trades to my account, taking systematic 30% profits along the way and not getting stopped out of any trades. At the end of each day, I might see that I had 2 trades closed out for 30% profit and 0 trades stopped out for 50% losses. At the end of the week, I see in my review process (required by my business plan) that I've had 5 trades closed out for 30% profit and 0 trades stopped out for 50% loss. Lets go forward and now imaging the bullish % are now below 30% bullish and I make the "tie" that bearish traders now have higher risk in bearish trading as the MARKET has been removing risk as stock prices have been falling. After a couple of weeks of 5, 30% winning trades for every 1, 50% losing trade, I start to see my winning percentage from the put options begin to turn a bit. As the bullish % has fallen, all of a sudden, I'm only seeing 2, 30% winning trades for every 1, 50% losing trade. Aha! I sense my batting average, based on this systematic trading style, is starting to drop off a bit. Hmmmm.... something is changing, things aren't the same. So lets go forward another week. Now the bullish % just aren't falling like they were and they're all at more oversold levels below 30%. The bullish % charts are just sitting here. This week, I find I've only closed 1, 30% winning trade and gotten stopped out of 2, 50% losing trades. I find this "hard to believe" as I've got some "good puts" on stocks that are breaking to new lows and still should have some significant room to their bearish vertical counts. Do I continue to put on more and more put positions? Heck no. My systematic trading style of taking profits at 30% and stopping out of losing trades at 50% is telling me there's some type of "shift" taking place, and this is perhaps confirmed by the lower levels of bullish %. My trading style of buying puts with a 30%/50% gain/loss isn't necessarily flawed and the systematic approach is "confirming" what the bullish % are telling me about bears having the risk. Maybe I should put on a bullish/call trade using the 30%/50% discipline, but just make sure the stock I'm looking to go long has good relative strength and shows some type of bullishness either taking place, or having taken place in the last couple of weeks. Then, next week, I'd review how my business/trading account is doing. If I find that my winning trades are calls and I'm still seeing some losing trades from the puts, then I get even more signals that a shift or turn in the markets is taking place. Now, as stated previously, we all have our "style" or "discipline" for trading, and if this subscriber's discipline seems sufficient to match your business plan, then I would think about trying it, but here are some critiques of this "style." I've said before, that I don't "believe" in using STOP LOSS orders on option trades and I prefer to only risk in an option, what I'd risk to a stop loss in the underlying stock. In essence, if I'm going to short 200 shares of a $25.00 stock and try and only risk $2.00 per share, or $400, then I like to take that $400 and buy that amount of $25.00 puts, then sell them only when the stock reaches my target. As the stock nears the target, I will also place a "strop profit" for the trade, just in case the stock reverses direction as it neared my target, but didn't achieve it. Another "critique" of the 30% profit and 50% stop loss is simply based on statistical probability. From these number I KNOW for a fact that I will need two winning trades for every losing trade encountered. That's not all that bad, but depending on what type of options strike/expiration a trader is buying, there may be a higher probability that a $1.00 option can easily be stopped out with a 50% loss, within an hour of initiating a trade. Therefore, a trader needs to consider option price when using a 30%/50% type of gain/loss option trading style. As it relates to the question... I have read that one needs to let their profit plays "run". I've read this also and I believe it has its merits. I have some thoughts on this. My question is... "How do I or you know when a trade has run its course?" My simple answer is, "when the trade hits my profit target!" Hey, that's simple enough and why I feel YOU MUST HAVE A TARGET. If I bought LEAPS puts on Lucent (NYSE:LU) after it gapped down from its 200-day SMA at $50 and had a bearish trading target of $25, was I "wrong" to close out those LEAPS puts when the stock traded my target, instead of letting it run? In my mind, when a stock trades your target, which was used to assess risk/reward in the trade before I initiated the trade, then "NO it was not wrong" to not have let my winner run, to $20, then $15 and so on. When the stock hit my target and profit was taken, I paid myself for the risk taken. Now, I could "let the trade run" if I wanted to (based on remaining expiration) by snugging down a trailing profit stop. I'd be a little upset if Lucent (LU) traded my target then rebounded back. "Gosh darned it! I knew I should have closed it out at my target!" But think of this. Once you get your account "built up" with some 30% gains, is there any reason why, next quarter, or at the end of the year, when you review your business, that you see your original $5,000 trading account now at $7,500 and feel it might be "OK" to expand the business a little? Take Dell Computer (DELL) as an example. They started out just making and selling computers. As time progressed and profits built fro that business, they began taking some of those profits and RISKING some of the profits in new business areas like servers. They didn't jump into the server market head-first, and a trader that is using a 30%/50% type of trading discipline with success wouldn't just stop doing that either and begin implementing a strategy of ..... "just let your winners run." No sir! A trader might do this though. Say at the end of the week, you review your business plan and find that you had taken a 30% gain from a put option trade in Acme Dynamite Company and that that gain came in just 2-days. The trade was closed out for the 30% gain when the stock fell from $30 to $27. After you closed out the trade, Acme kept falling to $23. You say... "Shoot, I should have let that winner run and there's still quite a bit of room to its bearish vertical count of $15." What a trader might do here, that still has the bulk of his trading discipline using the 30%/50% discipline, is check the sector and various major market index bullish % charts, and if there is still some downside to lower levels of bullish %, look for Acme Dynamite to rebound back near $27, initiate another put option trade, and have this trade slated for your "let the winner run" part of your business. As time progresses, you may find that the "let your winner run" trading style is actually seeing greater percentage net gain (you'll still have some losing trades) than your 30%/50% and you might slowly shift your business plan in that direction as your business/account begins to grow. Just remember, the horse and buggy served its purpose for years and years and got people where they wanted to go. The invention of the automobile got people where they wanted to go at a faster rate of speed than the horse and buggy method of transportation, but back in the day, those that stuck with their COMFORT LEVEL of horse and buggy transportation as a method of transportation that got them where they wanted to go made that decision based on risk/reward. One could argue the risk/reward tradeoffs for horse and buggy versus the automobile. Check your business plan. You've got your stated longer-term goals. If your 30%/50% gain/loss trading style is comfortable and is going to get you where you want to go (your business goal) then I wouldn't change a thing! With the service I am using, I can place a "trailing stop", but the stop is triggered on the "ask" and filled at market on the "bid" and I don't want a MM turning a normal spread of .2 into 5. I'm not sure if the subscriber is having stops triggered based on the stock trading a certain price and that price being traded then has the stop loss being triggered on the option, or if the stop loss is simply being applied to the option itself, so I'm guessing a bit here. I will assume that the latter is true as the trader is using a 30%/50% gain/loss trading discipline. If stops are being placed on the option itself, then just understand "why" the trade is executed the way it is for a put option. You're being filled at the "ask" on a put option, because the market maker that takes the other side of the trade is being FORCED and OBLIGATED to buy the 100 shares (if you sell 1 contract) at the stated strike if the stock closes below that strike on expiration. There are rules for market making in options and all you can do here is make reference to time and sales. If you feel the option's price was "manipulated" (bid increased rather quickly or ask increased quickly and triggered your stop) then you should look at a bar chart of the stock. Did the price of the stock rise "quickly" just minutes before your put option stop was triggered? What did the Market Volatility Index ($VIX) or NASDAQ-100 Volatility Index ($VXN) do at that time. If volatility "jumped" then that's a bad break for you. If the stock's price didn't "jump" or volatility didn't "spike", then call your broker/dealer and tell them that you feel the market maker manipulated his/her bid/offer to trigger you at an unfavorable trade (for your account). YOU had better be able to state your case clearly and ask your broker/dealer "how can the bid or offer of this put option do that, if the stock edged up just 5-cents?" Remember, your broker/dealer gets paid a commission (by you) and works for you. Any fees paid by you is partially divided up to the option exchange where your trade ran too. Don't take any guff or let them put you off and your broker/dealer should be willing to work for you. A good broker/dealer will earn your commission by checking into things. If at anytime they say "Hey, it's only $20.00" then ask them for a commission free trade to make up for this "small error." Then say nothing, but listen to their response. Is what I am doing a sound strategy, or am I missing out on more gains? It's a sound strategy, if you're making money and achieving your stated business plan goal. Are you missing out on more gains? I don't know. Go back and review past trades. What did those stocks do after you closed out the trade? Too many traders close out a trade (profitable or unprofitable) and simply forget about the stock and never learn anything from their success or failure. If you review your trades (especially the losers) you will learn what to look for in future trading. Hey... on losses, you lost good money, so you might as well consider that loss the price paid for some tuition and try and learn from it. Now.... don't just look at your trade blotter against the stock's eventual price movement after the trade was closed out. I'd also look at the bullish % charts during the time periods of trades you review. You might also find that after you were stopped out of a put option trade for a loss, that the stock may have moved higher the next day, but over the course of the next two, three or four weeks fell and would have not only had you achieving a 30% gain, but under a "let the winner run" style of trade, become a very nice "winner." If you review your trades, you may just find out that under a "let your winner run" type of strategy, that 70% of these trades were nice winners, 10% break-even, and 20% losers. I don't know, but you will if you review some of your trades. Try to review what shape the MARKET was is, what shape the SECTOR was in, and what shape the STOCK was in when you initiated the trade. I'm willing to "bet" that you will find the put trades that were LARGER winners, had you let them run, came not only from weak technicals in the underlying stock, but when that stocks sector bullish % was relatively high and had reversed into a column of O's, or the major index bullish % charts were high and reversed into a column of O. I'm thinking the bigger winners came from higher levels of bullish % that began reversing lower, and as you review further trades, some gains became less on the put side when the bullish % had fallen and more sector and market risk has been reduced. Also make some notes on "length" of time you held trades. Under "bear confirmed" market conditions, I'd think that "time held" was rather short compared to other periods. Take some notes here too. With a 30%/50% trading style, you're going to get an "average" amount of time you held a trade. From this you may learn.... On average, I'm closing out the bulk of my trades for 30% profits over X-number of days held. Aha! My 50% loser trades all came when I held over X-number of days. If you're 50% losers are all coming at 6-days or on average, then YOU will have a feel that if you're trade isn't working in your favor in 6-day's or so, that maybe your analysis was wrong and instead of waiting to lose 50%, you cut out with a 20% loss and move on. Sounds like a lot of work doesn't it? Just remember, your account is your business. What you put into it, you'll get out of it. Final Note: This week, I received a lot of e-mail regarding risk/reward assessment in trading. This is fantastic as it comes in a market environment filled with various scenarios of bullish and bearish uncertainty. One question that seems to be cropping up a bit is "when do I take a profit." While my blanket answer is ALWAYS... "when it hits your target," there are those trades that either look to have further potential in the direction of trade, or are getting very close to the target, but juuuuuust aren't quite there yet. Next weekend I'd like to discuss a strategy I use in my account that has the MARKET telling me what to do that is based PURELY off of risk/reward assessment, but you need to have a profit TARGET for this technique to work. Still.... send me some questions. If you can, type "Ask the analyst" in the subject line. Then I can sort my 700-unread e- mails by subject and try and address subjects that seem to be "popular" among subscribers. Another question that was frequently asked this week is "when are my annual renewal specials gifts going to arrive?" I can say this. It has looked like Santa's workshop around here for about a week now. Books, videos, mouse pads being loaded into boxes, and labels stuck on those boxes. Just when a big stack disappears another stack appears, so I know for a fact that stuff is being shipped out. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of February 10th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- BAB British Airways Mon, Feb 10 Before the Bell N/A CHD Church & Dwight Co Mon, Feb 10 Before the Bell 0.35 EOC Empresa Nac Elect Mon, Feb 10 -----N/A----- N/A ETM Entercom Comm Mon, Feb 10 Before the Bell 0.33 EVC Entravision Comm Corp Mon, Feb 10 After the Bell -0.03 RE Everest Re Group, Ltd Mon, Feb 10 After the Bell 1.54 FDG Fording Inc. Mon, Feb 10 -----N/A----- N/A LF LeapFrog Ent Inc. Mon, Feb 10 After the Bell 0.39 LRY Liberty Property Trst Mon, Feb 10 -----N/A----- 0.83 LNCR Lincare Holdings Mon, Feb 10 After the Bell 0.46 MAR Marriott Intl Mon, Feb 10 Before the Bell 0.54 MCY Mercury General Mon, Feb 10 Before the Bell 0.59 MET MetLife Inc. Mon, Feb 10 After the Bell 0.64 NHY Norsk Hydro Mon, Feb 10 -----N/A----- 1.19 ORH Odyssey Re Holdings Mon, Feb 10 After the Bell 0.34 PRE PartnerRe Ltd. Mon, Feb 10 After the Bell 1.47 RCII Rent-A-Center Mon, Feb 10 After the Bell 1.24 SWFT Swift Transportation Mon, Feb 10 Before the Bell 0.23 UDR Un Dom Realty Trust Mon, Feb 10 After the Bell 0.40 VAL Valspar Mon, Feb 10 Before the Bell 0.30 BER W.R. Berkley Mon, Feb 10 After the Bell 0.89 WLP WellPoint Hlth Ntwk Mon, Feb 10 After the Bell 1.15 WEC Wisconsin Energy Corp Mon, Feb 10 Before the Bell 0.70 YUM Yum! Brands, Inc. Mon, Feb 10 After the Bell 0.55 ------------------------- TUESDAY ------------------------------ AET Aetna Inc. Tue, Feb 11 Before the Bell 0.59 AKZOY Akzo Nobel N.V. Tue, Feb 11 During the Market N/A AEE Ameren Corporation Tue, Feb 11 Before the Bell 0.21 AIV Aptmnt Invest Mana Tue, Feb 11 After the Bell 1.06 AMAT Applied Materials Tue, Feb 11 After the Bell 0.02 BBI Blockbuster Inc. Tue, Feb 11 -----N/A----- 0.19 BP Bp PLC Tue, Feb 11 Before the Bell 0.71 CVC Cablevision Systems Tue, Feb 11 Before the Bell -0.40 CMX CareMark Rx, Inc. Tue, Feb 11 -----N/A----- 0.33 CNT CENTERPOINT PPTYS TR Tue, Feb 11 After the Bell 1.03 CLX Clorox Tue, Feb 11 -----N/A----- 0.35 CUZ COUSINS PPTYS INC Tue, Feb 11 After the Bell 0.55 DE Deere & Company Tue, Feb 11 Before the Bell 0.15 DTE DTE Energy Company Tue, Feb 11 After the Bell 1.26 EXPD Expeditors Intl WA Tue, Feb 11 Before the Bell 0.28 FDP Frsh Del Mnte Produce Tue, Feb 11 Before the Bell 0.34 GALN Galen Holdings PLC Tue, Feb 11 Before the Bell 0.24 GG Goldcorp Tue, Feb 11 After the Bell 0.08 INET Instinet Group Inco Tue, Feb 11 Before the Bell N/A INMRY Instrumentarium Tue, Feb 11 Before the Bell N/A IPCR IPC Holdings Tue, Feb 11 After the Bell 0.99 LZB La-Z-Boy Inc. Tue, Feb 11 After the Bell 0.40 LNC Lincoln National Tue, Feb 11 -----N/A----- 0.58 NTAP Network Appliance Tue, Feb 11 After the Bell 0.06 NRD NORANDA INC Tue, Feb 11 Before the Bell N/A POM Pepco Holdings, Inc. Tue, Feb 11 After the Bell 0.29 PER Perot Systems Tue, Feb 11 Before the Bell 0.17 PRU Prudential Financial Tue, Feb 11 After the Bell 0.45 PUB PUBLICIS Groupe SA Tue, Feb 11 During the Market N/A ROIAK Radio One Tue, Feb 11 -----N/A----- 0.05 PHG Royal Philips Elec Tue, Feb 11 -----N/A----- N/A IMI SanPaolo IMI SpA Tue, Feb 11 -----N/A----- N/A SIAL Sigma-Aldrich Corp Tue, Feb 11 After the Bell 0.56 SRCL Stericycle Tue, Feb 11 -----N/A----- 0.28 SWMAY Swedish Match Tue, Feb 11 Before the Bell N/A TLTOB Tele2 AB Tue, Feb 11 Before the Bell N/A VFC VF Tue, Feb 11 Before the Bell 0.75 WON Westwood One Tue, Feb 11 -----N/A----- 0.31 XL XL Capital Ltd Tue, Feb 11 After the Bell 1.79 ----------------------- WEDNESDAY ----------------------------- AAP Advance Auto Parts Wed, Feb 12 -----N/A----- 0.42 AOC Aon Corporation Wed, Feb 12 Before the Bell 0.54 APPB Applebee's Intl Wed, Feb 12 After the Bell 0.36 CSG Cadbury Schweppes Wed, Feb 12 Before the Bell N/A CCJ Cameco Wed, Feb 12 -----N/A----- N/A CTSH Cognizant Tech Solut Wed, Feb 12 After the Bell 0.47 COX Cox Communications Wed, Feb 12 Before the Bell -0.02 DCN Dana Wed, Feb 12 -----N/A----- 0.23 ELUX Electrolux Ab Wed, Feb 12 -----N/A----- 0.75 FRT Fed Rlty Invstmnt TrstWed, Feb 12 After the Bell 0.71 FR First Indl Rlty Trust Wed, Feb 12 After the Bell 0.92 FST Forest Oil Corp Wed, Feb 12 After the Bell 0.26 FOX Fox Entertainment Grp Wed, Feb 12 After the Bell 0.28 GRMN Garmin Ltd. Wed, Feb 12 Before the Bell 0.35 GSK GlaxoSmithKline Wed, Feb 12 -----N/A----- 0.62 HNT Health Net, Inc. Wed, Feb 12 After the Bell 0.60 HRH Hilb, Rogal Hamilton Wed, Feb 12 Before the Bell 0.46 RX IMS Health Wed, Feb 12 After the Bell 0.28 LAMR LAMAR ADVERTISING CO Wed, Feb 12 After the Bell -0.09 TVL LIN TV Corp. Wed, Feb 12 Before the Bell 0.24 MDT Medtronic Inc. Wed, Feb 12 After the Bell 0.35 MME Mid Atl Med Serv Wed, Feb 12 After the Bell 0.57 MCL Moore Corporation Ltd. Wed, Feb 12 After the Bell 0.17 NOI National Oilwell Wed, Feb 12 Before the Bell 0.22 OCR Omnicare Wed, Feb 12 Before the Bell 0.41 PSD Puget Sound Energy Wed, Feb 12 After the Bell 0.51 STR Questar.com Wed, Feb 12 After the Bell 0.53 SCG SCANA Wed, Feb 12 Before the Bell 0.59 SPW SPX Wed, Feb 12 Before the Bell 1.30 SLF Sun Lf Finl Serv Can Wed, Feb 12 -----N/A----- 0.38 TFX Teleflex, Incorporated Wed, Feb 12 After the Bell 0.81 KO The Coca-Cola Company Wed, Feb 12 Before the Bell 0.40 FAF The First Am Corp Wed, Feb 12 Before the Bell 0.90 NWS The News Corp Limited Wed, Feb 12 After the Bell 0.23 TMS Thomson Wed, Feb 12 02:00 am ET N/A TMPW TMP Worldwide Inc. Wed, Feb 12 After the Bell 0.00 WFMI Whole Foods Market Wed, Feb 12 After the Bell 0.40 ZBRA Zebra Technologies Wed, Feb 12 -----N/A----- 0.65 ------------------------- THURSDAY ----------------------------- ABN ABN Amro Holdings Thu, Feb 13 Before the Bell N/A AES AES Corporation Thu, Feb 13 Before the Bell 0.00 ALD Allied Capital Corp Thu, Feb 13 Before the Bell 0.49 AW Allied Waste Ind Thu, Feb 13 After the Bell 0.24 AIG American Intl Group Thu, Feb 13 -----N/A----- 0.21 ADI Analog Devices Inc. Thu, Feb 13 After the Bell 0.16 BHI Baker Hughes Incorp Thu, Feb 13 Before the Bell 0.25 BCS Barclays Bank PLC Thu, Feb 13 -----N/A----- N/A ABX Barrick Gold Thu, Feb 13 Before the Bell 0.09 BTY BT Group PLC Thu, Feb 13 Before the Bell N/A CPN Calpine Corporation Thu, Feb 13 Before the Bell 0.08 CPB Campbell Soup Thu, Feb 13 -----N/A----- 0.55 CZ Celanese AG Thu, Feb 13 -----N/A----- 0.59 CNP CenterPoint Energy Thu, Feb 13 Before the Bell -0.02 CNA CNA Financial Corp Thu, Feb 13 Before the Bell 0.47 DVA DaVita Thu, Feb 13 After the Bell 0.51 DF Dean Foods Thu, Feb 13 Before the Bell 0.74 DELL Dell Computer Corp Thu, Feb 13 After the Bell 0.23 FE FirstEnergy Thu, Feb 13 -----N/A----- 0.44 DA Groupe Danone Thu, Feb 13 During the Market 0.56 HAS Hasbro, Inc. Thu, Feb 13 Before the Bell 0.38 HRL Hormel Foods Corp Thu, Feb 13 Before the Bell 0.37 INTU Intuit Thu, Feb 13 After the Bell 0.57 IVGN Invitrogen Corp Thu, Feb 13 After the Bell 0.41 KIM Kimco Realty Thu, Feb 13 After the Bell 0.78 LTR Loews Corp. Thu, Feb 13 Before the Bell 1.25 MAC Macerich Co Thu, Feb 13 -----N/A----- 1.02 MAS Masco Thu, Feb 13 -----N/A----- 0.37 NFX Newfield Exploration Thu, Feb 13 Before the Bell 0.63 NXY Nexen Thu, Feb 13 -----N/A----- N/A NVDA NVIDIA Corporation Thu, Feb 13 After the Bell 0.06 ODP Office Depot Inc. Thu, Feb 13 Before the Bell 0.21 OSI Outback Steakhouse Thu, Feb 13 -----N/A----- 0.52 PDS Precision Drllng Corp Thu, Feb 13 Before the Bell 0.11 SCIO Scios Thu, Feb 13 Before the Bell -0.52 SBL Symbol Technologies Thu, Feb 13 -----N/A----- 0.08 TELN Telenor Asa Thu, Feb 13 -----N/A----- N/A MAY The May Depart Store Thu, Feb 13 -----N/A----- 1.21 TRH Transatlantic Holding Thu, Feb 13 -----N/A----- 0.39 TRZ Trizec Properties, Thu, Feb 13 Before the Bell 0.46 UBB Unibanco Thu, Feb 13 -----N/A----- 0.62 UN Unilever N.V. Thu, Feb 13 Before the Bell 0.91 UL Unilever PLC Thu, Feb 13 02:00 am ET 0.54 UHS Universal Health Serv Thu, Feb 13 After the Bell 0.66 WC WellChoice, Inc. Thu, Feb 13 After the Bell 0.48 ------------------------- FRIDAY ------------------------------- BNN Brascan Corporation Fri, Feb 14 Before the Bell N/A BSY British Sky Brdcstng Fri, Feb 14 -----N/A----- N/A CCH Coca-Cola Hell Btlng Fri, Feb 14 Before the Bell N/A SJM J. M. Smucker Company Fri, Feb 14 Before the Bell 0.53 KEG Key Energy Services Fri, Feb 14 Before the Bell 0.01 LYG Lloyds TSB Group Fri, Feb 14 12:00 pm ET N/A MTA MATAV Fri, Feb 14 10:00 am ET N/A NAV Navistar Intl Fri, Feb 14 Before the Bell -1.49 RG Rogers Communications Fri, Feb 14 Before the Bell N/A RCN Rogers Wireless Comm Fri, Feb 14 -----N/A----- -0.29 SXT Sensient Tech Corp Fri, Feb 14 -----N/A----- 0.45 TI Telecom Italia Fri, Feb 14 -----N/A----- N/A TU TELUS Fri, Feb 14 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable CBI ChicagoBridge 2:1 Feb. 13th Feb. 14th LCI Lannett Co. 3:2 Feb. 14th Feb. 17th -------------------------- Economic Reports This Week -------------------------- Earnings season isn't quite finished. Several high-profile companies will be announcing their quarterly results next week, including AMAT, NVDA, DELL, and KO. Also look for some key economic reports on Thursday and Friday. ============================================================== -For- Monday, 02/10/02 ---------------- None Tuesday, 02/11/02 ----------------- None Wednesday, 02/12/02 ------------------- None Thursday, 02/13/02 ------------------ Initial Claims (BB) 02/08 Forecast: N/A Previous: 391K Retail Sales (BB) Jan Forecast: -0.5% Previous: 1.2% Retail Sales ex-auto(BB)Jan Forecast: 0.5% Previous: 0.0% Export Prices ex-ag.(BB)Jan Forecast: N/A Previous: -0.1% Import Prices ex-oil(BB)Jan Forecast: N/A Previous: 0.1% Friday, 02/14/02 ---------------- Business Inventories(BB)Dec Forecast: 0.3% Previous: 0.2% Industrial Producton(DM)Jan Forecast: 0.4% Previous: -0.2% Capacity Utilization(DM)Jan Forecast: 75.6% Previous: 75.4% Mich Sentiment-Prel.(DM)Feb Forecast: 82.2 Previous: 82.4 Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ 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 ------------------------------------------------------------ ********************* SWING TRADE GAME PLAN ********************* All Fall Down The breakdowns I talked about in this space yesterday continued today, adding bearish confirmation in areas we had yet to see. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Sunday 02-09-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: TRMS Put Play of the Day: TSCO Dropped Calls: SYMC Dropped Puts: None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week EBAY 72.37 -1.25 -0.94 -0.08 –0.37 –2.92 Alternate entry SYMC 46.09 -0.68 -0.40 -0.42 –0.34 –0.54 Drop, sinking TRMS 41.63 -1.79 0.28 -1.05 –0.22 –1.23 New, Bouncing PUTS AT 44.50 0.00 -1.04 -0.36 –0.48 –2.50 Drifting lower AZO 64.15 -0.01 -0.35 -0.15 –1.59 –1.95 Holding up CCMP 41.97 -1.27 0.04 -0.14 –0.43 –2.43 SOX rolled GWW 44.90 0.30 -0.15 0.08 –0.63 –2.20 Nice start PII 48.77 -0.79 -1.20 -0.21 –0.50 –2.73 Slow but down PNRA 27.45 0.08 -0.77 -0.25 –0.95 –2.15 Approaching goal TSCO 33.42 -0.55 -0.51 0.25 –0.99 –3.49 New, 200-dma ------------------------------------------------------------ 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 ------------------------------------------------------------ ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* TRMS – Trimeris, Inc. $41.64 (-0.63 last week) See details in play list Put Play of the Day: ******************** TSCO - Tractor Supply Co. - $33.42 -1.86 (-3.49 FOR THE WEEK) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ SYMC $46.09 (-0.59) Despite holding up better than the broad market for the past several weeks, we're losing confidence in SYMC's ability to continue this trend. One of the key points was the fact that the bulls were turned back a mere 3-cents shy of a new high on Wednesday, and the stock has been languishing ever since. Certainly, it hasn't broken down just yet and there could very well be another run at the highs. But with the stock losing its upward momentum, we would recommend using such a move as an opportunity to exit the play. If deciding to stay in the play, maintain a rigid stop at $45. We're dropping SYMC this weekend to make room for other stronger plays. PUTS ^^^^ None *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 02-09-2003 Sunday 3 of 5 In Section Three: New Calls: TRMS Current Calls: EBAY New Puts: TSCO ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** NEW CALL PLAYS ************** TRMS – Trimeris, Inc. $41.64 (-0.63 last week) Company Summary: Trimeris is a biopharmaceutical company engaged in the discovery and development of a class of antiviral therapeutics called viral fusion inhibitors (Fis). The company's most advanced product candidates, T-20 and T-1249, are for the treatment of human immunodeficiency virus (HIV), type I. T-20 is a first-generation FI that prevents HIV from entering and infecting cells, while T-1249 is a rationally designed second-generation FI in an earlier stage of development. Using its proprietary viral fusion platform technology, TRMS has identified and filed patent applications disclosing numerous discrete peptide sequences that appear to inhibit fusion for several viruses. Why We Like It: With the broad markets continuing to deteriorate on a daily basis, finding a solid bullish play is almost as difficult as finding an honest politician, but we've managed to uncover one this weekend. One of the few sectors to end Friday's session in the green was the Biotechs, with the BTK index spending the entire day in the green, even if it was by a small amount. One truly bright spot in this sector of the market was TRMS, as the stock rebounded from strong support near the $40 level and then closed with a 3.6% gain on the day. All of the gains came at the open, but it was impressive to see the stock hold those gains in the face of the broad market weakness. While there wasn't any specific news to drive the stock today, obviously somebody wanted to defend that $40 support level. Perhaps investors are positioning themselves for next month's expected approval of the company's new HIV drug, Fuzeon. Whatever the root cause, the technicals certainly look favorable for a continued rebound from current levels. Another bounce from above the $40 level can be used for entering the play, as can a breakout over $42, just above Friday's intraday high. The bulls are likely to run into some resistance near the 50-dma ($43.39) and the 20-dma ($43.72), but once above that congestion, the stock should be in good shape to run up to the $45 resistance level and possibly test the 200-dma ($45.67). In the current market environment, any long position carries greater risk, but TRMS should be relatively immune to the effects of the geopolitical situation. Initial stops are set at $39.50. *** February contracts expire in two weeks *** BUY CALL FEB-40 RQM-BH OI= 416 at $3.00 SL=1.50 BUY CALL FEB-45 RQM-BI OI=1304 at $0.50 SL=0.25 BUY CALL MAR-40*RQM-CH OI= 48 at $4.40 SL=2.75 BUY CALL MAR-45 RQM-CI OI= 50 at $1.70 SL=0.75 Average Daily Volume = 5.66 K ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** EBAY - eBay Inc. - $75.16 +0.95 (-2.79 for the week) 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: The weakening tech sector continues to eat away at EBAY's January gains. The stock tagged a new relative low today after spending the previous three sessions in the $72-$75 range. A round of buying during the final hour erased some of the intraday losses, ultimately leading to a 1.0% loss. This was slightly better than the NASDAQ's 1.4% decline. This relative strength might partially be attributed to a favorable report regarding EBAY's used auto sales in the Wall Street Journal. However, if the recent selling action continues next week it'll only be a matter of time before EBAY tests its rising 50-dma at $71.16. You'll recall that we've set a downside entry strategy to take advantage of a rebound from that moving average. Tonight we're making some modifications to our entry points. To begin with, we've removed our upside trigger at $75.51. While this might be a reasonable action point if EBAY manages to bounce back from current levels, we're no longer looking to capture a breakout. Secondly, we've set the following stipulations for our pullback strategy: If the stock trades into the $70-$71.50 area, we'll look for a bounce back above the 50-dma. Rather than try to catch a falling knife, we'll look for a move above the day's high when that level is tested for an entry trigger. This will ensure that we don't active the play until the stock actually rebounds from the 50-dma. If we're triggered we'll use a stop at $69.94. As we mentioned earlier, our upside target for this "buy the dip" entry will be the $75-$76 region. While we're being somewhat aggressive in attempting to call a short-term bottom, our stop-loss should keep potential losses to a bearable minimum. If EBAY falls below the 50-dma without rebounding we'll probably drop the play, un-triggered. BUY CALL FEB-70 QXB-BN OI= 5132 at $3.50 SL=1.75 BUY CALL FEB-75 QXB-BO OI= 15656 at $0.85 SL=0.00 BUY CALL MAR-70 QXB-CN OI= 2285 at $5.30 SL=2.65 BUY CALL MAR-75 QXB-CO OI= 3114 at $2.60 SL=1.30 Average Daily Volume = 5.75 mln ************* NEW PUT PLAYS ************* TSCO - Tractor Supply Co. - $33.42 -1.86 (-3.49 FOR THE WEEK) Company Description: Tractor Supply Company operates more than 400 stores in 30 states and is focused on supply products for the lifestyles needs of hobby and part-time farmers and ranchers. The Company, headquartered in Nashville, Tenn., also serves the maintenance needs of suburban customers, contractors and tradesmen. Tractor Supply stores are located in the outlying towns in major metropolitan markets and in rural communities. (source: company press release) Why We Like It: If the stock market could talk, you'd probably hear the same phrase over and over: "What have you done for me lately?" Wall Street is constantly looking forward and pricing in future developments. Tractor Supply provides a particularly good example of this phenomenon. On January 23rd the company reported quarterly earnings of 88 cents per share - a full eleven cents better than analyst expectations. That's pretty impressive, especially given the difficult retail environment. The company also said that it expects to see a 16% increase in sales for 2003. This positive news, however, was only good for a one-day rally in shares of TSCO. The muted reaction suggests that the good news had already been priced in. Tractor Supply has experienced soaring sales and revenue over the past two years. This growth is reflected in the company's stock, which exploded from the $8.00 area in mid-2001. Investors now appear to be skeptical about whether the past two years of fundamental growth are sustainable in a challenging economic climate. These concerns were underscored by today's release of the December consumer credit numbers. The data showed a contraction for $4.0 billion, versus the consensus expectation for an *increase* of $3.5 billion. That's quite a difference! Consumer credit tends to be somewhat volatile, but the large decline is nonetheless disconcerting for the retail sector. If Americans were reluctant to charge items during the Holiday season it's likely that they'll continue to be conservative about their credit spending habits in the months ahead. Technically, there are several reasons for our bearish bias on TSCO. First and foremost is today's violation of the 200-dma 34.82. Shares have not traded below that moving average since January 2001. This breakdown, which came on no apparent news, triggered a heavy round of selling as the stock posted a 5.2% decline on the second-strongest volume of the year. TSCO has already been declining precipitously ever since it broke out of a bearish p-n-f triangle at $38.00. We suspect that the high- volume violation of the 200-dma could lead to a test of the October lows near $28.00. TSCO is currently in a fast-move region that was created by the steep rally from those lows. $28.00 would provide a reasonable downside target for short-term traders. We're going to be somewhat more aggressive in targeting a decline to the July lows at $25.50-$26.00. This level could be easily attainable if the major market indexes continue their losing ways. Our trigger to enter this play is at $32.76, one cent under today's low. If the play is activated we'll use a stop at $36.55, just above yesterday's high. Traders who are more risk-averse could use a stop slightly above today's high of $35.30. BUY PUT FEB-35 QTF-NG OI= 87 at $2.60 SL=1.30 BUY PUT MAR-35 QTF-OG OI=153 at $3.50 SL=1.75 Average Daily Volume 310 K ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. 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 02-09-2003 Sunday 4 of 5 In Section Four: Current Put Plays: AT, AZO, PII, PNRA, CCMP, GWW Leaps: Bears Still In Charge... Traders Corner: Getting Out From Under, Ending Up On Top Traders Corner: Seasonal stock market trends and MACD Brokers Corner: The Broader View ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** AT - Alltel Corporation $44.50 (-2.37 last 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: Steadily, and bit by bit, the bears are grinding away at the $44 support level in shares of AT. When we initiated coverage of the stock near $46, we were concerned about chasing the stock lower, with the PnF bullish support line at $44, which is also the site of strong historical support. So far, those concerns have been unfounded, as each day last week saw the stock post a lower high and a lower low, inching its way down to that $44 support. Wednesday provided the best entry point of the whole week, with a failed rebound near $46.50, right at the 2-week descending trendline. Then again on Thursday, a failed rebound near the $45.50 level afforded entry into the play. Friday's session provided nothing of merit for traders seeking an entry, as the stock dropped to the $44.50 level at the open and then stayed there right up to the closing bell. A strong clue as to AT's behavior can be found in the action of the North American Telecom index (XTC.X), which spent the week drifting lower along the declining 200-dma ($430.16). After closing right on that average on Thursday, the XTC finally dropped below it on a closing basis on Friday and this could be the beginning of the next slide lower. But we need to be cautious, as the last close below this level led to a quick spurt higher. A repeat performance will likely give us another failed rally, which we can use to enter new positions, with a rollover in the $46.00-46.50 area. Due to the proximity of strong support, we don't want to chase the stock lower here. Lower stops to $47.25, just above the declining 200-dma. *** February contracts expire in two weeks *** BUY PUT FEB-45 AT-NI OI= 202 at $1.80 SL=0.75 BUY PUT MAR-45 AT-OI OI= 159 at $2.70 SL=1.25 Average Daily Volume = 1.25 mln --- AZO – AutoZone, Inc. $64.15 (-1.56 last week) Company Summary: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why We Like It: Much like the rest of the market, AZO spent Friday providing mixed signals, as it vacillated about the critical $64 support level. That level was staunchly defended early in the day before finally giving way, but just fractionally. There were several rebound attempts throughout the day, but each one was met with a fresh round of selling at a lower intraday high. All except for the last one, which appears to have been end-of-week short-covering, bringing the stock up to close fractionally above that $64 level. In the end, it was much ado about nothing, with the only decent entry point all day being the failed rally near $65 in the opening 20 minutes of the day. After that, it was a slow grind lower. Even after trading below our $63.75 trigger in the late afternoon, the buyers stubbornly battled back to close the day with a fractional gain. One interesting point is that the final surge higher came to rest just pennies below the descending trendline that has capped each rally attempt since the intraday highs on Wednesday. While not a stellar move on Friday, the intraday dip below $64 looks to be setting the stage for a continuation of the pattern of lower highs and lower lows. A rollover on Monday should provide additional entry points as AZO breaks below Friday's intraday low ($63.50), preferably on continued broad market weakness. Should we be so fortunate as to get a rebound first, another failed rally near $65 (or even as high as $66) would make for an even better entry point. For now, keep stops set at $67.10. *** February contracts expire in two weeks *** BUY PUT FEB-65 AZO-NM OI=1326 at $2.10 SL=1.00 BUY PUT MAR-65*AZO-OM OJ=1586 at $3.90 SL=2.50 Average Daily Volume = 1.48 mln --- PII - Polaris Industries, Inc. $48.77 (-2.79 last week) Company Summary: Polaris Industries designs, engineers and manufactures all terrain vehicles (ATVs), snowmobiles, motorcycles and personal watercraft(PWC). The company markets them together with related replacement parts, garments and accessories through dealers and distributors, principally located in the United States, Canada and Europe. ATVs are four-wheeled vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland. Snowmobiles have been manufactured under the Polaris name since 1954. Why We Like It: An oversold rebound was a very real possibility when we initiated coverage of PII last week, and if the intraday pop on Thursday was the best the bulls could muster, then we just may be approaching the next major breakdown in the stock. That said, it is rather interesting that the bears haven't been able to appreciably break below the $48 support level, with the broad market continuing to break support levels. But a look at the longer-term chart (a necessity if we want to find any support at these levels) shows significant support just below $48 on numerous occasions throughout 2001. With On Balance Volume continuing to drill lower, it is clear that there really isn't any buying interest in the stock. It is just taking some time to work through this support level. Intraday rallies into the $50-51 level (now strong overhead resistance, backed up by the declining 10-dma) should make for solid entry points ahead of the next breakdown. Traders looking to enter on continued weakness need to be mindful of the possibility of a short-covering rally, but a drop under $47 should make for a reasonable entry point. Maintain stops at $52, as this level is now formidable resistance. It would take a significant change of sentiment to break above that level. *** February contracts expire in two weeks *** BUY PUT FEB-50 PII-NJ OI=196 at $2.60 SL=1.00 BUY PUT MAR-50*PII-OJ OJ=220 at $3.70 SL=1.75 Average Daily Volume = 420 K --- PNRA - Panera Bread Company $27.42 (-2.00 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: Over the past two weeks, our PNRA play has been rather good to us, performing almost exactly to the script we originally laid out when the stock was trading up above $31. The steady selling pressure in the broad markets has served to drive this stock steadily down through one support level after another, finally giving up the $28 level on Thursday and extending its losses to round out the week with a $2 loss. When we started this journey, we were looking for an ultimate downside target of $26 to be achieved and we're getting really close to that now. We debated about whether to drop PNRA this weekend, but ultimately decided to give it a bit more room to achieve our $26 target. But now is not the time to be contemplating new positions. Now the play is all about maximizing gains without giving too much back to Mr. Market. To that end, we're tightening up our stop to $28.50, which is just above Friday's intraday high. A continuation of the recent decline should see the $27 level broken early next week and that's when we want to look to harvest those gains that have already accrued. With the daily oscillators now buried deep in oversold, any trade below $26.50 should be looked at as a perfect opportunity to exit the play and then look to move on to the next winning play. *** February contracts expire in two weeks *** BUY PUT FEB-27 UPA-NY OI=577 at $1.05 SL=0.75 BUY PUT MAR-30*UPA-OF OI=129 at $3.50 SL=1.75 Average Daily Volume = 678 K --- CCMP - Cabot Microelectronics - 41.97 -1.17 (-1.93 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: Yesterday we talked about how the semiconductor index seemed to be headed towards support at 260. The SOX.X closed just above that level today after setting a multi-month low of 259.43. Not one to be left behind, CCMP also traded a new low after the bulls succumbed to heavy selling pressure early in the session. This is an encouraging development for our short play. Previously this week CCMP had bounced around in the $42.50-$45.25 range while trading in a somewhat directionless fashion. Now that shares have broken to new lows, it looks like a test of psychological support at $40.00 could be just around the corner. But with the daily chart showing no significant support until the $33-$35 region, we think CCMP could really pick up downside momentum if the SOX.X continues to descend. Our stop-loss has been snugged down to $45.36, two cents over the descending 200- dma. New entries can be evaluated on a move under today's low of $41.89 BUY PUT FEB-50*UKR-NJ OI=1176 at $8.10 SL=4.05 BUY PUT MAR-45 UKR-OI OI= 215 at $5.30 SL=2.65 Average Daily Volume = 1.04 mil --- GWW - Grainger Inc. - $44.90 -1.10 (-2.40 FOR THE WEEK) Company Description: W.W. Grainger, Inc, with 2001 sales of $4.8 billion, is the leading North American industrial distributor of products used by businesses to maintain, repair, and operate their facilities.(source: company website) Why We Like It: That's a heckuva ugly red candle on the daily chart. Grainger, already in the midst of a prolonged downtrend, did not respond very well to another negative session in the equity market. The stock encountered heavy selling shortly after it gapped higher with the major indexes. Our action trigger at $45.59 was reached within the first hour of trading. The rest of the day was characterized by a steady decline that took GWW to new multi- month lows. The lack of underlying support seems to be scaring away any potential buyers; shares finished near the worst levels of the day and suffered a 2.3% loss. The Dow Jones, by way of comparison, gave back less than one percent. This bodes well for a continued decline next week. New entries could be considered on further weakness from current levels, but remember that GWW has potential support at $44.00. A move below this level would pave the way for a possible test of the October lows. Our stop for this play is set at $48.06. More conservative traders could use a stop just above Wednesday's high of $47.25. On a final note, today's volume was somewhat light at 224K shares. This mirrored a similar lack of volume in the overall market. We'd like to see that number pick up as GWW continues lower. BUY PUT FEB-50 GWW-NJ OI=83 at $5.30 SL=2.65 BUY PUT MAR-50*GWW-OJ OI=N/A at $5.60 SL=2.80 Average Daily Volume 351 K ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***** LEAPS ***** Bears Still In Charge... By Mark Phillips mphillips@OptionInvestor.com But for how much longer, is the important question. The continuing decline in the broad markets doesn't seem to be driven so much by heavy selling, but by a lack of any serious buying. The major indices definitely gave up some important support levels last week, but there just didn't seem to be a strong desire to sell. The sellers that are at work just happen to be outnumbering the buyers that are willing to hold stocks in the face of the event risk related to the Iraq (and to a lesser degree North Korea) situation. But enough of my beliefs about the market. Let's turn to the important metric of the bullish percent charts. First up is the DOW, which fell as low as 20% last week, now deep in Bear Confirmed and oversold territory. Certainly it can fall further, but bears in the DOW are now carrying the bulk of the risk. The OEX broke its bullish support line and traded down below $420 and is getting closer to satisfying its bearish price target ($4 box size) of $392. The OEX Bullish Percent, while Bear Confirmed, is still up at 38% and has plenty of room to fall before reaching its bullish support line at 18%, also the site of the October lows. The SPX finally gave another PnF Sell signal when it traded below $840 and with the Bullish Percent still in Bull Correction up at 42%, looks entirely capable of falling far enough to satisfy the current bearish price target ($5 box size) of $750. Based on these three broad market measures, I'd say there is still substantial downside ahead of us. The sticking point is the NASDAQ market which is holding up much better than the rest of the market. While the NASDAQ-100 Bullish Percent is clearly deep in Bear Confirmed at 38%, the actual NDX is still holding above that strong support in the 925-930 area, where the index based before heading higher in mid- to late-October. Can the NDX head substantially lower from here? Absolutely, as demonstrated by the still-elevated Bullish Percent reading. In fact, with the DOW Bullish Percent as low as it is, if the OEX and SPX are going to achieve their downside targets, a significant portion of the market weakness is going to have to come from the Technology sector. All that, is the long way of saying that the trend is still decidedly down, but bearish traders need to be cognizant of the fact that at some point we're going to get another explosive upside move. It will be just another bear market rally, most likely failing at a lower level than the last rally, but it will be strong, nonetheless. The reason I've gone into this discussion is not to dissuade readers from trading the downside over the near-term. It is to caution you not to chase breakdowns lower. At this stage of a decline, the prudent strategy is to sell into failed rallies and aggressively manage open positions so that winning trades can not turn into losing trades. There's another interesting observation that I made this weekend, looking at the action in the OEX vs. the VIX since last July. A apologize for the density of the chart, but I think you will see why it caught my attention. Over the past few days, Linda Piazza and I have been discussing the action in the VIX, and we've posted much of that discussion in the Market Monitor. My contention has been that for the price action in the market (OEX), the VIX has really not seen the upside that I would have expected. I have had a hard time quantifying my perceptions until this weekend, when I took a closer look at the stacked charts below. OEX vs. VIX - Daily Chart Throughout the July-October timeframe, every time the OEX fell below the $430 level, it was accompanied by the VIX pushing back over the 40 level and holding there. I've highlighted each of those occurrences in yellow on the chart above. This time though, something is different, with the VIX stubbornly holding below 40, while the OEX for the past four days. What this tells me is that relative to price action, there is less fear of the downside than there was in the July-October period of time. The million $ question is whether this is smart money telling us that we are not going to test the October lows, or if it is foolish complacency that is going to get mauled by the almighty bear again. If I knew the answer to that question, I'd tell you to position yourself accordingly. But since I don't know the answer, I share my observations and suggest playing the trend while it lasts, but be ever watchful for a significant change, as the VIX/OEX relationship seems to be a bit different this time around. Another sharp selloff in the market should spike the VIX well above 40, but what about a continued gradual decline? Could we see the VIX hold near current levels while the markets continue to deteriorate? I suppose anything is possible, and only time will tell. Since I'm already running behind today, let's move on to the currently listed plays and see what we can learn. Portfolio: NEM - Can you say consolidation? I knew that you could! While gold hit another multi-year high last week, the gold stocks continued to drift between recent support and resistance. NEM once again fell back into the $28-29 area as the week drew to a close and the pincers are getting closer together. The 50-dma has risen to just under the $28 level, while resistance at $30.50 remains firmly in place. One of these levels is going to have to give way soon, and unless I miss my guess, it's going to be a break to the downside. Don't misunderstand me -- the bull market in gold and gold stocks is still in its earliest phase, but it's looking a bit over-extended in the near term. In recent weeks, I've advised conservative traders to harvest gains on the play near the $30 level, and then look for fresh entries at lower levels. There has been ample opportunity to do that, and now I'm going to start getting more aggressive with our stop. I want to force NEM to take us out of the play with a gain, or else keep working higher. So let's tighten our stop to $28 (just below the level of the 50-dma, as of Monday) and I would still recommend taking profits on open positions above the $30 level. We'll then look to play the stock again after what I suspect to be a significant post-Iraq pullback, ideally at $25, but possibly as low as $24 the site of the still ascending trendline. Watch List: DJX - The slide in the DJX continues, and I would be surprised if we don't see that push down to the $75-77 area sometime in the next 2 weeks, as the Iraq situation gets ever closer to a head. Last weekend, I suggested that aggressive traders looking to enter the play should use a failed rally in the $81.50-81.99 area to enter the play. At this stage of the game though, I don't think it makes sense to chase the play lower, and we won't be listing an official entry in the Portfolio. I continue to monitor the play for those that did take an entry at higher levels. There were a couple of failed rallies at that point last week, both of which were followed by pretty steep drops. With the DJX now below $79, the weekly Stochastics now entering oversold and the DOW Bullish Percent falling to 20%, risk is really starting to shift to the upside. Stops should now be lowered to $81.60, and if the $78 level breaks, then I would recommend trailing stops to $80.10, just above Friday's intraday high. BEAS - Now we're making some progress! Some negative press surfaced on Thursday, regarding GE Supply shifting from BEAS to Jboss for their ASP software and that slammed the stock down to almost the $10 level. But we've still got some more work to do, with all of the major indices looking to have further downside risk in store. The PnF chart has now given that Sell signal, which currently forecasts a decline back to the $7.50 level, but I have a strong feeling that we won't see that target achieved. My view is that this downward move will have run its course near the $9 level, which is just above the 200-dma ($8.85). So, let's be patient and wait for the stock to come to us, as the weekly Stochastics continue to drill down towards oversold territory. The revised entry target is now $8.50-9.00, and if filled in the next couple weeks, we'll set our initial stop at $7, just below what I believe is very strong support. GS - I debated long and hard with myself on Monday about whether to list the failed rally in GS near the $70 level (actually $69.75) as a Portfolio entry. With the proximity of strong support at $67, I just didn't think it made sense for the more conservative approach in this section. So I just let it go and only commented on the breakdown the stock made later in the week. Another missed opportunity on the play (as hindsight shows), but the entry strategy would have worked nicely, as GS broke below that support and this weekend is resting just above $65. Note that this is right at the bottom of the 10/15 gap, and could provide some near-term support for a bounce. But now that the $67 support level has been broken, GS should not be able to challenge the $70 level again. So traders with open positions should now have stops trailed to $70. If GS breaks lower into the 10/11 gap, stops should then be trailed to $67. This is another play, where we most likely will not be listing an official entry, and will instead just track the play for those intrepid readers that did take an entry at a higher level. IBM - Alas, it appears that we missed our opportunity to play IBM on the downside, and based on the way the stock is holding above the 200-dma, I think that may be a good thing. This $76 support level is turning out to be stronger than I had at first surmised and price is trading essentially flat while the weekly Stochastics are nearing oversold territory again. I still like the potential for a big breakdown though, and would still consider new entries if we can get another rally failure in the $81.00-81.99 area, market permitting. If we do get an entry, the stop will be set very tight at $83. NVDA - The Semiconductor index (SOX.X) continues to weaken and NVDA along with it, finally cracking the $10 level on Friday. This is a bottom fishing play though, and we really want to see the stock fall back towards the $8 level before playing. With a PnF price target of $7.50, and a PnF price target of $200 on the SOX, that target looks quite achievable, especially if we get one more major downdraft in the market before the bulls go bottom fishing again. For now, we watch and wait. QCOM - I picked QCOM for a new Call play last weekend due to the stock's amazing resilience in the face of the continued deterioration in the broad market. But I have to admit I've been impressed with just how well the stock held up last week. Apparently, there are some bulls determined to defend that $36 support level. Regardless of the action last week, I still expect we'll get some more action to the downside before the next leg up commences. My entry strategy will be just as I originally listed it; partial positions on a bounce from $35, rounding out to full positions if $33 (PnF bearish price target) is reached. In the current environment, it seems that economic news, fundamental news and earnings news is all being trumped by the news centered on Iraq and the rest of the geopolitical environment. I don't think the bulls will have any significant success until these tensions are resolved or reduced significantly. It really doesn't matter how it is resolved, just so it is. The market hates uncertainty, and the current price action is telling us that it sees a lot of uncertainty in the international arena right now. Play the downside as long as it lasts, but watch for a sharp reversal if we get so lucky as to have a speedy resolution to the current geopolitical tensions. Have a great weekend! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None NEM 10/30/02 '04 $ 30 LIE-AF $ 3.90 $ 4.50 +23.08% $28 '05 $ 30 ZIE-AF $ 6.10 $ 6.90 +26.23% $28 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: BEAS 12/22/02 $8.50-9.00 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 MSFT 02/09/03 $21.50-22.00 WAIT Until After 2/18 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 MSFT - Microsoft Corporation $46.58 **Call Play** One look at the PnF chart of Mr. Softee, and long-time readers are going to wonder if I've taken leave of my senses. To be sure, it isn't looking particularly constructive right here, but like last week, I'm starting to look ahead to when this latest downswing in the markets has finished running its course. While the current column of O's and break of bullish support looks ominous, it is the prior column of O's that generated the current bearish price target of $45. Hey, that's pretty close to where we are right now! But I don't think there is any need to rush this one, especially with the company's split coming up on February 18th. That's just a little over a week from now and I'm certainly not expecting to get an entry into the play before then. So I'm going to save us all a bunch of confusion and not list actual strikes until after the split is completed. Then we'll have new post-split strikes available, and I'll list them in the 02/23 weekend LEAPS edition. Fundamentally, there's nothing earth-shattering to focus on, except that MSFT is still the de facto standard for desktop computing, both for operating systems and productivity software. As long as the company continues to execute on its business plan, look for institutional sponsorship to be strong. Due to its presence in all the major stock indices, MSFT can be used as a proxy for the broad market. So when the broad market reaches bottom (via the bullish percent readings), we'll be looking for MSFT to find support where it has throughout the past 30 months, in the $43-44 area ($21.50-22.00 post-split). That lines up nicely with the $45 ($22.50 post-split) PnF target as well. Once entering the play, we'll set stops at $40 ($20 post-split). Hopefully I've been clear that we're waiting until after the split to list strikes or enter the play. This is just your early warning that we're going to target the stock after that event is out of the way. WAIT UNTIL AFTER THE SPLIT ON 2/18 Drops DELL - $23.34 What a dismal failure! We gave DELL every chance to hold support and get moving upwards, but with Friday's trade below $23, the party's over. Despite the fact that the stock rebounded fractionally above that level at the end of the day, the damage was done. Now the PnF chart has broken through the bullish support line and has generated a double-bottom Sell signal. I still expect the stock to perform well this year, but I'm done arguing with the price action until the technicals improve. I'm dropping coverage of the play this weekend, so DELL should be free to rally next week. In fact, looking at the weekly Stochastics, which are buried in oversold, I think we could see a decent rebound in the stock, market permitting. The problem is that I just don't see the catalyst right now. My advice for those in the play is to evaluate the risk/reward of closing/holding the trade open. If the support in the $22-23 area gives way, then DELL longs have risk down to the $17 area. When we initiated the play, our stop was set at $23, and we're going to stick with that discipline. ************** TRADERS CORNER ************** Getting Out From Under, Ending Up On Top By Mike Parnos, Investing With Attitude On Friday we moved from yellow to orange. That’s the color of something in my sink I’m afraid to touch. If it begins to move, I have no choice. I’m moving. The secret to keeping a clean kitchen is to kill whatever it is before it gets to the orange stage. The same concept applies to dealing with terrorists as well as option trades that go bad. You have to pre-empt the moves of your opposition – whether it’s a fungus, a terrorist group, or a trade moving in the wrong direction. That’s what we’ll deal with in today’s column – what to do when a Condor lays an egg. Believe me, you don’t want to know my politics about fungi or terrorists – it’s easy to confuse them. ______________________________________________________________ Reader Warning: Today’s column is rated “MI” (multiple innuendo). If you don’t understand the contents, ask your children. I only answer option questions. It’s Nice To Have Choices Since many of our CPTI trades are Iron Condors, and option expiration is approaching, this is a particularly opportune time to review the ways of dealing with trades gone bad. I should probably say “going” bad, because we’re going to catch these puppies before they can do too much harm. It’s called CPTI damage control. Scenario: We have put on a 10 contract BBH Iron Condor position with a maximum profit range of $85-$95. We took in $1.55 in premium. What if BBH threatens to break below $85.00? What do we do? The Choices: 1. The “Take Your Licking” I’m wearing protection method. 2. The “Put On Your Shorts” and keep your options open method. 3. The “Rawhide” -- rollin’ rollin’ rollin’, keep them options rollin’ method. 4. The “Knees Together” close up shop method. 5. The “Going Both Ways” but it won’t last forever method. 1. “I’ll Take My Licking” -- I’m wearing a long put for protection. OK, I’m easily influenced. Sometimes my remote malfunctions and the TV mysteriously gets stuck on the Playboy Channel. It could be worse. It could be stuck on the Cartoon Channel. Then these titles would be like “Scooby Do’s and Don’ts”. Hypothetically, BBH is at $85 and looks like it may continue to fall. However, there is support at $85 and we are believers. Also, as part of our Condor position, we purchased the $80 put to protect us from a catastrophic event. In the world of options, our “protection” can’t break. We won’t give birth to a lot of baby Condors. We’re covered from $80 down to zero. Since we took in $1.55 in premium, our total exposure is really only $3.45. 2. “Put On Your Shorts” and keep your options open. We’ve discussed this at length before. In this method, as BBH is about to break below $85, we’re going to short 1,000 shares of MMM at $85. Since it has broken below support, there’s a good chance that it will continue on down. The short shares now cover the violated (sounds naughty, doesn’t it?) put. Since the $80 put is covered, it’s time to root for BBH to continue down. Why? Because we still own the $80 put. The further down BBH goes, the more valuable the $80 put becomes. There’s a chance BBH will reverse and move back above $85 (where you shorted it). Simply buy back your 1,000 short shares at $85. You may have to repeat the short-and-cover process a few times – and incur some commissions and slippage – until BBH picks a direction, but that’s the cost of doing business. 3. The “Rawhide” -- rollin’ rollin’ rollin’, keep them options rollin’ This rolling out method is fun, but it’s not for the meek of heart or for the meager of account size. Here’s how it works. a) When BBH breaks $85, you close out the position by buying back the short $85 put and selling the long $80 put. Let’s estimate that it would cost you $2.50 to unwind the position. b) Now, look at the $80/$75 bull put spread. You may be able to take in $1.00. Remember, you have to make up $2.50. So you have to trade 25 contracts to make up the amount you paid to close out the original position. The premise is that BBH will have to stop going down eventually. When it does, you’re bull put spreads will expire worthless. You may have to roll it out to the following month, but an escape is an escape. It will take an account that can withstand substantial maintenance requirement. To ease the burden and reduce the number of put contracts, if BBH continues its move down, you can sell some bear call spreads along the way. 4. The “Knees Together” close up shop method. This is the “I was wrong and I’ll take my lumps” approach. When BBH breaks $85, you close out the position by buying back the short $85 put and selling the long $80 put. Let’s estimate that it would cost you $2.50 to unwind the position. You took in $1.55, so you accept the $.95 loss and move on to the next position figuring that you can’t win them all. In life, the degree of your success is inversely proportional to the number of failures. Hopefully, you learn from your failures, thereby increasing your chances of future success. If one pick- up line doesn’t work, don’t you change your approach? Either get with it or get in the car and go home. 5. The “Going Both Ways” but won’t last forever. This is a second cousin to the “Rollin’, rollin’, rollin’,” method. It sort of keeps it in the family. They use it in the deep south a lot. It can be profitable, but you still wouldn’t want it to date your sister. a) When BBH breaks $85, you close out the position by buying back the short $85 put and selling the long $80 put. Let’s estimate that it would cost you $2.50 to unwind the position. b) You then sell a sufficient number of bear call spreads to generate the $2.50 it took to unwind the position. If BBH continues down, the bear call spreads will expire worthless and you will still have the original profits. If BBH reverses, you’ll have to close out the bear call spreads and more than double up again on new bull put spreads. Eventually, BBH will pick a direction and the open spreads will expire worthless. This, also, requires a substantial account – for maintenance. Remember that maintenance can be in many forms – marginable securities, mutual funds, CDs, Treasuries, and (of course) cash. _____________________________________________________________ CPTI PORTFOLIO POSITION UPDATE Position #1: BBB Iron Condor – Closed Friday at $87.69. An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The objective is for the underlying, at expiration, to finish anywhere within the $85-$95 range. Position #2: MMM Iron Condor – Closed Friday at $122.48. 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 $20.64. 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. The market has been trading in a range and some volatility has come out of the premiums. We have two weeks left. Position #4: QQQ ITM Strangle – Closed Friday at $23.81. 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. In this position, we’re glad the QQQs have stayed in a range. It will make life easier when the short options expire and we prepare to sell a new set of short options. Position #5A: XAU Condor – Closed Friday at $74.55. 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. Patience, patience and patience. Time is working in our favor. Position #6A: MMM Condor – closed Friday at $122.48. 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 $23.81. 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. As time goes by . . . we’re ready for action. ______________________________________________________________ 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 ************** Seasonal stock market trends and MACD By Leigh Stevens lstevens@OptionInvestor.com It is well known that commodity markets have pronounced seasonal tendencies, especially for commodities that have growing seasons like cotton or corn or have strong seasonal consumption patterns like heating oil. Not as known or recognized is a pronounced tendency for a seasonal trend in the U.S. financial markets. I first became aware of this back when one of my PaineWebber colleagues, Jack Schwager, did extensive studies of “seasonality” in the various futures markets, including the financial (eurodollars and bonds) and stock index futures. Surprisingly, to me, the bond and stock futures had some of the most consistent seasonal trends – for example, stocks would tend to bottom for the year around October, rise into about April, then tend to decline into late-June and so on. Even when this seasonal tendency is recognized, there is little that money managers have ever done in the way of having an investment strategy of being in the market during the seasonally strongest period and then being in a money market fund during the rest of the year. This works contrary to the “buy and hold” strategy of most the fund managers stemming especially from the belief that you cannot “time” the market. What they mean is that THEY don’t know how to do so and don’t want to try – perhaps to the detriment of the mutual funds we might be holding in retirement accounts. For option traders, a knowledge of the seasonal tendencies for stocks can aid the ability to make profitable index trades during certain periods. Holding index calls during October in the last 2 years was a lay up for a very profitable trade and month. As always with “technical” factors like this, other technical aspects should “confirm” single-factor decisions like this; e.g., a “confirmation” is to buy calls as an index breaks out above its dominant down trendline and the market is oversold according to stochastics and RSI. Back to the “buy and hold” investment school – no matter how much lip service investors give to the “we never trade, only invest” school of thought, its also true that investors often liquidate stocks when they decline against them by any appreciable amount. Professional money managers certainly don’t always practice what they “preach” regarding a buy and hold philosophy. Some past studies have indicated that some of the best performing stock mutual funds have an annual turnover rate of 100% or more; i.e., the entire portfolio is turned over on average within a 12-month period. A 300% turnover rate indicates an average holding period of only four months – some top funds have had rates like this in some of their best years. Contrary to “conventional” wisdom that you cannot “time” the market, there is an example provided by at least one money manager who has improved his track record by doing just that and relies on a seasonally bullish tendency for a portion of most years or the “typical” year. Sy Harding, a fund manager, has written extensively in Barron’s magazine about his seasonal method of market “timing” which employs an S&P 500 index fund as the investment vehicle. Sy defines the optimum “average” seasonal pattern as being from around the end of September into early May – specifically, the 4th trading day of May. However, he also notes that the actual favorable season can contract or extend itself and range from 4 to 8 months. Sy has also applied another key criteria – use of a technical indicator - for entry or exit from the market, besides being in the optimum seasonal time period. For this purpose, a bullish crossover of the MACD must also occur as the seasonal period approaches within 6-weeks of the seasonal period dates he has defined. This is an important refinement to a purely seasonal approach. Exit is I believe also made when there is a bearish MACD downside crossover I will not here go into explaining what the MACD is – other than saying that the MACD acronym is for the Moving Average Convergence Divergence indicator and that a complete explanation of the MACD and its uses, can be found in my prior Trader’s Corner article found at – http://www.OptionInvestor.com/traderscorner/080802_1.asp The aforementioned Sy Harding method of yearly entries and exits, when “back-tested” from 1965 through the year 2000, resulted in returns that were approximately triple that of continuously holding the S&P 500 index during the same time frame. This result should not be taken to mean that there was always a positive return in years when the index was down, just that negative returns were likely to be LESS than losing years for the S&P 500 on average. Once and a while an entire “favorable” seasonal period could be passed over if the MACD did not achieve a bullish crossover. Also, his particular fund returns included interest earned when not invested in the S&P 500 group of stocks through an SPX index fund. This first chart, of the weekly S&P 500 (SPX) includes the MACD indicator shown at bottom and indicates the approximate periods (within the vertical lines) when the criteria suggested by the aforementioned Sy Harding resulted in being invested – any such period is marked as “in”. The estimation of when invested is my estimate and for purposes of demonstrating the yearly seasonal tendency for stock prices to rise and fall. Other periods shown between the vertical lines on the chart above that are without any text notation are time spans when the seasonal timing fund is earning interest only. Note that in the years shown, use of the seasonal tendency for gains of around half the year or 6 months (investing during the “optimal” Oct/Nov through April period) out of 12 - provided the MACD was ALSO in agreement - would not necessarily result in being in the market during every period when the index advanced. However, several losing periods were avoided and the implied results for the years shown appears consistent with Harding’s studies showing that his method offered a superior return relative to a “buy and hold” strategy. While it not my purpose to describe in detail all possible fundamental reasons for the seasonal stock market tendency for strength during certain months of the year, the following factors are among those commonly noted: - Extra investor cash coming from November and December capital gains distributions from mutual funds in up market years. - More attention focused on the market before and after the summer vacation season. - 3rd and 4th -quarter dividend distributions from corporations. - Company contributions to employee 401K plans and pension plans for the year. - Year-end bonuses. - Individual owners of businesses see what their “profits” are by early in the New Year and this money can be a source of funds that adds to an advance in the 1st quarter. SEASONAL STRENGTH LAST YEAR AND THIS YEAR – Of course, when in a relentless bear market such as we’ve been in, there will not be any prolonged market advances but there are some rally periods and – guess what! – those have tended to begin during the expected seasonal time periods for gains. The first part of these advances were good money makers for traders buying index calls and shorting put options. As you can see the rebound periods were short-lived in the past couple of years in terms of duration and the trend fairly quickly turned sideways – and was time to exit any call positions and to buy index puts at least at the top of the sideways trading range that developed. During the period when the MACD (blue line) was above the MACD Average, there were some opportunities for countertrend trades, against the dominant down trend. Perhaps you would have SAVED giving back trading profits or going into the hole by going more lightly on put positions during the seasonal period when the market would tend to gain – even if the indices were not very strong in terms of a sustained advance. As always go with the flow or be with the trend, but note what time of the year we’re in as another confirming or background factor relating to the odds for trade success. And, not for nothing is there this idea of a “Santa Claus rally” and “sell in May and keep the flies away” – no I made that up:- Lastly, relating to the current market it appears that any seasonal strength has met the cold hard reality of other events conspiring to keep investors out of stocks. The weekly MACD on the Nasdaq and the S&P 500 is very near to giving a “sell signal” or to achieve a bearish downside crossover reflecting the renewed downside momentum. This also makes the point that economic and political events dominate any “normal” or average seasonal tendency. ************** TRADERS CORNER ************** The Broader View By Jonathon Levinson As with any speculative activity, uncertainty and risk are primary barriers to entry, and the most important factors to manage. That investing is a speculative activity comes as no surprise to us, particular when we trade options. Derivatives of any nature are particularly speculative because of their inherent leverage. For this reasons, options are said to be “riskier” than stocks or equity-based mutual funds. You can lose all of your investment going long on option contracts. Worse yet, you can go far beyond losing all your investment going short contracts. However, these facts miss the broader picture, which is one of timeframe. The mutual fund industry has numerous and compelling charts showing that a buy and hold of the Dow in 1920 would be worth many times the initial investment by now, and that for this reason, stocks may go up and down, but over time they tend to appreciate. The Dow certainly has. However, a scratch below the surface shows that the Dow is not a true index, insofar as the losers are regularly removed and new issues added to replace them. In fact, only one of the original 30 Dow stocks still exists- as for the other 29, buy and hold would have been a grave error, and as with option investments gone wrong, a buy and holder of any of those 29 Dow components would be “out of Schlitz”, as my father likes to put it. Unlike with options, however, it would have taken longer to occur. Many investors who are averse to the leverage and risk of options are currently holding their equity funds and stocks, waiting and hoping for them to “come back”. The trouble with investing is that it’s a speculative activity. Some invest to make disposable income, others for fun, others, like me, to protect the fruits of their labor and to attempt to plan for and hopefully expedite the arrival of their eventual retirement. The risk of investing is an unfortunate fact of life for most who work hard for their savings. No matter what the investment vehicle, investor have no choice but choose wisely. Deferring the task to a broker or advisor does not eliminate these risks. The correct investments must be chosen with the correct time horizon if one is to reasonably expect to gain, or at least not to lose. I wish to illustrate how investors concerned with the overall health of their portfolios can position themselves to reduce their risk During the day, in the Market Monitor, we watch many different timeframes in the attempt to game short and intermediate term trades. Much confusion is caused by traders trying to reconcile what we see on and report from our charts with their own opinions of the market’s direction or the predictions they hear from other sources. In assessing any market view, and more importantly, in planning your own positions, it’s critical to establish the timeframe. That said, my own strategy is to align my short term trades with the longer term trend. This has resulted, during the past year, in almost exclusively making bearish trades on US equities and long trades on precious metals in particular and commodities in general. Here’s a closer view. Please note that these charts are intended to show the broader trends, and may not reflect price action of the past few weeks. In each of the charts, the recent trend has continued. These charts have been reproduced with permission from http://www.sharelynx.net: We’ll use the S&P 500 as a proxy for US equities. We see that since 2000, the SPX has been in a downtrend. The past 3 years have been in a bear market for US equities. This does not make me a “perma bear”, but merely an investor trying to align himself with the secular trend. Over a longer timeframe, the trend is up, but over the intermediate term, this wave is clearly down. I watch the intraday, daily and weekly action to try not to miss the “turn” in the event that this is a corrective wave down, and don’t want to miss the next intermediate bull market. But in the meantime, my equity trades have been bearish. Other indicators and fundamentals will help alert me to the turn, and we try to follow the shorter term action in the market monitor. The US Dollar Index has also been in an intermediate term correction and is currently trading below 100.00. This means that investments in US Dollars, or Canadian dollars for that matter (the Canadian Dollar forms part of the USDX) are at a great disadvantage as the currency in which they’re denominated has been dropping. More worrisome, the formation it’s printing is a “head and shoulders”, which is a bearish pattern and could portend a much larger drop. This makes US and Canadian bonds risky relative to other currencies, but still a better bet than US or Canadian equities, as bonds have provided relative shelter against the drop in equities depicted in the previous chart. My continuing interpretation has been that so long as the US Dollar Index continues to trade weakly, it will provide an incentive for foreigners to seek other markets in which to invest. If the USDX has dropped 20% in one year, then foreign investors have no desire to hold our bonds or stocks, as it requires a corresponding 20% gain on those investments just to break even on the currency conversion. I believe that this phenomenon is one of the keys to the bear market in equities we’ve been witnessing since their peak in 2000. As the US Dollar Index has dropped, so has the CRB, the commodities index, risen. It is currently trading above 245. It shows support in the 205-210 range, and has so far provided a relatively “diversified” hedge against the currency depreciation we’ve been witnessing on a worldwide basis. In a similar vein, one component of the CRB, gold, has also been doing well, currently above 370/oz. The chart below shows the broader trend in gold. How, then, have I positioned my own hard-earned portfolio to benefit from what I see in these charts? Most of my portfolio is in sector-based mutual funds. Being in Canada, I’m severely restricted by the relatively unimaginative products offered by our mutual fund industry. The vast bulk of our funds are bullish equity/ bond funds. Approximately 1/3 has been in precious metals funds, with an additional < in a managed commodities fund. The rest is in bond/income funds, resource funds, and money market funds. I trade a smaller percentage of my portfolio in option trades as I watch the daily activity of the different markets. Most often this has been in long put positions on US equities using the Nasdaq-100 tracking stock, the QQQ, with rare bullish trades or hedges when the market so dictates. Overall, my portfolios grew last year. However, as we see from the longer term charts, the trends of the past three years are not ironclad, and only form part of the longer trend in which they occur. I will therefore continue to watch the daily and weekly action closely, because it’s unreasonable to expect them to continue forever. I believe in buying and holding so long as it remains profitable to do so. We will continue to focus more closely on the shorter timeframes to provide all of you with the indicators that signal the heads up when things get ready to change, which, after all, is the only true constant in the market. ------------------------------------------------------------ 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. 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The Option Investor Newsletter Sunday 02-09-2003 Sunday 5 of 5 In Section Five: Covered Calls: More Q&A With The Editor Naked Puts: Planning The Trade -- Trading The Plan Spreads/Straddles/Combos: The Carnage Continues! Updated In The Site Tonight: Market Watch: Sinking Fast Market Posture: Feeding the Bear ------------------------------------------------------------ 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 ------------------------------------------------------------ ************* COVERED CALLS ************* Trading Basics: More Q&A With The Editor By Mark Wnetrzak This week's discussion involves a common question we receive from new subscribers. Attn: mark@OptionInvestor.com Subject: Covered-Calls -- A Good Strategy? Mark, I just started receiving the newsletter on a trial subscription and I noticed your section focused on "covered" calls. I have heard that this is a good strategy for new traders because it involves owning stock and selling options, rather than buying them. What is your opinion of the strategy and do you think it is a good approach in the current market for someone who has little experience with options? DG Hello DG, Many investors view options as speculative, risky investments, however there are several option-trading strategies that are relatively conservative in a neutral to bullish environment. One such method is covered call writing, a strategy where an investor sells call options against the underlying common stock to produce additional income and provide a measure of downside protection against small declines in share value. Covered call writing is usually considered to be a more conservative strategy than just buying the stock because the investor's cost basis is reduced by the amount of "premium" received for selling the call. The strategy is simple: the covered call writer buys stock and simultaneously sells the same number of calls against the shares purchased (a buy-write), or he sells calls against common stock that is already owned. Any investor can profit from the strategy and there are three beneficial characteristics of a covered call: 1. The sale of the call option provides immediate cash flow. 2. Any future losses in the price of the stock are reduced by the amount of money received from the sale of the call. 3. Conservative (in-the-money) covered-calls can provide a reasonable profit if the underlying stock is "called away" and substantially lower cost basis when the stock declines. The downside of this technique is a limited return as the covered call writer is willing to give up potential increases in the stock, in excess of the (sold) option strike price, in return for money received from the sale of the call. In addition, the stock may be called away at any time during the life of the option, creating potential tax issues for positions with capital gains. To avoid losing the stock in an assignment, the investor may cancel the obligation by closing the short position (buying-back the sold calls) or purchasing new calls in a similar (offsetting) series and exercising them. In a bearish market such as we are experiencing now, covered-calls are often used as a hedge strategy and should normally be written only on stocks you are prepared to own. For the candidates in this section, our goal is to use the money from the sold call to reduce the cost basis in technically sound stocks with favorable trends, thus providing low-risk profits with large downside protection for the overall position. With this conservative approach, an investor considers the covered-write position as a single entity and is not interested so much in stock ownership or bullish stock movement, but rather in obtaining a consistent (monthly) return on investment with limited losses. For more information on the "single-entity" approach, read the appropriate chapter (covered-writes) in Options as a Strategic Investment, 4th edition, by Larry McMillan. This is the bible of options trading, used by professional as well as retail traders, and it is the benchmark by which all other books on this subject are compared. The book also provides a complete explanation of the various methods for utilizing the covered-write strategy. 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 ASKJ 5.36 5.86 FEB 5.00 0.65 0.29* 8.9% MSTR 20.78 20.69 FEB 20.00 1.85 1.07* 8.2% MMR 7.92 7.65 FEB 7.50 1.00 0.58* 7.3% ORB 5.02 5.31 FEB 5.00 0.35 0.33* 6.1% LSS 15.01 16.01 FEB 15.00 0.80 0.79* 6.0% SPN 7.95 7.95 FEB 7.50 0.75 0.30* 6.0% EMIS 5.44 5.66 FEB 5.00 0.75 0.31* 5.7% RCOM 5.71 5.66 FEB 5.00 0.90 0.19* 5.7% ALKS 8.07 7.51 FEB 7.50 1.00 0.43* 5.3% ALA 5.76 6.82 FEB 5.00 1.10 0.34* 5.3% WEBM 10.89 10.91 FEB 10.00 1.55 0.66* 5.1% ALO 16.00 15.48 FEB 15.00 1.95 0.95* 4.9% FTS 8.39 8.30 FEB 7.50 1.20 0.31* 4.7% MVK 15.34 15.20 FEB 15.00 0.80 0.46* 4.6% ABMD 4.97 4.67 FEB 5.00 0.45 0.15 3.6% EFII 17.46 17.30 FEB 17.50 0.70 0.54 3.5% NFLX 13.20 12.18 FEB 12.50 1.15 0.13 1.6% JDEC 13.86 11.84 FEB 12.50 2.05 0.03 0.2% MEDC 9.26 7.09 FEB 7.50 2.15 -0.02 0.0% MEDC 9.31 7.09 FEB 7.50 2.20 -0.02 0.0% LMNX 5.16 4.51 FEB 5.00 0.60 -0.05 0.0% ADLR 13.45 11.93 FEB 12.50 1.45 -0.07 0.0% OSUR 7.85 7.01 FEB 7.50 0.65 -0.19 0.0% * = Stock price is above the sold striking price. Comments: Not much to say this week that hasn't already been said as the bearish malaise increases and the major averages march lower. For those that eschew the current environment, sitting in cash has been a wise move indeed. As for the early-exit watch list, J.D. Edwards (NASDAQ:JDEC), Med-Design (NASDAQ:MEDC), and Adolor (NASDAQ:ADLR) look a tad suspect for a sharp move lower. Positions Closed: Globespan-Virata (NASDAQ:GSPN), Regeneron Pharmaceuticals (NASDAQ:REGN), and Cubist Pharmaceuticals (NASDAQ:CBST). 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 ALN 13.15 FEB 12.50 ALN BV 0.90 110 12.25 14 4.4% ASKJ 5.86 MAR 5.00 AUK CA 1.25 54 4.61 42 6.1% CKFR 18.25 FEB 17.50 FCQ BW 1.25 1715 17.00 14 6.4% CURE 18.15 FEB 17.50 QCW BW 1.15 366 17.00 14 6.4% DNDN 5.50 MAR 5.00 UKO CA 0.85 15 4.65 42 5.5% EMIS 5.66 MAR 5.00 MTQ CA 1.10 418 4.56 42 7.0% JDSU 2.68 MAR 2.50 UQD CZ 0.40 20615 2.28 42 7.0% 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 EMIS 5.66 MAR 5.00 MTQ CA 1.10 418 4.56 42 7.0% JDSU 2.68 MAR 2.50 UQD CZ 0.40 20615 2.28 42 7.0% CKFR 18.25 FEB 17.50 FCQ BW 1.25 1715 17.00 14 6.4% CURE 18.15 FEB 17.50 QCW BW 1.15 366 17.00 14 6.4% ASKJ 5.86 MAR 5.00 AUK CA 1.25 54 4.61 42 6.1% DNDN 5.50 MAR 5.00 UKO CA 0.85 15 4.65 42 5.5% ALN 13.15 FEB 12.50 ALN BV 0.90 110 12.25 14 4.4% 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). ***** ALN - Allen Telecom $13.15 *** Earnings Rally! *** Allen (NYSE:ALN) is a global provider of wireless infrastructure equipment and services to many large wireless communications carriers and OEMs. The company's business is aligned around 5 product lines: Base Station Subsystems & Components; Repeaters & In-Building Coverage Products; Base Station & Mobile Antennas; Geolocation Products; and Wireless Engineering & Consulting Services. Allen's products and services are integral to mobile wireless communications networks and offer customers the ability to build networks that enhance network capacity, coverage and performance. The company's principal customers include, among others, Alcatel, Lucent Technologies, and Motorola. Allen reported its earnings this week and said sales rose 43.1% for the quarter compared to last year and 20% sequentially. The stock has been on a roll since November and the recent price history reveals one of the better charts we've seen in the broader market (jinx?). Investors who wouldn't mine owning ALN can use this position to participate in the future movement of the issue with relatively low risk. FEB 12.50 ALN BV LB=0.90 OI=110 CB=12.25 DE=14 TY=4.4% ***** ASKJ - Ask Jeeves $5.86 *** Still Smoking! *** 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. MAR 5.00 AUK CA LB=1.25 OI=54 CB=4.61 DE=42 TY=6.1% ***** CKFR - CheckFree $18.25 *** Own This One! *** CheckFree (NASDAQ:CKFR) is a provider of financial electronic commerce products and services. The company operates 3 business divisions: Electronic Commerce; Investment Services; and Software. Through the Electronic Commerce division, CKFR enables consumers to receive and pay bills electronically. The company, through the Investment Services division, provides a range of portfolio management services to financial institutions, including broker dealers, money managers and investment advisors. In addition, through the Software division, it delivers software, maintenance, support and professional services to large financial service providers and other companies across a wide range of industries. Shares of CheckFree rallied this week on heavy volume after the CEO said the company expects to record pro forma earnings of 74 to 77 cents a share, well above consensus estimates. Investors who agree with a bullish outlook for the stock can establish a conservative basis in the issue with this position. FEB 17.50 FCQ BW LB=1.25 OI=1715 CB=17.00 DE=14 TY=6.4% ***** CURE - Curative Health Services $18.15 *** Solid Outlook! *** Curative Health Services (NASDAQ:CURE) is engaged in businesses that serve patients who are experiencing serious or chronic medical conditions. The company operates two business units: Specialty Pharmacy Services and Specialty Healthcare Services. The Specialty Pharmacy Services business unit provides services to help patients manage the healthcare process and offers related pharmacy products to patients for chronic and critical disease states. Through the unit, the company purchases various biopharmaceutical products from manufacturers and contracts with insurance companies, government agencies and other payors to provide distribution, education and other services in connection with these products. The Specialty Healthcare Services business unit is a disease management company engaged in chronic wound care management. The unit manages, on behalf of hospital clients, a nationwide network of Wound Centers that provide a comprehensive range of services for treatment of chronic wounds. On January 13, CURE reiterated its previously stated guidance for 2003 of revenues of approximately $219-$230 million and earnings per share in the range of $1.47-$1.53. The current trend is bullish and investors can use this conservative position to profit from continued upside activity in the issue. FEB 17.50 QCW BW LB=1.15 OI=366 CB=17.00 DE=14 TY=6.4% ***** DNDN - Dendreon $5.50 *** Favorable Clinical Trials *** Dendreon (NASDAQ:DNDN) is devoted to the discovery as well as development of novel products for the treatment of diseases through its manipulation of the immune system. Dendreon's product pipeline is focused on cancer, and includes therapeutic vaccines, monoclonal antibodies and a pathway to small molecules. Their most advanced potential products are therapeutic vaccines that stimulate a patient's immunity for the treatment of cancer. Provenge is a therapeutic vaccine for the treatment of prostate cancer and is in Phase III clinical trials, the final stage of product development. The company is conducting Phase II clinical trials for Mylovenge, its therapeutic vaccine for the treatment of multiple myeloma, and Phase I clinical trials for APC8024, its therapeutic vaccine for the treatment of breast, ovarian and colon cancers. Shares of DNDN surged recently after the company said it is moving forward with late-stage testing of an experimental treatment for prostate cancer. The company also recently reported favorable results from its Phase I study for APC8024. We like the bullish chart pattern and traders can speculate on the near-term performance of the issue with this conservative position. Target a smaller "net-debit" to lower the cost basis and increase the potential yield in the position. MAR 5.00 UKO CA LB=0.85 OI=15 CB=4.65 DE=42 TY=5.5% ***** EMIS - Emisphere $5.66 *** Earnings Due! *** Emisphere Technologies (NASDAQ:EMIS) is a biopharmaceutical company engaged in solving one of the most challenging technical hurdles in the pharmaceutical industry: the oral delivery of medicines, which, for a variety of reasons, cannot be offered to patients directly in an oral form. EMIS has pioneered the oral delivery of otherwise injectable drugs, including proteins, peptides, polysaccharides and other compounds not currently deliverable by oral means. These drugs present challenges for oral delivery because they are often large molecules, which are inactivated in the gastrointestinal tract, have limited ability to cross cell membranes and generally cannot be delivered orally. With earnings due next week, the near term trend in the issue is bullish and traders can speculate on the post-announcement performance of the stock with this conservative position. MAR 5.00 MTQ CA LB=1.10 OI=418 CB=4.56 DE=42 TY=7.0% ***** JDSU - JDS Uniphase $2.68 *** Entry Point? *** JDS Uniphase (NASDAQ:JDSU) is a worldwide leader in optical technology. The company designs and manufactures products for a range of fiber-optic communications, as well as for markets where its core optics competency provides innovative solutions for industrial, commercial and consumer applications. JDS Uniphase's fiber-optic components and modules are deployed by system manufacturers for the telecom, data communications, and cable television industries. JDS Uniphase also produces and markets products for display, security, medical/environmental instrumentation, decorative, aerospace and defense applications. JDSU recently named a new Chief Financial Officer and although his job will be a difficult one with the company facing sluggish demand and more job cuts, some analysts believe the new firm will be stronger and more prepared for growth when the recovery begins. Investors who agree with a bullish, long-term outlook in JDSU can establish a relatively conservative cost basis in the issue with this position. MAR 2.50 UQD CZ LB=0.40 OI=20615 CB=2.28 DE=42 TY=7.0% ***** ***************** 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 PLUG 5.05 FEB 5.00 PQL BA 0.30 599 4.75 14 11.4% WMB 2.92 MAR 2.50 WMB CZ 0.70 775 2.22 42 9.1% RMBS 13.41 FEB 12.50 BNQ BV 1.40 6003 12.01 14 8.9% TWTR 5.11 MAR 5.00 TQZ CA 0.65 71 4.46 42 8.8% CELG 22.52 FEB 22.50 LQH BX 0.85 660 21.67 14 8.3% DIGE 15.29 FEB 15.00 QDG BC 0.80 0 14.49 14 7.6% TSO 5.00 MAR 5.00 TSO CA 0.45 1375 4.55 42 7.2% OVTI 14.26 FEB 12.50 UCM BV 2.15 168 12.11 14 7.0% PLCE 10.60 FEB 10.00 TUY BB 0.90 153 9.70 14 6.7% SCIO 42.20 FEB 40.00 UIO BH 3.10 2483 39.10 14 5.0% FTS 8.30 MAR 7.50 FTS CU 1.25 323 7.05 42 4.6% WEBM 10.91 MAR 10.00 UUW CB 1.50 83 9.41 42 4.5% LVLT 5.12 MAR 5.00 HGY CA 0.40 4204 4.72 42 4.3% PVN 6.28 MAR 5.00 PVN CA 1.55 4541 4.73 42 4.1% FDRY 8.35 MAR 7.50 OUJ CU 1.25 1150 7.10 42 4.1% ***************** NAKED PUT SECTION ***************** Options 101: Planning The Trade -- Trading The Plan By Ray Cummins Today's discussion concerns one of the most important requirements for new participants in the options market: the need to develop a trading plan. There are two main goals in a trading plan. The first objective is to outline a strategy that has profit potential in a specific situation. The second purpose is to establish a format that will help you execute the strategy correctly, and in a timely manner. A trading plan will also help you remain focused on the principal factors that affect a portfolio position and avoid a number of common pitfalls in the financial markets. If you are a beginning trader, developing a trading plan should be one of the first tasks you undertake and the following guidelines will provide a basis for this process: 1) Determine the maximum potential exposure of your portfolio. A conservative trader should risk only a small proportion of their total capital, perhaps 5%-10%, in any one position and those who participate in speculative strategies should only use money they are prepared to lose. In addition, remember that uncovered short positions require collateral or initial margin and additional funds may be required if the underlying issue moves adversely. For this reason, some experts suggest that you have a reserve capital balance of at least twice the initial margin requirement for any uncovered short position. 2) Establish a basis for trading decisions, whether fundamental or technical. Fundamental analysis is the process where one attempts to predict the future share value of a company by evaluating their future earnings, which are based on market share, product revenues, pricing structure, and operating margins, as well as various other financial components of the company's business. Technical analysis, which is the study of historical share values, directional trends and patterns in price charts, has nothing to do with the profitability of the company. Rather, it is a technique used to forecast the future direction and magnitude of a stock's movement based on its past price activity. Although each style is often viewed as less than adequate by the opposing group, there is value in both methods and in many cases, each approach can produce favorable results. 3) Study and become completely familiar with the form of analysis you favor most, until you can consistently identify potentially profitable trading opportunities. Technical analysis is more suitable to short-term trading, since it offers a very accurate method for establishing entry and exit points. Fundamental analysis can often provide a more precise picture of the long range outlook, but it is woefully inefficient for predicting the near-term movement of stock prices. However, analyzing the value of a company can help to forecast potential profits or losses and since earnings significantly affect share values at least once every three months (quarterly reports), it is important to have complete and accurate knowledge of a company's financial condition when ever you trade its stock or options. 4) Trade with the trend or character of the market and if in doubt, stay out! If the primary market trend is poorly defined and prices are fluctuating within a small range, it is probably not a good time to initiate a directional trade. At the same time, a strongly biased market would not favor delta-neutral positions such as debit straddles or credit strangles. The simplest way to profit in the financial markets is to identify the current trend and establish positions with the appropriate (technical or fundamental) outlook, in a timely manner. If this process can't be completed successfully under the current conditions, wait until a more favorable opportunity exists before trading. 5) Identify the actions to take when a specific profit (or loss) occurs, as well as any potential adjustments that will be made to reduce losses or increase gains in a position. The options market can move very quickly and profits can be lost or large draw-downs can occur in a short period, due to the combination of option leverage and the volatility of stocks. One of the attributes of successful traders is the ability to limit losses in unsuccessful positions and this task is best accomplished through the use of trading stops. The most important objective of the stop is to preserve capital if the play goes badly and yet provide every opportunity for the position to achieve its potential. Most traders use major trend-lines, minor lows and current support/resistance areas to help identify the correct stop-order placement. Although "slippage" will occur in some transactions, the stop order will limit a position's downside in all but the most volatile (gapping) situations. 6) Above all, stick to the plan! A successful trader will be to recognize early on when they have made an incorrect forecast but the key to success is learning to close-out the position before it deteriorates further. In contrast, positions with large upside potential (speculative calls or puts) should be allowed to run their "full course" before profits are taken. Experienced traders know it is necessary to maximize gains on profitable plays to offset the losses that inevitably occur in losing positions. The biggest hurdle to overcome in trading is making emotional decisions. Greed, hope, and fear affect your thinking process and acting on these emotions reduces the probability of a profitable outcome. Remember, the enemy is not the market, it is YOU, and that one of the primary reasons why a trading plan is so essential to long-term success. A trading plan is essential for new market participants, as it can provide a system for position management that will increase profits and minimize losses. In addition, it will improve the level of discipline and curb emotional reactions during periods of volatile market activity. Regardless of the style of trading you favor, a methodical approach is highly recommended in any financial market and the best way to accomplish this task is through the use of a trading plan. 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 MSTR 20.78 20.69 FEB 17.50 0.45 0.45* 11.9% 3.8% SEPR 12.99 10.83 FEB 10.00 0.35 0.35* 10.3% 3.2% REGN 20.63 17.89 FEB 17.50 0.50 0.50* 9.7% 3.2% FTE 25.50 25.20 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% QCOM 37.66 36.24 FEB 35.00 0.75 0.75* 8.3% 3.2% ANF 27.84 27.97 FEB 25.00 0.50 0.50* 8.2% 3.0% FTE 25.98 25.20 FEB 22.50 0.40 0.40* 7.9% 2.6% CKFR 19.53 18.25 FEB 17.50 0.45 0.45* 7.8% 2.9% VRTS 18.30 17.44 FEB 15.00 0.30 0.30* 7.5% 2.2% SEPR 13.20 10.83 FEB 10.00 0.30 0.30* 7.4% 2.2% CURE 17.49 18.15 FEB 15.00 0.40 0.40* 7.1% 2.4% VECO 15.39 13.36 FEB 12.50 0.35 0.35* 7.0% 2.1% APPX 24.18 23.75 FEB 22.50 0.55 0.55* 7.0% 2.7% CVC 19.44 16.25 FEB 15.00 0.40 0.40* 6.8% 2.0% FTE 24.40 25.20 FEB 20.00 0.45 0.45* 6.7% 2.0% AVCT 25.10 26.24 FEB 22.50 0.35 0.35* 6.5% 2.3% MATK 23.93 22.60 FEB 20.00 0.35 0.35* 6.3% 1.9% GTRC 19.63 18.66 FEB 17.50 0.45 0.45* 6.3% 2.3% S 26.45 23.24 FEB 22.50 0.30 0.30* 6.3% 2.0% MRCY 32.11 31.80 FEB 30.00 0.45 0.45* 5.8% 2.2% RGLD 26.67 26.27 FEB 22.50 0.35 0.35* 5.6% 1.7% CURE 17.06 18.15 FEB 15.00 0.25 0.25* 5.4% 1.8% ANF 27.11 27.97 FEB 22.50 0.40 0.40* 5.2% 1.6% EASI 37.00 36.00 FEB 33.38 0.40 0.40* 5.0% 1.8% MEDC 8.88 7.09 FEB 7.50 0.30 -0.11 0.0% 0.0% IMPH 21.53 19.08 FEB 20.00 0.75 -0.17 0.0% 0.0% * = Stock price is above the sold striking price. Comments: Last week's comments could easily be "pasted in" for the current narrative as there has been little change in outlook for equity values. The economy continues to struggle with no recovery on the horizon and concerns about terrorism and global politics are on the minds of Americans almost on a daily basis. Considering the prevailing conditions, it is easy to see why the majority of stocks are moving lower and the trend is likely to continue well into the future. The only hope, sadly, is for a "war rally" and trading lives for share values is a concept I simply don't want to contemplate. As usual, traders are warned to be extremely cautious in their position selection and extra diligent in their portfolio management. Conservative traders should consider early exits in Impath (NASDAQ:IMPH) and Med Design (NASDAQ:MDCO), and virtually all the remaining positions in the portfolio are on the "watch-list." Previously Closed Positions: Quest Software (NASDAQ:QSFT), Capital One (NYSE:COF), and FEI Co. (NASDAQ:FEIC), which are currently positive, as well as Network Associates (NYSE:NET) and Xylinx (NASDAQ:XLNX). 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 27.97 FEB 25.00 ANF NE 0.25 606 24.75 14 6.4% 2.2% ANSS 22.20 MAR 20.00 QUS OD 0.80 0 19.20 42 7.7% 3.0% APPX 23.75 MAR 20.00 AQO OD 0.55 45 19.45 42 6.3% 2.0% CGNX 21.84 MAR 20.00 QCG OD 0.75 0 19.25 42 7.1% 2.8% MDCO 16.92 MAR 15.00 MQL OC 0.60 11 14.40 42 8.0% 3.0% MSTR 20.69 MAR 17.50 EOU OW 0.75 65 16.75 42 9.3% 3.2% OTEX 27.14 MAR 25.00 QFT OE 0.75 0 24.25 42 5.7% 2.2% POSS 19.50 MAR 17.50 UPQ OW 0.55 10 16.95 42 6.3% 2.3% Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield MSTR 20.69 MAR 17.50 EOU OW 0.75 65 16.75 42 9.3% 3.2% MDCO 16.92 MAR 15.00 MQL OC 0.60 11 14.40 42 8.0% 3.0% ANSS 22.20 MAR 20.00 QUS OD 0.80 0 19.20 42 7.7% 3.0% CGNX 21.84 MAR 20.00 QCG OD 0.75 0 19.25 42 7.1% 2.8% ANF 27.97 FEB 25.00 ANF NE 0.25 606 24.75 14 6.4% 2.2% APPX 23.75 MAR 20.00 AQO OD 0.55 45 19.45 42 6.3% 2.0% POSS 19.50 MAR 17.50 UPQ OW 0.55 10 16.95 42 6.3% 2.3% OTEX 27.14 MAR 25.00 QFT OE 0.75 0 24.25 42 5.7% 2.2% 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 $27.97 *** 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, Abercrombie & Fitch Co. said it enjoyed better-than-expected sales growth in January, thanks to strong clearance sales. Same-store sales increased 3%, exceeding analysts' mean estimate for growth of 0.3% as total sales climbed 24% to $79.7 million. The retailer also said it now expects its fourth-quarter earnings to exceed its previous guidance and traders who believe that will translate to higher share values can profit from that outcome with this position. FEB 25.00 ANF NE LB=0.25 OI=606 CB=24.75 DE=14 MY=6.4% SY=2.2% ***** ANSS - Ansys $22.20 *** Rally Mode! *** Ansys (NASDAQ:ANSS) develops and globally markets engineering simulation software used by designers and engineers across a broad spectrum of industries, including aerospace, automotive, manufacturing, nuclear, electronics and biomedical. The company develops open and flexible simulation solutions that enable users to simulate design performance, providing a common platform for fast, efficient and cost-effective product development from design concept to final-stage testing and performance validation. Its subsidiary, CADOE S.A., is an independent software vendor that specializes in the computer-aided design and engineering markets. The company recently reported favorable earnings and an agreement to buy CFX, a leading supplier of computational fluid dynamics software and services. The news was seen as very positive by investors and the stock rose to 6-month highs on heavy trading volume. Investors can establish a conservative cost basis in the stock with this position. MAR 20.00 QUS OD LB=0.80 OI=0 CB=19.20 DE=42 MY=7.7% SY=3.0% ***** APPX - American Pharmaceutical $23.75 *** Entry Point? *** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. The company produces over 100 generic injectable pharmaceutical products in more than 300 dosages and formulations. Its primary focus is in the oncology, anti-infective and critical care markets. The firm manufactures products in all three of the three basic forms in which injectable products are sold: liquid, powder and lyophilized (freeze-dried). In January, American Pharmaceutical Partners raised its fourth quarter and full year earnings guidance due to strong demand for newly launched, higher margin products. The firm also recently received FDA approval for vincristine sulfate injection, which is the generic version of Eli Lilly's Oncovin, for the treatment of acute leukemia. Investors who wouldn't mind owning APPX near a cost basis of $19 should consider this position. MAR 20.00 AQO OD LB=0.55 OI=45 CB=19.45 DE=42 MY=6.3% SY=2.0% ***** CGNX - Cognex $21.84 *** Trading Range? *** Cognex Corporation (NASDAQ:CGNX) designs, develops, manufactures, and markets machine vision systems that are used to automate a wide range of manufacturing processes. These systems consist of image analysis software and high-speed, special purpose computers that, when connected to a video camera, interpret video images and generate information about them. The firm has two operating divisions: Modular Vision Systems Division (MVSD) and Surface Inspection Systems Division (SISD). MVSD designs, develops, makes and markets modular vision systems that are used to control the manufacturing of discrete items. SISD designs, develops, makes and markets surface inspection vision systems. In late January, Cognex reported a quarterly profit, reversing a year-ago loss, as cost-cutting helped offset slow spending in the semiconductor and electronics industries. Now the issue is near the top of a recent trading range and the sold strike price at $17.50 is a good place from which to speculate on the future movement of the issue. MAR 20.00 QCG OD LB=0.75 OI=0 CB=19.25 DE=42 MY=7.1% SY=2.8% ***** MDCO - The Medicines Company $16.92 *** Next Leg Up? *** The Medicines Company (NASDAQ:MDCO) operates as a pharmaceutical company selling and developing products for the treatment of hospital patients. MDCO acquires, develops and commercializes biopharmaceutical products that are in late stages of development or have been approved for marketing. The company began selling Angiomax, its lead product, in U.S. hospitals in January 2001 as an anticoagulant replacement for heparin. MDCO is developing Angiomax for additional potential hospital applications as a procedural anticoagulant and for use in the treatment of ischemic heart disease. The Medicines Company rallied Friday, despite the downward trend of the broader market and the technical indications suggest the up-trend will continue in the near future. This play offers favorable speculation with a cost basis near recent buying support. MAR 15.00 MQL OC LB=0.60 OI=11 CB=14.40 DE=42 MY=8.0% SY=3.0% ***** MSTR - MicroStrategy $20.69 *** Post-Earnings Rally! *** 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 recently after the maker of business software reported better-than- expected profits and rising software sales. A number of analysts also raised their 2003 outlooks for the company and bullish traders can use the current consolidation to establish a conservative cost basis in the issue. MAR 17.50 EOU OW LB=0.75 OI=65 CB=16.75 DE=42 MY=9.3% SY=3.2% ***** OTEX - Open Text $27.14 *** Up-trend Intact! *** Open Text (NASDAQ:OTEX) develops, markets, licenses and supports collaboration and knowledge management software for intranets, extranets and the Internet, enabling users to find electronically stored information, work together in creative and collaborative processes, perform group calendaring and scheduling and distribute or make available to users across networks or the Internet the resulting work product and other information. OTEX's principal product line is Livelink, a collaboration and knowledge management software for global enterprises that integrates several engines, including, but not limited to, search, collaboration, workflow, group calendaring and scheduling and document management. As an extension to its solutions-based offerings, OTEX also provides a range of professional services, training, documentation and other technical support services to accelerate the implementation of, and satisfaction with, its products. In January, OTEX announced that profits were up sharply in its second quarter, ahead of expectations, and it raised its earnings guidance for the year. Investors who like the outlook for the company can speculate on its future share value with this position. MAR 25.00 QFT OE LB=0.75 OI=0 CB=24.25 DE=42 MY=5.7% SY=2.2% ***** POSS - Possis Medical $19.50 *** Bullish Outlook! *** Possis Medical (NASDAQ:POSS) manufactures and markets medical products. The company was initially engaged in the designing, manufacturing and sales of industrial equipment, and had a small division that provided temporary technical personnel. The firm's involvement with medical products began in 1976 but in 1990, Possis made the decision to focus solely on medical products and subsequently divested all non-medical operations. Possis Medical said last week that second-quarter earnings will significantly exceed earlier forecasts on higher than expected sales. The technical indications support a bullish fundamental outlook and investors who want to own POSS near a cost basis of $17 should consider this position. MAR 17.50 UPQ OW LB=0.55 OI=10 CB=16.95 DE=42 MY=6.3% SY=2.3% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield DIGE 15.29 FEB 15.00 QDG NC 0.65 0 14.35 14 21.8% 9.8% DRXR 15.95 FEB 15.00 RXQ NC 0.35 20 14.65 14 13.2% 5.2% CVTX 19.35 FEB 17.50 UXC NT 0.35 1609 17.15 14 12.2% 4.4% LF 23.70 FEB 20.00 LF ND 0.30 322 19.70 14 10.7% 3.3% BVF 31.15 FEB 30.00 BVF NF 0.55 735 29.45 14 10.1% 4.1% CURE 18.15 MAR 17.50 QCW OW 1.00 1 16.50 42 9.5% 4.4% POWI 20.26 MAR 17.50 FPW OW 0.70 5 16.80 42 8.4% 3.0% BCGI 13.30 MAR 12.50 QGB OV 0.55 251 11.95 42 7.9% 3.3% PRXL 13.10 MAR 12.50 VBQ OV 0.55 15 11.95 42 7.7% 3.3% PDG 11.21 MAR 10.00 PDG OB 0.30 2372 9.70 42 6.1% 2.2% FLO 25.50 MAR 25.00 FLO OE 0.80 20 24.20 42 5.5% 2.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Carnage Continues! By Ray Cummins Stocks slumped to 4-month lows Friday as investors shrugged-off favorable employment data and instead focused on the threat of terrorism and dismal earnings forecasts. The blue-chip Dow Jones industrial average dipped 65 points to 7,864 amid weakness in AT&T (NYSE:T), Eastman Kodak (NYSE:EK), and J.P. Morgan (NYSE:JPM). The technology-laden NASDAQ index slid 19 points to 1,282, its lowest level since mid-October, as software, hardware and networking shares struggled with renewed selling pressure. The broader Standard & Poor's 500 Index fell 8 points to 829 with almost every major sector experiencing a downward bias. Declining stocks outpaced advancers by a ratio of 2 to 1 on both the New York Stock Exchange and the technology exchange. More than 1.2 billion shares changed hands on the Big Board and a similar amount were traded on the NASDAQ. The bond market was relatively unchanged with the 10-year Treasury note up 3/32 at 100 17/32 to yield 3.93%. The 30-year bond slid 2/32 at 108 22/32 to yield 4.81%. ***************** 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 26.12 FEB 20 23 0.40 22.60 $0.40 Open XAU 79.51 74.55 FEB 65 70 0.75 69.25 $0.75 Open BHE 35.30 34.48 FEB 25 30 0.45 29.55 $0.45 Open AET 43.86 40.95 FEB 35 40 0.45 39.55 $0.45 Open HCA 43.75 40.38 FEB 37 40 0.30 39.70 $0.30 Open CERN 37.31 35.11 FEB 30 35 0.55 34.45 $0.55 Open PRX 31.50 33.00 FEB 25 30 0.45 29.55 $0.45 Open APA 62.41 61.60 FEB 55 60 0.60 59.40 $0.60 Open FRX 51.75 49.88 FEB 45 47 0.25 47.25 $0.25 Open NBR 36.85 37.66 FEB 33 35 0.30 34.70 $0.30 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Aetna (NYSE:AET), HCA Inc. (NYSE:HCA), and Cerner (NASDAQ:CERN) are on the "early exit" watch-list. Positions previously closed include: Intuit (NASDAQ:INTU) and Chiron (NASDAQ:CHIR). CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ABK 57.56 50.35 FEB 70 65 0.55 65.55 $0.55 Open KBH 44.01 44.42 FEB 55 50 0.55 50.55 $0.55 Open BZH 61.98 55.00 FEB 75 70 0.50 70.50 $0.50 Open ITW 65.70 58.97 FEB 75 70 0.60 70.60 $0.60 Open BGEN 37.93 39.98 FEB 45 42 0.25 42.25 $0.25 Open PIXR 53.76 51.70 FEB 65 60 0.55 60.55 $0.55 Open RE 51.70 48.25 FEB 60 55 0.50 55.50 $0.50 Open ROAD 36.43 34.02 FEB 45 40 0.30 40.30 $0.30 Open ATK 54.75 48.94 FEB 65 60 0.45 60.45 $0.45 Open CAT 43.92 42.63 FEB 50 47 0.25 47.75 $0.25 Open IBM 78.94 77.10 FEB 90 85 0.50 85.50 $0.50 Open MER 36.81 32.93 FEB 43 40 0.25 40.25 $0.25 Open LXK 60.54 59.18 FEB 70 65 0.45 65.45 $0.45 Open QLGC 33.28 32.84 FEB 40 37 0.25 37.25 $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 36.98 FEB 50 45 4.50 45.50 0.50 Open VIA 38.72 37.30 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 46.09 FEB 35 40 4.50 39.50 0.50 Open PHSY 29.19 27.15 FEB 25 27 2.00 27.00 0.50 Open? OCR 25.03 24.83 FEB 25 27 1.00 26.00 (1.00) Open? EBAY 73.36 72.37 FEB 60 65 4.45 64.45 0.55 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Omnicare (NYSE:OCR) is a candidate for early-exit and Pacificare Health Systems (NASDAQ:PHSY) remains on the watch-list. Although barely positive, the bullish position in University of Phoenix Online (NASDAQ:UOPX) has previously been closed to limit losses. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status VAR 50.38 51.60 FEB 55 45 0.10 0.20 Open? WPI 29.22 28.65 MAY 35 22 (0.10) 0.50 Open ANF 26.39 27.97 FEB 30 22 0.05 0.60 Open UPL 10.11 9.47 MAR 10 10 0.10 0.00 Open AFFX 27.14 25.87 MAR 30 25 0.15 0.00 Open CTMI 26.24 21.97 MAR 30 23 0.05 0.00 Closed Our new position in CTI Molecular Imaging (NASDAQ:CTMI) was closed following the company's quarterly earnings report, which reflected $0.07 a share profit on revenues that rose 27%. The company also affirmed its second quarter projections, but the announcement was not viewed favorably by traders and they quickly dumped the issue. 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 39.98 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 AXP 33.70 33.74 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. Previously closed positions: 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. ***** BVF - Biovail $31.15 *** New FDA Approval! *** Biovail (NYSE:BVF) is a full-service pharmaceutical company that applies its proprietary drug delivery technologies in developing "oral controlled-release" products throughout North America. The company applies its proprietary drug delivery technologies to successful drug compounds that are free of patent protection to develop both branded and generic oral controlled-release products. The branded oral controlled-release products improve on existing formulations, providing better therapeutic and economic benefits. The company also engages in the formulation, clinical testing, registration, manufacturing and sales of oral controlled-release products throughout North America. Technical Outlook: A nearly 10% "gap-up" rally on Friday with 5X trading volume suggests higher share prices in the near future; recent buying support near $28.50. Potential Catalysts: U.S. Food and Drug Administration approved Cardizem LA as a new graded extended-release formulation for the treatment of high blood pressure or hypertension; company also recently provided a full-year outlook that confirmed expectations with earnings growth of 30% or more in the second half of 2003 due to the expected success of product launches. PLAY (moderately aggressive - bullish/credit spread): BUY PUT FEB-25.00 BVF-NE OI=1018 A=$0.15 SELL PUT FEB-30.00 BVF-NF OI=735 B=$0.55 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$29.60 ***** SCIO - Scios $42.20 *** J&J Buy-Out Candidate? *** Scios (NASDAQ:SCIO) is a biopharmaceutical company developing novel treatments for cardiovascular and inflammatory diseases. The company's disease-based technology platform integrates new protein biology with computational and medicinal chemistry to identify novel targets and rationally design molecule compounds for large markets with unmet medical needs. Scios is focused on the development of three primary product candidates: Natrecor, for the treatment of acute congestive heart failure, SCIO-469, an oral small-molecule inhibitor of p38 kinase for the treatment of rheumatoid arthritis, and small molecule inhibitors of the receptor for TGF-beta, a cytokine that has been implicated in diseases characterized by chronic scar formation, or fibrosis. Technical Outlook: Shares of SCIO closed at an "all-time" high Friday on heavy volume; bullish technical indications suggest the trend will continue in the near-term. Potential Catalysts: Rumored to be in merger/buy-out talks with Johnson & Johnson (NYSE:JNJ); acquisition price could be as high as $45 per share. PLAY (moderately aggressive - bullish/credit spread): BUY PUT FEB-35.00 UIO-NG OI=1206 A=$0.30 SELL PUT FEB-40.00 UIO-NH OI=151 B=$0.70 INITIAL NET-CREDIT TARGET=$0.45-$0.65 POTENTIAL PROFIT(max)=9% B/E=$39.55 ***** SYMC - Symantec $46.09 *** No Slump Here! *** Symantec (NASDAQ:SYMC) provides a broad range of content and network security solutions to individuals and enterprises. The company is a provider of virus protection, firewall, virtual private network, vulnerability management, intrusion detection, remote management technologies and security services to various consumer groups and enterprises around the world. The company currently views its business in five primary operating segments: Consumer Products, Enterprise Security, Administration, Services and Other. Technical Outlook: Intermediate-term "bullish" with resistance near $47; currently in consolidation with recent trading range support at $43, and again at $40. Potential Catalysts: Quarterly sales and profit results exceeded consensus estimates; earnings surpassed analysts' expectations in each of the last four quarters. PLAY (conservative - bullish/credit spread): BUY PUT MAR-35.00 SYQ-OG OI=253 A=$0.35 SELL PUT MAR-40.00 SYQ-OH OI=252 B=$0.80 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$39.50 ***** BSC - Bear Stearns Companies $59.90 *** Sector Slump! *** The Bear Stearns Companies (NYSE:BSC) is a holding company, which, through its subsidiaries, principally Bear, Stearns & Co. Inc., Bear, Stearns Securities, Bear, Stearns International Limited and Bear Stearns Bank PLC, is an investment banking, securities and derivatives trading, clearance and brokerage firm. The company serves corporations, governments, institutional and individual investors worldwide. BSC provides professional and correspondent clearing services, in addition to clearing and settling customer transactions and certain proprietary transactions of the company. The firm is primarily engaged in business as a securities broker and dealer operating in three principal segments: Capital Markets, Global Clearing Services and Wealth Management. Technical Outlook: Near-term "bearish" as it tests the bottom of a recent trading range; next level of support near $58. Potential Catalysts: Brokerage sector slump has affected even the top companies in the group and no fundamental improvements are expected until the market begins to recover. PLAY (conservative - bearish/credit spread): BUY CALL MAR-70.00 BSC-CN OI=617 A=$0.25 SELL CALL MAR-65.00 BSC-CM OI=1274 B=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$65.55 ***** HRB - H&R Block $35.80 *** Low Risk = Low Reward *** H&R Block (NYSE:HRB) is a diversified company with subsidiaries that deliver tax services and financial advice, investment and mortgage products and services, and business accounting and consulting services. As the world's largest tax services firm, H&R Block served nearly 23 million clients during fiscal year 2002. Clients were served at the approximately 10,400 H&R Block retail offices worldwide and through the company's award-winning software, TaxCut, and its online tax services. Technical Outlook: Near-term "bearish" with resistance near $38 and again at the sold (call) strike at $40; slightly oversold conditions and well below 150-day EMA, however no buying support near the current price. Potential Catalysts: Still working to overcome recent problems with litigation concerning class-action lawsuits; also concerns about the company's mortgage business, which involves sub-prime lending. PLAY (conservative - bearish/credit spread): BUY CALL MAR-45.00 HRB-CI OI=177 A=$0.15 SELL CALL MAR-40.00 HRB-CH OI=5338 B=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$40.45 ************* DEBIT SPREADS ************* These candidates offer a risk/reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** AMGN - Amgen $52.09 *** New Trading Range? *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and sells human therapeutic products including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. Technical Outlook: Near-term lateral consolidation with upside bias; testing recent trading-range highs near $52. Potential Catalysts: Lots of attention on drug developers with products for arthritis and AMGN is one of the heavy hitters, having reported fourth-quarter profit that nearly tripled on a 58% increase in revenue. PLAY (conservative - bullish/debit spread): BUY CALL MAR-45.00 AMQ-CI OI=1074 A=$7.90 SELL CALL MAR-47.50 AMQ-CW OI=387 B=$5.70 INITIAL NET-DEBIT TARGET=$2.10-$2.20 POTENTIAL PROFIT(max)=14% B/E=$47.20 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial costs and large potential profits. ***** CI - Cigna Corporation $43.02 *** Reader's Request! *** Cigna Corporation (NYSE:CI) and its subsidiaries are investor- owned employee benefits organizations in the United States. Its subsidiaries are major providers of employee benefits offered through the workplace, including health care products and other services, life, accident and disability insurance, retirement products and services and investment management. CIGNA's main perating divisions include Employee Health Care, Disability and Life Benefits, CIGNA Group Insurance, Employee Retirement, and Investment Services, and International Life, Health and Employee Benefits. Technical Outlook: Neutral to bullish short-term outlook with resistance near the current price and a recent trading-range top at $46; potential for some consolidation before further upside activity. Potential Catalysts: On Friday, CI posted fourth-quarter income that declined to $47 million versus $191 million for the same period last year, but adjusted earnings were ahead of consensus estimates. PLAY (speculative - bearish/calendar spread): BUY PUT APR-45.00 CI-DI OI=1147 A=$1.90 SELL PUT FEB-45.00 CI-BI OI=1355 B=$0.40 INITIAL NET DEBIT TARGET=$1.35-$1.45 INITIAL TARGET PROFIT=$0.50-$0.75 *********************** 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. ***** IGT - International Game Tech. $74.84 *** Active Sector! *** International Game Technology (NYSE:IGT) is a world leader in the design, development and manufacture of microprocessor-based gaming and lottery products and software systems in all jurisdictions where gaming and lotteries are legal. IGT makes casino gaming products and proprietary gaming systems for the casino gaming industry in the United States. In addition to its production in the United States, the company manufactures gaming products in the United Kingdom and through a third party manufacturer in Japan. IGT also maintains sales offices in selected legalized gaming jurisdictions globally, including Australia, Argentina, Peru, New Zealand, South Africa and The Netherlands. Technical Outlook: Intermediate-term lateral trend with near-term "bearish" activity on higher-than-average volume; volatile issue within a current range from $72-$79. Potential Catalysts: Industry stocks are in a slump as companies report mediocre quarterly earnings. More activity likely in the near-term with Boyd Gaming (NYSE:BYD), Mandalay Bay (NYSE:MBG), and Penn National Gaming (NASDAQ:PENN) due to report in the coming weeks. PLAY (very speculative - neutral/debit straddle): BUY CALL FEB-75.00 IGT-BO OI=2279 A=$1.65 BUY PUT FEB-75.00 IGT-NO OI=1025 A=$1.75 INITIAL NET-DEBIT TARGET=$3.20-$3.35 INITIAL PROFIT TARGET=$0.75-$1.25 ***** ------------------------------------------------------------ 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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