The Option Investor Newsletter Sunday 02-16-2003 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: Relief or Reaction? Futures Market: Getting Bears' Attention Index Trader Wrap: MR. PRESIDENT? Editor’s Plays: Expiration Week Explosion? Market Sentiment: Seeing Red (Flags) Ask the Analyst: (See Note) Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Follow the Bouncing Ball Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 02-14 WE 02-07 WE 01-31 WE 01-24 DOW 7908.80 + 44.57 7864.23 -189.58 8053.81 - 77.20 -455.73 Nasdaq 1310.17 + 27.70 1282.47 - 38.44 1320.91 - 21.23 - 34.06 S&P-100 422.57 + 3.78 418.79 - 13.78 432.57 - 3.57 - 21.22 S&P-500 834.89 + 5.20 829.69 - 26.01 855.70 - 5.70 - 40.38 W5000 7896.94 + 23.52 7873.42 -251.65 8125.07 - 50.67 -354.59 RUT 358.50 - 0.28 358.78 - 13.39 372.17 - 2.89 - 13.04 TRAN 2102.60 - 37.37 2139.97 - 33.38 2173.35 + 10.02 -181.20 VIX 37.10 - 1.35 38.80 + 3.02 35.78 + 0.01 + 7.09 VXN 48.38 - 2.59 48.26 + 1.45 46.81 + 1.76 + 2.21 TRIN 0.58 1.57 0.89 1.69 Put/Call 0.97 0.94 0.84 0.83 ****************************************************************** Relief or Reaction? by Jim Brown It was a new form of terror attack. Terrorists poured massive amounts of money into stocks on Friday in a devious psychological attack. With everybody expecting the worst, the best came to pass as is normally the case. Once everybody finally decided a retest of the October lows was inevitable buyers appeared. Dow Chart - Daily Nasdaq Chart - Daily Economically Friday was a good day with Industrial Production soaring +0.7% in January according to the headline number. The jump was actually a reaction bounce from the -0.4% decline in December which was likely a calendar issue. Averaging both gives you a more realistic +0.15% growth. Analysts credit the strong gains to a jump in auto parts and higher output by power companies due to the cold winter weather. Business Inventories jumped +0.6% in December, which was strongly over expectations of only +0.1%. On the surface this would appear good that businesses are stocking up for a coming increase in demand. Unfortunately the rise came from a slowing of existing sales to only a +0.2% gain and that caused the inventory levels to grow. This was not a bearish report but yet another cautionary item. The most bearish report was the Michigan Consumer Sentiment which came in at 79.2 for the first two weeks of February. This is a new nine-year low and a drop from 82.4 in January. This should not surprise anybody with high unemployment, war worries, terrorist alerts, weak economy and a falling market. Higher gasoline prices hit consumers with every fill up and being told to buy duct tape and plastic is not a confidence builder either. Bankruptcy filings came in at 8.7% for the last quarter and the full 2002 calendar year set a new record. Money is tight for most people and stock profits are not flowing. Friday was a slow news day if you were looking for stock news. It was totally focused on the different speeches coming from the UN and the perceived reactions to the different presentations. I am going to try and keep this brief but it is relative. To put it bluntly the US was slam dunked by the inspectors and the opposing countries. There was actually applause in the normally reserved climate of the meeting room. Unfortunately the applause was for speeches against the US position. The most prevalent market view towards the war WAS to get a coalition quick then launch the attack and get it over with so the nation could get on with business. In a few short hours that view changed to "this could take months before the shooting starts" and fears that the drag on the markets would last all summer. By mid afternoon the view had changed again to "there may not be a war any time soon and over the next several months the need for a war may disappear completely." No war means no market drag, let's buy stocks. We could debate the various possibilities that energized traders but the bottom line is that investors decided to spend some money after the fear of an immediate war has passed. While I have no problem with the concept I was surprised at the magnitude of the bounce just before a three day weekend during a high terrorist alert. This would not be a normally bullish day. However there was news on the alert front as well. It appears that some of the information that officials relied on to issue the alert was bogus. The Al Qeada captive who told investigators that a radiological/chemical/biological weapon would be deployed, failed a lie detector test. He had told officials that Washington, New York or Florida would be hit by a "dirty" bomb sometime this week but it was a concocted story. He said a cell in Virginia or Detroit had found a way to smuggle the equipment into the country and they were going to target specific government buildings and religious events. It was reported that officials decided to leave the orange alert over the weekend as a precaution. The combination of these two events transformed the current market sentiment from bearish to bullish. Suddenly there was no war overhang. Maybe I should say "immediate" war overhang. Traders would always rather put off worrying about problems as long as possible. With the expected start of the war just two weeks away it was fully priced into the market. Now with the war 60-90 days away or maybe never that war premium can be taken out again. The wildcard in this equation is the 200,000 troops already in the region and the full weight of the US military moving full speed towards an attack in two weeks. The administration has found itself between a rock and a hard place. Those troops cannot be left there indefinitely. The cost to just run in place is horrendous. Troops keyed up for action and then left to bake in the sun for months would lose their combat edge. Units would have to be continually rotated back to the states and replaced with new troops and equipment. The military showed up for the game but the gates to the stadium are locked. The Powell team is in full court press to get a new resolution passed that will allow the use of force. According to news reports on Friday this effort will be dead on arrival. Four different countries have already threatened veto of the measure. Now the US has to decide to go it alone or back down. We all know how tough to swallow a retreat would be. Conversely an attack by the US on its own with no help would be viewed very badly on the world stage. There are several major antiwar demonstrations around the world this weekend with over a million participants in a single event. In my opinion the Bush administration has been checkmated by an Iraq regime that has made good use of four years without inspectors and hidden everything very well. I relate this not to bombard you with a constant barrage of political viewpoints but to relate how the market might react and why. I think what you saw on Friday was this realization sinking in to investors consciousness. Traders were putting 2+2+2 together and getting "buy" instead of 6. That buying also took the form of short covering. Those who were expecting that last downdraft between the UN update today and the start of the war in two weeks suddenly found themselves without a war. Instead of a smoking gun from the inspectors they found reluctant cooperation from Iraq and outright defiance from the inspectors. Instead of a new resolution for war there is more than likely going to be a resolution for peace. The smoking gun that would have every nation on earth riding down on Iraq with legions of soldiers was found this week. Unfortunately it was in North Korea. Instead of trying to link Al Qeada to Iraq maybe they should have been looking for the Korean connection to prove their case. (grin) There may actually be a smoking gun about to appear. Or, more correctly a loose canon. According to www.debka.com there really was a defection on Thursday and it was Adib Shaaban, the right hand man of Uday Hussein, Saddam's son. According to Debka, which is a highly biased and not always verifiable source, Uday was in charge of the hidden weapons and as his right hand man Adib would be better than a smoking gun. While this story is unverified you can read about it on their website. If it is true you can expect serious changes in the deadlock soon. Where to now? Obviously that is the $64 question. We were trapped in a trading range between 7950-8150 for two weeks in late January and early February. We fell out of that range last week and dipped to a 75% retracement of the October lows. With economic reports showing glimmers of hope those lows may be way overdone. Earnings have not come back yet but even with the negative economic overtones they are not falling out the bottom. For the 1Q 40% of the pre-announcements have been warnings. 23% have raised guidance and 37% affirmed estimates. That means 60% are doing ok, not great but ok. The 40% that warned is higher than normal but not the end of the world. It is the economy after all and the Iraq ate my earnings excuse will not fly for the 2Q. If the economy was on the verge of collapse because of the impending uncertainties of war the will removing the war card give it an injection of speed? You should be very confused by now. It boils down to these decisions. Will the US be able to get a new resolution? I strongly doubt it without inspectors uncovering a surprise stockpile over the weekend. Will the UN pass a resolution specifically prohibiting use of force and canceling the war? I doubt that because the US could veto it. Will the US decide to mount up and ride into Iraq with all guns blazing and risk major consequences with major allies? I doubt that as well. There was even an implied threat of force against the effort by Russia. What a twist! We would have to loan them money to buy gas to attack us. The administration may have to give up trying to assemble the coalition of the willing and settle for a coalition of the reluctant if they proceed with the attack. The betting on the street is less than a 20% chance of a war at this time. That means there is an 80% chance of the market rallying on this news next week. That rally should reach 8150 at a minimum and possibly 8300. The majority of the gains are not going to be made on better earnings or a better economy but simply on an equalizing of the war premium. We are very oversold long term and there is substantial cash waiting on the sidelines for a signal. That signal was the +158 Dow gain on Friday. That was the shot heard around the world. Obviously I over stated the simplicity of next weeks decision. The political war will continue over the weekend as the administration attempts damage control and offers the dissenting countries some type of bribe to regain their support. How eager would you be to come back to our side after the various diplomats and talking heads slandered you in the world press. If you cave in now you would lose face on the global stage. The markets are going to love this war of words instead of bullets. However, if the US appears to be winning the political battle the market will be quick to remove its bullish horns. I will be so glad to get back to regular markets with real fundamentals. I would love to worry about NVDA beating estimates instead of nuclear missiles in Korea. I would much rather watch Gateway and Dell duke it out on CNBC than round the clock replays of the UN meeting. Give me Larry Ellison or John Chambers instead of Tariq Aziz any day. You know it has gone too far when you start reminiscing about the good old days of 2001 when all you had to worry about was a bear market. Things have certainly changed in the last 18 months. There will be a lot of late night hours spent over the long weekend as politicians ply their trade. By Tuesday morning this may all be mute and conditions reversed again. There are still hawks expecting the war to start as early as this weekend. If not then Tuesday should be a good day for the bulls. Sell Too Soon! Jim Brown "If you bet on a horse, that's gambling. If you bet you can make three spades, that's entertainment. If you bet IBM will go up three points, that's investing." Blackie Sherrod ************** FUTURES MARKET ************** Getting Bears' Attention By John Seckinger jseckinger@OptionInvestor.com All three futures contracts rallied from one daily retracement area to another. Are these contracts simply at the top of a range, or was Friday's rally more than just short covering? Friday, February 14th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7908.80 +158.93 7908.80 7725.32 YM03H 7925.00 +165.00 7950.00 7712.00 35,129 Nasdaq-100 982.09 +30.19 982.12 952.70 NQ03H 985.00 +23.50 985.50 950.50 265,382 S&P 500 834.89 +17.52 834.89 815.03 ES03H 837.00 +18.00 837.25 813.75 728,664 Contract S2 S1 Pivot R1 R2 Dow Jones 7664.16 7786.48 7847.64 7969.96 8031.12 YM03H 7624.00 7775.00 7862.00 8013.00 8100.00 Nasdaq-100 942.88 962.48 972.30 991.90 1001.72 NQ03H 938.75 961.75 973.75 996.75 1008.75 S&P 500 808.41 821.65 828.27 841.51 848.13 ES03H 805.75 821.50 829.25 845.00 852.75 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7486.00 7706.00 7836.00 8056.00 8186.00 NQ03H 919.25 952.25 971.25 1004.25 1023.25 ES03H 790.75 814.00 828.25 851.50 865.75 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 817.25, exit 818.25, change -1.00 Long 822.25, exit 821.25, change -1.00 Short 820.75, exit 822.75, change -2.00 Total for the day: -4.00 Total for the week: +10.67 Total for five weeks: +51.92 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) A short-covering rally in the equity markets was bound to take place one of these days, and what better time than from the BOTTOM of a daily retracement area (805.25) to the top (839.50). The halfway mark came in at 822.25, and was just above the high print seen after Thursday's recovery. With that said, this recovery rally late Thursday and Friday didn't do any technical damage to bearish positions. It is also encouraging for bears to see the 90-minute Bollinger Bands fall outline this retracement range almost perfectly (see chart below). Moreover, the daily MACD oscillator has not yet crossed higher; thus making it clear bears are still active in this trading environment. If, on the other hand, we do get a daily close above 839.50, it will be time to re-evaluate conditions. Recapping Friday's session, the ES did rally to its daily R1 after taking out this 822.25 level, but then ensuing sell-off trapped bears under the daily pivot 815 as the Dow failed to test its daily pivot at 7720. I thought that the ES falling under its pivot would drag the Dow under 7720, but the blue chips were unexpectedly more powerful. With that said, if the ES does move above 839.50 and portends a move to 850.50, I would be worried if the Dow falls back underneath 7900. Chart of ES03H, 90-minute A 60-minute chart of the ES contract shows prices simply getting back to the bottom of the recent long liquidation pattern (lowercase "b") and intermediate term pivot of 839.50. If this level is broken, there is the likelihood that the daily R1 level of 845 could cap the rally (the possible trend line drawn below). If not, the range from 850 to 853 is very strong. On the other hand, with the daily pivot at 829.25 and weekly pivot below at 828.25, I would look for a break of the weekly pivot at as a reason to expect lower prices and not simply a move under the daily level. The Daily S1 level is below at 821.50, and would be the objective to the downside (or range from 821.50 to 822.25 - noted above). Chart of ES03H, 60-minute Bullish Percent of SPX: This indicator fell one percent on Friday to 34.80%. The recent column of O's stands at 14, and is currently in "Bull Correction" status. The last column of "O's" ended at 20. Still short- and long-term bearish, but risk is getting close to shift to the bears' camp. Looking at P&F analysis, the SPX reversed back into a column of X's on Friday, but will need an 845 print to give a buy signal. The bearish price objective remains at 750. This 845 level is the most recent quadruple bottom area. Expect resistance at 840, and support below at 795. The March E-mini Nasdaq 100 Contract (NQ03H) The rally on Friday in the NQ contract actually settled the contract above the 50% retracement area (983) at 985; however, the mid-point of the daily Bollinger Bands comes in at 987.25 and should be the last line of defense before a test of 1003. Bears should look for a move back under 983 as a signal that Friday's rally was simply short covering, while also looking for a rollover from the 1003 level if bids do continue. For bulls, the play would be for a move from 987.25 to 1003; however, in this market environment (still bear market), stops have to be tight. Note: The daily MACD oscillator has not crossed higher. The most bullish projection would be for a test of 1023.75 and the weekly R2 level. Downside support under 983 is seen at 962.50 and then back to 941.50. Chart of NQ03H, Daily A 60-minute chart of the NQ contract shows both a breakout above the recent bearish regression channel, as well as closing above Tuesday's pivot of 973.73. I would prefer to look for weakness under 970, since this move should (depending on the time) put the NQ back into the regression channel and signal the recent move was simply short covering and a bull trap. Chart of NQ03H, 60-minute Bullish Percent for NDX: The bullish percent for the NDX remained unchanged on Friday at 34%. This indicator remains in "Bear Confirmed Status". The last column of O's ended at a reading of 14%. Remember, once under 30%, risk should start to shift towards bearish positions. The NDX, according to P&F charts, still shows resistance at 1000 and support near 925. The bearish objective remains at 775, and only a print of 1025 will have this indicator reversing in a column of X's. The March Mini-sized Dow Contract (YM03H) The YM contract also managed to close just below the top of a retracement area (61.8% to 80.4% retracement of the move from October to December; 7937 to 7611, respectively), and bears will be forced to defend this 7937 level going forward. Note that the DOW closed above its 7902 retracement area at 7908, so look for the Dow for confirmation. If bears are able to successfully pressure prices back into the regression channel, the downside objective would be for a move to 7770. Along the way down, support is seen at 7862 and 7800. I am not treating the 8048 level as an actual level traded; however, notice how this print does line up nicely with the mid-point of the Bollinger Bands and the halfway area from 7937 to 8143. Note: The MACD oscillator on a daily basis did not cross higher, and the bullish percent in the Dow failed to reverse into a column of X's and signal a "Bull Alert" reading. With that said, bears are still in control for the time being. Chart of YM03H, Daily Looking at the YM contract on a 90-minute basis, the bearish regression channel has been cleared on a closing basis and the bottom of the recent long liquidation pattern is just above at 7920. The apex of this bearish pattern appears to come in just under the daily R2 reading of 8100, and should be more important for bears than any other level. There is always the chance that the 8100-8150 level will simply become the top of a much larger wedge (not drawn), so remember to be prepared to re-short the contract in this area if this larger wedge pattern comes to fruition. If the daily pivot is cleared, the YM contract should fall back into the bearish regression channel and give bears more ammunition going forward and keep risk manageable (7937 and the retracement area just above). Chart of YM03H, 90-minute Bullish Percent of Dow Jones: A P&F chart of the Dow shows a strong reversal back into a column of X's on Friday (five total back to 7900); however, the most recent quadruple bottom is just above at 7950 and should offer some resistance for the blue chips. Only a move above 8200 would give a 'buy signal' and cancel out the recent bearish objective of 7100. As far as the bullish percent is concerned, it remained unchanged at 13.33%. The column of O's remains at twenty-three. 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; thus giving bears a possible reason to take some profits off the table. It is both interesting that the Dow didn't get a "Bull Alert" status, and that the bullish percent of the NYSE (much broader index) actually fell to 39.76 and added another "O". This should have bears thinking Friday's rally was simply short-covering. Good Luck. Questions are welcomed, John Seckinger ******************** INDEX TRADER SUMMARY ******************** MR. PRESIDENT? By Leigh Stevens lstevens@OptionInvestor.com Monday is President’s Day honoring past greats especially, but many U.S. citizens are more focused on our present leader. And, are wondering if President Bush remains intent and determined to take military action against Iraq. It seems the public is supportive on the war on terrorism but doubtful about going it alone on Iraq – Blair is our one stalwart ally, but his public is very against military action without a further UN mandate. Of course the U.S. can go it alone but the end game is a big and doubtful question. Recent polls suggest that the public is very against the nation building (i.e., its “cost”) work that should come after a Saddam overthrow. Anybody besides me know what we are doing in Afghanistan these days other than an occasional firefight? Politically, it’s a mess in terms of International unity. In the age of the global integrated economy this goes against the grain. In terms of the market going nowhere fast, its because the economy is on “hold” of course, as also pointed out by Chairman Greenspan. Resolution is needed one way or the other to have a chance to sustain an uptrend – meanwhile the market is doing what I would call “basing” ahead of that possibility. THE BOTTOM LINE: The S&P and the (Nasdaq) Composite rallied from the low end of its downtrend channels after getting fully oversold. A short- covering type rebound should be expected in these conditions, ESPECIALLY after the sharp build up of bearish sentiment and on relatively low volume. Gold retreated from technical resistance as seen with the Gold stock index (XAU). As the market read it on Friday, the prospects of us not going to war with Iraq increased somewhat. Ahead of a 3-day weekend those short wanted to take some profits. Besides which key stocks like GE, Microsoft, Cisco and Intel were into technical support areas. Taking at least some index put profits off the table was not a bad idea on Friday. However, it’s very doubtful that the rebound will have sustainable “legs” and I suggest bearish trading strategies again in resistance areas. A caution on being too quick on this as the market could continue to move sideways to higher this week – maybe enough to confound the bears for a time. FRIDAY'S TRADING ACTIVITY – In a volatile session, but on low volume – they often go hand and hand – the Dow rebounded 159 points or 2% to inch back above 7900, while the Nasdaq (COMPX) advanced more, gaining 2.6% or a gain of nearly 33 points. Much of the gain was a final hour push. Stocks first rallied when chief U.N. weapons inspector Hans Blix suggested that Iraq was being cooperative. But this rally didn’t last and stocks fell sharply again but did rebound strongly before the close. The Indices have broken a 4-week losing streak although the S&P 500 (SPX) was only up 5 points (+0.6%) on the week and the Composite (COMPX) 28 points or around 2% – hey, but it’s the thought that counts!? The best technical clues suggesting an area for a rebound, was provided by the Nasdaq 100 tracking stock QQQ per the trendlines and retracement level (62%) I pointed out last week – Of course there was an intraday dip under the trendline on hursday, but I discount that given the upside or “bear trap” reversal on Thursday – more on upside/downside reversal patterns can be found in my Trader’s Corner article at – http://www.OptionInvestor.com/traderscorner/tc_122602_2.asp For those who want an instant memory jog, an upside or bear trap reversal is a move to a new low (a sharp spike to a new low for the move is even better), followed by a close above the prior close. [Even more “potent” is a close above a prior day’s High, which would have also have made it a “key” reversal in my book.] Since I won’t repeat this chart again, key resistance looks like 25.30-25.60, then 26.30-26.50, at the top of the hourly downtrend channel – I suggest shorting QQQ at the top of the hourly channel if reached. Of course, keep in mind that the upper channel line is falling over the next few trading sessions, so resistance implied by a trendline falls accordingly in terms of where prices intersect the line. But that’s why you have Q-charts, TradeStation or some type of charting software – or on a web site – so you can track this. What does not change in terms of resistance are prior significant swing highs – currently the prior hourly (up) swing high around 26.80 on an hourly closing basis is key and the most significant technical resistance in terms of keeping the Q’s downtrend. OTHER MARKETS - Bonds fell on Friday – the 10-year (Treasury) note was off 28 32nds, as its yield rose to 3.96%. The dollar was mixed – down against the Yen slightly and was up marginally (to $1.0795) against the euro. Nearby (March) crude oil futures ran up to nearly $37 dollars a barrel (close: 36.80) on the NYMEX (New York Mercantile Exchange). The intraday high was only a dime shy of 37 bucks and this makes it the highest price since the fall of 2000. Gold also ran up sharply during this same period 2+ years ago, with bullion prices going from under $300 to the $375 area – not unlike what we’ve seen over the past 2 years with the yellow metal. Gold prices peaked in the week before last in the low 380 area. The top for a while? – stay tuned. If we look at the key gold (& silver) mining index, XAU, I wonder if the gold sector has much further upside, per my musings on its chart – COMING UP THIS WEEK – Housing starts and the producer price index are due on Wednesday; jobless claims, the trade balance, leading indicators and the Philly Fed comments are due on Thursday. Friday will see the release of the latest data on consumer prices. With inflation in check – and why I think the gold rally is temporary rather than a big sea change – the PPI and the CPI numbers are not likely to move the market much. However, housing stats, jobless claims, leading indicators and the Philly Fed comments are significant in terms of the clues they provide on a further economic recovery. With about 9 of 10 of the S&P 500 having reported their earnings already, we can mostly look to Wal-Mart (WMT) for some spark in terms of earnings trends after trading begins on Tuesday – WMT reports on Tuesday after the NYSE close. However, earnings guidance is mostly downward revisions and Analysts are cutting their Q1 and Q2 estimates. Expectations are for weakness in the first half of 2003. MY FURTHER INDEX OUTLOOKS – S&P 500 Index (SPX) – Hourly chart: Down down we went until the index both got oversold and reached a trendline forming the bottom of likely channel. What now? Doubtful that SPX climbs above 843 and if it does, there is a tough zone of resistance and selling interest that we can assume starts just over 850 and extends 20 points higher. I would like to buy OEX and SPX puts with the SPX back into the 855-865 area, but so would many others no doubt. I would settle for buying S&P puts with the 500 Index around the prior 843 high and unable to pierce this level. The chart pattern above has one bullish aspect that I note, but the fundamentals don’t appear to support much of a rally at this juncture. S&P 100 Index (OEX) – Daily and Hourly charts: We got to the next implied downside objective around 415 in the S&P 100, at the low end of the daily chart downtrend channel and then some. OEX made yet another dip to the 6% lower envelope line that its been following lower. From this lower trading “band” or moving average envelope line, just like a similar pattern in Sept-Oct. there was a technical rebound. “Technical” here mostly refers to influences UNrelated to fundamentals factors – such as when many hedge funds and individuals that are short a lot of S&P stocks, all head for the exit at the same time. The fear is that nice fat profits might slip away. Since I am talking “technicals”, what often happens when the S&P final rebounds substantially from the lower envelope line is a tendency to rally to the area, or just shy of, the 21-day moving average. This implies a “maximum” move up to the 430 area then good bye. A bit higher than implied resistance at 430-432 there are a cluster of prior hourly highs in the 435 to 439 area. Above this zone is resistance implied by the top end of the hourly downtrend channel which intersects in the 450 area. Do I think that OEX can get back up to 450 – especially after getting down so close to 400 already? Unlikely, but I like to point out successive “layers” of resistance in case – I don’t know – Saddam decides to take early retirement in Libya. The 430-435 area is my suggested area to buy puts again, if you don’t already own them – or are looking to re-short the market. It would take two consecutive closes ABOVE OEX’s 21-day average to suggest to me that this Index was headed back up the upper envelope or to the upper channel line I mentioned. Note on my CALL-PUT readings – the way I keep them, comparing CBOE daily EQUITIES call volume to puts. Option traders got quite bearish recently judging by the sizable jump in put volume relative to call volume on individual stocks. Some of which – e.g., GE, MSFT, INTC, CSCO – were looking like they were going to pop to the upside. There are a number of key bellwether type stocks that are getting into price areas where the bears stop shorting them and there is some buying interest. Keep in mind that the most money is locked up in regular ol mutual funds that either are in cash or are LONG stocks. Dow 30 Daily Chart - While its certainly consistent with the way chart looks for there to be another shot down to the 7500 area (or lower), the pattern of 2 higher relative lows on either side of (the “wings” so to speak) of the lowest low, is also consistent with a possible Head & Shoulder’s bottom. I’m not so convinced of this (a H&S bottom), but do see an apparent bottoming process on balance going on with the major indices. If so, then lows often get made in the same approximate area multiple times or lows are slightly higher than the all-time low for that index (or is higher than the low that preceded the most recent one). In terms of the Dow Industrials, the average did not get as oversold as it has in at least the prior instance shown. However, it also did not get AS oversold as the lower low, which may be significant in terms of suspecting that when the economic uncertainty factor – go away Saddam – is lifted, this may be the spark that lead to a bullish economy in the second half. Since this is a few months away, the market would be right on target to mount a sustained rally anticipating this. The foregoing is by way of saying to not get entirely bearish, bearish, and more bearish. All bears eventually wind up as rugs or worm food. Bulls may at least finish as steaks. ************************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 ************************************************************** ************** Editor's Plays ************** Expiration Week Explosion? I was planning on doing a low premium index option like the DJX this weekend with expiration only four days away. Unfortunately the Friday explosion has rocketed the volatility and the prices for the DJX calls are too expensive for me. I think there is a possibility for doing something with the QQQ @ $24.49. The Feb-$25.00 call is only $.30 cents but it would require a +$1.00 move to profit. The SMH was also a choice but the rebound off Thursday's lows was incredible. At $22.00 the $22.50 call is $.45 cents but would need another $1.00 move to break even. Both of these plays are marginal. I can see us getting a strong bounce on Tuesday but it would require at least one more positive day to really be assured of a profit. Instead I elected to go with an old friend that is slumming below the $25 level. Three guesses? The stock split 2:1 after the close on Friday and will be trading at the new price of $24.15 on Tuesday morning. Think about it $24.15 for a share of stock in a company that has nearly $50 billion in cash and makes money by the truck load. Of course I am talking about Microsoft. Microsoft for $24. Can you believe it? I am banking on several million other investors that can't believe it either. It just became far more attractive for investors with small retirement accounts to ignore. 100 shares for $2400 compared to 100 shares at $5800 just a month ago. Granted there are twice as many shares but it is the perceived value that counts. The stock got killed after it announced earnings and the split because many mutual funds cannot own more than a fixed number of shares of any stock. If your fund limit was five million then you will have to sell 2.5 million shares post split to stay within the rules. Guess what? Most companies don't wait they sell the shares early, especially if the market is going down. This is what happened to Microsoft. I think this is the strongest tech company in the world. This company will recover quickly when the economy recovers. The option I am recommending is the July-$25 call MSQ-GE. If you look it up in a quote system this weekend you will probably see it referenced as the $125 call. The CBOE has already assigned it as the new $25 symbol as it should be but the quote systems have not picked it up yet. The price should be half of the current $50 call at $4.50 or $2.25 for the $25 call. It could be a little less on Tuesday due to premium decay. Longer term investors would be better served to buy the Jan-$25 call (LMF-AE) at $3.50 or the $20 call (LMF-AD) at $6.40. That $20 option is already $4.15 in the money and that makes the real time premium only $2.25. That would be my first choice. There are no puts deep enough in the money to be worthwhile or that would be my preferred way to play. The stock appears to have bottomed on rising support and it gained +$1.31 on Friday. Own a piece of the rock! ******************************** Play updates: EMC Call from Feb-2nd Inch by inch, penny by penny, EMC is moving up. The $8.00 resistance is proving strong but EMC is still on track. Considering the market set new lows for the year this week I am still positive on EMC and will be adding it to the Powerball portfolio today. TMPW Put from Feb-2nd ($11.05 when recommended) The TMPW dip occurred right on schedule this week with a drop to $8.17 and 3 cent below our target of $8.20. The $1.10 March $10 put when recommended traded for $2.00 on Thursday and nearly a +100% gain. They do not get much better than this for doing exactly what we expected. This play is now closed. The stock was $11.05 when recommended. NEM Put from Jan-26th ($30.15 when recommended) Newmont continued falling from the $30.15 level when recommended and closed at $27.24 on Friday. The March $27.50 put rose to $2.00 from $1.10 and the June $27.50 put rose to $3.30 from $2.25. Gold has fallen from six year highs at $390 to close at $352. This play has gone exactly as we expected and any further easing of war fears could cause that support at $27.25 to break with significantly lower lows ahead. We have plenty of time on this play but I would not be a pig. If we hit $25 I would exit the play. We are up substantially and I do not see a change insight. However, keep those stops in place in case a war breaks out unexpectedly. AMZN Puts from Jan-19th ($21.40 when recommended) Finally the break we needed! The tax problems with Internet retailers may finally be the straw that breaks its back. The Feb-$22.50 put moved back into slightly profitable territory at $2.55 from the $2.25 when recommended. Considering the stock rallied on bad news this is a welcome change. I think the stock still has further to fall but due to expiration next Friday I would close this play now and roll out into March options. I reported on the AMZN problems on Thursday night in the market wrap so I will not repeat it here. Because time is expiring on this option I am going to consider this play closed for a breakeven. Frankly I am glad to get it. We were right about the direction but wrong in the time frame. This option may still continue into profitability with further drops next week but it is not worth the risk. DJX $85 Puts from Jan-5th. (86.01 when recommended) Put this one in the win column. The BIG win column. The target for this move when recommended on Jan-5th was Dow 7700. We hit that level this week as expected. The Feb-$85 put traded at $8.20 from the $2.85 price when recommended. The March $85 put traded at $8.90 from the $3.40 price when recommended. The instructions were to exit at 7700 and that level was hit on Thursday. Chalk this one up as your Valentines present. BZH May $50 Put - From Feb-9th ($55 when recommended) The stock got a life from some better than expected earnings in the sector but is still in the longer term down trend. This is a long term play using May options and there has been no change in the outlook. See the Feb-9th Editors Plays for info. Powerball - From 12/29/02 The Powerball Lottery play for December-2003 dropped another to a loss of -$515 at the close Friday. This is a 12-month "lottery" play and we are only six weeks into it. Be patient. If you are not in it I would consider it a buying opportunity. It would cost you about $740 to buy one contract of each today. Any one contract could repay that $740 by 12/31/03 leaving the rest as profit. It is a high risk "LOTTERY" play but then $740 is not much risk. When I setup the Powerball play on Jan-1st IDTI and VTSS did not have January 2004 options. I used the longest option available but that was July/August. In order to standardize the expirations I replaced them with stocks that have January 2004 options. I replaced the August IDTI call with a Jan-EMC call for a net change of -.15 cents in original cost. I replaced the VTSS July call with a GLW Jan call for a net change of +1.30 in cost. It would have taken $1,255 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 **************** Seeing Red (Flags) by Steven Price We continue to see wild swings dominated by world events. Picking direction over a period of days is becoming more difficult, much less picking direction for just a couple of hours. What world event is going to drive the markets higher? What will be seen as a negative? There are plenty of scenarios offered to explain the market's reaction to certain events in hindsight, but few that have successfully predicted the immediate future. Overall, we have undoubtedly been trending lower. However, as we have approached oversold conditions and gotten a big bounce the past couple of days, we are left to decipher whether the bounce we've seen is due to market or world conditions. For that matter, we are still left to decide whether the recent drop has been due to market or world conditions. It seems that any moved can be explained once it is over, but deciding what will happen next is becoming more difficult than it has been in recent times. Thursday's and Friday's action is a prime example of that difficulty. Thursday started off deep in the red. We continued the sell-off that has taken us down over 1000 Dow points since the middle of January. We then got a triple digit bounce that continued with a triple-digit gain Friday morning. That gain was followed by a triple-digit drop, which was followed by an equally powerful rally. Going back to the drop that got us to these levels, why did sentiment suddenly shift after two bullish weeks to start the year? The obvious answer seems to be that investors were funding their retirement plans for 2003, buoyed buy the President's stimulus plan that included the elimination of taxes on dividends. When those contributions were completed, the rally ended and we were left to focus on corporate earnings reports that looked decent as far as beating estimates for the fourth quarter, but painted a grim picture for 2003. We have undoubtedly seen institutions switch their balancing between bonds and stocks as we have reached extreme ends of the spectrum and that has led to some of the market activity. However, they were most likely shifting those assets from bonds into stocks as the Nasdaq fell over the past few years and it simply continued lower, so while that strategy works well for traders engaging in similar action, it does not necessarily tell us if we have found a bottom or a top. July's closing low in the Dow was breached on Thursday morning, but a rebound since that time has taken us higher. Is it merely a stop on the way to the October lows 500 points lower, or our rebound level? Obviously this is an impossible question to answer without a crystal ball and right now the trend remains down. However, as I mentioned in Thursday's Sentiment, as we approach those bottoms and the bullish percents become further extended to the downside, the risks are shifting less in favor of the bears. I have devoted some discussion in this space to the recent patterns in the point and figure charts and we once again saw a reversal in those signals. The reversals we got over the past couple days were more powerful than the past few reversals in the SPX and Dow. In the case of the OEX, the last few reversals varied between 3 and 5 boxes and the Dow has seen several 4-box reversals recently, as well. The SPX, however has seen only three-box reversals on the last three bounces and this is not only its biggest bounce since it rallied off of the 850 level, but also the first bounce that has made it past the breakdown level since giving a triple bottom sell signal back at 840. The Dow has now seen a 5-box reversal, which also went beyond the strength of recent rallies. Bullish percents are still sinking, but the Dow is becoming very extended, down to 14% (oversold territory is 30% and lower) and sitting right on its bullish support line. The recent lows are 8% and 4%, so we are getting close to those levels, but yet still heading down inspite of the rally of the last two days. The OEX has also entered oversold territory at 28% and the SPX sits at 36%, but usually lags the others due to a higher number of stocks. A couple of significant previous support levels today failed to act as resistance on the end of week rally. The Dow had been bouncing off 7800 before finally giving in and tumbling down to 7628. However, that tumble led to a big bounce and the only obvious explanation was short-covering ahead of the Hans Blix speech. Blix had a much different tone this morning than he did the last time, when he crucified Iraq for non-cooperation. He essentially said they had found nothing and that Iraq had shown some signs of cooperation, such as allowing scientists to be interviewed without Iraqi monitors present. The market loved the news that maybe the U.S. case for war would be more difficult to make and we rallied right through the 7800 level. Then came a turnaround sell-off that made it appear as though the rally had just been short covering as the Dow reversed all its gains and went into the red. We then climbed higher all afternoon and eventually took out the previous intraday high at the close, in what appears to be a sign of further bullishness. The market has tended to trick us with new relative highs rolling over into big losses, but what we can take from today (and yesterday) are the most significant bullish reversals in a while. The previous floor on the Dow prior to the drop to 7800 was between 7900 and 7950 and we are right back into that area. If we rally above 7950 on Tuesday, look for the next level of resistance at 8000 and then 8150. We are getting into choppy waters and traders should keep that in mind when choosing direction. Each bounce has rolled over for the past month, but none have been as powerful as the last two days. While I have a hard time making a case for bullishness in the current market and I still believe we are seeing only an intermediate bounce, I will try to trade what I see. Right now I see a big red flag for bearish positions. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 7908 Moving Averages: (Simple) 10-dma: 7908 50-dma: 8370 200-dma: 8695 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 834 Moving Averages: (Simple) 10-dma: 835 50-dma: 883 200-dma: 920 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 982 Moving Averages: (Simple) 10-dma: 968 50-dma: 1018 200-dma: 1020 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The chip stocks rallied today, following Dell's earnings release on Thursday night. During the broad market drop over the past couple of weeks the SOX has actually held steady support at 260, indicating the sell-off might not be as decisive as it seemed. After holding that level, it bounced today through its previous support at 270 and finished at 280.16. 280 had been a significant support level going back to a head and shoulders neckline begun in November. While we haven't seen a decisive move above that neckline, the level it is now sitting on should be pivotal to tell us whether we get a rollover at that neckline, or make another run at 300. Dell didn't have any positive news, other than meeting estimates and giving forward guidance in-line with expectations. That was a departure from other forecasts which have recently come in on the low end and it was good enough to get the bulls interested again after the SOX sold off from a high of 393 in December. 52-week High: 641 52-week Low : 209 Current: 280 Moving Averages: (Simple) 21-dma: 278 50-dma: 300 200-dma: 338 ----------------------------------------------------------------- The VIX ended the day in the red by over a point, but it's early action was a warning that the morning rally might not hold. While the market was soaring on Hans Blix weapons inspection report to the UN, the VIX was holding up in positive territory, rather than sinking as it does on most rallies. That indication bore fruit when the market rolled over, giving up 160 Dow points after Blix finished speaking. It also forecast a more decisive rally in the afternoon. As the market climbed later in the day, the VIX sank, letting us know this rally had more staying power. The fact that we have a three-day weekend ahead of us also may have played a part in weekend premium selling, as traders attempt to capture (or avoid) three days of time decay. CBOE Market Volatility Index (VIX) = 37.10 -1.35 Nasdaq-100 Volatility Index (VXN) = 48.38 -2.59 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.98 458,347 447,017 Equity Only 0.79 318,083 249,717 OEX 1.19 31,833 37,877 QQQ 1.53 40,653 62,146 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 40.3 - 0 Bull Correction NASDAQ-100 32.0 - 0 Bear Confirmed Dow Indust. 13.0 - 0 Bear Confirmed S&P 500 34.6 - 1 Bull Correction S&P 100 28.0 - 1 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 1.16 10-Day Arms Index 1.38 21-Day Arms Index 1.43 55-Day Arms Index 1.36 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 1827 1003 NASDAQ 1930 1165 New Highs New Lows NYSE 42 104 NASDAQ 58 103 Volume (in millions) NYSE 1,583 NASDAQ 1,289 ----------------------------------------------------------------- Commitments Of Traders Report: 02/11/02 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 slightly decreased long positions, while increasing shorts by a more significant amount. The net result was an increase of 8700 on the short side. Small traders increased longs by 10,000 and shorts by 2,000. Commercials Long Short Net % Of OI 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%) 02/11/03 412,333 472,156 (59,823) (6.8%) 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 01/23/03 148,227 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% 02/11/03 161,126 95,618 65,508 25.5% 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 reduced longs by 1,500 and increased shorts by 3,000, for a 6% increase in overall short position. Small traders increased the long side by 4,000 contracts, while leaving shorts close to unchanged. Commercials Long Short Net % of OI 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%) 02/11/03 39,412 53,818 (14,406) (15.5%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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% 02/11/03 29,667 8,915 20,752 53.8% 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 2,000 contracts and shorts by 600. Small traders took a similar approach with an increase of 800 to the long side and a small decrease to shorts. Commercials Long Short Net % of OI 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% 02/11/03 19,826 11,800 8,026 25.4% 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 01/23/03 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%) 02/11/03 5,390 9,300 (3,910) (26.6%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************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 ************************************************************** *************** ASK THE ANALYST *************** Please Check the Site on Tuesday to read Jeff's Ask the Analyst Column! ************* COMING EVENTS ************* ========================================== Market Watch for the week of February 17th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- PBR Petrobras Mon, Feb 17 -----N/A----- 1.26 TEVA Teva Pharmaceutical Mon, Feb 17 After the Bell 0.46 ------------------------- TUESDAY ------------------------------ ANF Abercrombie & Fitch Tue, Feb 18 After the Bell 0.90 AMCR Amcor Limited Tue, Feb 18 After the Bell N/A BRG BG Group Tue, Feb 18 Before the Bell 0.28 VNT C. A. Nac Tele Vene Tue, Feb 18 -----N/A----- -0.09 CU Compania Cerv Unidas Tue, Feb 18 -----N/A----- 0.34 CE Concord EFS Tue, Feb 18 Before the Bell 0.18 ECL Ecolab Inc. Tue, Feb 18 Before the Bell 0.44 FHCC First Health Group Tue, Feb 18 Before the Bell 0.33 GPC Genuine Parts Tue, Feb 18 -----N/A----- 0.52 GLG Glamis Gold Ltd Tue, Feb 18 Before the Bell 0.03 KG King Pharmaceuticals Tue, Feb 18 Before the Bell 0.39 LH Lab Corp of Am Tue, Feb 18 After the Bell 0.36 RTRSY Reuters Group Tue, Feb 18 Before the Bell N/A SNY Sanofi Synthelabo Tue, Feb 18 Before the Bell N/A STO STATOIL ASA Tue, Feb 18 Before the Bell 0.25 SDS SunGard Data Systems Tue, Feb 18 After the Bell 0.31 RSE The Rouse Company Tue, Feb 18 -----N/A----- 1.26 UBS UBS AG Tue, Feb 18 Before the Bell N/A WMT Wal-Mart Stores Inc. Tue, Feb 18 Before the Bell 0.56 WMI Waste Management Tue, Feb 18 Before the Bell 0.34 ----------------------- WEDNESDAY ----------------------------- ADCT ADC Wed, Feb 19 After the Bell -0.04 ACL Alcon Inc. Wed, Feb 19 After the Bell 0.30 AIB Allied Irish Banks Wed, Feb 19 -----N/A----- N/A AFG American Financial GrpWed, Feb 19 Before the Bell 0.63 BLDP Ballard Power Systems Wed, Feb 19 -----N/A----- -0.34 CEPH Cephalon, Inc. Wed, Feb 19 After the Bell 0.36 KOF COCA-COLA FEMSA Wed, Feb 19 Before the Bell 0.45 DCI Donaldson Wed, Feb 19 After the Bell 0.45 FMX FEMSA Wed, Feb 19 Before the Bell 1.02 JHX James Hardie Ind N.V. Wed, Feb 19 After the Bell N/A PHA Pharmacia Corporation Wed, Feb 19 Before the Bell 0.40 Q Qwest Communications Wed, Feb 19 Before the Bell -0.11 STOSY Santos Ltd. Wed, Feb 19 -----N/A----- N/A TK TEEKAY SHIP MRSHL ISL Wed, Feb 19 After the Bell 0.67 TEM Telefonica Moviles Wed, Feb 19 Before the Bell N/A TLSN TELIASONERA A B Wed, Feb 19 -----N/A----- N/A XTO XTO Energy Inc. Wed, Feb 19 Before the Bell 0.43 ------------------------- THURSDAY ----------------------------- AMLN Amylin Pharm Inc. Thu, Feb 20 Before the Bell -0.29 AHG Apria Healthcare Grp Thu, Feb 20 -----N/A----- 0.49 ARW Arrow Electronics Thu, Feb 20 -----N/A----- 0.05 BEAS BEA Systems Thu, Feb 20 After the Bell 0.08 CBRL CBRL Group Thu, Feb 20 -----N/A----- 0.48 CIEN CIENA Corporation Thu, Feb 20 Before the Bell -0.14 CXR COX RADIO INC Thu, Feb 20 Before the Bell 0.16 CEI Cres Rl Est Eq Co Thu, Feb 20 Before the Bell 0.58 DCX DaimlerChrysler Thu, Feb 20 02:00 am ET N/A DDR DEVEL DIVERS RLTY CO Thu, Feb 20 After the Bell 0.64 DEO Diageo PLC Thu, Feb 20 02:00 am ET N/A ENL Elsevier NV ADS Thu, Feb 20 -----N/A----- N/A ECA EnCana Corporation Thu, Feb 20 -----N/A----- 0.50 HAL Halliburton Company Thu, Feb 20 Before the Bell 0.23 HAN Hanson PLC Thu, Feb 20 02:00 am ET N/A HCC HCC Insurance Hldng Thu, Feb 20 After the Bell 0.50 HRL Hormel Foods Corp Thu, Feb 20 Before the Bell 0.37 IM Ingram Micro Thu, Feb 20 -----N/A----- 0.18 JDEC J.D. Edwards Thu, Feb 20 -----N/A----- 0.03 JCP JC Penney Thu, Feb 20 Before the Bell 0.66 MLS Mills Corporation Thu, Feb 20 Before the Bell 0.93 NXTL Nextel Communications Thu, Feb 20 Before the Bell 0.10 JWN Nordstrom Thu, Feb 20 After the Bell 0.42 PDCO Patterson Dental Thu, Feb 20 Before the Bell 0.43 PDG Placer Dome Thu, Feb 20 -----N/A----- 0.08 RSH RadioShack Corp Thu, Feb 20 Before the Bell 0.59 RUK Reed Elsevier NV/Plc. Thu, Feb 20 -----N/A----- N/A SRE Sempra Energy Thu, Feb 20 -----N/A----- 0.53 SCRI SICOR Thu, Feb 20 -----N/A----- 0.21 SYT Syngenta Thu, Feb 20 Before the Bell N/A TGT Target Corporation Thu, Feb 20 -----N/A----- 0.75 TOT Total Fina Elf Thu, Feb 20 Before the Bell 1.27 TP TPG NV Thu, Feb 20 -----N/A----- 0.40 VCI Valassis Comm Inc. Thu, Feb 20 -----N/A----- 0.62 WGR Western Gas Resources Thu, Feb 20 Before the Bell 0.32 WMB Williams Companies Thu, Feb 20 Before the Bell -0.17 ------------------------- FRIDAY ------------------------------- A Agilent Technologies Fri, Feb 21 Before the Bell -0.25 ING ING Groupe NV Fri, Feb 21 -----N/A----- N/A MDG Meridian Gold Inc. Fri, Feb 21 -----N/A----- 0.10 PBR Petrobras Fri, Feb 21 -----N/A----- 1.26 TKP Technip-Coflexip Fri, Feb 21 Before the Bell 0.24 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable TARR Tarragon Realty Investors 3:2 Feb. 14th Feb. 18th MSFT Microsoft 2:1 Feb. 14th Feb. 18th ODSY Odyssey Healthcare 3:2 Feb. 21st Feb. 24th LCI Lannett 3:2 Feb. 28th Mar. 03rd EXAC Exactech 2:1 Feb. 28th Mar. 03rd -------------------------- Economic Reports This Week -------------------------- Economists may be looking towards the upcoming PPI and CPI reports this week but the world and the stock markets will be watching and waiting for the next scene to unfold in the Iraqi-UN-US saga. ============================================================== -For- Monday, 02/17/02 ---------------- None Tuesday, 02/18/02 ----------------- None Wednesday, 02/19/02 ------------------- Housing Starts (BB) Jan Forecast: 1.775M Previous: 1.835M Building Permits (BB) Jan Forecast: 1.800M Previous: 1.887M Thursday, 02/20/02 ------------------ Initial Claims (BB) 02/15 Forecast: 386K Previous: 377K PPI (BB) Jan Forecast: 0.4% Previous: 0.0% Core PPI (BB) Jan Forecast: 0.1% Previous: -0.3% Trader Balance (BB) Dec Forecast:-$38.5B Previous: -$40.1B Leading Indicators (DM) Jan Forecast: 0.0% Previous: 0.1% Philadelphia Fed (DM) Feb Forecast: 11.0 Previous: 11.2 Friday, 02/21/02 ---------------- CPI (BB) Jan Forecast: 0.3% Previous: 0.1% Core CPI (BB) Jan Forecast: 0.2% Previous: 0.1% Treasury Budget (DM) Jan Forecast: 75.6% Previous: 75.4% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************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 ************************************************************** ********************* SWING TRADE GAME PLAN ********************* Follow the Bouncing Ball Wow! That's about all I can say after a wild day of movement that gave us just about every emotion and gave both bulls and bears a scare at various times throughout the day. I had been talking about a short-covering rally ahead of and possibly during Hans Blix' testimony at the U.N. regarding weapons inspections in Iraq. And boy, did those shorts cover. 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Sunday 02-16-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: EMC Put Play of the Day: EXPE Dropped Calls: None Dropped Puts: CCMP, WHR, GWW, AZO, AT, PII ************************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 ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AMGN 52.59 0.85 0.47 -0.83 -0.67 0.46 Channeling EMC 7.91 0.55 -0.27 -0.18 0.21 0.51 New, uptrend NPSP 23.68 0.49 -0.16 -0.53 0.06 1.58 New, new supply TECD 21.51 0.53 0.33 -0.21 0.23 1.71 New, into gap TRMS 41.02 -0.28 0.78 -1.46 -0.79 -1.19 Holding over $40 PUTS AT 44.88 -0.35 -0.28 -0.80 -0.51 0.38 Drop, stopped AZO 65.70 -1.11 1.31 0.43 -0.43 1.60 Drop, stopped CB 48.69 0.80 -1.25 -0.43 0.14 -0.61 Weakness CCMP 44.31 0.28 -0.78 0.77 -0.17 2.03 Drop,SOX strong EXPE 59.75 -0.87 0.27 0.16 -1.94 -3.10 New, Rolled GWW 46.17 -0.10 1.22 -0.81 0.03 1.77 Drop, Market HIG 50.30 0.32 -1.16 -0.58 -0.93 -1.68 New, weakness PII 50.30 0.95 -0.03 -1.77 0.36 1.65 Drop, over $50 WHR 50.42 0.53 -0.45 -0.04 -0.63 -0.38 Drop, never in ************************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 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* EMC - EMC Corporation - $7.91 +0.05 (+0.48 for the week) See details in play list Put Play of the Day: ******************** EXPE – Expedia, Inc. $59.75 (-3.45 last week) See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ CCMP –44.31 +2.38 (+2.34 for the week) On Friday morning the semiconductor index broke out of its recent trading range – but not in the direction we hoped it would. The sector was lifted by a positive reaction to DELL’s (and to a lesser extent, NVDA’S) quarterly earnings announcements. There were also some bullish comments out of the Taiwan Semi (TSM) camp. While these developments probably would’ve taken a back seat to a U.N.- induced market sell-off, the major indexes actually rallied on Hans Blix’s comments. This proved to be too much for CCMP bears to handle. Shares proceeded to move through $44.00 and our stop- loss at $44.06. Our short play was stopped out for a loss of less of one percent. On the 60-minute chart, we see that the SOX.X has traced a double-bottom pattern. This formation, along with the breakout from the recent consolidation range, is a sign that the index could be headed for a test of overhead resistance at 290. Further upside action in the SOX.X could push CCMP above the 200-dma near $45.00. The stock faces more substantial resistance at $48.00. A failed rally from this level might provide another bearish entry point. --- WHR $50.42 +1.09 (-0.17 for the week) Our entry trigger was set on this short at $48.67. WHR bounced hard, with the rest of the broader market, following Hans Bilx UN presentation that seemed to indicate weapons inspections may continue for a while and the prospect of war may not be as immediate as most investors believed. Whether that ends up being true or not, this stock managed to erase the previous day's loss and pop back above the $50 level that seemed to provide resistance after serving as support since late January. We don't like the move back over $50 and since we were never triggered, we are simply going to call a do-over and drop this one from the play list. If it does roll over and break down below our trigger, it would look much better as a short and we would consider adding it back at that point. --- GWW $46.17 +1.47 (+1.27 for the week) Grainger is one of the broad sector stocks that caught fire with the rest of the market following the Blix testimony. it managed to erase the entire week's loss in one fell swoop and burst back above its recent $45 breakdown level to just about where we entered the short. We are concerned about the broad market action and this stock has some room to bounce if the rally continues. The 21-dma still sits just above the current level, at $46.81 and more aggressive traders that choose to hold the play can target that level as a stop from here, but we are going to let it go after it bounced twice from $44. A breakdown below those recent bottoms may signal a new round selling, so if we pullback with a big drop on Monday and the stock gets below that level, traders may want to give it another chance. If not, use a pullback to pick up some gains on an exit. --- AZO $65.70 (+1.55) Just when AZO looked like it would break back under the $63 level on Thursday, the shorts threw in the towel and the stock recovered back to just below the $64 level at the close. Friday's session was ruled by news events, whipping the markets strongly in both directions until the bulls finally won. AZO found early support just above $63 and then the buying began. After stalling just below our stop at $65, the final ramp into the close took out that resistance with conviction. That broke the stock above the 2-week descending trendline, so we are obviously dropping the play tonight. --- AT $44.88 (+0.38) After more than two weeks of consistently tracing out lower highs and lower lows, AT really caught fire on Friday with the rampant short-covering in the afternoon session. AT recouped all of its losses from the first four days of the week and then closed above its 10-dma for the first time since the middle of January. The initial rally stalled just below the $44.50 level, but when it continued higher into the close, it removed any question about dropping the play this weekend. AT was a nice winner of a play while it lasted, but the music stopped on Friday, so we'll chalk it up as a small winner. --- PII $50.30 (+1.53) Our PII play got a reprieve on Tuesday with its rally failure just below the descending trendline, and that rollover was enough to drive the stock down to new recent lows near the $47 level. But things changed dramatically on Friday, with the broad market rebound taking our play along for the ride. It still looked like resistance at the descending trendline would serve to keep the stock under pressure up until the final hour. Then the final group of shorts covered and PII blew through both that trendline and our $50.10 stop. Additionally, the stock closed above its 10-dma for the first time in over a month, solidifying our rationale for dropping the play this weekend. *********** 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. ************************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 ************************************************************** ********** 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 02-16-2003 Sunday 3 of 5 In Section Three: New Calls: NPSP, EMC, TECD- Current Calls: AMGN, TRMS New Puts: EXPE, HIG ************************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 ************************************************************** ************** NEW CALL PLAYS ************** NPSP - NPS Pharmaceuticals Inc. +1.32 (+1.72 for the week) Company Summary: NPS discovers, develops and intends to commercialize small molecules and recombinant proteins as drugs, primarily for the treatment of bone and mineral, metabolic, gastrointestinal, and central nervous system disorders. (source: company release) Why We Like It: Sometimes a company can have a great idea, but run into roadblocks along the way. Fellow OI call play Trimeris ran into a similar problem to NPS - good products, but difficulty making enough of them. NPSP saw its stock drop 25% last May when it warned that trials of osteoporosis drug Preos could be disrupted because of a lack of supply of the material needed to make it. The company came out a week ago and said it had now acquired enough of the material to complete clinical trials. It has also signed long-term agreements with its Synco, it current supplier and partner Boehringer Ingelheim that will allow it to meet commercial requirements if the drug is approved. Even prior to that announcement, the company saw its rating raised at Morgan Stanley from 'equal-weight' to 'over-weight' on January 29. While the biotechs have been a tough lot to predict, Salomon Smith Barney analyst Elise Wang recently stressed focusing on those companies with products with strong earnings growth, or with products in late stage testing, highlighting NPSP as one of those stocks. NPS said it expects to complete a late-stage clinical trial of Preos in September. The stock took a beating in late January, but has rebounded nicely and was defended by Lehman, which cited its expectation for strong data in the next 12 months for both Preos and AMG-073 and said the stock's recent weakness presented a buying opportunity. Apparently investors stepped up and took advantage and now the stock has not only bounced after setting a double bottom just over $20, but is approaching a vacuum are to the upside just above $25. That $25 mark is also where bearish resistance comes in on the point and figure charts and conservative traders may want to hold off until the stock clears that hurdle before going long. However, the stock blew through its 200-dma on Friday on a closing basis. That 200-dma had provided a ceiling over the last three weeks and we like the strength of the bounce on a volume spike to get our play activated at current levels. If the stock does break above the $25 mark, which will likely present some resistance, we will get a new PnF buy signal at $25 and a bullish vertical count of $34. That count can grow with the current column of 'X'. Set stops at $20.94, just below recent closing lows. More aggressive traders can set stops below $20 to allow `for another bounce from those double bottoms $20.30. Longer term traders should note the company will be releasing earnings on February 27 and as is our policy, we will be dropping the play ahead of those earnings. BUY CALL MAR-22.50 QKK-CX OI= 61 at $2.90 SL=1.45 BUY CALL MAR-25 QKK-CE OI= 432 at $1.50 SL=0.75 BUY CALL MAY-22.50 QKK-EX OI= 13 at $4.10 SL=2.05 BUY CALL MAY-25 QKK-EE OI= 569 at $2.80 SL=1.40 Average Daily Volume = 432 K --- EMC - EMC Corporation - $7.91 +0.05 (+0.48 for the week) Company Summary: EMC Corporation is the world leader in information storage systems, software, networks and services, providing automated networked storage solutions for organizations across the globe.(source: company release) Why We Like It: Friday's rally in the techs was quite powerful, lifting the Nasdaq Composite 32 points and breaking through previous resistance (and support) at 1300. EMC added only a nickel to the price, but in actuality looks much stronger than may of the techs that saw big gains. Those stocks showing the biggest numbers over the last two days are also the stocks that have been the weakest and had some room to bounce. We'd rather put our call money on a stock that has been in a consistent uptrend and has decent future prospects. EMC has held its upward trend throughout the market decline of the last month, establishing a rising support trend line, indicating higher lows ever since the end of December. The current formation has encountered resistance around $8, so has a rising bottom and a flat top. This pattern is very bullish on an upside breakout. The stock has actually been putting together a series of higher lows as it has risen since bottoming with the rest of the market last October. The company recently introduced a new line of data storage boxes named Symmetrix DMX, which have been positively received by beta testers and analysts alike. The new product could account for 50% of the Symmetrix sales for EMC. The company is betting a big investment on the product and CEO Joe Tucci said, ""We have clearly said that in this year, we will grow faster than any high-end storage provider... We (currently) have over 50% market share. Clearly, we expect to grow faster than the rest of the high-end of the market." In addition to the mew system, the recent earnings release and projections from Dell are a big boost for EMC, as well. Dell is a significant partner of EMC's in the storage area and its guidance matched expectations as it continues to build market share. While matching expectations does not seem to be a reason to bang the drum, it has been a rare occurrence recently, with companies such as Microsoft and IBM making cautious statements about the future. Analysts expect EMC's sales to increase steadily throughout 2003, with revenue for the year pegged close to $6 billion. While that is short of 2001's numbers, it is $550 million higher that 2002 and earnings projections of 11 cents per share far outstrip 2002's loss of 5 cents. A look at the point and figure chart shows the stock in a column of 'X', having spiked higher from the October low of $4 per share. The stock rallied, got a pullback to a higher low and has once again moved higher, giving a buy signal at $8. The current bullish vertical count puts the stock close to $15, which coincides with its bearish resistance line and that number can be used as an eventually target for longer term players. That would amount to almost a doubling in price and we are going to target the next level of resistance on the PnF at $12.50 as a more reasonable target on the play. The stock has not managed to close above $8 and conservative traders can wait for that achievement before getting in long. We will enter the play here, but with a recent high of $8.28, momentum traders may want to wait for a break over $8.30 for entry. Set stops at $6.49, just below recent lows, as that would indicate a break in the trend of higher lows. BUY CALL MAR-5 EMC-CA OI= 701 at $3.00 SL=1.45 BUY CALL MAR-7.50 EMC-CU OI= 10274 at $0.90 SL=0.00 BUY CALL APR-5* EMC-DA OI= 3461 at $3.10 SL=1.55 BUY CALL APR-7.50 EMC-DU OI= 27808 at $1.15 SL=0.00 Average Daily Volume = 15.7 mln --- TECD – Tech Data Corporation $21.51 (+2.01 last week) Company Summary: Tech Data Corporation is a provider and distributor of information technology products, logistics management and other value-added services. The company distributes microcomputer hardware and software products to value-added resellers, direct marketers, retailers corporate resellers and Internet resellers. TECD and its subsidiaries distribute to more than 80 countries and serve over 100,000 resellers in the United States, Canada, the Caribbean, Latin America, Europe and the Middle East. The company's broad assortment of vendors and products meets the customers' need for a cost-effective link to those products through a single source. Why We Like It: There aren't many stocks that can claim a 10% gain last week, with the broad markets still very nervous ahead of military action in Iraq. Even more impressive would be if it were a technology stock involved in the Information Technology food chain. Guess what? That's exactly what we have this weekend. TECD got pummeled just over a week ago, after the company warned of a 15-25% shortfall in earnings for the 2004 fiscal year. First Albany followed up by slashing its estimates for the company and the stock fell from the $24 level almost to the $19 level on very heavy volume. That was a 21% haircut, and apparently investors have now figured all the bad news is discounted in the price of the stock. In the past 5 days, the stock has been rebounding smartly, and on pretty robust volume too. We're not looking for any great rally out of the stock, just a move up to fill that gap near the $24 level. A quick dip to the $20-50 level (intraday support for the past 4 days) would make for the ideal entry, although we aren't going to pass up a momentum entry either. Those looking to trade a breakout will want to wait for a trade above the $21.75 level (just above Friday's intraday high) before jumping in. Our initial stop is set at $19.74 *** February contracts expire next week *** BUY CALL FEB-20*TDQ-BD OI=101 at $1.75 SL=0.75 BUY CALL MAR-20 TDQ-CD OI=888 at $2.50 SL=1.25 BUY CALL MAR-22 TDQ-CX OI= 15 at $1.00 SL=0.50 BUY CALL JUN-22 TDQ-FX OI= 3 at $2.15 SL=1.00 Average Daily Volume = 1.09 mln ************************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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** AMGN – Amgen, Inc. $52.60 (+0.51 last week) Company Summary: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why We Like It: After pulling back from its recent attempt at pushing through resistance, AMGN wasn't looking very good Thursday morning, once again testing the $51 support level. But then a funny thing happened, as buyers showed up to support the stock right at its ascending support line that has been in force since late September. While AMGN stabilized near the $51.50 level, it wasn't having much success at actually pushing significantly higher until the broad market rebound really got underway Friday afternoon. That pushed the stock back up to the $52.50 support/resistance level, leaving the play right at a critical level. We were looking for a push through the $52.75 level to give us confirmation on a bullish move and the bulls didn't quite get there before the clock ran out on Friday. Traders that took advantage of the rebound from the $51 level to open new positions are looking good right now, and we can still use a dip and rebound from above that level (preferably above $51.50) as a solid entry point. A continuation of Friday's bullish move early next week can be used to open new positions on a successful push through that $52.75 level. The big picture is that AMGN is still maintaining its trend of higher lows and as long as that pattern continues, an eventual breakout over $54 seems likely. Critical to the success of our AMGN play will be whether the Biotechnology sector (BTK.X) can solidify its rebound of the past couple days and push up through resistance in the $325-330 area. Maintain stops at $50.50. *** February contracts expire next week *** BUY CALL FEB-50 AMQ-BJ OI=11310 at $2.95 SL=1.50 BUY CALL MAR-50*AMQ-CJ OI= 3657 at $4.20 SL=2.50 BUY CALL MAR-55 YAA-CK OI=22967 at $1.25 SL=0.50 BUY CALL APR-55 YAA-DK OI=30363 at $2.35 SL=1.25 Average Daily Volume = 12.6 mln --- TRMS – Trimeris, Inc. $41.12 (-0.51 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: Despite the strong rebound in the broad markets on Friday, the Biotechnology sector (BTK.X) was notably absent from the leader board throughout the day. Although it did manage to finally end the day in the green, it wasn't far off its worst levels since the middle of October. Despite that sector weakness, our TRMS play bravely fought its way back in the afternoon session. After a quick spike down to the $39.50 level Friday morning, the stock spent most of the day drifting around the $40.50 level before a surge of short-covering volume showed up in the final hour of trade, propelling price back over $41. TRMS isn't out of the woods by any stretch of the imagination, but Friday's rebound is encouraging in that it confirmed the strength of that $40 support level. While aggressive players could certainly have bought the rebound from the $40 level, those with a more conservative risk profile will need to exercise a bit of patience. Should Friday's sharp afternoon rebound continue next week, a push through the $41.50 level can be used for new entries, as it would have TRMS once again over its 10-dma ($41.19) and recent intraday resistance. Those looking for a real breakout before playing will need to wait for the bulls to push through the $43 resistance level that held them in check last week. Note that the 50-dma has now fallen below $43 (actually $42.89) and a break over this level should have TRMS bulls setting their sights on the $45 level. Keep stops in place at $39.50, because if that support fails to hold, we'll clearly have a busted play on our hands. *** February contracts expire next week *** BUY CALL FEB-40 RQM-BH OI= 445 at $2.20 SL=1.25 BUY CALL MAR-40*RQM-CH OI= 298 at $4.20 SL=2.50 BUY CALL MAR-45 RQM-CI OI= 336 at $1.65 SL=0.75 BUY CALL APR-45 RQM-DI OI= 715 at $2.25 SL=1.25 Average Daily Volume = 517 K ************* NEW PUT PLAYS ************* EXPE – Expedia, Inc. $59.75 (-3.45 last week) Company Summary: Expedia is a provider of online travel services for leisure and small business travelers, offering one-stop shopping and reservation services with real-time access to schedules, pricing and availability. The company's global travel marketplace includes direct-to-consumer Websites offering travel-planning services at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.nl and Expedia.it. In addition, the company provides travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is a division of Travelscape, Inc., one of EXPE's wholly owned subsidiaries. Why We Like It: Between the still-weakening economy and the growing geopolitical and terrorism concerns, travel-related stocks have not been on investors' "Buy" lists. And that situation isn't likely to change to any appreciable degree until one or both of those impediments to earnings growth are removed. Ever since early December, shares of EXPE have been in a persistent downtrend, with every rebound providing yet another opportunity for entry into new bearish positions. The descending trendline connecting the early December and early January highs currently rests at $63, and with the declining 20-dma and 200-dma both drifting southwards below that line, we've got some stiff overhead resistance. The latest rebound attempt came on February 6th after the company reported better than expected earnings and announced a 2-for-1 split. Remember the days when that sort of news was good for a 20% gain the next day? Well, not this time. Dampening investors' spirits was news that the company's was resigning. So even with a Legg Mason upgrade the morning after earnings, the upside action was short-lived (1 day) before the selling party resumed. The past week has been a series of lower highs and lower lows, but after testing the $58.75 level on Friday, EXPE went along with the short-covering theme in the rest of the market, recovering all its intraday losses by the close. It doesn't take a rocket scientist to see that the bulls expended a lot of energy getting back to break even, and it is our hope that they continue on that path when the markets reopen on Tuesday. A rally to the $62 level looks like a high-odds short entry opportunity, with both the 20-dma and 200-dma clustered around that level. A weaker rally attempt that fails near the $61 level is also a viable entry, especially if it occurs at the same time the broad market is rolling over as well. Initial stops are set at $63.10, just above the descending trendline. *** February contracts expire in two weeks *** BUY PUT FEB-60 UED-NL OI=4925 at $1.85 SL=1.00 BUY PUT MAR-60*UED-OL OI=2565 at $4.20 SL=2.50 BUY PUT MAR-55 UED-OK OI=2351 at $2.35 SL=1.25 Average Daily Volume = 2.20 mln --- HIG - Hartford Financial Services $37.00 (-1.67 last week) Company Summary: Hartford Financial Services Group is a diversified insurance and financial services company. The company provides investment products, individual life, group life and group disability insurance products, as well as property and casualty insurance products in the United States. HIG writes insurance and reinsurance in the United States and internationally, and is organized into two major operations: Life and Property & Casualty. Why We Like It: Blame it on the terrorists, investment losses, liability concerns or just the overall market environment, but Insurance stocks have not been doing well lately. This fact is borne out by the action in the Insurance index (IUX.X), which broke both its July and October lows last week. The index finally finding a bit of support following some bullish comments from insurance giant AIG. Last week, we added a put play on CB, and with its lack of participation in the short-covering rally on Friday, we decided to add another bearish play in the sector. HIG has been in a persistent downtrend since mid-January, with the last test of the declining 10-dma (currently $38.76) being a month ago. A rumor surfaced on Thursday that HIG might announce a secondary offering soon, but trading sources disputed that rumor, saying the company won't be able to raise money in the near-term due to their asbestos liability along with investors' reluctance to buy insurance shares during a period of heightened terrorism concerns. While that rumor may not have hurt the stock, it certainly didn't help, as HIG slipped below its October lows ($37.25) at the close on Thursday and found intraday resistance near that level on Friday. The PnF chart is downright ugly, with the most recent column of O's now pointing to a bearish price target of $24. An oversold rebound early next week could provide a very attractive entry point, as the $38.75 level ought to make for some stiff resistance. More aggressive traders can target a breakdown below Thursday's intraday low ($36.25) as their entry into the play. Our initial stop is set at $39.50. *** February contracts expire next week *** BUY PUT FEB-40 HIG-NH OI=108 at $3.20 SL=1.50 BUY PUT MAR-40*HIG-OH OJ=116 at $4.10 SL=2.50 BUY PUT MAR-35 HIG-OG OJ=543 at $1.40 SL=0.75 Average Daily Volume = 1.31 mln ************************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 ************************************************************** ********** 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 02-16-2003 Sunday 4 of 5 In Section Four: Current Put Plays: CB Leaps: Was That The Bottom? Traders Corner: Covering Your “6”, But What About Your 1 through 5? ************************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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** CB - Chubb Corporation $48.69 (-0.75 last week) Company Summary: Chubb Corporation, incorporated in June 1967, is a holding company with subsidiaries principally engaged in the property and casualty insurance business. The Company presently underwrites most forms of property and casualty insurance. The Company's Property and Casualty Insurance Group writes non-participating policies. Several members of the Property and Casualty Insurance Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. Why We Like It: Remember that pattern of lower highs and lower lows that attracted us to the CB play in the first place? Well, it is still very much in place, as the stock opened at its high of the day and after plunging down to a fractionally lower low just above the $47.50 level, had to struggle to get back into the green by the close. That isn't very impressive from a bullish standpoint, as the broad market really ramped up into the closing bell. Even the Insurance index (IUX.X) tacked on nearly 2.5% to round out the day. That leaves the impression that, even if the market or IUX index continue their rebound next week, CB is likely to lag that advance, making it a solid put candidate, especially if the broad market rebound once again fails. The PnF chart still has a bearish price target of $44, and at the current rate, that target looks very attainable. The best possible entry into the play right now looks to be a rally failure in the vicinity of $50, which is both recent historical resistance, as well as the declining 10-dma ($50.15). Given the way the stock has been finding support at its slightly lower lows over the past couple days, we need to exercise caution with trying to enter on what appears to be a breakdown move. But for those so inclined, a trade below $47.50 looks like the appropriate trigger point. If trading momentum to the downside, make sure to confirm weakness in the IUX index before taking the plunge. On the outside chance that CB is finding a bottom near current levels, we're lowering our stop to $50.75, just above last week's intraday highs. *** February contracts expire next week *** BUY PUT FEB-50 CB-NJ OI=612 at $1.90 SL=1.00 BUY PUT MAR-50*CB-OJ OI= 95 at $3.30 SL=1.75 BUY PUT MAR-45 CB-OI OI=100 at $1.15 SL=0.60 Average Daily Volume = 1.41 mln ************************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 ************************************************************** ***** LEAPS ***** Was That The Bottom? By Mark Phillips mphillips@OptionInvestor.com I'm going to keep it short and sweet this weekend, as I quite honestly don't know what to make of the market action late last week. Everything appeared to be proceeding towards the October lows in an orderly fashion, with rallies continually capped at lower levels. Then an interesting thing happened on Friday, as we got some serious short-covering at the end of the day. Here's what I found interesting about it. Nothing happened to reduce the risk of a terrorism attack over the long weekend, and the Bush administration seems just as intent to go to war with Iraq as they have been for the past several months. Nothing that transpired at the UN seems to have had any impact except that it seems that whatever is done will occur without the participation of the French and the Germans. Big Deal! So I'm left with the thought that maybe the market has fully discounted the prospects of war and is once again turning to developments in Corporate America for direction. Wow, wouldn't that be a pleasant change of pace? I think there's some merit to this idea, because of how the market reacted. Thursday night brought a couple of really nice earnings reports from DELL and NVDA (I'm ticked about both of them, but more on that below) and the market started out on Friday in the green. But the bulls didn't want to bet too heavily ahead of the Blix report and as he revealed the details of his report the market released a big sigh of relief, quickly shooting the DOW up to just below the 7900 level, nearly 300 points above Thursday's intraday low. Then things got choppy through the middle of the day until the final hour. I think what happened is that the bears figured out that if anything, the geopolitical situation had cooled off a bit in the near term and they turned their attention to the Thursday night's earnings reports. By now, the bulls had done the same thing and it was a good old-fashioned short-squeeze into the close. So the $64,000 question is whether what we saw was a bottom or if Friday's gains are going to be taken away by the cranky bears again next week. Personally, I would side with the bearish thesis, as most of the bullish percent readings still have a ways to go before reaching oversold territory. The DOW is the only one that looks to be close to a bottom (now below 14%), with the SPX at 34%, the OEX at 28% (just barely into oversold), the NDX still up at 32% and the COMPX at 38%. With the notable exceptions of the SPX and COMPX, the other indices are all still in Bear Confirmed, so we're still premature in trying to call a bottom to the recent slide. That said, the bears are now carrying the bulk of the risk in this market, and we saw what effect that can have on Friday. Continuing in its role as the Great Humiliator, the market has continued to use me as its foil over the past several weeks. Another way of looking at it is that timing is everything! Need proof? Take a look at the following list of recent LEAPS Portfolio plays, all of which were very frustrating on a personal level. BBH (Put) - Entered at $89.52, and stopped out at $93.05 GM (Put) - Entered at $39.95, and stopped out at $40.50 DELL (Call) - Entered at $26.81, and stopped out at $23.34 Why are these plays so frustrating? Because each of them stopped me out (some just barely) before reversing substantially in my favor. Have you taken a look at where they're trading as of Friday's close? GM has now fallen to $33.10 and looks to be headed lower. After barely stopping us out, the BBH was back to testing the $85 support level (also the site of the 200-dma) late last week. And DELL really took off on Friday, to the tune of almost 11% following its strong earnings report. Want an idea of the magnitude of DELL's move? In one day, the stock wiped out an entire MONTH's losses. So I'm not upset about getting stopped out of any of these plays. What irritates the $%*& out of me is just barely getting stopped out on each of them before they turned around and ran in my favor. If any of you are holding onto positions in any of these plays from my prior coverage, I would consider tightening stops on the Put plays to no worse than breakeven. DELL is a stickier question, as the PnF chart is still on a Sell signal. But based on Friday's action, I think that Sell signal was a bear trap and now the stock is going to go on to fulfill the bullish aspirations I had for it a couple months ago. See what I mean about timing? The real wild card in my opinion is the action in the VIX. I think it is really interesting that even when the market was selling off early on Thursday, the VIX still couldn't top 41. That wasn't an accident! I highlighted that issue in my commentary last weekend, and the chart I showed got even more stretched out of proportion this past week, with the OEX falling all the way to 408...but still no breakout in the VIX. Call me a conspiracy nut if you like, but the simple fact is that the VIX didn't break out because there wasn't enough fear in the market to cause that to occur. Now we'll find out if it was nerves of steel or just plain complacency. I've replicated last week's chart for reference here. OEX vs. VIX - Daily Chart As I said last week, another sharp selloff in the market "should" spike the VIX well above the 40 level. But it didn't happen. When what you expect to happen in the market doesn't, that should be a wake up call, that perhaps you're wrong. At the very minimum it should tell you that market participants with deeper pockets than you or I are acting differently than we thought they would at this point in the game. That's a warning to be very careful. With that, let's move onto the plays, as we've got some major changes to deal with this week. Portfolio: None Watch List: DJX - Dropped from the active list, but it seems it is time to switch sides. I'm swapping this one from Put to Call and now we're looking for a bullish entry. BEAS - Friday's action in shares of BEAS was really interesting, as the stock didn't participate in the short-covering party. Instead, the stock just meandered around its recent support near $10, closing just fractionally above there, just as it has for the past week. No hurry to enter this play, as we are waiting for that bullish support line at $8.50 to be tested. Keep the entry target set where it is and exercise patience. NVDA - All right, now that just ticked me off! Working perfectly according to my plan, NVDA cracked the $10 support level early last week, and it seemed well on its way to fulfilling our entry requirements. Then the company came out with earnings that were 400% better than consensus estimates and this was real earnings, not pro-forma! Where was the comment from the company giving some indication of this blowout? Sounds fishy to me! But all I'm really complaining about is missing out on a great entry point, because now we need to try to find a way to get aboard. I'm now looking at the area of Friday's gap to measure the strength of the stock. A successful rebound from anywhere in the $10.50-11.00 area can still be used to enter the play. I'm just not comfortable with chasing the stock higher with the PnF chart still on a Sell signal. QCOM - Now that's what I call a perfect entry. Check out the details below. MSFT - Still waiting to see what transpires after the split next Tuesday. I expect a drop after that event, but it will likely depend on what is going on in the broad market. Given the explosion in DELL on Friday, MSFT's nearly 3% gain seems rather tame. I'm sticking with the initial entry strategy, which means after the split, we'll be looking for a dip into the $21.50-22.50 area to provide entry. In the meantime, we'll just keep it on the radar screen. If anything significant happens next week, look for updates on MSFT in the Market Monitor. Despite the impressive earnings late last week from the likes of DELL and NVDA, I continue to believe this is a geopolitically-driven market. That means the market can soar for apparently no reason, just as easily as it can dive for the same invisible reasons. Conservative traders should be on the sidelines until there is some resolution to the Iraq situation and even those with a more aggressive approach should still be playing with reduced capital positions. Keep in mind, the VIX is still trolling along just below its recent highs, and if it something 'bad' happens, it will likely punch through that 41 resistance level like a hot knife through butter! Have a great extended weekend! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None QCOM 02/14/03 '04 $ 40 LLU-AH $ 4.60 $ 4.90 + 6.52% $30 '05 $ 40 ZLU-AH $ 7.90 $ 8.30 + 5.06% $30 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 $10-11 JAN-2004 $ 12 KMF-AV CC JAN-2004 $ 10 KMF-AU JAN-2005 $ 12 XMF-AV CC JAN-2005 $ 10 XMF-AU MSFT 02/09/03 $21.50-22.00 WAIT Until After 2/18 DJX 02/16/03 $77.50 DEC-2003 $ 80 DJX-LB CC DEC-2003 $ 76 DJX-LX DEC-2004 $ 80 YDJ-LB CC DEC-2004 $ 76 YDJ-LX PUTS: None New Portfolio Plays QCOM - Qualcomm $34.70 **Call Play** The rebound in the broad markets late last week gave us just about the perfect setup for our QCOM play. Recall that we added the stock to the Watch List due to its stubborn resilience throughout the January swoon in the broad market, holding stubbornly to the $35 support level. Well, we really wanted to take our first position on a successful rebound from that level, but we never got the chance. Some negative press from the WSJ on Thursday morning knocked the legs out from under the stock, driving it down to just below our secondary entry target of $33 and then the stock popped up above that level after being defended by Lehman brothers on both the issue of INTC competition and expansion in China. Bang! Entry point! Confirming the bounce, QCOM fell on Friday to almost kiss the 200-dma ($32.39) before a powerful afternoon rebound drove the stock to just below the $35 level. Subsequent dips and rebounds above the 200-dma can still be used to enter the play, while more conservative traders may want to wait until the stock is able to once again close over the $35 level. Remember that we targeted the $33 level for entries, as the PnF chart had that level pegged as its bearish price target. Now that it has been achieved, we'll have to watch for a new PnF Buy signal, as well as the weekly Stochastics turning bullish again. To avoid being stopped out prematurely, I'm setting our initial stop at $30. BUY LEAP JAN-2004 $40 LLU-AH $4.90 BUY LEAP JAN-2005 $40 ZLU-AH $8.30 New Watchlist Plays DJX - Dow Jones Industrials $79.09 **Call Play** Ready to rumble again? It seems like we've been playing the DJX one way or the other for months on end now, and the plain and simple reason is that it gives us lots of metrics for monitoring the play. That and the fact that it tends to have some pretty significant moves, if we can only get a decent entry point early in the move. Well with the DOW's Bullish percent falling to 14% last week and the weekly Stochastics just trying to turn a bullish reversal, I think we're about as close as we're going to get to a solid bullish setup. The one remaining fly in the ointment is the bearish measuring objective from the Head & Shoulders breakdown, which is near th3e $75 level. That tells me to expect one more push to the downside before the bulls truly show some conviction. But even with all the geopolitical risks, I don't think we'll see a move much below the $75 level on this downward move. In fact, my biggest concern is that the bulls just ramp this thing away from us next week for no good reason. If that happens, I won't be chasing it. Either the market gives us the entry we're looking for, or we let it go without us. Speaking of entries, I'll bet you're wondering what I'm hoping for. First up, I'd prefer to see this rally attempt fail below the $80 level and give us another drop to the $76-77 area, to confirm it as support. But we may not go quite as low on the next downward move, so I'll set the entry target at $77.50, subject to potential revisions, based on action in the broad market. Once we're in the play, we're going to start with a wide stop set at $74. BUY LEAP DEC-2003 $80 DJX-LB BUY LEAP DEC-2003 $76 DJX-LX **Covered Call** BUY LEAP DEC-2004 $80 YDJ-LB BUY LEAP DEC-2004 $76 YDJ-LX **Covered Call** Drops NEM - $27.64 I sure hope those of you following along with this play heeded my repeated advice to harvest gains near the $30 level! With the price of gold surging so strongly in recent weeks and NEM unable to break above the $30 level, it seemed like a bit of divergence setting in, and not in favor of the play. Sure enough, gold finally relaxed from its recent highs and settled at the end of a rather volatile week more than $30 below its recent highs. We were stopped out of our NEM play on Monday when the stock fell below both our $28 stop and the 50-dma. Note that this was the first close under the 50-dma since charging higher in early December. At its best levels our NEM play was sitting with better than a 40% gain, but with volatility coming out of the stock over the past few weeks, we've done well to get out at par, right where we started. While we've exited the play for now, I'll be watching for another opportunity to play the long side in the weeks to come, as I think the bull market in gold has a long ways to run after this correction has run its course. DJX - $79.09 That was close enough, and it is time to pull the plug on this bearish play. Although we never officially took a position in the play, those that did, got a nice little ride for their trouble. We were initially looking bearish the DJX up near the $88 level, with an eventual target of $75-77 in mind. Isn't it interesting that the DJX traded down to just above $76 on Thursday before the solid rebound to round out the week. It has been a winning play for those that chose to take it, but now with the DOW bullish percent deep in oversold and the weekly Stochastics trying to turn up, I think it is time to close this one out. While I don't personally think last week's rebound will continue higher from here with the war fears still lingering about, I think we may have seen the bottom for this cycle. GS - $66.70 Turn out the lights, the party's over. I'll be the first to tell you that I've been impressed with the resilience of this Brokerage stock over the past month. Even with the extreme weakness in the broad market and the Brokerage sector (XBD.X), I expected to see more weakness from GS. I thought the breakdown under the $67 level was going to lead to much lower levels, but apparently not, with the $64 level apparently providing strong support. What really convinced me to pull the plug was the break of the descending trend. GS entered into a steady descending trend back in the middle of January, when it rolled over just below $76. Friday's late-day short covering blasted the stock through that descending trendline for the first time in a month, and on strong volume too. For those of you that were following the play, I think it is time to close it out and move on. IBM - $77.45 Too late to the party, is my excuse on IBM. The ideal entry would have been up near the $88 level, but that was before I even listed it on the Watchlist. After I did highlight the stock, there wasn't one decent bounce to give us a good entry into the play and I think we may be looking at the bottom for the time being. Note the strong rebound from Thursday's dip below the 200-dma and on Friday Big Blue ended right at its high of the day. Finally, we have the weekly Stochastics trying to bottom in oversold and the daily once again turning up. I'm dropping the play in favor of some of our new bullish candidates. ************** TRADERS CORNER ************** Covering Your “6”, But What About Your 1 through 5? By Mike Parnos, Investing With Attitude You've heard about Spain's famous "Running of the Bulls"? But did you know there are two "follow-up" events? The "Soiling of the Pants." And then the "Burying of the Idiots." Well, we at the Couch Potato Trading Institute (CPTI) can’t help the idiots that have already been soiled and buried. However, for those who are still breathing, relatively unsoiled and reasonably coherent, we can offer some guidance. _____________________________________________________________ Building Your Parachute Readers have asked of how to trade safely in their IRA accounts. As much as we at the CPTI like our complicated, low risk spread strategies, there is a problem. Only a select few brokerages allow spread trading or pure (unmarried) option purchases in an IRA. So, in a situation where you have to own stocks (we HATE owning stocks, but . . .), can you do it without risking the entire value of the stocks? Yes. Readers on this site are very familiar with covered calls. One of the “selling” points of a covered call is that it’s supposed to provide you with a cushion. A buck? Two? That’s no cushion. That’s a joke. Even if you sell an ITM (in-the-money) covered call, you’re still taking a substantial risk – especially since most traders don’t have the discipline to close out a position before it can do serious damage to their account. Hey! Dirty Harry said, “a man’s got to know his limitations.” Unfortunately, too few traders know theirs. At the CPTI we need something more substantial than a simple covered call. We’re not gamblers and we recognize the fact that we’re not going to be right all the time. We want our risk to be small and defined. No surprises. Below is a hypothetical examples of how you can be optimistic and cover your “6” (I watch “JAG”) at the same time. ______________________________________________________________ Dialing Up AOL AOL is trading at $10.50. Where do you think it’s going to be by January 2005? Could it be at $15? 20? 25? Buy The Stock -- Buy 1,000 shares of AOL at $10.50 = $10,500 Buy Your Insurance -- Buy 10 contracts of the AOL January 2005 $10 put for $2.70 = $2,700 Your out-of-pocket (cost basis) for the position would be $13,200. That means that you would not be profitable until AOL trades above $13.20. But you’re optimistic, right? Miss Cleo personally told you AOL would be over $20. George W. should have such good sources . . . What A Bargain! Look at what you paid for your insurance -- $2.70 – for 22 months. $2.70 seems like a lot of money, but it’s only 12.3 cents per month – and you’re protected from $10 all the way down to zero! What If . . . AOL is $18.00 by January 2004 expiration (in 10 months)? a) You could close the entire position. Sell the AOL for $18. Plus, your 2005 $10 put still has a year to go and may have a value of about $.20. So you’ve taken in $18.20. You’re profit would be about $5,000. b) But wait! You just checked with Miss Cleo again and she said “don’t sell! AOL is going to $30!” You can repeat the process by buying the January 2006 $17.50 put. The numbers would be approximately the same and you would have locked in your profit. This method of trading is commonly used (by knowledgeable traders) in regular (non-IRA) brokerage accounts. It allows them to lock in profits without selling the stock – which could avoid potential capital gains tax ramifications. So, if you’re right – and patient – this is a method that can save you from catastrophic events and allow you to lock in profits – for only pennies a month. You Want More? There are ways to further enhance your return using this same strategy. a) You can actually sell a covered call on AOL if you believe its move up will be slow and methodical. What if you only took in an average of $.25 per month? Multiply that by 22 months and you would have an additional $5.50 over the life of the position. b) You could also (not in an IRA) sell an OTM (out-of-the-money) put against your long January 2005 $10 put and possibly generate an additional $.15 per month. These “enhancing” strategies may better be used with a more volatile stock. By selling a covered call too close, you risk a sudden upward move of the stock and having the stock called away prematurely. Plus, selling against your long put, unless it’s far OTM, can limit your downside protection. Risk vs. Peace Of Mind Your risk was $.50 (the difference between where you originally bought the shares of AOL) plus the $2.70 you paid for the January 2005 $10 put. You would lose this $3.20 if AOL closed below $10 in January of 2005. But you were bullish on AOL. Look at all the peaceful nights of sleep you will have had. You didn’t have to worry about Ted Turner being caught wearing Jane Fonda’s bikini underwear at a truck stop with three midgets and a salami. ____________________________________________________________ Plug In General Electric’s Numbers Using the AOL example above, let’s try it on GE – another widely held stock people are long-term bullish on. GE is trading at about $22.50 Buy 1,000 shares of GE at $22.50 = $22,500 Buy 10 contracts of the GE January 2005 $20 put for $3.40 = $3,400 (GE does not have any January 2005 $22.50 calls – which would have been preferable). Total out of pocket would be $_____________ Risk: ______________ Note: GE is currently paying 3.4% interest, which you will be collecting as long as you own the stock _____________________________________________________________ CPTI PORTFOLIO POSITION UPDATE Position #1: BBB Iron Condor – Closed Friday at $86.75. An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The objective is for the BBH to finish anywhere within the $85-$95 range. BBH has traded down and will hopefully continue to bounce off support. Position #2: MMM Iron Condor – Closed Friday at $125.09. 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 trading days. Position #3: SMH Straddle – Closed Friday at $22.01. 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 only four trading days left to expiration. Position #4: QQQ ITM Strangle – Closed Friday at $24.49. 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 $72.15. 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. XAU has been moving lower. We’ll keep an eye on this one. Time is working in our favor. Position #6A: MMM Condor – closed Friday at $125.09. This is a longer term more conservative trade expiring in March. There is a $20-point range and we took in a credit of $1.20. We want MMM to finish anywhere between $115 and $135. Position $7A: QQQ 2-Month Baby ITM Strangle – closed Friday at $24.49. 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 ************************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 ************************************************************** ********** 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 02-16-2003 Sunday 5 of 5 In Section Five: Covered Calls: A Conservative Approach To Covered-Calls Naked Puts: Success Basics Spreads/Straddles/Combos: A Brief Respite! Updated In The Site Tonight: Market Watch: Ready for a Reversal Market Posture: Big Bounce ************************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 ************************************************************** ************* COVERED CALLS ************* Trading Basics: A Conservative Approach To Covered-Calls By Mark Wnetrzak With the editor of this section away on a much-needed vacation, it's a great time to review the fundamentals of one of the most popular stock-option strategies. Investors usually write covered-calls to generate monthly income, collecting the premium for the sale of an option against a stock position in his or her portfolio. This conservative strategy can be used effectively on all type of stocks as long as the outlook (fundamental or technical) for the issue is favorable. One of the advantages to this approach is that it allows new investors to learn successful trend-trading techniques with a small margin of safety while managing the combined position for upside profit and downside risk. This underlying basis for this strategy is a high probability of limited profit. The primary advantage to a novice trader is the technique is easy to use and the resultant position is more conservative than outright stock ownership. In writing an option on the stock, the investor has insured the issue against a future drop in value. Of course, the downside risk in ownership is not eliminated, only reduced. In addition, the actual cost of opportunity loss or potential upside movement can be substantial. There are other, more subtle benefits and disadvantages but these are the most common reasons that investors choose (or avoid) this strategy. Each week we receive a number of questions regarding the various approaches to the investment strategy of selling covered-calls. In our personal portfolios, we utilize the "in-the-money" covered write as a primary technique for consistent profits. This method is easy to master and works in harmony with a low maintenance, low risk investing style. The theory behind this approach is to be "aggressively conservative." This tactic is in contrast to the a popular "conservatively aggressive" outlook used by many traders, where the underlying position is bullish, (based on OTM calls) and requires an upward movement from the stock for profit. In general we are traditional, long-term investors with contempt for excessive risk and the potential for large losses. Studies suggest (and our results confirm) that the average investor will make substantially greater returns through the consistent profits from "in-the-money" covered writing than he/she would using the high risk, high reward approach of more aggressive positions. You may think that this technique is far too conservative to yield favorable returns however, the "magic" ingredient of the strategy is the power of compound interest. Covered call writing allows investors to potentially compound their returns on stock ownership each month of the year. Unfortunately, while most investors begin writing covered calls with the goal of compounding their money on a monthly basis, many lose focus of the fundamental outlook of the technique (consistent, low risk profits) and begin to concentrate on higher, single transaction returns. This is a common mistake and it can substantially increase risk and the probability of loss. The market historically offers a 2-4% monthly (annualized) return for this strategy but with diligent research and analysis, and proper money management, the margin of profit can be increased. In our personal portfolios, we attempt to establish positions that offer on average, a 4-6% (8-12% on margin) monthly return on investment. Even with this meager profit, the long-term portfolio growth is excellent, due to the unique mathematics of compounding. Earning 3% per month in a personal portfolio, without compounding or margin trading, equates to a 36% yearly return. We have yet to find a bank or CD that matches that rate. Obviously, most retail option traders regard a 3% monthly return as far too low. In fact, why would anyone want such a paltry reward when the market offers such great potential for wealth. There is answer is quite simple: RISK. Any strategy that yields 10% will be riskier (on a purely theoretical basis) than one offering a 3% return. The old adage, "The greater the risk, the greater the reward" is quite accurate. Regardless, some of you will learn the hard way, just as we did. After getting hammered on the majority of aggressive positions, we made the transition to ITM covered-writes with lower returns. Now our portfolio value grows (most of the time) on a consistent basis. The goal of the covered-call writer is to have a good selection of favorable positions with adequate downside protection. With this approach, an investor reduces risk by entering several stock and option plays with a predetermined conservative profit target for each one. We strive for a 5-8% monthly return in the newsletter but again with a lower profit target, the higher the probability of a favorable outcome and the lower the risk. To further reduce the potential for catastrophic loss, a trader should diversify his market exposure through a wide variety of covered-call positions. The stocks you purchase should generally represent companies of different types in a variety of favorable industries. Most novice investors ignore this principle and consequently, their portfolio losses are substantial when a heavily weighted sector falls "out of favor." Many experts suggest you should limit each investment to no more than 10% of your overall portfolio value. This is very important to the success of the covered call strategy as you don't want one issue to have a significant impact on your overall gains or losses. The fact is, no one really knows what a specific stock is going to do in the future. History suggests that even the most prolific traders are correct in only slightly more than one-half of their directional forecasts and that statistic reinforces our basis for choosing to hedge poor selections with "in-the-money" covered writes. Before you open any position, it is important to understand the strategy that you are using and identify the specific goals for that particular trade. You can't make good decisions without knowing the mechanics of a specific technique. In addition, don't use complex or advanced methods simply because they are intriguing. The best strategy is usually the simplest one that accomplishes your goals. Prior to executing a transaction, you should know exactly what the break-even (cost basis) point is, and be prepared to take action if the underlying issue reaches that price range. Once you have a candidate in mind, do your homework! Study the company and the calendar; upcoming events, earnings dates and any other scheduled reports. When you have a superior knowledge of a stock and its industry, you are way ahead of the investor that trades simply on intuition or outside advice. Portfolio management is critical to the success of any portfolio. After you take a position in a particular issue, stay informed by monitoring all the news and announcements affecting that issue. Observe the daily progress of the your stocks and realize that you have the ability and control to adjust or close the position at any time. Obviously you do not need to check the prices on an hourly basis, but we do recommend that you review each session's closing quotes. News and public opinion can have a significant impact on a stock's price and unfortunately, it is impossible to research "future" events before you buy an issue. The key is to be fully prepared for any outcome because the most difficult lesson comes when you close a losing trade. Indeed, it is very hard to learn to exit unsuccessful plays in a timely manner but the simple fact is, there is no reason to hang on to a losing position when there are so many other profitable plays that deserve your time and money. Accept your losses, learn from your mistakes (evaluate each one critically) and move on! With any strategy losses are inevitable and instead of being surprised, you must anticipate them. History has proven that a percentage of the covered write positions selected will be unprofitable thus, when the situation arises, it is not regarded as a failure but rather an integral part of the trading system. Your personal portfolio should be evaluated based on the sum of its positions, rather than each transaction. In this manner, success is gauged by growth in portfolio value and the losses become less significant. That is one of the principal reasons for entering several positions; it becomes much easier to identify and act on a potentially negative play when it doesn't have a substantial effect on your overall success. The concepts of most exit and adjustment strategies are relatively simple but there is no way to develop a specific guide for proper position management. With stock and option combinations, the key is to evaluate the risk-reward outlook of each possible scenario and construct a position that fits your trading plan and technical outlook for the underlying issue. Success with this strategy lies in one objective; a consistent flow of monthly income with limited portfolio risk. The focus of play selection and management should be to continually generate an acceptable level of option premium while protecting against the potential for downside losses. Any positions that become unfavorable due to changes in the fundamental or technical characteristics of the underlying issue should be removed from the portfolio before they can generate significant deficits. Catastrophic failures are not unavoidable but they can be sufficiently managed to reduce the effects of the shortfall. Obviously, each situation will require a different solution but in general, a trader should try to limit individual position losses to 20%. Unfortunately, there are some occasions when issues fail without warning, leaving no opportunity for exit or adjustment. Unexpected events simply occur; earnings warnings, shareholder lawsuits, negative news in the industry or sector and changes in public sentiment. All of these activities can affect the success of an individual position but with a diversified portfolio, the long-term effects are minimal. Our approach to "in-the-money" covered calls is designed to lock in profits whenever possible and reduce the inevitable losses to a minimum. A rise in share value is the ultimate goal of stock ownership and with this strategy, a significant short-term move can provide additional opportunities for profit. When the share value rises substantially after the initial position has been established, you have several choices. You can do nothing, get "called-out" and accept the original return that was established when the play was opened. If the option is priced near parity, you can close the play early or, you may also choose to adjust the position to match the new outlook for the underlying issue, "rolling" the call up and forward to a higher strike price. When you roll up (repurchase the current sold call and sell a higher strike call), the profit potential of the position is increased. Unfortunately, the downside break-even point is also increased by the amount of debit required to complete the transaction. That is the main reason most traders transition to a future expiration date; it reduces the debit required for the new position. While it is not always compatible with our weekly candidates, there are a number of benefits and advantages to long-term stock ownership. If that is your intention, additional measures are necessary when utilizing "in the money" covered-writes. As expiration nears and the time-value premium disappears from the written option, you should consider rolling forward to reduce the likelihood of early assignment. The overall profit potential of the position will be increased and the risk versus reward outlook for the combination can be adjusted, consistent with your forecast for the movement of the underlying issue. With deep-in-the-money calls, most of the time premium vanishes long before expiration. However, as long as time value remains in the call option, there is little risk of early assignment. When the option price (bid) falls to parity or a discount, there is a considerable probability of exercise by arbitrageurs; specialists and floor traders who do not pay commissions for trading. When this situation occurs, you should endeavor to roll-forward or adjust the position in some manner that prevents a monetary loss through unexpected assignment of the short option. 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 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. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield ASKJ 5.36 6.20 FEB 5.00 0.65 0.29* 8.9% MSTR 20.78 20.83 FEB 20.00 1.85 1.07* 8.2% CKFR 18.25 19.55 FEB 17.50 1.25 0.50* 6.4% ORB 5.02 5.30 FEB 5.00 0.35 0.33* 6.1% LSS 15.01 16.37 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 5.48 FEB 5.00 0.75 0.31* 5.7% RCOM 5.71 5.47 FEB 5.00 0.90 0.19* 5.7% NFLX 13.20 14.24 FEB 12.50 1.15 0.45* 5.4% ALA 5.76 7.58 FEB 5.00 1.10 0.34* 5.3% ALKS 8.07 7.54 FEB 7.50 1.00 0.43* 5.3% WEBM 10.89 11.94 FEB 10.00 1.55 0.66* 5.1% ALO 16.00 15.72 FEB 15.00 1.95 0.95* 4.9% FTS 8.39 9.30 FEB 7.50 1.20 0.31* 4.7% MVK 15.34 15.95 FEB 15.00 0.80 0.46* 4.6% ALN 13.15 13.23 FEB 12.50 0.90 0.25* 4.4% JDEC 13.86 12.52 FEB 12.50 2.05 0.69* 4.2% ADLR 13.45 12.05 FEB 12.50 1.45 0.05 0.5% EFII 17.46 16.70 FEB 17.50 0.70 -0.06 0.0% OSUR 7.85 7.00 FEB 7.50 0.65 -0.20 0.0% MMR 7.92 6.72 FEB 7.50 1.00 -0.20 0.0% LMNX 5.16 4.20 FEB 5.00 0.60 -0.36 0.0% ABMD 4.97 3.78 FEB 5.00 0.45 -0.74 0.0% MEDC 9.31 6.14 FEB 7.50 2.20 -0.97 0.0% MEDC 9.26 6.14 FEB 7.50 2.15 -0.97 0.0% CURE 18.15 15.87 FEB 17.50 1.15 -1.13 0.0% EMIS 5.66 5.48 MAR 5.00 1.10 0.44* 7.0% JDSU 2.68 2.81 MAR 2.50 0.40 0.22* 7.0% ASKJ 5.86 6.20 MAR 5.00 1.25 0.39* 6.1% DNDN 5.50 6.10 MAR 5.00 0.85 0.35* 5.5% * = Stock price is above the sold striking price. Comments: Finally, some upside activity in the market! Even if it is only for a brief period, it sure makes the portfolio summary look better. In the current environment it's surprising that any of the covered-call plays are positive but Friday's move suggests there may be some "light at the end of the tunnel." Thomas McManus, a popular market analyst at Banc of America Securities, said he sees "attractive equity valuations" and a "meaningful economic pickup in 2003-04." I hope that outlook is correct because it is getting hard to find any stocks with bullish trends. As noted last week, Med-Design (NASDAQ:MEDC) was closed for a small loss and Abiomed (NASDAQ:ABMD), McMoran (NYSE:MMR) and Curative Health Services (NASDAQ:CURE) are also candidates for early exit. Luminex (NASDAQ:LMNX), Electronics For Imaging (NASDAQ:EFII) and Orasure (NASDAQ:OSUR) are the most prominent "watch-list" members, however in this (bearish) market, almost every stock is subject to a sell-off at a the drop of a hat. Positions Previously Closed: Globespan-Virata (NASDAQ:GSPN), Regeneron Pharma (NASDAQ:REGN) and Cubist Pharma (NASDAQ:CBST). NEW CANDIDATES ********* 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 ARRS 5.14 MAR 5.00 AQC CA 0.60 27 4.54 35 8.8% EMIS 5.48 MAR 5.00 MTQ CA 0.90 418 4.58 35 8.0% ALA 7.58 MAR 7.50 ALA CU 0.65 1932 6.93 35 7.1% GLW 5.18 MAR 5.00 GSG CA 0.55 13k+ 4.63 35 6.9% SEPR 11.17 MAR 10.00 ERQ CB 1.90 168 9.27 35 6.8% RSAS 5.90 MAR 5.00 QSD CA 1.25 78 4.65 35 6.5% NFLX 14.24 MAR 12.50 QNQ CV 2.30 663 11.94 35 4.1% 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). ***** ALA - Alacatel $7.58 *** On The Rebound! *** Alcatel (NYSE:ALA) is a provider of advanced telecommunications, Internet, networking and optics products and services, integrating communications onto a single broadband network and creating unique end-to-end networks that help people communicate. With operations in 130 countries, the firm sells terrestrial and submarine optical transmission systems and in direct subscriber line (DSL) services. Alcatel's primary business services include high-speed Internet access, terrestrial and submarine optical networks and intelligent networking. The company's many customers are telecommunications operators and Internet service providers, as well as businesses and consumers. In early February, investment bank Morgan Stanley lifted its price target and earnings forecasts on this company and investors who believe there is growth potential in the European telecom market should consider this position. MAR 7.50 CALL ALA-CU LB=0.65 OI=1932 CB=6.93 DE=35 TY=7.1% ***** ARRS - Arris Group $5.14 *** New Trading Range? *** Arris Group (NASDAQ:ARRS) develops and supplies equipment and technology for cable system operators and other broadband service providers. The company specializes in developing advanced cable telephony equipment, enabling the delivery of converged services (voice, video and data) through broadband local access networks, and designing and engineering hybrid fiber-coax architectures. The firm's complete solutions for Internet protocol and optical transport allow broadband service providers to deliver a range of integrated voice, video and data services to their subscribers. The company's product offerings are divided into three categories: broadband, transmission, optical and outside plant, and supplies and services. Arris Group was formerly known as Broadband Parent Corporation, and is the successor to ANTEC Corporation. Earlier this month, Credit Suisse First Boston said analyst Monica Gould raised her 2003 earnings estimate for Arris Group on expectations of a "modestly higher level of business among (Arris') existing customer base." That's good news and investors have pushed the issue to a multi-month on increasing volume. MAR 5.00 CALL AQC-CA LB=0.60 OI=27 CB=4.54 DE=35 TY=8.8% ***** EMIS - Emisphere Technologies $5.48 *** Own This One! *** Emisphere Technologies (NASDAQ:EMIS) is a biopharmaceutical firm 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 in an oral form. The company has pioneered the oral delivery of injectable drugs, including proteins, peptides, polysaccharides and other compounds not 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. Emisphere is one of our favorite small-cap drug stocks and investors who like the outlook for the company can establish a low risk cost basis in the issue with this play. MAR 5.00 CALL MTQ-CA LB=0.90 OI=418 CB=4.58 DE=35 TY=8.0% ***** GLW - Corning $5.18 *** Recovery Underway! *** Corning Incorporated (NYSE:GLW) is a worldwide, technology-based firm that operates in three business segments: Telecommunications, Advanced Materials, and Information Display. Telecommunications produces optical fiber and cable, optical hardware and equipment, photonic modules and components and optical networking devices for the worldwide telecommunications industry. Advanced Materials has specialized products with properties for customer applications utilizing glass, glass ceramic and polymer technologies. The major businesses within this segment include environmental products, life science products, semiconductor materials and optical and lighting products. The Information Display Segment makes glass panels and funnels for televisions and cathode ray tubes, LCD glass for flat panel displays and precision lens assemblies for projection video systems. Shares of GLW have been slowing recovering since hitting an all-time low last October and it appears the company is on track for a long-term rebound. Investors can speculate on that outcome with this conservative position. MAR 5.00 CALL GSG-CA LB=0.55 OI=13763 CB=4.63 DE=35 TY=6.9% ***** NFLX - Netflix $14.24 *** Up-Trend Intact! *** Netflix (NASDAQ:NFLX) is an online entertainment service in the United States that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month and they select these titles at the firm's Website (www.netflix.com) aided by its proprietary CineMatch technology. They receive them on DVD by first-class mail and return them to the company at their convenience using prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber's queue. Netflix is becoming popular among movie-watchers and the company's subscription base in growing exponentially. Investors who think this will translate into higher share values can profit from that outcome with this position. Target a lower "net-debit" initially, to increase the potential yield in the play. MAR 12.50 CALL QNQ-CV LB=2.30 OI=663 CB=11.94 DE=35 TY=4.1% ***** RSAS - RSA Security $5.90 *** A Technical Bounce? *** RSA Security (NASDAQ:RSAS) is a provider of electronic security (e-security) solutions that are designed to help organizations ensure the authenticity of the people, devices and transactions involved in e-business. The company's core competencies are in two-factor user authentication solutions, Web access management software, digital certificate management solutions and encryption software. Through its RSA SecurID, RSA ClearTrust, RSA Keon and RSA BSAFE product lines, the company directly addresses critical e-security requirements for e-business. Shares of RSAS slumped in late January after the company announced losses for the fourth quarter and all of 2002. However, the E-security company also posted a sequential growth in revenue and a favorable order rate as bookings exceeded revenue by approximately 10% for the fourth quarter. Investors who think the stock is "fairly" valued can establish a cost basis near recent buying support (and below the long-term MA) with this position. MAR 5.00 CALL QSD-CA LB=1.25 OI=78 CB=4.65 DE=35 TY=6.5% ***** SEPR - Sepracor $11.17 *** Drug Sector Speculation *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The firm's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which Sepracor refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to current products. Beyond the multitude of lawsuits, the most recent news for SEPR occurred in mid-December when the company announced it is on track to seek government marketing approval for its new insomnia drug. Estorra, a unique compound used to treat transient and chronic insomnia, has successfully completed clinical Phase III studies and the company recently announced that it has been granted U.S. Patents covering the use of Estorra brand eszopiclone for the treatment of insomnia. Investors who agree with a bullish near-term outlook for the issue should consider this position. MAR 10.00 CALL ERQ-CB LB=1.90 OI=168 CB=9.27 DE=35 TY=6.8% ***** ***************** 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 BELM 6.47 MAR 5.00 QBL CA 2.00 56 4.47 35 10.3% AYE 7.65 MAR 7.50 AYE CU 0.90 204 6.75 35 9.7% CRY 5.34 MAR 5.00 CRY CA 0.80 48 4.54 35 8.8% AMKR 5.02 MAR 5.00 QEL CA 0.45 1199 4.57 35 8.2% PLUG 5.10 MAR 5.00 PQL CA 0.50 1004 4.60 35 7.6% JDEC 12.52 MAR 12.50 QJD CV 1.00 58 11.52 35 7.4% NEOF 10.40 MAR 10.00 QZX CB 1.15 5 9.25 35 7.0% RMBS 13.69 MAR 12.50 BNQ CV 2.10 1634 11.59 35 6.8% SNDK 16.09 MAR 15.00 SWQ CC 2.15 342 13.94 35 6.6% IMCL 10.96 MAR 10.00 QCI CB 1.65 298 9.31 35 6.4% NXTL 12.89 MAR 12.50 FQC CR 1.25 11k+ 11.64 35 6.4% FFIV 13.00 MAR 12.50 FLK CV 1.35 53 11.65 35 6.3% HEPH 5.41 MAR 5.00 QGQ CA 0.75 329 4.66 35 6.3% QSFT 10.53 MAR 10.00 QUD CB 1.20 7 9.33 35 6.2% ITMN 18.33 MAR 17.50 IQY CW 2.00 1625 16.33 35 6.2% IDCC 13.23 MAR 12.50 DAQ CV 1.55 2388 11.68 35 6.1% SBL 9.90 MAR 10.00 SBL CB 0.60 231 9.30 35 5.6% NVDA 12.04 MAR 10.00 UVA CB 2.45 5783 9.59 35 3.7% CENT 23.07 MAR 22.50 EQH CX 1.40 22 21.67 35 3.3% ROK 22.30 MAR 22.50 ROK CX 0.80 33 21.50 35 3.2% ***************** NAKED PUT SECTION ***************** Options 101: Success Basics By Ray Cummins In this unique game, the education never ends, and since stocks are dynamic, ever-changing entities, traders must continuously improve their skills to be successful. When the market becomes unruly or difficult to forecast, it’s important to concentrate on historically proven methods that provide the most accurate means of identifying primary directional trends and the character of individual issues. In most cases, the preferred technique for experienced options traders is charting or technical analysis. The recent slump in technology and industrial issues highlights the potential downside risk in the stock and options market. It also sets the stage for widespread speculation among investors and gives rise to the "doomsday" analysts. However, technical traders should not be persuaded by the onslaught of media hype and propaganda such as "sell every rally," that is fashioning much of the current market sentiment. Historical charts should continue to guide your decisions and during periods of excessive pessimism, the most important patterns to study are long-term. Traders generally use daily charts for entry and exit signals but the best way to determine major support and resistance levels is through the analysis of weekly or monthly time frames. Primary support and resistance levels are especially significant during periods when the market appears to be overextended or near a potential climax and by carefully reviewing long-term cycles and trends, a trader can identify areas where significant supply or demand will likely be encountered. In addition, major reversal and continuation patterns found in daily charts also occur with both weekly and monthly periods and the significance of these formations is strikingly similar. In the Covered-Call and Naked-Put sections, our methodology of selecting stocks with chart analysis and option pricing models has been very successful regardless of the market’s condition. In most cases, we take a purely technical view with regard to each individual issue and our decision-making process is based on the stock’s past trading history along with its current share value and primary directional trend. We carefully analyze the price action of each candidate using a wide range of technical indicators to determine if the issue meets our minimum criteria for a favorable position. The secret is to identify relatively strong issues early in a bullish cycle where there is far less downside risk and longer time frames often provide more accurate indications in that respect. After we have compiled a list of potential stocks, a thorough review of the option premiums is conducted to determine if the overall position offers sufficient downside protection, relative to the issue’s technical history and price support. Once the minimum acceptable cost basis has been established, it is relatively easy to select positions in which the return on investment warrants our participation in a play. Most traders agree that technical analysis is an art and this concept is even more apparent when we are near the end of a bearish market environment. The best indicators can be highly unreliable when extreme emotion dictates the daily movements in stocks and it is far more difficult to earn consistent returns under these conditions. The best we can do is focus on methods that have worked well in the past and simply let the technical condition of each individual issue be our guide. In short, we use the more recent price action of the stock to alert us to favorable opportunities while at the same time relying on the longer-term patterns to determine if the movement is likely to continue. After the position is initiated, the performance of the issue will determine our future actions. If we are wrong about the character of the underlying stock, we simply exit the position and look for another potential play. The worst outcome that can occur with this approach is a modest loss in capital and usually, that limited shortfall is more than offset by other gains in the portfolio. In fact, the primary reason that novice investors achieve poor results with low risk, low return trading strategies is not due to a deficiency in play selection, but rather their inability to effectively manage failing positions for minimum loss. That's a subject we'll tackle in one of the upcoming narratives. 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 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. Stock Price Last Option Price Gain Max Simple Symbol Picked Price Series Sold /Loss Yield Yield MSTR 20.78 20.83 FEB 17.50 0.45 0.45* 11.9% 3.8% SEPR 12.99 11.17 FEB 10.00 0.35 0.35* 10.3% 3.2% FTE 25.50 25.89 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% ANF 27.84 26.98 FEB 25.00 0.50 0.50* 8.2% 3.0% FTE 25.98 25.89 FEB 22.50 0.40 0.40* 7.9% 2.6% CKFR 19.53 19.55 FEB 17.50 0.45 0.45* 7.8% 2.9% VRTS 18.30 17.27 FEB 15.00 0.30 0.30* 7.5% 2.2% SEPR 13.20 11.17 FEB 10.00 0.30 0.30* 7.4% 2.2% CURE 17.49 15.87 FEB 15.00 0.40 0.40* 7.1% 2.4% VECO 15.39 13.88 FEB 12.50 0.35 0.35* 7.0% 2.1% APPX 24.18 23.01 FEB 22.50 0.55 0.55* 7.0% 2.7% CVC 19.44 16.75 FEB 15.00 0.40 0.40* 6.8% 2.0% FTE 24.40 25.89 FEB 20.00 0.45 0.45* 6.7% 2.0% AVCT 25.10 26.50 FEB 22.50 0.35 0.35* 6.5% 2.3% ANF 27.97 26.98 FEB 25.00 0.25 0.25* 6.4% 2.2% GTRC 19.63 19.60 FEB 17.50 0.45 0.45* 6.3% 2.3% MATK 23.93 23.19 FEB 20.00 0.35 0.35* 6.3% 1.9% MRCY 32.11 31.24 FEB 30.00 0.45 0.45* 5.8% 2.2% RGLD 26.67 25.75 FEB 22.50 0.35 0.35* 5.6% 1.7% CURE 17.06 15.87 FEB 15.00 0.25 0.25* 5.4% 1.8% ANF 27.11 26.98 FEB 22.50 0.40 0.40* 5.2% 1.6% EASI 37.00 36.55 FEB 33.38 0.40 0.40* 5.0% 1.8% QCOM 37.66 34.70 FEB 35.00 0.75 0.45 5.0% 1.9% REGN 20.63 17.25 FEB 17.50 0.50 0.25 4.8% 1.6% S 26.45 21.85 FEB 22.50 0.30 -0.35 0.0% 0.0% MEDC 8.88 6.14 FEB 7.50 0.30 -1.06 0.0% 0.0% ** IMPH 21.53 16.57 FEB 20.00 0.75 -2.68 0.0% 0.0% ** ANSS 22.20 22.80 MAR 20.00 0.80 0.80* 9.9% 3.0% MSTR 20.69 20.83 MAR 17.50 0.75 0.75* 8.6% 3.2% OTEX 27.14 27.73 MAR 25.00 0.75 0.75* 8.6% 2.2% APPX 23.75 23.01 MAR 20.00 0.55 0.55* 7.3% 2.0% CGNX 21.84 22.62 MAR 20.00 0.75 0.75* 7.3% 2.8% MDCO 16.92 16.93 MAR 15.00 0.60 0.60* 5.7% 3.0% POSS 19.50 17.47 MAR 17.50 0.55 0.52 4.0% 2.2% * Stock price is above the sold striking price. ** Summary data not reflective of a timely exit trade. Comments: Friday's rally boosted a number of issues in the portfolio but the activity did little to help Impath (NASDAQ:IMPH) and Med Design (NASDAQ:MDCO), both of which were recommended for "early exit" in last week's summary comments. The good news is, there is only one week left in the February options expiration period and with any luck, the oversold market conditions will shore up the bullish trend in the near-term. All of the March positions are faring relatively well, however traders are cautioned to be very careful in their position selection and diligent in their portfolio management due to the potential for downside activity. Previously Closed Positions: Quest Software (NASDAQ:QSFT), FEI Company (NASDAQ:FEIC), Capital One Financial (NYSE:COF), and Xylinx (NASDAQ:XLNX), which are currently positive, as well as Network Associates (NYSE:NET). WARNING: THE RISK IN SELLING NAKED 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. 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 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 20.83 MAR 17.50 EOU OW 0.80 79 16.70 35 12.0% 4.2% CGNX 22.62 MAR 17.50 QCG QW 0.55 11 16.95 35 9.4% 2.8% RMBS 13.69 MAR 10.00 BNQ OB 0.30 2586 9.70 35 8.6% 2.7% OVTI 16.55 MAR 12.50 UCM OV 0.35 141 12.15 35 8.3% 2.5% LRCX 12.56 MAR 10.00 LKR OB 0.25 2465 9.75 35 7.9% 2.2% IRF 20.39 MAR 17.50 IRF OW 0.50 638 17.00 35 7.5% 2.6% DIGE 15.54 MAR 12.50 QDG OV 0.30 120 12.20 35 7.5% 2.1% ADBE 27.43 MAR 22.50 AEQ OX 0.40 295 22.10 35 5.4% 1.6% 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). ***** ADBE - Adobe Systems $27.43 *** Portfolio Stock? *** Adobe Systems (NASDAQ:ADBE) builds software solutions for network publishing, including Web, print, e-paper, video, wireless and broadband applications. Its graphic design, imaging and dynamic media authoring tools enable customers to create, manage and deliver visually rich, reliable content. The company licenses its technology to hardware manufacturers, software developers and service providers, and it offers integrated software solutions to businesses of all sizes. Its software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS and Pocket PC platforms and Adobe distributes its products through a network of distributors and dealers, value-added resellers, systems integrators and OEMs; direct to end users through Adobe call centers, and through its own Website, www.adobe.com. ADBE shares have found a comfortable range near $25 and investors who wouldn't mind owning this stock in a long-term portfolio can establish a cost basis near $22 with this position. MAR 22.50 PUT AEQ-OX LB=0.40 OI=295 CB=22.10 DE=35 MY=5.4% SY=1.6% ***** CGNX - Cognex $22.62 *** A Big Day! *** Cognex (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 company has two operating divisions: Modular Vision Systems Division and Surface Inspection Systems Division. MVSD designs, develops, manufactures and markets modular vision systems used to control the manufacturing of discrete items. SISD designs, develops, manufactures and markets surface inspection vision systems. In late January, CGNX reported a quarterly profit, reversing a year-ago loss, as cost cutting helped offset reduced spending in the semiconductor and electronics industries. Despite the lack of news since then, the stock rallied Friday to a recent high near $22 and this position offers favorable speculation for traders who believe the bullish trend will continue. MAR 17.50 PUT QCG-QW LB=0.55 OI=11 CB=16.95 DE=35 MY=9.4% SY=2.8% ***** DIGE - Digene $15.54 *** Warburg Upgrade = Rally! *** Digene (NASDAQ:DIGE) develops, manufactures and markets proprietary gene-based testing systems for screening, monitoring and diagnosis of human diseases. Its primary focus is in women's cancers and infectious diseases. The firm has applied its proprietary Hybrid Capture technology to develop a unique diagnostic test for human papillomavirus, which is the primary cause of cervical cancer and is found in greater than 99% of all cervical cancer cases. In addition to its HPV Test, the company's product portfolio includes gene-based tests for detecting chlamydia, gonorrhea, hepatitis B virus and cytomegalovirus. In early February, DIGE rallied after UBS Warburg analyst Ricky Goldwasser raised his investment rating for the medical diagnostic company to a "buy," saying he is more confident after a survey that physicians will adopt Digene's "DNA Pap" test when it is approved by the U.S. FDA. The stock is now at a 9-month high near $15 and traders who believe it will remain in that range (or move higher) can profit from that outcome with this position. MAR 12.50 PUT QDG-OV LB=0.30 OI=120 CB=12.20 DE=35 MY=7.5% SY=2.1% ***** IRF - International Rectifier $20.39 *** Favorable Outlook! *** International Rectifier (NYSE:IRF) is a designer, manufacturer and marketer of power semiconductors, and a worldwide supplier of metal oxide semiconductor field effect transistors (MOSFET), a type of power semiconductor. The company's products are used in a range of end markets, including communications, consumer electronics, information technology, automotive, industrial and government/space. The company's products are divided among three product categories: integrated circuits and advanced circuit devices, power systems and power components. International Rectifier reported earnings last month and although the numbers weren't overly impressive, analysts optimistic about the outlook. The company expects revenues for the third quarter to be sequentially flat with gross margin up about a percentage point but for 2003, IRF said it is on target to achieve its target revenue growth of 17% to 23%. Traders can speculate on the company's near-term stock performance in a conservative manner with this position. MAR 17.50 PUT IRF-OW LB=0.50 OI=638 CB=17.00 DE=35 MY=7.5% SY=2.6% ***** LRCX - Lam Research $12.56 *** Chip-Equipment Specialist! *** Lam Research Corporation (NASDAQ:LRCX) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. The company's products are currently used in the front-end of the wafer processing manufacturing cycle: etch, CMP, and post-CMP clean. Lam's unique family of etch systems incorporates plasma technologies designed to meet both current and future needs. The company offers both 200-milimeter and 300-milimeter Teres CMP integrated polishing and cleaning systems with Linear Planarization Technology (LPT), which uses a high-speed belt instead of the rotating table used in conventional polishers. The company also provides the Synergy Integra, which incorporates advanced cleaning technology with a platform that integrates polisher and cleaner. LRCX is one of our old favorites in the chip-equipment segment and the current lateral trend suggests the issue has found a "comfort zone" near $12. Traders who think the range-bound activity will continue in the coming weeks can profit from that outcome with this position. MAR 10.00 PUT LKR-OB LB=0.25 OI=2465 CB=9.75 DE=35 MY=7.9% SY=2.2% ***** MSTR - MicroStrategy $20.83 *** 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 in late January after the maker of business software posted better than expected profit and rising software sales. Industry analysts also raised their 2003 outlook for the company and bullish traders can profit from continued upside activity in the issue with this position. MAR 17.50 PUT EOU-OW LB=0.80 OI=79 CB=16.70 DE=35 MY=12.0% SY=4.2% ***** OVTI - OmniVision Technologies $16.55 *** Earnings Due! *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells high performance, high quality and cost efficient semiconductor imaging devices for computing, telecommunications, industrial, automotive and consumer electronics applications. The company's main product, an image sensing device called a CameraChip, is used to capture an image in cameras and camera-related products in a range of imaging applications such as personal computer cameras, digital still cameras, security and surveillance cameras, personal digital assistant cameras, mobile phone cameras, and cameras for automobiles and toys that incorporate both still picture and live video applications. OmniVision is set to report quarterly earnings next week and investors are hoping the announcement will be bullish. Traders who believe the report will result in future upside movement for OVTI can profit from that outcome with this position. MAR 12.50 PUT UCM-OV LB=0.35 OI=141 CB=12.15 DE=35 MY=8.3% SY=2.5% ***** RMBS - Rambus $13.69 *** Rally Mode! *** Rambus (NASDAQ:RMBS) designs, develops and markets "chip-to-chip" interface solutions that enhance the performance and effectiveness of its client's chip and system products. These solutions include multiple chip-to-chip interface products, which can be grouped into two categories: memory interfaces and logic interfaces. Rambus' memory interface products provide an interface between memory chips and logic chips. In addition, the firm's logic interface products provide an interface between two logic chips. Rambus has two major memory interface products: Rambus dynamic random access memory and Yellowstone. Additionally, it offers a logic interface product for high-speed serial chip-to-chip communications between logic chips in a range of computing, networking and communications applications. RMBS shares soared in January after a favorable ruling in a patent case. A federal appeals court ruled that Rambus had not committed fraud in a dispute involving memory maker Infineon, reversing the ruling of a lower court, and the court also revived Rambus' patent infringement claim against Infineon. The current trend is bullish and traders who believe it will continue can speculate on that outcome with this position. MAR 10.00 PUT BNQ-OB LB=0.30 OI=2586 CB=9.70 DE=35 MY=8.6% TY=2.7% ***** ***************** 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 NVDA 12.04 MAR 10.00 UVA OB 0.40 2632 9.60 35 10.9% 3.6% SNDK 16.09 MAR 12.50 SWQ OV 0.40 725 12.10 35 9.6% 2.9% NXTL 12.89 MAR 10.00 FQC OB 0.30 1247 9.70 35 9.1% 2.7% ICST 21.54 MAR 17.50 IUY OW 0.45 18 17.05 35 7.8% 2.3% HPQ 17.79 MAR 15.00 HHY OC 0.35 6219 14.65 35 6.5% 2.1% VSEA 25.88 MAR 20.00 UES OD 0.35 90 19.65 35 5.5% 1.5% MSTR 20.83 MAR 15.00 EOU OC 0.25 14 14.75 35 4.9% 1.5% PSUN 17.51 MAR 15.00 PVK OC 0.25 51 14.75 35 4.6% 1.5% ADI 26.90 MAR 22.50 ADI OX 0.35 821 22.15 35 4.5% 1.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Brief Respite! By Ray Cummins Stocks rebounded Friday as investors went bargain-hunting in the wake of better-than-expected economic data and an upbeat forecast from Dell Computer (NASDAQ:DELL). The Dow Jones Industrial Average soared 158 points to 7,908 amid renewed strength in Hewlett Packard (NYSE:HPQ), SBC Communications (NYSE:SBC) and United Technologies (NYSE:UTX). The NASDAQ jumped 32 points to 1,310 on bullish performances by Intel (NASDAQ:INTC), Dell Computer (NASDAQ:DELL) and Microsoft (NASDAQ:MSFT). The S&P 500 index rose 17 points to 834 with the majority of broad-market sectors enjoying upside activity. On the Big Board, where 1.37 billion shares traded, 2,074 stocks rose and 1,165 fell. On the NASDAQ, where 1.31 billion shares changed hands, 1,986 advanced and 1,198 declined. The benchmark 10-year treasury slipped 20/32, driving yields to 3.96%, while the 30-year bond lost 1-6/32 for a closing yield of 4.89%. Trim Tabs said that $6.3 billion flowed out of the equities markets during the week ended Wednesday, down from $7.1 billion in the week-ago period. ***************** 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 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. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status MYL 24.50 26.62 FEB 20 23 0.40 22.60 $0.40 Open XAU 79.51 72.15 FEB 65 70 0.75 69.25 $0.75 Open? BHE 35.30 34.28 FEB 25 30 0.45 29.55 $0.45 Open AET 43.86 41.24 FEB 35 40 0.45 39.55 $0.45 Open HCA 43.75 39.89 FEB 37 40 0.30 39.70 $0.19 Closed CERN 37.31 33.80 FEB 30 35 0.55 34.45 ($0.65) Closed PRX 31.50 33.88 FEB 25 30 0.45 29.55 $0.45 Open APA 62.41 62.48 FEB 55 60 0.60 59.40 $0.60 Open FRX 51.75 46.25 FEB 45 47 0.25 47.25 ($1.00) Closed NBR 36.85 37.52 FEB 32 35 0.30 34.70 $0.30 Open BVF 31.15 31.76 FEB 25 30 0.40 29.60 $0.40 Open SCIO 42.20 43.56 FEB 35 40 0.00 40.00 $0.00 No Play SYMC 46.09 44.80 MAR 35 40 0.50 39.50 $0.50 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss As previously noted, HCA Inc. (NYSE:HCA) and Cerner (NASDAQ:CERN) were candidates for early exit and Forest Labs (NYSE:FRX) also joined that group this week, despite the fact that the company reported record quarterly profits. Positions previously closed include: Intuit (NASDAQ:INTU), which is positive, and Chiron (NASDAQ:CHIR). The bullish position in the Gold Index (XAU) is a candidate for exit/adjustment on any further downside movement. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ABK 57.56 49.17 FEB 70 65 0.55 65.55 $0.55 Open KBH 44.01 45.88 FEB 55 50 0.55 50.55 $0.55 Open BZH 61.98 57.07 FEB 75 70 0.50 70.50 $0.50 Open ITW 65.70 58.02 FEB 75 70 0.60 70.60 $0.60 Open BGEN 37.93 37.64 FEB 45 42 0.25 42.25 $0.25 Open PIXR 53.76 52.10 FEB 65 60 0.55 60.55 $0.55 Open RE 51.70 51.60 FEB 60 55 0.50 55.50 $0.50 Open ROAD 36.43 32.84 FEB 45 40 0.30 40.30 $0.30 Open ATK 54.75 51.04 FEB 65 60 0.45 60.45 $0.45 Open CAT 43.92 43.25 FEB 50 47 0.25 47.75 $0.25 Open IBM 78.94 77.45 FEB 90 85 0.50 85.50 $0.50 Open MER 36.81 33.75 FEB 42 40 0.25 40.25 $0.25 Open LXK 60.54 59.16 FEB 70 65 0.45 65.45 $0.45 Open QLGC 33.28 34.56 FEB 40 37 0.25 37.25 $0.25 Open BSC 59.90 60.36 MAR 70 65 0.50 65.50 $0.50 Open HRB 35.80 36.82 MAR 45 40 0.50 40.50 $0.50 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss PUT DEBIT SPREADS ****************** Symbol Pick Last Month LP SP Debit B/E G/L Status SNPS 40.00 38.36 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 44.80 FEB 35 40 4.50 39.50 0.50 Open PHSY 29.19 21.40 FEB 25 27 2.00 27.00 (1.10) Closed EBAY 73.36 75.00 FEB 60 65 4.45 64.45 0.55 Open AMGN 52.09 52.60 MAR 45 47 2.20 47.20 0.30 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PacifiCare Health Systems (NASDAQ:PHSY) slumped Thursday after the firm posted quarterly earnings that were $0.02 ahead of consensus estimates, but the profits came on revenues that fell 5% in the latest three months. The issue "gapped-down" at the open to the $25.50 range, preventing a favorable roll-out, however the sale of long option provided some capital preservation in the bullish play. Omnicare (NYSE:OCR) was exited for a loss during Wednesday's drop and although barely positive, the bullish spread 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 50.03 FEB 55 45 0.10 0.20 Open? WPI 29.22 28.55 MAY 35 22 (0.10) 0.50 Open ANF 26.39 26.98 FEB 30 22 0.05 0.60 Open? UPL 10.11 9.58 MAR 10 10 0.10 0.00 Open AFFX 27.14 25.45 MAR 30 25 0.15 0.00 Open Our new position in CTI Molecular Imaging (NASDAQ:CTMI) was closed following the company's quarterly earnings report, which reflected $0.07 per 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 37.64 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 33.15 APR-30C FEB-30C 0.75 1.20 Open? CI 43.02 42.03 APR-45C FEB-45C 1.35 1.25 Open The bearish position in American Express (NYSE:AXP) reached the short-term profit target and conservative traders should consider closing the spread. Previously closed positions: Global Imaging (NASDAQ:GISX), Capital One (NYSE:COF), Raytheon (NYSE:RTN), Hershey (NYSE:HSY) and Applied Materials (NASDAQ:AMAT). DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ROOM 40.14 41.17 MAR 40 40 6.50 6.70 Open IGT 74.84 75.87 FEB 75 75 3.20 3.00 Open Both of our speculative straddles have been volatile, but within a relatively small range and if there are no large moves early in the week, traders should begin to plan an exit in the IGT position. SHORT-PUT COMBOS **************** No Open Positions CREDIT STRANGLES **************** 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. ***** COP - ConocoPhillips $48.72 *** Trading Range! *** ConocoPhillips (NYSE:COP), formerly Phillips Petroleum Company, is an international, integrated energy company with operations in 49 countries. The firm has four core activities worldwide: petroleum exploration and production, petroleum refining, marketing, supply and transportation; natural gas gathering, processing and sales, including a 30.3% interest in Duke Energy Field Services, and a chemicals and plastics production and distribution business through a 50% interest in Chevron Phillips Chemical Company. The company was founded in August 2002, following the merger of Conoco and Phillips Petroleum. Technical Outlook: Current lateral trend with buying support near sold strike at $45, resistance near $50 (150-day EMA). Potential Catalysts: U.S. commercial oil inventories have fallen to historically low levels and potential conflict with Iraq is holding crude prices at recent highs. PLAY (conservative - bullish/credit spread): BUY PUT MAR-42.50 COP-OV OI=27 A=$0.30 SELL PUT MAR-45.00 COP-OI OI=4740 B=$0.55 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$44.75 ***** NKE - Nike $45.14 *** Basing Pattern? *** Nike (NYSE:NKE) principally is engaged in the design, development and worldwide marketing of footwear, apparel, equipment and other clothing accessory products. Nike sells its products to over 17,000 retail accounts in the United States and through a mix of independent distributors, licensees and subsidiaries in over 140 countries around the world. Virtually all of Nike's products are manufactured by independent contractors. Most of the company's footwear products are produced outside the United States, while apparel products are produced in the United States and abroad. Technical Outlook: Lengthy base (established AUG-DEC 2002) with recent buying support near $42; near-term bullish activity on average volume; strong moves Friday in Apparel/Footwear sector. Potential Catalysts: Margins expected to rise due to new supply chain system, which gives NKE more flexibility to respond to market conditions; declared a quarterly cash dividend of $0.14 per share, payable to SOR as of 3/17/03. PLAY (conservative - bullish/credit spread): BUY PUT MAR-37.50 NKE-OU OI=20 A=$0.35 SELL PUT MAR-40.00 NKE-OH OI=200 B=$0.60 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$39.75 ***** BUD - Anheuser-Busch $47.70 *** Beverages & Brewers *** Anheuser-Busch Companies (NYSE:BUD) is the holding company of Anheuser-Busch, Incorporated (ABI), a brewer of beer. The firm is also the parent corporation to a number of subsidiaries that conduct various other business operations. The company's main operations are comprised of the following business segments: domestic beer, international beer, packaging, entertainment and other. Its domestic and international beer operations produce and distribute ABI brand beers. Its packaging operations make beverage cans and liners, as well as glass bottles. The firm's entertainment area operates theme parks, and the other business area is engaged in real estate development. Technical Outlook: Current lateral consolidation in the wake of a longer-term bearish trend; near-term "oversold" with support at $47 and resistance near short (call) strike at $50. Potential Catalysts: Recent earnings stumble by Coors (NYSE:RKY) is weighing on sector; BUD had previously reported quarterly numbers in line with estimates but analysts are projecting an overall industry volume growth of only 1% to 1.5% in 2003. PLAY (conservative - bearish/credit spread): BUY CALL MAR-55.00 BUD-CK OI=1975 A=$0.10 SELL CALL MAR-50.00 BUD-CJ OI=3415 B=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$50.45 ***** MDT - Medtronic $44.15 *** Pure Premium Selling! *** Medtronic (NYSE:MDT) is a medical technology firm that provides lifelong solutions for people with chronic disease. With roots in the treatment of heart disease, Medtronic has expanded beyond its historical core business and provides a range of products and therapies that help solve many challenging, life-limiting medical conditions. The company operates in five major business segments that make and market device-based medical therapies. These are: cardiac rhythm management, vascular, cardiac surgery, neurological and diabetes and spinal and ear, nose and throat. Technical Outlook: On the rebound from an earnings-related slump and downgrade; near-term upside potential should provide premium for bearish (call) plays; expect rally to stall near resistance at $47-48. Potential Catalysts: Recent mediocre quarterly earnings report with concerns over profits in vascular and diabetes divisions; Morgan Stanley downgrade also negatively affected share value. PLAY (conservative - bearish/credit spread): BUY CALL MAR-50.00 MDT-CJ OI=121 A=$0.15 SELL CALL MAR-47.50 MDT-CW OI=668 B=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$47.75 ***** PEP - PepsiCo $39.86 *** More Beverages & Brewers *** PepsiCo (NYSE:PEP) manufactures, markets and sells soft drinks and concentrates, and snack foods. PepsiCo and its divisions and subsidiaries operate in three business segments: Worldwide Snacks, Worldwide Beverages and Quaker Foods North America. Pepsi's snack food business is comprised of two business units: Frito-Lay North America and Frito-Lay International. Pepsi's beverage business is comprised of three major business units: Pepsi-Cola North America, Gatorade/Tropicana North America and PepsiCo International. The Quaker Oats Company is a wholly owned subsidiary of PepsiCo. Technical Outlook: Near-term "bearish" with resistance near $41 and also at the sold (call) strike at $42.50; currently oversold and well below 150-day EMA, however Friday's rally may carry the issue to a test of February highs near $42. Potential Catalysts: Profits up 21% in the fourth quarter, due to improvements in margins and U.S. market share; expects volume and revenue growth in the mid-single digit range and EPS growth in the low double digit range going forward. PLAY (conservative - bearish/credit spread): BUY CALL MAR-45.00 PEP-CI OI=1190 A=$0.15 SELL CALL MAR-42.50 PEP-CV OI=5924 B=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$42.75 **************** 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. ***** BMET - Biomet $28.52 *** Trading Range! *** Biomet (NASDAQ:BMET) operates in one primary business segment, musculoskeletal products, which includes the design, manufacture and marketing of four product groups: reconstructive devices, fixation products, spinal products and other. Reconstructive devices include knee, hip and extremity joint replacements, as well as dental reconstructive implants, bone cements and other accessories and the procedure-specific instrumentation required to implant the firm's reconstructive systems. Fixation products are internal and external fixation devices, craniomaxillofacial fixation systems and electrical stimulation devices that do not address the spine. Spinal products are electrical stimulation devices addressing the spine and spinal fixation systems. The other sales category includes soft goods and bracing products, arthroscopy products, casting materials, surgical instruments, operating room supplies, wound care products and other surgical products. Technical Outlook: Spread based on technicals only; neutral to bullish short-term outlook in an intermediate-term trading range; resistance near the spread strike and maximum profit point ($30). Potential Catalysts: Analysts expect relatively robust earnings growth in the sector; competitor recently reported a 39% jump in quarterly profit on increasing sales of its artificial joints. PLAY (speculative - bearish/calendar spread): BUY PUT JUL-30.00 BIQ-GF OI=567 A=$1.95 SELL PUT MAR-30.00 BIQ-CF OI=307 B=$0.40 INITIAL NET DEBIT TARGET=$1.45-$1.50 INITIAL TARGET PROFIT=$0.45-$0.75 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** NVDA - Nvidia $12.04 *** Xbox Settlement = Rally! *** Nvidia (NASDAQ:NVDA) designs, develops and markets graphics and media communication processors and related software for personal computers, workstations and digital entertainment platforms. The company provides an architecturally compatible family of 3-D graphics processors and graphics processing units that set the standard for performance, quality and features for a broad range of desktop PCs. Its processors are designed to be architecturally compatible backward and forward between generations, which allows for a low cost of ownership. Technical Outlook: Short-term bullish trend on Friday's spike; resistance near current price and again at $14-15; some support at previous trading-range bottom near $10. Potential Catalysts: Company posted a smaller net profit for its fourth quarter but gained more than $40 million in revenue after settling a pricing dispute with Microsoft; multiple upgrades. PLAY (very speculative - bullish/synthetic position): BUY CALL JUN-15.00 UVA-FC OI=1512 A=$1.10 SELL PUT JUN-10.00 UVA-RB OI=1067 B=$1.20 INITIAL NET CREDIT TARGET=$0.15-$0.30 INITIAL TARGET PROFIT=$0.65-$0.90 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $400 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($10). ***** ************************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 ************************************************************** ************ MARKET WATCH ************ Ready for a Reversal To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_021603.asp ************** MARKET POSTURE ************** Big Bounce To Read The Rest of The OptionInvestor.com Market Posture Click Here http://www.OptionInvestor.com/marketposture/MP_021603.asp ********** 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
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