The Option Investor Newsletter Wednesday 02-12-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Point of No Return? Futures Wrap: Fearing the Future Index Trader Wrap: (See Note) Weekly Fund Family Profile: Babson Fund Group Options 101: Fixated on the VIX Traders Corner: Let's make that "Gold: Some Strategies and Vehicles" Updated on the site tonight: Swing Trader Game Plan: Bleeding Continues Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-12-2003 High Low Volume Advance/Decl DJIA 7758.17 - 84.94 7854.62 7753.71 1474 mln 277/1170 NASDAQ 1278.97 - 16.49 1301.11 1278.74 1191 mln 189/956 S&P 100 413.61 - 4.97 419.95 413.45 totals 466/2126 S&P 500 818.68 - 10.52 832.12 818.49 RUS 2000 355.38 - 4.58 360.50 355.38 DJ TRANS 2100.67 - 27.61 2136.02 2100.67 VIX 39.10 + 1.75 39.42 38.11 VIXN 47.49 + 0.59 48.84 47.48 Put/Call Ratio 0.90 ****************************************************************** Point of No Return? by Steven Price We continue to ratchet down in the broader markets, as buyers continue their strike in the face of war fears. Alan Greenspan continued his testimony before Congress, sparring mostly over the how the President's tax-cut plan will affect the economy. By mid- morning, we had taken out relative lows and each day continues to bring signs of a further weakening stock market. It was not a massive sell-off and volume remained on the light side, but we continue to push the envelope to the downside and today brought further evidence that the bounces we are seeing on a technical basis continue to be short entry opportunities. The last couple of days have been a prime example of the short- entry theory. The news out of Iraq on Monday, that the country would allow U2 fly-overs (old news now) gave us a big rally as we tested new lows. That rally continued on Tuesday ahead of Alan Greenspan's testimony. As the Fed Chairman spoke, the rally eventually faded, possibly due to the comments that the President's dividend tax-cut plan, while fundamentally sound, would be a better idea if it did not result in deficit spending to finance it. The rally may have also faded as short-covering that began on the Iraq announcement on Monday afternoon, finished off when Greenspan didn't say anything earth-shatteringly positive, or imply further immediate rate cuts. After all, if he doesn't necessarily think we need a stimulus package before we know just how much the geo-political concerns are affecting us, it seems unlikely that he would be in a rush to lower rates below already historically low levels. His take on the deficit that would result from the dividend tax cut did not sound supportive, even though we continued to hear that the cut was a good idea on a policy basis. Greenspan said he did support the President's plan, but his comments about deficit spending in general did not echo that sentiment. He talked about it being possible to maintain flat debt to GDP ratios while running small deficits of of 1-2%, but the president's plan exceeds that, likely crossing over the 3% mark. Greenspan said, "But if we get into a position... where we are finding that the debt-to-GDP ratio begins to accelerate, we have to be very careful because there is no (self-correction) mechanism when that is occurring, because a rise in the debt increases the amount of interest payments, which in turn increases the debt still further, and there is an accelerating pattern after you reach a certain point of no return." His description of a point of no return certainly does not sound like he thinks the president's stimulus plan requiring larger deficits than he is comfortable with is such a hot idea, in spite of his statement of support. President Bush spent some time on air defending his plan, but there is no doubt the damage was done and the democrats will have plenty of ammo to counter with. That certainly could be another reason we are seeing selling over the past couple days, when combined with the ever- present geo-political problems. The rally ahead of his testimony on Monday and Tuesday, however, was enough to turn the point and figure charts back up into columns of "X," which represent significant upward movement. A reversal requires three-boxes in the opposite direction of the downtrend and therefore is supposed to represent a reversal in sentiment. However, we have now seen the last four Dow reversals up indicate contrary profitable short entry levels. The last five reversals in the SPX and OEX have been short entry opportunities. What's even more impressive is that the last reversals on Tuesday not only failed, but failed at a lower level and were unable to move back above the previous breakdown levels. We continue to set lower lows, and we are approaching territory not seen on the way down since September, when were on our way to setting lows below even those seen in July. After consolidating between 7950 and 8150 in the Dow, we ratcheted down a notch and have been trading between 7800 and 8000. That is, until today. The lows of the last few days had been 7830, 7801 and 7806, indicating the bulls were staunchly defending the 7800 support level. This morning, we broke down below 7800, reaching a low of 7753, and eventually finished the day at 7757. The pattern is becoming clearer each day. While we are getting bounces in the broader markets, those bounces continue to come at lower levels. We take out the floor of the previous consolidation range, get a bounce and then eventually collapse below that floor, establishing a lower range as bounces come at successively lower levels. This pattern has continued ever since the bullish percents began rolling over in December and January. Those percents measure the number of stocks in a given index currently giving buy signals. Right now the Dow bullish percent is the most extended to the downside, registering only 20%. The SPX sits at 42%, coming off a December high of 68% and the OEX sits at 38%, coming off a December high of 75%. The NDX sits at 38%, after coming off a December high of 82%. The Dow is the only index of these to have entered oversold territory below 30%, however we need to keep in mind that the last two bottoms came at 4% (July) and 8% (October)in the Dow, so it is still a ways from support. The sinking bullish percent has been a good indicator that bounces would be only temporary on the way down, just as a rising bullish percent in October and November was a good indication that pullbacks were temporary on the way up. Still, we must note that we are getting closer to the extreme bottom end of the range we have traded in over the last year and risks will begin to shift less in favor of bears as we continue to drop. It is true that the October drop took us below the drop in July and we certainly could be headed to sub-7000 Dow range on this drop. However, as we reach those bottoms, shorts would be best advised to tighten stops and take some chips off the table. Point and Figure Chart of the SPX Point and Figure Chart of the Dow Dow Bullish Percent We spent some time talking about head and shoulders patterns over the last couple of months and so far those patterns are bearing fruit to the downside. We saw the similar pattern over the summer and fall end up very close to its downside objective before bouncing, with the Dow actually coming within just a few points of its objective on the July drop. The target of the current Dow head and shoulders pattern is 7500, while the SPX is targeting a low around 785. Those would both be higher than the October lows and if we get there we can then decide just how significant a higher low would be. Daily chart of the Dow Daily Chart of the SPX Notables: The COMP closed well below previous support at 1300, finding resistance there once again on an intraday basis. Its mid-morning rebound high was 1301. The VIX is again testing the 40% level that has signaled short-term rebounds, although those rebounds have continued to eventually fail. The ten-year yield took out recent lows, but has yet to approach the low from late January or late February. The five-year yield finished up on the day, in contrast to the ten and thirty year. This morning's testimony from CIA chief George Tenet that North Korea has an untested ballistic missile capable of reaching the U.S. and likely has as many as two plutonium based nuclear weapons, which came alongside the International Atomic Energy Agency's 35-nation executive board's citation of Pyongyang for being in breach of U.N. safeguards, also weighed on markets. In the end, it turns out the news of the missile had been known to U.S officials for a couple of years, but the splash across the news screens certainly made buyers think twice about buying a dip. Most of the blame for today's drop has fallen on concerns over a war in Iraq. Whatever the reason the market continues to be sold, the Iraq concerns are as good a reason as any. However, we are not exactly getting positive news from the corporate sector either. General Motors saw its price target cut at Banc of America Securities from $32 to $28. B of A cited a lower rate of free- cash-flow growth, saying the new target reflects 23% downside from current levels. It also said that if GM's pension fund assets were marked to market right now, the price target would drop to $24. The big concern for investors is also B of A's assertion that the company will be forced to cut its dividend. GM finished down $2.03 on the day. The analyst cited cash-flow growth problems at all big three U.S. automakers, which are being hurt by increased foreign capacity in the truck market. He mentioned increases for Toyota pickups specifically. Ford's price target was lowered from $13 to $11. Viacom also released earnings that showed improved profits, after a year ago loss, but also found only sellers. In spite of beating estimates by three cents per share, the company's cable and video results fell short of expectations. The lower than expected cash flow in those areas gave bears all the ammo they needed in a market that seems to be looking for the bad news in just about any earnings release. We have seen a slew of stocks sold-off in spite of beating forecasts and this was no exception. The stock started off the day sinking over $2 before rebounding to show a loss of $0.98 for the day. One sector that showed surprising strength was the semiconductor group. Last night, AMAT missed profit and revenue estimates, as well as said, "In the near term, we do not expect to see a significant upturn in capital spending and will continue to implement cost-cutting measures, as necessary, to better align our operations with business conditions." It also said it would shut down for two weeks this quarter. These comments followed a warning at the end of January and only added to the bearish evidence piling out of the sector. However, the Semiconductor Index (SOX) actually spent most of the day in the green, as investors were apparently expecting even worse things from AMAT. The SOX eventually gave in with the broad market sell-off, dropping two points on the day, but if not for that heavy pressure, very well could have ended positively. After the bell, TMP Worldwide, parent of Monster.com, pulled its guidance for 2003, saying, "The fragile economy and the unpredictability of world events make it imprudent to discuss specific guidance. Any prior guidance is therefore not applicable." While we have seen nothing to make us anything but bearish, we have to start thinking about a bottom. Things looked awfully ugly before big rebounds in July and October, as well. Those bounces both eventually failed, as we are approaching the lows once again, but after a sell-off of over 1000 Dow points, a bounce making up less than 1/2 of that drop can whip us around by 500 points very quickly. I am not predicting that bounce in the immediate future, but the possibility grows greater with each leg down. Bears can be comforted by the fact that we did consolidate for a while in the 7950-8150 range and that could have been our bounce. If that is the case, then the drop could be much steeper than the H&S patterns indicate. However, my guess is that when it comes, it may run a little more than 200 points. For right now, any short-term rallies have been good shorting opportunities and until that trend changes then we should go with it. Traders should continue to watch the bullish percents, because if we do reverse up at the same time we begin to bounce, then that may be our first signal that the tide may be turning. Until then, lean short, but stay cautious. ************ FUTURES WRAP ************ Fearing the Future By John Seckinger jseckinger@OptionInvestor.com With Geopolitical events becoming a daily occurrence, are the futures contracts pricing in enough worry as the aura of uncertainty grows? Wednesday, February 12th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7758.17 -84.94 7854.62 7753.71 YM03H 7735.00 -104.00 7845.00 7729.00 29,194 Nasdaq-100 956.77 -14.84 978.06 956.57 NQ03H 958.50 -13.50 979.50 957.00 196,557 S&P 500 818.68 -10.52 831.91 818.49 ES03H 816.75 -13.00 831.50 816.25 621,239 Contract S2 S1 Pivot R1 R2 Dow Jones 7687.92 7723.04 7788.83 7823.95 7889.74 YM03H 7654.00 7694.00 7770.00 7810.00 7886.00 Nasdaq-100 947.00 959.50 975.00 987.50 1003.00 NQ03H 942.50 950.50 965.00 973.00 987.50 S&P 500 809.61 814.15 823.03 827.57 836.45 ES03H 806.25 811.50 821.50 826.75 836.75 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 830.00/831.00, exit 826.50, change +4.00 Short 826.50, exit 822.50, change +4.00 Short 822.50/823.25/823.75, exit 824.25, change -1.08 Total for the day: +6.92 Total for the week: +11.17 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 bearishness continued once again on Wednesday, as traders allowed the ES contract to get 0.50 from the daily pivot before sending prices down to the support are of 821. This level not only becomes resistance, but it is the daily pivot for Thursday. The intermediate objective of 805 is still intact, and only a close above 839 should change this perspective. The daily S2 level is at 806.25, so we could get close to this 805 level during the next few days of trading. Along the way, I definitely expect the 811 to 815 area to act as a "support zone" and be used for traders to square positions temporarily. From a bullish point of view, a move above the daily pivot and the 822.25 area (50% of two daily retracement levels) will most likely have shorts covering and bears less aggressive until either resistance is tested (daily R1 at 826.75) or the daily pivot is cleared to the downside and a failure materializes. Chart of ES03H, Daily A 5-minute chart of the ES contract shows the aggressive bearish channel containing prices over the last few days. Note that, if the daily pivot is cleared, this channel should be broken as well. The bottom of the channel currently comes in at the 811 to 815 support zone area, increasing this areas significance. At current levels, the risk/reward is not great; therefore, I will look for either a roll down from the pivot or a bounce upwards if the daily S1 is reached (811.50). Remember, once 811 is cleared, then the "zone of support" become the "zone of resistance." Chart of ES03H, 5-minute Bullish Percent of SPX: 39.80% after falling 1.60% on Wednesday. The column of O's is now at 12. I still expect a move in the bullish percent to the 30% level. This indicator is currently in "Bull Correction" status. Looking at P&F analysis, the SPX contract reversed back into a column of O's on Wednesday, and this sets up for a buy signal if 845 is reached. The 845 level is the quadruple bottom level, and solid short covering should take place if this level is now reached. Nevertheless, least resistance is still lower, with support seen from 805 to 810. The bearish price objective remains at 750. The March E-mini Nasdaq 100 Contract (NQ03H) The NQ contract set a lower low and lower high versus Tuesday's session, and this contract is once again edging towards the 941.50 objective. The NQ is also below both the 50% area of two daily retracement levels and Thursday's pivot (961.75 and 965, respectively). If 965 is cleared to the upside, there will most likely be a short-covering move. Will the move end up above 983? If bearish, this would not be a good sign. Speaking of being bearish, the MACD oscillator is still in bearish mode, most likely representing bulls on the sidelines waiting for either the Geopolitical uncertainty to end (which, as we saw in 1991, doesn't mean the market will immediately rally) or until a perception of value is reached. I think 941 is a good beginning when looking for value. Chart of NQ03H, Daily The following 15-minute chart of the NQ03H contract shows the formation of a Head & Shoulders pattern and its objective of 938.25. This 938.50 area would come close to the intermediate rising bullish support line in the chart above (thick blue line). As the chart shows, a move above the daily pivot would take prices above the neckline and most likely signal to shorts that is makes sense to take a breather. Also noted is S1 at 950.50, and can be used by aggressive traders. Chart of NQ03H, 15-minute Bullish Percent for NDX: This indicator fell one percent on Wednesday to 38, and added to the column of "O's" (now at 14). . This indicator is in "Bear Confirmed Status". Note: The NDX, according to P&F charts, still shows resistance at 1000 and support below at 925. The bearish objective is 825. On Wednesday, the NDX did not trade 950 and add another "O" to the recent column. The March Mini-sized Dow Contract (YM03H) The YM contract actually shows the most bullishness of all three contracts, closing within a solid "support zone" as well as at the bottom of a descending support line (blue). The same theory, however, applies to the YM contract as well. A move above the daily pivot should send the contract to 7810, but if the pivot is cleared to the downside (failure) before 7810 is reached, I would then look for more downside pressure. Once under 7730 (five- minute close), look for support at the daily S1 (7694). On Thursday, there is always the possibility that this downward move will go into a more "vertical" state; therefore, if 7694 is cleared, by all means look for 7654 to be hit while keeping a tight stop. I would then go flat at the end of the day, since such "verticalness" could mean capitulation. Chart of YM03H, 120-minute Bullish Percent of Dow Jones: A P&F chart of the Dow added another "O" on Wednesday, lowering the bearish price objective to 7400. The quadruple bottom remains higher at 7950, and should be defended by bearish traders protecting profits. Support is now seen at 7600. As far as the bullish percent is concerned, it fell 3.33% to 16.67%. The column of O's is now at twenty-one. Note: The last column of O's ended at 10%. Moreover, the next column of X's will put this indicator in "Bull Alert" status. Good Luck. Questions are welcomed, John Seckinger ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_021203_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Babson Fund Group Our Weekly Fund Family Profile this week looks at the Babson Fund Group, which manages and administers 10 pure no-load mutual funds across the three asset classes. David L. Babson & Co., Inc. acts as the investment advisor to the Babson Funds, while another fund affiliate, Jones & Babson, Inc. serves as the underwriter and the distributor of the Babson Funds. David L. Babson & Co. has been managing assets for institutional clients for more than 60 years. Since its founding in 1940, Babson has grown to become one of the leading money managers in the U.S. with more than $70 billion in assets under management and a staff of over 500. The DLB website (www.dlbabson.com) indicates that the firm's predominant strategy is one of "fundamental analysis." Investment decisions are made, they say, using in-depth, internal research. Based in Cambridge and Springfield, Massachusetts, Babson and its subsidiaries have clients throughout the U.S. and worldwide. Babson launched its first mutual fund, Babson Growth Fund in 1959 and today offers 10 distinct mutual funds with different risk and reward opportunities. In managing the mutual funds, Babson takes a conservative approach to both equity and fixed income portfolio management similar to the way it manages assets for institutional accounts. The Babson Funds believe their first responsibility is to avoid taking unnecessary risks with investors' money. They're long-term investors who invest in high quality securities to help preserve capital while still offering investors a range of growth and income opportunities. Part of the appeal of the Babson Funds is their 100% no-load cost structure and low minimum initial investment of $1,000. Babson's mutual funds are pure no-load funds, meaning they impose no sales or redemption charges, or 12b-1 fees. Babson is also a member of the Mutual Fund Education Alliance, an organization that seeks to educate the public about the benefits of direct-purchase, no-load fund investing. For more information on the Babson Funds' lineup or to download a prospectus, go to www.babsonfunds.com. Fund Overview The Babson Fund Group currently offers 10 mutual funds to retail investors across the range of asset classes including six equity funds, three fixed income funds and one market money fund. D.L. Babson & Co., the firm's investment arm, built its reputation in stock investments, mostly large-cap equities. The Babson Growth Fund (BABSX), started in 1960, seeks growth of capital over time by investing in reasonably priced high-quality growth companies. Here Babson emphasizes larger-sized companies with consistent records of increasing net earnings and dividends. Most investments are in the giant-cap and large-cap ranges, with the fund's top five holdings at year-end 2002 being AIG, Freddie Mac, Medtronic, Pfizer and Amgen. At $183 million, the Babson Growth Fund is one of three funds to be valued at more than $150 million in assets today. The Babson Enterprise Fund (BABEX) started operations in 1983, and has $175 million in assets today. It seeks long-term growth by investing in stocks of smaller-size, faster growing companies whose stocks are realistically priced at the time of purchase. Typically the fund will hold stocks of companies with market values of between $15 million (micro-cap) to $500 million (small-cap). The Babson Enterprise II Fund (BAETX) came out in 1991 and is comparable to its older sibling except that the market capitalization range of stock holdings is between $250 million and $1 billion. Babson Value Fund (BVALX) was launched in 1984 and currently has the most assets of any Babson fund today, at $347 million. This fund seeks long-term growth consistent with a conservative value strategy. Its value orientation is evident in its below average P/E ratio relative to the overall market (S&P 500). That offers investors some protection from market declines and fluctuations. The value-driven Babson Shadow Stock Fund (SHSTX) was started in 1987. It uses a value approach to invest in the smallest stocks. This generally means micro-cap stocks with market values of $175 million or less. Babson Stewart Ivory International Fund (BAINX) is a partnership between David L. Babson & Co. and Stewart Ivory & Company. Note though that this fund has had its share of problems and received a new manager and strategy as of October 2002. Morningstar says that has created some uncertainty there. For a mutual fund that has been around since 1988, its assets stand at just $12 million today. Below is a summary of the Babson Funds by investment class: Babson Equity Funds: Babson Growth (BABSX) Large-Cap Growth Babson Value (BVALX) Large-Cap Value Babson Shadow Stock (SHSTX) Small-Cap Value Babson Enterprise (BABEX) Small-Cap Value Babson Enterprise II (BAETX) Small-Cap Blend Babson Stewart Ivory International (BAINX) Foreign Stock Babson Fixed Income and Money Market Funds: Babson Bond Trust - S (BBDSX) Intermediate-Term Babson Bond Trust - L (BABIX) Intermediate-Term Babson Tax-Free Income (BALTX) Muni National Long-Term Babson Money Market (BMMXX) Money Market Four income-oriented funds complement the six Babson equity fund products. Babson Bond Trust - S (BBDSX) seeks high income, with reasonable stability of principal, by investing in bonds with an average quality rating of AA. AAA- and AA-rated bonds represent the two highest rungs of the investment-grade classification and are considered to be "high-grade" securities. It is designed to appeal to more risk-adverse investors due to its focus on short- term maturities. Babson Bond Trust - L (BABIX) seeks to provide a slightly higher level of income than its short-term sibling by investing in intermediate-term, high-grade debt securities. Fund Performance Of the nine Babson equity and bond funds tracked by Morningstar, only one currently sports an above average (4 stars) or high (5 stars) rating from the funds tracker for relative risk-adjusted performance. Compared to its small-cap blend peers, the Babson Enterprise II Fund has produced average-to-above average return through the years with a below average-to-average level of risk, earning it a Morningstar overall rating of 4 stars. For the trailing 10-year period through January 31, 2002, Babson Enterprise II Fund had a 8.9% average annual return, compared to just 6.5% a year for its index benchmark, the Russell 2000 index. This fund has benefitted from stable management, and an emphasis on profitable, established small-cap companies that are dominant in their industries. Portfolio manager, Lance F. James has been D.L. Babson since 1986. Today, he is an Executive VP, and heads Babson's small-cap investing effort. Below are trailing 5-year returns and category rankings according to Morningstar as of Tuesday, February 11, 2003 for the different Babson mutual funds. 5-Year Annualized Returns (February 11, 2003): -6.8% Babson Growth (BABSX) 72nd Percentile -3.0% Babson Value (BVALX) 62nd Percentile +3.1% Babson Shadow Stock (SHSTX) 26th Percentile +2.6% Babson Enterprise (BABEX) 35th Percentile +0.7% Babson Enterprise II (BAETX) 40th Percentile -8.6% Babson Stewart Ivory Int'l (BAINX) 90th Percentile +5.7% Babson Bond Trust - S (BBDSX) 68th Percentile +5.6% Babson Bond Trust - L (BABIX) 73rd Percentile +4.8% Babson Tax-Free Income (BALTX) 28th Percentile 10-Year Annualized Returns (January 31, 2003): +5.8% Babson Growth (BABSX) 57th Percentile +9.1% Babson Value (BVALX) 34th Percentile +9.4% Babson Shadow Stock (SHSTX) 50th Percentile +9.1% Babson Enterprise (BABEX) 57th Percentile +8.9% Babson Enterprise II (BAETX) 48th Percentile +1.7% Babson Stewart Ivory Int'l (BAINX) 87th Percentile +6.0% Babson Bond Trust - S (BBDSX) 81st Percentile +6.2% Babson Bond Trust - L (BABIX) 68th Percentile +5.5% Babson Tax-Free Income (BALTX) 58th Percentile As you can see, Babson's performance has generally been average, with some funds doing a little better than average while others lagged their category peers. Babson's trailing 10-year returns are respectable, not great relative to similar funds, according to Morningstar's rankings. When you look at the 10-year return figures, however, you do see some consistency, with four equity funds averaging between 8.9% to 9.4% over the past 10 years per Morningstar. The flagship Babson Growth Fund has struggled at times and over the past 10 years has produced an average annual return of just 5.8%, ranking it in the 57th percentile of the large-cap growth category. Controlling risk has been a prime focus, but returns have still lagged similar funds by a small margin. The same is true for the two bond funds in the Babson Bond Trust. Here you can see the difference a few basis points makes in the world of fixed income investing, with a 6.2% annualized return earning a 68th percentile ranking and a 6.0% annualized return ranking in the intermediate-term category's 81st percentile. According to Morningstar, average intermediate-term bond fund had an average annual return of 6.5% for the same 10-year period. So a little bit off there too on a relative basis to category peers. Conclusion Overall, the Babson Fund Group has delivered decent returns for investors and largely achieved fund objectives. Performance in relation to similar funds could be a little better overall, but on the other hand it hasn't been that bad with the exception of Babson Stewart Ivory International Fund, which has struggled in the last five years. The new manager and strategy adopted last October hasn't revived the fund. During the past three months, returns have ranked in the bottom decile of the foreign equity category, per Morningstar. Because Babson takes a long-term perspective in managing money, their funds are appropriate for long-term financial plans, such as the accumulation of wealth, college savings, and retirement. If you share the firm's long-term perspective, the Babson Funds have a few options worth considering for long-term investments. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org *********** OPTIONS 101 *********** Fixated on the VIX by Mark Phillips mphillips@OptionInvestor.com Regular readers of this column know that I pay a lot of attention to the VIX, trying to unearth clues to the direction of the broad market. If you've been following the Market Monitor over the past few weeks, you've been treated to a regular series of comments from Linda Piazza, Kent Barton and Steven Price. Some of Linda's recent comments got us to talking about the VIX and to what degree technical indicators and chart patterns can be reliably used on the VIX. The primary reason why this is even a subject for debate is that the VIX is not a tradable vehicle. It's fluctuations are actually derived from action in the options market, which is really derived from fluctuations in the price of the S&P 100 index (OEX.X). If looking for more details than any rational human should want to know about the creation of the VIX, feel free to check out the links below, where I went into great detail about how this index is calculated. Measuring the Mood of the Markets VIX Details for the Masochist But I don't want to talk about any of the basis of the VIX today. While interesting to those with a mathematical bent, the important question for traders to answer is "How do I use the VIX?" That is the question about which Linda and I have debating recently. Before I delve into this important topic though, let's take a short detour into an interesting observation I came to. Linda and I both come from a fairly solid mathematical background, with a bent towards the realm of Physics. I've reflected in the past that oscillators (in one way of thinking of them) are a measure of the rate of change of price action. Relating this to the world of physics, there may be an interesting parallel. Speed or velocity of an object is a measure of the rate of change of position. Or for those of you with an advanced math background, velocity is the derivative of position. Remember that? Well, how about this? Acceleration (the rate of change of velocity) is the derivative of velocity. Simple calculus gives us a mathematical relationship between position, speed and acceleration in the realm of physics. So what does any of this have to do with the VIX? Well the option market is part of the "Derivatives" market, and the VIX is really a derivative of the options market. So my inquisitive mind asked the question, "Is there a mathematical relationship between the price of the OEX, OEX options and the VIX that is roughly equivalent to the relationship between position, velocity and acceleration in the Physics world?" It may be a silly question, and probably uninteresting to many of my readers, but these are the strange kinds of questions that tend to occur to me late at night when I should be staring at the backs of my eyelids. I don't want to dwell on the issue too much here today, but if any of you have any bright ideas or thoughts on the subject, I'd certainly be interested to hear them. Hey, I'll bet Linda would find it interesting too! Alright, let's get back to the subject at hand, that of how do we use the VIX. The basic question that Linda and I have been debating is "Since the VIX is really derived from the price action in other vehicles (OEX and OEX options) how reliably can we apply the study of chart patterns, oscillators and the use of moving averages?" I think Linda fired the first volley in this debate a few months ago, when she started following the action of the VIX as it related to its 200-dma. That didn't really get my attention, because at the time, I didn't see the 200-dma as providing much meaningful information with respect to the support/resistance being observed in the VIX. But it was enough to get my attention and I started looking at the VIX and its 200-dma. Then a funny thing happened. I noticed that the 200-dma seemed to act as a reference point from which the rubber band (VIX) tended to get stretched, with particularly interesting results when it was stretched to the downside. I made note of this in the LEAPS column commentary back on January 26th, and I've copied the pertinent part of my observations here. The one thing I do know is that throughout the time period from 1998 through late 2002, the 200-dma of the VIX tended to oscillate around the 25-26 area, sometimes rising as high as 29-30, and sometimes dropping as low as 23.50. But throughout that period of time, it remained confined to this range. But something interesting happened in the latter half of the year we just closed out. The VIX soared above 30 in early July and it took nearly 4-1/2 months to come back under that level. In the intervening span of time, the 200-dma rose through the 30 level for the first time ever and continues to rise, now at 33.01. I looked at all the historical data for the VIX, and found that it has never been more than 8 points below its 200-dma. That occurred back in July of 2001, with the VIX at 20 and the 200-dma at 28. Doing a quick calculation from that difference, I come up with a minimum possible VIX (with the 200-dma at 33) of 25. Allowing for the increase in the baseline with the 200-dma now at 33 (a percentage increase of just under 18%, I come up with a maximum possible deviation from the 200-dma of 9.4. That means that with the 200-dma at 33, the absolute minimum VIX we could see would be around 23.5. See the logic there? Throughout the past 5 years, the position of the VIX's 200-dma has helped to define a floor for the VIX itself. Up until recently the 200-dma has been confined to a pretty steady range between 23-29, and that has helped to keep the VIX in the 20-30 range most of the time. But with the significant increase in volatility in the overall market in recent months, the 200-dma is persistently rising (now just below 34) and the net result is that the floor for the VIX is also rising. So I think the 200-dma of the VIX is an important indicator, but not necessarily as an absolute support or resistance level. Linda made another interesting observation last month, when she pointed out the potential for a double bottom formation near the 26 level. Sure enough, that seems to have been a very prescient observation, as the VIX soared through the 36 level (the peak between the two valleys of that formation) in late January, and since then has used that level as support. Another interesting observation as it pertains to that double bottom formation is the fact that Stochastics gave pretty solid "Buy" signals as it moved up from the 26 area, both in late November and then again in the middle of January. However, note that when the Stochastics rolled over from overbought in both early December and then in late January, those "Sell" signals were much less reliable. So perhaps the Stochastics (and other oscillators) can provide solid "trading" signals, but only in the direction of the primary trend. Finally, the descending trendline on the VIX from the July and October highs appears to be an important level, as it has continued to cap the upwards move in the VIX, even with the broad markets continuing to break support levels, getting closer and closer to the October lows. My expectation is that the VIX will eventually break above that trendline, and when it does, should come with some force. Remember that I've occasionally talked about the PnF chart on the VIX. It is telling us something interesting as well, as a print at 41 would be another PnF Buy signal. we've been close a couple of times in the recent past, but I think it is interesting that it hasn't been reached just yet. Another important clue? Time will tell! So what do we know now that we didn't know 1400 words ago? I'm not sure we can draw any firm conclusions, but it certainly appears that there is merit to applying our tried and true knowledge about technical analysis to the VIX. Any observations we draw there should be used in the context of other observations we make directly on price action in the OEX, but I would view chart patterns and indicators on the VIX as just one more tool that we can use in our pursuit of understanding what the market is trying to tell us. Today's discussion isn't so much about providing a definitive answer as it is about opening a new door in the process of discovery. I hope you found this as provocative as I did. If nothing else, it sure is interesting! Questions and observations are certainly welcome! Mark ************** TRADERS CORNER ************** Let's make that "Gold: Some Strategies and Vehicles" By: Jon Levinson Hi Jon, To diversify his portfolio, an acquaintance just plunked down $185,000 to buy 500 ounces of gold through his private banker. I assume he was staking the "recommended" 5-10% of his portfolio in the revived metal. I cannot help thinking that from a capital utilization standpoint, there must be a better way to achieve the same objective without having to actually put the entire sum into this investment at one time. My own thinking was that if he exercised discipline with available leverage, he had various options, including the following: Buy distant gold futures (5 contracts) for an approximate margin of $7,000. Put an additional $28,000 into the margin account to cover $56/ounce worth of drawdowns if gold retraces. At worst, put the remaining $150,000 into t-bills but perhaps better, use other yield strategies, such as option-spreads on low-gold- correlation assets to earn better absolute returns. Or he could sell short-term out-of the money calls on the gold futures on a hopefully recurring basis. The other possibility that occurred to me as I was writing this is to sell deep in the money puts on gold (futures? XAU?) with the safety margin tucked away? Is buying 'physical' gold better because if all goes to h!, financial exchanges collapse etc, the gold futures might be "worthless"? Could that happen? Could I get your take on what would have been, theoretically speaking, the correct way to analyze this issue, and the 'smart' way of using the available capital (besides buying the corner pub of course). Many thanks....SR This is a great question. First things first- I believe that the margin requirements were changed last week, and $1500 per contract is now $2025 per, if I'm not mistaken. However, whatever the exchange margin requirements are, your own contractual margin requirement with your broker will vary, and the easiest way to verify this important detail is with a call to your broker. That said, the sagacity of your friend's decision will depend in large measure on the scenario for which your friend is attempting to plan. As with any investment, the underlying motive is of prime concern, and for sophisticated traders, the actual execution is more of a mechanical response to that idea. With experience comes the almost robotic selection of the trading vehicle, the trigger points for entry and exit, the size of the full position, etc. As Doug Cliggott put it in an interview a few weeks ago, a true "hedge fund" is one which hedges ideas, and not merely trading vehicles. For this reason, it's difficult to assess your friend's decision on the simple facts as described above. Furthermore, without knowing the size and composition of his portfolio, it's impossible to know what proportion of the total his gold investment represents. We will assume, as do you, that it represents 5-10% of the total. Investors purchase gold for a variety of different reasons. As always, some invest in gold as a hedge against their "paper" investments, others to catch the momentum of the current trend, others still as a "put" on the entire financial world. I wish to examine these different motives with reference to your question, as the motive or idea will determine the appropriate vehicles. One of my favorite quotes about gold is from Peter Smith, VP at JP Morgan Chase: "Gold is nobody else's paper." Unlike bonds, stocks or currencies, gold's value is not dependent on the health, solvency, or honor of any counterparty. Gold is not backed by the full faith or credit of any company, debtor, government or other authority. If anything, its value is inversely correlated to the financial health of companies, governments and other debtors. To this extent, gold as a commodity does well in times of inflation, and it is free of default risk in times of deflation, making it a comparatively stable store of wealth. While the price of gold is subject to swings, most would want to have gold and silver in their pocket if taking a ride in a hypothetical time machine. How much cash will be enough in 1000 years? Which currency? Gold, however, has always been gold, and its value has been stable relative to other "things" throughout the millennia. Most of us, however, aren't planning for a time machine ride any time soon and storing our wealth in gold and silver for that purpose isn't high on the list. However, we see gold coins and jewellery handed down from generation to generation for this very reason. From an investment perspective, however, this type of planning is in most cases peripheral. The advantage sought by most investors in physical gold is for security, portability and durability. Gold is not as susceptible to the elements as cash or other paper. As well, it needn't be stored in a bank or in an account. In the event of a serious dislocation or "bank holiday", any kind of systemic breakdown, the gold in one's possession is handy and portable. An investor who is "building an ark", as Buzz Lynn puts it, will select gold and silver for this reason. However, it's rare to hear of investors storing all of their wealth in physical metal, given the relative unlikelihood of a systemic breakdown to that degree. Nevertheless, as our fellow investors in Argentina know, never say never. Other investors choose gold because it's in an uptrend and it pays to be long whatever market is rallying at the time. Investors seeking to increase their profits on the run in gold can choose from a multitude of different instruments, from futures to XAU options to shares of gold miners to investment funds to equity mutual funds. Each vehicle has its own relative advantages and disadvantages. The one central distinction between these investments and physical gold itself is that these "paper" assets are dependent on the investor's ability to "cash out" one day. In the interim, they are "electrons on a screen", which under the vast majority of circumstances is just fine, but again, never say never. Your alternative of using gold futures instead of simply plunking down $185K on physical gold is vulnerable in this way. Equities, whether the XAU, shares of individual miners, or mutual funds comprised of mining stocks and related securities tend to offer leverage on price moves in the underlying price of gold. The simplest explanation for this leverage is that the share price of a mining stock is based on the company's inventory of gold and its production, with the "premium" implied by the p/e ratio. The result is best seen below in the comparison between the price of gold and the price of the Amex Gold Bugs Index (HUI): Of course, the flipside of leverage is that what gets levered up can also be levered down, and for this reason, investors need to exercise caution in allocating their portfolios to gold miners. Somewhat of a middle ground is offered by "hedged" mining stocks, comprised of companies such as Barrick (ABX) and Placerdome (PDG), among others, which maintain bearish gold positions on their books, often by selling calls or other such obligations against the price of gold. In a rising gold market, these companies will underperform "unhedged" miners, but in a falling gold market, they fall relatively less. The Precious Metals Index (XAU) is relatively overweighted with hedged miners, and the results can be seen below. Compare this to the chart of HUI above, as HUI is comprised principally of unhedged miners. It has outperformed the XAU dramatically through this most recent bull run in gold. For option traders, the XAU is optionable. I have never traded it, not just because of the low volume/ open interest/ wide spreads, but also because of my own time horizon. I am a precious metals investor based on the intermediate to long term fundamentals of gold. Most of my position is made up of gold equity mutual funds, most of which is based on unhedged miners, but one which contains exposure to some hedgers. In this manner I can allow the trend to assert itself without having to deal with time or premium concerns. Although I never say never and have a part of my position in gold and silver coins, it is a small one. I maintain that position, as well as a position in CEF, which is a fund that warehouses physical gold and silver, to provide stability against the wider swings in my equity funds. The investor who purchased 500 physical ounces had something in mind, and it might well have been to build an ark in the event of financial flood. Investors of such a mind are unlikely to put on their position using gold futures or XAU options, given that these are exposed not just to premium decay, but also to the possibility of systemic failure. Had more rapid profit been his priority with the entirety of that position, he would have looked at options, futures, equities or equity funds, or some combination of the above. In choosing your own strategy, it's fundamental to understand why you're considering precious metals. From there, selecting from the variety of different vehicles should flow naturally. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Bleeding Continues The trend continues. We have been ratcheting our way down ever since breaking out of congestion a week ago. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* 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 Wednesday 02-12-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Put - AT Big Cap Covered Calls & Naked Puts: Down, Down, Down We Go... Updated on the site tonight: Market Posture: Repeat Performance Market Watch: Elevator Down ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* 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: Amazingly, our AT play just continues along its trend of lower highs and lower highs, with rally attempts looking feeble at best. Since the failure at the 200-dma on February 3rd, AT has hit a posted a lower low every day and is looking pretty oversold right here. But it looked oversold a week ago too. Proof that oversold can always become more oversold. At this point, gaming new entries is a tough proposition, as there hasn't been enough of a bounce in the past week to provide a solid risk/reward proposition, especially with the PnF bullish support line at $44. It looks like that support is about to break, and AT came close on Tuesday with a low print of $43.30. Looking at the hourly chart shows that the stock has repeatedly been turned back each time it has tested the descending trendline that began in early January, so that's where we'll define a possible new entry point. A failed rally attempt below this trendline (currently $44.50) can be used for new entries, but keep in mind that we're now starting to get aggressive with our stop, lowering it to $45.10 tonight. Why This Is Our Play of the Day: AT did finally breakthrough its bullish support and there looks to be little support between current levels and $40. The stock received a backhanded upgrade this morning, with UBS raising it to a buy and also lowering its 12 month price target by five dollars. That eventual target was lowered from $57 to $52, but it does not look like AT has much of a chance of achieving that level anytime soon. We particularly like today's failed rally following that upgrade, which fell short at the trend line described in the last write-up at $44.50 and eventually landed the stock in the red once again. Because the stock looks oversold, much like the rest of the market, we think a move below the recent bottom at $43.30 would provide for additional entries. If it manages to break down to new lows, even after the upgrade, it looks like $40 could be the next test in the near future. If we get a market bounce, then traders should wait for a failure below that trend line once again to target new entries. *** February contracts expire in two weeks *** BUY PUT FEB-45 AT-NI OI= 202 at $2.25 SL=0.75 BUY PUT MAR-45 AT-OI OI= 159 at $3.10 SL=1.25 ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Down, Down, Down We Go... By Ray Cummins Stocks moved lower Wednesday amid growing fear of terrorism and concerns over the impending war with Iraq. The Dow Jones Industrials Average slumped 84 points to 7,758 with General Motors (NYSE:GM) leading the slide after Banc of America issued a "sell" rating on the blue-chip component. The NASDAQ fared only slightly worse, down 16 points to 1,278 as chip and computer hardware stocks succumbed to the downside pressure amid a mediocre quarterly report from semiconductor-equipment maker Applied Materials (NASDAQ:AMAT). The S&P 500 Index declined 10 points to a new four-month low at 818 on weakness in media, drug, oil, gold and utility shares. Paper and retail were among the few groups enjoying gains. In the broader market, losing issues outnumbered advancing issues by more than 2 to 1 on the both the New York Stock Exchange and the NASDAQ. Trading volumes were light, with about 1.2 billion shares traded on the Big Board and 1.2 billion shares changing hands on the technology exchange. In the bond market, prices climbed higher despite weak demand at the government bond auction. The yield on the benchmark 10-year bond eased to 3.91%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 2/11/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, 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 editor of this section does not take actual positions in any published plays and the summary comments are 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 in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with new option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ASA FEB 35 34.45 38.50 $0.55 4.44% 1.60% COF FEB 25 24.35 29.71 $0.65 7.31% 2.67% IGEN FEB 35 34.05 38.57 $0.95 8.27% 2.79% INVN FEB 22 22.05 26.50 $0.45 6.32% 2.04% PHM FEB 45 44.05 50.13 $0.95 5.39% 2.16% AMGN FEB 47 46.30 53.45 $1.20 5.40% 2.59% CEPH FEB 45 44.15 50.78 $0.85 5.04% 1.93% AMGN FEB 47 46.90 53.45 $0.60 3.66% 1.28% AU FEB 30 29.55 33.34 $0.45 4.94% 1.52% CEPH FEB 45 44.25 50.78 $0.75 5.18% 1.69% SYMC FEB 40 39.45 45.21 $0.55 4.22% 1.39% COP FEB 45 44.45 48.51 $0.55 4.35% 1.24% CYMI FEB 30 29.20 30.48 $0.80 9.95% 2.74% DISH FEB 22 22.20 25.14 $0.30 5.19% 1.35% FTE FEB 22 22.20 25.09 $0.30 5.86% 1.35% MERQ FEB 30 29.75 33.74 $0.30 5.03% 1.01% MUR FEB 37 37.10 43.69 $0.40 4.12% 1.08% QCOM FEB 35 34.40 37.65 $0.60 6.20% 1.74% AVCT FEB 25 24.75 26.60 $0.25 5.40% 1.01% FTE FEB 22 22.20 25.09 $0.30 7.60% 1.35% MERQ FEB 30 29.70 33.74 $0.30 6.16% 1.01% PTEN FEB 30 29.65 32.90 $0.35 6.04% 1.18% As noted in last week's summary, losing positions in Accredo Health (NASDAQ:ACDO) and Biosite (NASDAQ:BSTE), as well as the (profitable) position in Genzyme General (NASDAQ:GENZ), have been previously closed. Cymer (NASDAQ:CYMI), Capital One Financial (NYSE:COF) and Anglogold (NYSE:AU) are now on the watch-list. Naked Calls Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield EXPE FEB 75 76.25 62.44 $1.25 6.84% 1.64% MBG FEB 30 30.65 25.44 $0.65 6.68% 2.12% QCOM FEB 42 43.05 37.65 $0.55 5.07% 1.28% CCMP FEB 60 61.15 41.78 $1.15 6.10% 1.88% KLAC FEB 45 45.80 32.10 $0.80 6.83% 1.75% LLTC FEB 32 33.25 27.07 $0.75 6.68% 2.26% QLGC FEB 47 48.40 33.29 $0.90 6.19% 1.86% CDWC FEB 50 50.55 42.59 $0.55 4.59% 1.09% CTSH FEB 65 65.75 66.00 ($0.25) 0.00% 1.14% * NVLS FEB 37 37.85 27.78 $0.35 5.41% 0.92% EXPE FEB 70 70.45 62.44 $0.45 3.20% 0.64% ZBRA FEB 60 60.75 56.76 $0.75 5.77% 1.23% CTSH FEB 70 70.65 66.00 $0.65 7.91% 0.92% KLAC FEB 37 37.75 32.10 $0.25 5.49% 0.66% NVLS FEB 32 32.75 27.78 $0.25 5.96% 0.76% The more aggressive position (short $65 call) in Cognizant Technologies (NASDAQ:CTSH) should be closed to limit losses. Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status SLM 106.71 104.16 FEB 90 95 0.50 94.50 $0.50 Open AGN 60.51 59.63 FEB 50 55 0.50 54.50 $0.50 Open BRL 77.63 74.83 FEB 65 70 0.40 69.60 $0.40 Open FIC 44.63 48.47 FEB 35 40 0.45 39.55 $0.45 Open AET 44.21 43.40 FEB 35 40 0.50 39.50 $0.50 Open BR 42.71 44.94 FEB 37 40 0.25 39.75 $0.25 Open MMM 127.50 123.08 FEB 115 120 0.55 119.45 $0.55 Open BLL 52.73 51.91 FEB 45 50 0.40 49.60 $0.40 Open EBAY 74.93 73.40 FEB 65 70 0.55 69.45 $0.55 Open BHE 34.68 34.26 MAR 25 30 0.60 29.40 $0.60 Open GYI 30.85 30.46 FEB 25 30 0.60 29.40 $0.60 Open MUR 42.63 43.69 FEB 37 40 0.25 39.75 $0.25 Open As previously noted, P.F.Chang's (NASDAQ:PFCB) close below the sold strike at $35 signaled our exit in the losing position. Getty Images (NASDAQ:GYI) will be a candidate for early exit on any daily close below $29.50. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status HET 37.47 32.95 FEB 42 40 0.40 40.40 $0.40 Open PHA 42.00 40.16 FEB 50 45 0.60 45.60 $0.60 Open ZBRA 57.32 56.76 FEB 70 65 0.50 65.50 $0.50 Open ATK 59.65 50.18 FEB 70 65 0.50 65.50 $0.50 Open GS 73.51 65.05 FEB 85 80 0.40 80.40 $0.40 Open PDX 34.40 27.80 FEB 45 40 0.65 40.65 $0.65 Open ABK 55.74 49.59 FEB 65 60 0.50 60.50 $0.50 Open FITB 56.49 52.50 FEB 65 60 0.50 60.50 $0.50 Open GM 37.28 36.05 FEB 42 40 0.25 40.25 $0.25 Open WB 35.72 34.42 FEB 40 37 0.25 37.75 $0.25 Open XL 75.92 71.50 FEB 85 80 0.50 80.50 $0.50 Open FNM 64.10 63.00 MAR 75 70 0.55 70.55 $0.55 Open ONE 35.65 35.17 FEB 40 37 0.20 37.70 $0.20 Open TOT 67.33 64.45 FEB 75 70 0.25 70.25 $0.25 Open? Although currently profitable, Harmon Electronics (NYSE:HAR) was closed when the issue moved above the sold strike at $60. Total Fina (NYSE:TOT) gapped lower last Thursday and never recovered, thus a credit near the target was not available. Calendar Spreads (Reader's Request) Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status APA 60.74 62.08 APR-65C FEB-65C 1.35 1.70 Open STJ 43.69 41.19 APR-45C FEB-45C 1.20 1.00 Open Apache Oil (NYSE:APA) offered an acceptable entry point and the position was profitable after only one week in play. Credit Strangles No Open Positions Synthetic Positions: No Open Positions Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. *************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS 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 order at a price that is no more than twice the original premium received from the sold option. *************** ANF - Abercrombie & Fitch $28.90 *** 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. ANF - Abercrombie & Fitch $28.90 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 27.5 ANF NY 827 0.40 27.10 12.8% 1.5% SELL PUT MAR 25 ANF OE 70 0.60 24.40 6.0% 2.5% * SELL PUT MAR 27.5 ANF OY 173 1.30 26.20 9.3% 5.0% ************** CLX - The Clorox Company $41.00 *** Profits Are Up! *** The Clorox Company (NYSE:CLX) produces and markets non-durable consumer products sold primarily through grocery and other retail stores. The company's Household Products - North America segment includes household cleaning, bleach and other home care products, water filtration products, food storage and trash disposal items marketed in the United States and all products marketed in Canada. The company's household products - Latin America - other segment includes operations outside the United States and Canada, exports and Puerto Rico, excluding European automotive care, and primarily focuses on the laundry, household cleaning, automotive care, insecticides (Brazil and Korea) and food storage and trash disposal categories. In addition, the Specialty Products segment includes charcoal, United States and European automotive care, cat litter, insecticides, dressings and sauces, and professional products categories. CLX - The Clorox Company $41.00 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 40 CLX NH 479 0.30 39.70 6.5% 0.8% SELL PUT MAR 40 CLX OH 92 1.00 39.00 5.0% 2.6% * ************** IGEN - IGEN International $38.59 *** Consolidation Complete? *** IGEN International develops and markets products that incorporate its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of various biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. The product is incorporated into instrument systems and other related consumable reagents, and IGEN also offers assay development and services used to perform analytical testing. Products based on ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. IGEN - IGEN International $38.59 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 35 GQ NG 954 0.35 34.65 9.7% 1.0% * SELL PUT MAR 30 GQ OF 917 0.60 34.40 4.0% 1.7% SELL PUT MAR 35 GQ OG 1,712 1.75 33.25 10.6% 5.3% ************** OTEX - Open Text $28.05 *** Strong Profits! *** 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. The firm's principal product line is Livelink, a collaboration and knowledge management software for global enterprises. Livelink offers 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, the firm also provides professional services, training, documentation as well as technical support services to accelerate its customers' implementation of, and satisfaction with, its products. OTEX - Open Text $28.05 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 25 QFT OE 0 0.50 24.50 4.7% 2.0% * ************** SYMC - Symantec $45.24 *** Up-Trend Intact! *** Symantec (NASDAQ:SYMC) provides a broad range of content and network security solutions to individuals and enterprises. The company is a provider of virus protection, firewall, virtual private network, vulnerability management, intrusion detection, remote management technologies and security services to various consumer groups and enterprises around the world. The company currently views its business in five primary operating segments: Consumer Products, Enterprise Security, Administration, Services and Other. SYMC - Symantec $45.24 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT FEB 45 SYQ NI 2,105 0.95 44.05 17.1% 2.2% SELL PUT MAR 40 SYQ OH 422 0.85 39.15 5.1% 2.2% * SELL PUT MAR 45 SYQ OI 296 2.35 42.65 9.6% 5.5% ************** VIP - Vimpel-Communications $33.66 *** Strong Telecom! *** Vimpel-Communications (NYSE:VIP) is a current provider of telecommunications services in Russia, operating under the Bee Line family of brand names. VimpelCom's license portfolio covers approximately 70% of Russia's population (100 million people), including the City of Moscow and the Moscow Region. VimpelCom introduced two digital cellular communications standards to Russia and built a dual band GSM-900/1800 cellular network. The company also led the development and emergence of the mass consumer market for wireless communications in Russia by introducing a prepaid product solution. In 2000, VimpelCom introduced new technologies, such as wireless application protocol and BeeOnline, a multi-access Internet portal that offers a multitude of wireless information and entertainment services, including location-based features. VIP - Vimpel-Communications $33.66 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 30 VIP OF 255 0.60 29.40 4.7% 2.0% * ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** PRX - Pharmaceutical Resources $33.67 *** Bullish Trend *** Pharmaceutical Resources (NYSE:PRX) is a holding company that, through its subsidiaries, is in the business of developing, manufacturing and distributing a broad line of generic drugs in the United States. PRX operates primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc., a manufacturer and distributor of generic drugs. PRX's product line consists of prescription and, to a lesser extent, over-the-counter generic drugs consisting of approximately 119 products representing various dosage strengths for 51 drugs. The company also has strategic alliances with several pharmaceutical and chemical companies. PRX markets its products primarily to wholesalers, retail drug store chains, drug distributors and repackagers. PRX - Pharmaceutical Resources $33.67 PLAY (conservative - bullish/credit spread): BUY PUT MAR-25.00 PRX-OE OI=0 A=$0.15 SELL PUT MAR-30.00 PRX-OF OI=30 B=$0.55 INITIAL NET-CREDIT TARGET=$0.40-$0.45 POTENTIAL PROFIT(max)=8% B/E=$29.60 ************** SLM - SLM Corporation $105.54 *** Safe With Sally Mae! *** SLM Corporation (NYSE:SLM), formerly USA Education, is a private source of funding, delivery and servicing support for higher education loans for students and their parents in the United States. SLM provides a range of financial services, processing capabilities and information technology to meet the needs of educational institutions, lenders, students and guarantee agencies. The company's managed portfolio of student loans, including loans owned and loans securitized, totals over $70 billion, of which the majority is federally insured. The firm also has commitments to buy billions of dollars of additional student loans. Primarily a provider of education credit, the company serves a diverse range of clients, including over 6,000 educational and financial institutions and guarantee agencies. The company serves in excess of seven million borrowers through its ownership or management of student loans. SLM - SLM Corporation $105.54 PLAY (very conservative - bullish/credit spread): BUY PUT MAR-90 SLM-OR OI=212 A=$0.60 SELL PUT MAR-95 SLM-OS OI=774 B=$0.95 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$94.60 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option 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 options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very 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 price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** BGEN - Biogen $37.76 *** Downtrend Resumes? *** Biogen (NASDAQ:BGEN) is a biopharmaceutical company principally engaged in the business of developing, manufacturing and marketing drugs for human healthcare. The firm derives revenues from sales of its AVONEX (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis (MS) and from royalties on worldwide sales by its licensees of a number of products covered under patents it controls. In addition, Biogen has a significant number of ongoing research programs and a pipeline of development stage products, including AMEVIVE (alefacept), which is being considered for approval by the United States FDA and regulatory authorities in the European Union and Canada for the treatment of moderate to severe psoriasis. BGEN - Biogen $37.76 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 40 BGQ BH 3,122 0.30 40.30 7.7% 0.7% * SELL CALL MAR 40 BGQ CH 1,215 1.15 41.15 6.7% 2.8% SELL CALL MAR 42.5 BGQ CV 512 0.45 42.95 3.4% 1.0% TS ************** ESRX - Express Scripts $46.90 *** Pre-Earnings Sell-Off! *** Express Scripts (NASDAQ:ESRX) is a pharmacy benefit management company in North America. The company is independent from any pharmaceutical manufacturer ownership, which allows it to make unbiased formulary recommendations to its clients, balancing both clinical efficacy and cost. The company provides a full range of pharmacy benefit management services, including retail drug card programs, mail pharmacy services, drug formulary management programs and other clinical management programs for approximately 19,000 client groups that include HMOs, health insurers, third-party administrators, employers, sponsored benefit plans and government health programs. As of January 1, 2002, some of the company's largest clients included AARP, Aetna U.S. Healthcare and Blue Cross of Massachusetts. ESRX - Express Scripts $46.90 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 50 XTQ BJ 480 1.35 51.35 26.8% 2.6% SELL CALL MAR 50 XTQ CJ 30 2.45 52.45 11.1% 4.7% SELL CALL MAR 55 XTQ CK 593 0.70 55.70 5.1% 1.3% * ************** GM - General Motors $34.02 *** A "Sell" Rating! *** General Motors (NYSE:GM) is a diversified automotive business with interests in communications services, locomotives, finance and insurance. GM's automotive business designs, manufactures, and/or markets vehicles primarily in North America under the Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn and Hummer nameplates, and outside North America under the Vauxhall, Opel, Holden, Isuzu, Saab, Buick, Chevrolet, GMC, and Cadillac nameplates. GM's communications services relate to its Hughes Electronics Corporation subsidiary, which includes its digital entertainment, information and communications services, and satellite-based private business networks. GM also is engaged in the design, manufacturing and marketing of locomotives and heavy-duty transmissions. The firm's financing and insurance operations are conducted through the General Motors Acceptance Corporation, which provides a broad range of financial services. GM - General Motors $34.02 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 35 GM BG 2,161 0.40 35.40 10.4% 1.1% SELL CALL MAR 35 GM CG 5,449 1.40 36.40 8.2% 3.8% SELL CALL MAR 37.5 GM CU 9,073 0.60 38.10 4.6% 1.6% * ************** VIA - Viacom $36.55 *** Sector Slump! *** Viacom (NYSE:VIA), together with its subsidiaries, is a widely diversified worldwide entertainment company. The company owns and operates advertiser-supported basic cable television program services through MTV Networks and BET: Black Entertainment TV and and premium subscription television program services through the Showtime Network in the United States and internationally. The Television segment consists of the CBS and UPN television networks. Infinity's operations are focused on "out-of-home" media with operations in radio broadcasting. The Entertainment segment's principal businesses are Paramount Pictures, which produces and distributes motion pictures. The company operates in the home video retail business, which includes both rental and sale of videocassette and DVD products. The company also publishes and distributes consumer hardcover books. VIA - Viacom $36.55 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL FEB 37.5 VIA BU 520 0.65 38.15 15.3% 1.7% SELL CALL MAR 37.5 VIA CU 323 1.90 39.40 10.0% 4.8% SELL CALL MAR 40 VIA CH 414 0.95 40.95 6.4% 2.3% * SELL CALL MAR 42.5 VIA CV 332 0.35 42.85 3.2% 0.8% TS ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** CCU - Clear Channel Comm. $36.70 *** Media Stocks Slide! *** Clear Channel Communications (NYSE:CCU) is a diversified media company with three business segments, radio broadcasting, outdoor advertising and live entertainment. The company owns, programs or sells airtime for over 1,000 domestic radio stations and two international radio stations and owns a national radio network. In addition, the company has equity interests in various domestic and international radio broadcasting companies. The company is also an outdoor advertising company, with a total advertising display inventory of 149,171 domestic display faces and 549,094 international display faces. Clear Channel is also a diversified promoter, producer and venue operator for live entertainment events and owns or operates over 100 live entertainment venues. CCU - Clear Channel Comm. $36.70 PLAY (moderately aggressive - bearish/credit spread): BUY CALL MAR-45.00 CCU-CI OI=1377 A=$0.30 SELL CALL MAR-40.00 CCU-CH OI=510 B=$1.05 INITIAL NET-CREDIT TARGET=$0.75-$0.85 POTENTIAL PROFIT(max)=16% B/E=$40.75 ************** FDX - FedEx Corporation $50.87 *** Air Cargo Slump! *** FedEx (NYSE:FDX) is a global provider of transportation, e-commerce and supply chain management services. Services offered by the firm include worldwide express delivery, ground small-package delivery, less-than-truckload freight delivery, global logistics, supply chain management and customs brokerage, trade facilitation, and electronic commerce solutions. FedEx offers integrated business solutions through a network of subsidiaries operating independently, including FedEx Express, an express transportation company; FedEx Ground, a provider of small-package ground delivery services, and FedEx Freight, a provider of regional LTL freight services. Other operating companies include FedEx Custom Critical, a critical shipment carrier; FedEx Trade Networks, a global trade services company, and FedEx Services, a provider of sales, marketing, supply chain management services and information technology (IT) support for the company's global brands. FDX - FedEx Corporation $50.87 PLAY (conservative - bearish/credit spread): BUY CALL MAR-60.00 FDX-CL OI=270 A=$0.15 SELL CALL MAR-55.00 FDX-CK OI=1493 B=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$55.55 ************** UTX - United Technologies $60.50 *** Big Down Day! *** United Technologies (NYSE:UTX), through its operating segments, manufactures, installs and services elevators and escalators; manufactures commercial and residential heating, ventilating and air conditioning systems; produces commercial, aviation and military aircraft engines, and military & commercial helicopters; and supplies transport helicopters. Otis manufactures, markets and installs elevators, escalators, automated people movers and service. Carrier manufactures heating, ventilating and air conditioning systems and equipment, and commercial and transport refrigeration equipment. Pratt & Whitney makes aircraft engines, parts, industrial gas turbines and space propulsion. The Flight Systems division manufactures helicopters, and sells aircraft power generation and management systems, engines, flight controls, auxiliary power units, environmental control systems and propeller systems, compressors, metering devices, fluid handling equipment and enclosed gear drives. UTX - United Technologies $60.50 PLAY (moderately aggressive - bearish/credit spread): BUY CALL MAR-70.00 UTX-CN OI=1693 A=$0.30 SELL CALL MAR-65.00 UTX-CM OI=1025 B=$1.05 INITIAL NET-CREDIT TARGET=$0.75-$0.85 POTENTIAL PROFIT(max)=16% B/E=$65.75 ************** DISCLAIMER The information published in this section should only be used by experienced traders who are fully aware of the risks associated with participating in complex financial markets. Option traders can lose their entire investment with a few unfavorable positions and there is no assurance or expectation that current or future candidates will be profitable or equal past performance. 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