The Option Investor Newsletter Sunday 02-23-2003 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: Bears Losing Grip? Futures Market: Playing the role of the Badger Index Trader Wrap: A PAUSE Editor’s Plays: Got Health? Market Sentiment: Back from the Edge Ask the Analyst: Setting profit stops when target is near Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Slippery Handle Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 02-21 WE 02-14 WE 02-07 WE 01-31 DOW 8018.11 +109.31 7908.80 + 44.57 7864.23 -189.58 - 77.20 Nasdaq 1349.02 + 38.85 1310.17 + 27.70 1282.47 - 38.44 - 21.23 S&P-100 429.87 + 7.30 422.57 + 3.78 418.79 - 13.78 - 3.57 S&P-500 848.17 + 13.28 834.89 + 5.20 829.69 - 26.01 - 5.70 W5000 8035.97 +139.03 7896.94 + 23.52 7873.42 -251.65 - 50.67 RUT 364.36 + 5.86 358.50 - 0.28 358.78 - 13.39 - 2.89 TRAN 2096.41 - 6.19 2102.60 - 37.37 2139.97 - 33.38 + 10.02 VIX 34.14 - 2.96 37.10 - 1.35 38.80 + 3.02 + 0.01 VXN 46.10 - 2.28 48.38 - 2.59 48.26 + 1.45 + 1.76 TRIN 0.97 0.58 1.57 0.89 Put/Call 0.85 0.97 0.94 0.84 ****************************************************************** Bears Losing Grip? by Jim Brown As amazing as it may seem the bears were unable to hold back the bulls even after a terrorist scare knocked a positive market for an instant -60 point loss. After three years of consuming high profit meals of prime beef the bears appear to be too fat to get up from the table. Bulls slimmed by a three-year diet and seeing light on the horizon that could signal a new economic cycle are pressing against the gate. Dow Chart - Daily Nasdaq Chart - Daily What a difference a day makes. Just Thursday night we were fighting to hold on to 7900 and looking very heavy. Economic news was about as grim as it gets and nobody wanted to own stocks. What changed? The CPI came in as expected at 0.3%. Break out the champagne! Not worse than expected, not bearish, not a disaster, just inline with estimates! I know we are grabbing at straws here. After taking out food and energy the increase was only +0.1% or completely irrelevant. This counter balanced the soaring PPI number from Thursday. Of course the PPI is a forward indicator which could ripple through the CPI over the next couple months. Still investors cheered. The ECRI Weekly Leading Index fell to 119.5 from last weeks 119.9 with rising unemployment the culprit. This was the second week of declines but investors ignored the indicator as old news. This indicator is a compendium of other reports and includes things like equity prices, mortgage applications, consumer sentiment and unemployment in an effort to provide a single broad based indicator. Early Friday morning an explosion and fire at a refinery just outside Manhattan knocked the legs out of a rebounding market and for a few anxious moments it appeared the bears had won the battle and the October lows were in our sights. The strength of the drop was very strong as traders pulled bids and hit the sell button when they thought there had been a terrorist attack. The barge that exploded had 100,000 barrels of unleaded gas and it made quite a smoke cloud over New York. Once it was determined that it was just an accident instead of an attack the bids returned and traders in cash rushed to buy the dip. Economic conditions did not improve, Osama did not call a truce and Iraq is still being obstinate. It simply appears that traders are accepting as fact the lack of significant risk in their future. The bullish percent on the Dow is only 16%. It has only reached this level three times in the past three years and while it is strongly in bear confirmed territory there is not a lot of risk left or so investors hope. Investors expect a rally or even a new bull market once the shooting starts in Iraq. If we are only days away from that event then it is natural for buyers to be getting eager. There were several reports during the day that caused investors to think it the shooting may be closer than previously thought. There was rumored to be a deal with Turkey as the cooperation blackmail drew into the final hours. The US announced it already had enough troops and equipment in the area to begin the war without the UN and without help. The message to Turkey was clear, take the current deal or our ships leave port and you lose $26 billion in aid. Several hours later vehicles were seen being unloaded. Iraq offered to enter into talk with the US about total disarmament if the US would call off the war. Fat chance. However it was seen as a sign that Saddam is getting worried and could be exiting soon. Italy was rumored to have offered him asylum in an effort to avoid a war. Obviously Italy would be much more desirable an exile location than others previously mentioned. A dictator with $20 billion in stashed cash could live well in Italy for quite awhile. The UN inspectors have reportedly been rebuffed by Iraq and are prepared to present a list of 30 demands to Iraq and the UN on Monday on items that Iraq refuses act upon. This is seen as an ultimatum for Iraq and Iraq is not expected to cheerfully comply. One of the items is the U2 flights whose unconditional approval had more conditions than Michael Jackson's prenuptial agreement. The planes are still not flying. Another condition is the complete and immediate destruction of all the illegal missiles and 380 brand new rocket engines that were smuggled in illegally. Millions of dollars of contraband that Saddam is not going to want to destroy immediately or otherwise. I could go on but you get the picture. It is not nice to fool the inspectors into thinking you are going to cooperate just before a critical UN meeting and then leave them standing at the gates empty handed the following week. The dominoes are starting to line up on the side of the US. The Saudi ambassador put out a plea to other Arab nations to get in line and quit complaining. He said any nation not in the coalition of the willing would not have any say in what a post war Iraq looked like. That is totally unacceptable to the Arab community and when faced with a US and British occupation force the odds are good a democracy could arise that would endanger the status quo of Arab ruling families everywhere. Get in line, no pushing please, plenty of war for everyone. There were also several reports that Special Forces were already on the ground in Iraq and had taken control of several of the smaller oil fields. I find this one hard to believe since Iraq would be protesting loudly. Confirmed reports had 460 UN humanitarian workers leaving Iraq quickly to avoid the rush next week. Russia also extracted its people as well as several other satellite countries. Doors are being boarded up and roads to the borders are reported to be filled with cars. That thud you heard was realization striking home. The US announced that a new resolution would be made on Monday and the rhetoric surrounding it was very strong about how this is the UN's last chance to be relevant. The implications are clear, approve it and let's get on with the project or don't come knocking on the US door the next time you need money or military power. The US and Britain have made it clear they are going to be the world's police force with or without the UN blessing. I know this is tough talk but that is the way they are playing it. All this tough talk, Saddam's offer to negotiate, Turkey's acceptance of some kind of deal and ticked off UN inspectors coming back to retract their cooperation speech all worked together to convince investors that the time was near. Nobody EVER picks the bottom exactly and the penalty for being late to the party is crumbs and no cake. Eager investors decided that the Friday dip could be their last buying opportunity. They were also bolstered by comments from Fed governor Ben Bernanke. Ben said the economy appeared to be in a position where many companies could boost hiring and spending and only a few industries were still suffering. Sure would like to have his crystal ball. He said there were a number of factors that suggest investment and hiring should pick up in the months ahead. In a very bullish speech he said the Fed would not raise rates until well after they were sure a strong recovery was in progress. This hands off policy statement seemed to encourage investors to put cash to work. The rally off the morning dip was very strong and would seem to have been the signal that the February weakness was over. I did say "seem". Despite the 2:1 advances over declines across all markets the new 52 week lows over powered the 52 week highs for the 13th straight day. There was definitely some money coming to market but it was NOT a strong confirmation day that traders are always looking for. It was enough to put us back into the win column for the week and the close was only 55 points below the high of the week. There was obviously some short covering before the weekend just like we saw last Friday. Can't leave those positions at risk in case of a Saddam retirement event. Considering this was an expiration Friday the action was even more interesting. Lately expiration Friday's have been boring and pinned to current strike prices without much movement. There is also the possibility that the morning panic dip and rapid rebound jarred traders out of their plan and therefore the bounce continuation is suspect. While the rebound was nice to see it was not overwhelming. The high for Friday was still below Wednesday's high and the close was still -130 points from the top of our current range. This means we need a +130 confirmation day on Monday before we hit very strong resistance and there are several levels of decent resistance in that path. The bulls will have not only a wall of worry to climb but strong resistance and high event risk. Everybody expects the shooting to start soon and the market to rally on successful press conferences. We tend to forget that in a war both sides shoot. Everybody expects Iraq to roll over in the face of overwhelming force. The wild card is the potential for a doomsday weapon from Saddam. He has nothing to lose. He knows they are coming for him and he will not get out alive. If he has nuclear, biological or chemical weapons most strategists expect him to use them even if it takes out his population as well. This may be smoke and mirrors or worst case scenarios to polarize the public. Nobody knows but the point I am making is that until we see those press conferences bragging about successful operations there is still event risk. We may move up from here but getting over Dow 8150 before the war is going to be a challenge. The Nasdaq however closed near the high for the week and in the black for the year. Tech stocks and small caps are normally the leaders of each cycle and traders are definitely showing buying interest. That interest will face confirmation next week when it tests resistance in the 1360-1365 range. As the only index anywhere close to its 50 DMA (1361) it will be the first to really test the conviction of its buyers. We look constantly at the earnings guidance of every major corporation and very few are saying good things about the future. We moan and groan with every negative prediction or lack of visibility statement. We should also remember that these same corporations did not see the top coming three years ago. They continually told us how great things were and there were endless profits ahead. If they could not see the future then why do we put so much credibility in their dire predictions now? It is because we are trend followers until long after the trend changes. Most investors buy at the top on excessive optimism and sell at the bottom on excessive pessimism. Many claim that the pessimism is not excessive yet. This may be true but when pain and suffering from this busted bubble is weighed I think you will find that pessimism has turned into total complacency. We have been told things were so bad for so long that we have finally become immune to the bad news. Instead of a capitulation bottom to the three year bear market we have seen an exhaustion or consolidation bottom instead. S&P Chart - Weekly Take a close look at the S&P chart. The drop to 806 on Feb-13th was only 38 points above the October low and 31 points above the July low. In a market that lost 50% of its value from the 1553 high, 30+ points is gimme and would count as a higher low triple bottom retest in most trader's eyes. I am not claiming we have seen the bottom. I am not claiming any divine gifts of prophecy. I am just reporting the market sentiment as I see it. The actual charts for the Dow and Nasdaq are still showing a down trend but the second bounce in a week has peaked the interest of eager investors. With 30% of the gains from major market rallies coming in the first five days I am betting that experienced investors are lining up at the door. In October the Dow rebounded +1058 points off the lows in four days. The only way you can be assured of not missing the train is to be aboard before it leaves the station. Now where did I put that ticket? Jim Brown ************** Readers Write ************** Jim, I've come to the conclusion news events mean little and are only an excuse. Whichever way the market goes there's always a positive or negative news event that will fit. But I believe the market is so technical that outside of another 9/11, and maybe even with one, the market will complete it's agenda regardless. As evidence, wasn't our fear the greatest of another terrorist attack right after 9/11? No one could believe it happened in the first place and everyone was waiting for the other shoe to drop. They blindsided us once and the fear was great they'd do it again. We had no idea where it would come from or how it would happen, but we’d be very surprised if it didn’t. Yet through October, November and December the market just kept climbing, in spite of the fact that large events were cancelled, we were warned daily and we were being told we really didn't even know who we were living next door to, especially here in Florida. But during that time the market had a technical agenda and it went about it regardless. It NEEDED to drive up prices so it could drive them down to new levels. It needed to do it and regardless of the fear, it did it. Now we have the fear of Iraq. Granted it's weighing heavy on the market but the market is still accomplishing it's goal. But news events are too coincidental to come exactly at the time we hit resistance and support levels. I believe the market does what it wants and then we find the news event to fit it. The Nasdaq needed to drop back to support and it did today (Friday). It sets up targets for itself and then goes for them. A high of 1314 on 2/7 and 1315 on 2/11 was resistance it set up for itself, or a target as it were, and when it couldn't get through, it went all the way down to 1260 to come back and take a run at it. Sure enough, it was able to power straight up through. I knew after it did, in looking at it Thursday night that it really needed to pull back before it could go higher, but that it was indeed going higher. It pulled back to 1316, which was now support and took off again. The two levels that stopped it 1314 and 1315, and the level it came back to, 1316 are not coincidental. Did it pull back because of the oil fire? To me it looked like it was starting to drop before the news. It was merely completing its two-week project and we found a news event to fit the drop and one for when it took off. Everyone thought the Dow would free fall when it fell through 8240, which was support that it had set up from October through December. It looked like there was nothing underneath but air until the bottom. Yet it bounced on resistance right at 7917, which was rock solid and clearly evident on a 60 minute chart. It banged between that and 8150 three times for a reason. It was setting up a target for itself. When it couldn't get through, it dropped way back to take more of a run at it. It drove itself down perfectly to the last real support it had. Go back to Oct 8th and you'll see we hit a low of 7331 and bounced up to 7622, almost 300 points. When it couldn't go higher it made the final drop to 7198 and then plowed back up through 7622 and kept right on going. 7622 was hard resistance and when it came back down to 7629 four months later (2/13), it was hard support. Find those two points on a 60 minute bar chart, draw a line and you'll see how obvious it is. Everything is momentum in the market. When it knocked on the 8150 door three times and it didn’t open it needed to go way back to get enough momentum to plow through. That’s what it’s doing now and I believe its taking a run at 8150 again. It may not do it on the first try but my guess is it will break through it before it goes below today's (Friday) low. It will do this regardless of the situation worldwide and the economy sucking. I'm looking for an inverted head and shoulders with last July being the left shoulder, October being the head and Thursday, Feb 13th, being the right shoulder. I believe we are trying to break out of this bear market and we've seen the bottom. I can make a good case for the Nasdaq as well. The only thing that is throwing me is the SOX and since that will probably lead the techs I wish that wrench weren't in the works. Nevertheless the SOX is strong right now and looks to advance further. Besides, either the bear market is history or it better find a bottom real soon, and come out smelling a whole lot better than it smells right now by the time campaigning starts. I really believe the market wants a republican administration and a stinking stock market can put an end to that real quick. So if its going to go down, in order to save this administration, it better fall fast and hard and then get going back up so at campaign time the bad times are just a memory. In other words, if we haven't reached a bottom we better do it quick, but if the market is based on momentum, personally I don't think the momentum is there to do it quick. I just wanted to write and share with you what I'm thinking. I’ve been with you a long time and I always analyze your calls. Calls that would have been a given before are not happening now. I'm finding this is not the market we've been used to dealing with. Gravity is not in the same places it used to be and with a bullish bias, falling through support doesn't always offer the same results as it has in the past. This may sound goofy with everything so negative, but I think the whole market has an up bias. Unless we have a world catastrophe, and I'm certainly not discounting one if we go Iraq alone, I think this bear market is history. However I also believe we'll be going through a number of bull and bear markets for the next several years, but we won't get into that now. Thanks for your time and let me know what you think. Best regards, Rick Utt Rick your letter was too insightful and I had to share it with the readers. I think there is a common thread beginning to form among investors and your letter expressed it well. The overhead weight appears to be lighter and the rush to retest old lows appears to be fading. I for one am ready to board the train. Now where did I leave that list of LEAPS? ************** FUTURES MARKET ************** Playing the role of the Badger By John Seckinger jseckinger@OptionInvestor.com A badger is the most ferocious animal when backed into the corner. Have bullish investors decided that now is the time to come out fighting and start buying pullbacks? Friday, February 21st at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 8018.11 +103.15 8039.27 7854.38 YM03H 8000.00 +75.00 8039.00 7844.00 30,866 Nasdaq-100 1015.92 +14.45 1019.25 986.73 NQ03H 1014.50 +10.00 1021.00 986.00 256,119 S&P 500 848.17 +11.07 852.28 831.48 ES03H 847.25 +8.50 852.25 829.75 678,557 Contract S2 S1 Pivot R1 R2 Dow Jones 7785.70 7901.91 7970.59 8086.60 8155.48 YM03H 7766.00 7883.00 7961.00 8078.00 8156.00 Nasdaq-100 974.78 995.35 1007.30 1027.87 1039.82 NQ03H 972.25 993.25 1007.25 1028.25 1042.25 S&P 500 823.18 835.68 843.98 856.48 864.78 ES03H 820.50 834.00 843.00 856.50 865.50 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7748.00 7874.00 7970.00 8096.00 8192.00 NQ03H 967.50 991.00 1006.50 1030.00 1045.50 ES03H 820.00 833.50 843.50 857.00 867.00 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 John Seckinger's day in the Futures Monitor. Recapping his signals: Short 838.75, exit 838.75, change +0.00 Long 839.50, exit 839.50, change +0.00 Short 835.00, exit 835.00, change +0.00 Long 847.50, exit 847.50, change +0.00 Total for the day: +0.00 Total for the week: +9.75 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) Bulls were actually in control on Friday for all but around 25 minutes of trading. The "wildcard support" at 833 was tested (near S1 as well), but bulls kept the contract from getting to the weekly pivot of 828.50. In fact, the ES fell almost exactly to the 50% level of the rise from 805.25 to 853.25. Bullish as well. I compiled a ton of retracement and pivot analysis studies, and the chart below highlights what I have found. The "Resistance Zone" from 850-854 is moved higher to 854-857, with more resistance above at 861.25 and then from 865 to 867. Support is felt at 838, and then from 829 to 831. Note that Monday's pivot lies at 843, and should offer slight support. Also note that R1 is within the new zone of resistance. With the ES contract currently in a new bullish regression channel and above the long-term trend line (blue), bears will have to keep tight stops just in case the rebound grows legs. Chart of ES03H, 120-minute Looking at a 30-minute chart of the ES contract, I haven't given up at a possible apex at the 853.50 level. We might have to get at test back at the 843 pivot before bouncing to this apex once more. If selling pressure continues, expect bears to get aggressive once under 838. The objective would be for a move to the 829-831 area. Chart of ES03H, 30-minute Bullish Percent of SPX: This indicator was unchanged at 34.80% on Friday, and will remain in "Bull Correction" status with a column of O's unchanged at 14. The volatility seen in the marketplace evidently didn't allow for one extra buy or sell signal within the index. The last column of "O's" ended at 20 percent. With that said, sentiment has to remain bearish. Looking at P&F chart of the SPX, the contract managed to rise 11- points on the session; however, since 835 was taken out a new column of O's down was formed. Going forward, support via P&F is still seen at 835, with resistance seen at 850, and then between 860-865. The March E-mini Nasdaq 100 Contract (NQ03H) The NQ contract failed once again to test the daily retracement level at 1024.50, and for the forth-consecutive day closed above the 1003 area. This futures contract bounced off its 50 EMA on Friday, and closed once again above all three watched moving averages. Bullish as well. Things are definitely lining up for a test of the 1024.50 area and above. The objective above 1025 would be for a move to 1045. Also notice that the WEEKLY low is 983. Also noted in the chart below is the ADX oscillator falling back underneath the 20 level on a daily basis. This indicates that the recent upward momentum could possibly be range bound. Ideally for bulls, the NQ rises above the 1025 area AND the ADX clears the 20 level. Chart of NQ03H, Daily Taking things to a 30-minute level, there are a ton of retracement levels; however, the macro picture remains the same. 1045, 1025, 1003, and then 983. There might be resistance above at the 1030.50 level. If the NQ moves above the 1025 level in the near-term, it will clear the mid-part of the regression channel as well. Chart of ES03H, 30-minute Bullish Percent for NDX: The bullish percent for the NDX remained rose only one percent to 36 on Friday, and will stay in "Bear Confirmed" status. This index needs a print of 40% to reverse back into a column of X's. The last column of O's ended at a reading of 14%. With that said, things continue to look bearish on an intermediate-term basis. The NDX, according to P&F charts, will have to get a 1025 print in order to produce a new column of X's. This lines up well with the solid resistance seen up to the 1025 area. Support is seen at 1000. The March Mini-sized Dow Contract (YM03H) The YM contract has now officially left the recent bearish regression channel, after setting a relative low above the top of the downward trending pattern (see chart). The key levels going forward represent the 50% area within their own timeframe. 7969, 8142, and 8262. Currently above 7969 and Friday's pivot of 7961, bulls can begin to look for a shift in sentiment. Once the pivot is taken out, the recent bullish sentiment will turn neutral. The 8142 objective is below the daily R2 level, but above R1 at 8078. Remember, bullish percent in the Dow has NOT turned into "Bull Alert" status, and all the other broader bullish percent indicators are still solidly bearish. Is this like picking a bottom? Exactly. The key will be to not test the daily pivot and get over 8142. Then 8262 is next, with bulls wanting the YM to stay above 8142. If this fails to materialize, bears will be waiting to send this contract back to 7748 area and weekly S2. Chart of YM03H, 90-minute Bullish Percent of Dow Jones: Using P&F analysis, the Dow needed an 8050 print to form a column of X's; however, the high was only 8039. The bearish objective for the blue chips remains at 7100, and we still need a move above 8200 to give a 'buy signal'. Resistance is seen at 8150, with support still not seen until 7900. As far as the bullish percent is concerned, this indicator finished unchanged at 16.67% once again, and will still need to reach 20% to get into "Bull Alert" status. The column of O's remains at twenty-three. Note: The last column of O's ended at 10%. Until we see a "Bull Alert" sign, bears should still be in control, especially since the Dow is the most narrow of the bullish percents listed in this section. When will we see a "Bull Alert" signal? Possibly above the 8150-8200 level. Good Luck. Questions are welcomed, John Seckinger ******************** INDEX TRADER SUMMARY ******************** A PAUSE By Leigh Stevens Even a temporary respite from fear of terrorism and some slowing of momentum to go to war was enough to generate some buying of stocks and give us two up weeks in a row. Usually when I see Index charts that start to look bullish but where it's also difficult to see what bullish fundamentals could support the charts, the technical picture is the one that has the true pulse of the market. This was the case for last week. THE BOTTOM LINE - The recent rally looks like it will have still more upside follow through. For example, with the Dow clearing near resistance at 8000 the average now has a technical objective to 8400; the S&P 100 (OEX) has potential to 450 and to 1400-1425 in the Nasdaq Composite (COMPX). These are also the areas in which to do new put buying. Forced to a choice last week, I would go with the charts and been long calls. Given also that the current rally is most likely an "oversold" technical type rebound, my broadest suggested strategy is to wait (again) for opportunities to buy puts at higher levels. A gun IS still being held to the head of Iraq and it still appears to have a better than even chance to go off. FRIDAY TRADING ACTIVITY - The market replayed the late-day surge of a week ago as a wave of short-covering buying again surfaced in the main - the added factor was the Friday expiration of equities options contracts. And there have been some interesting plays in individual stocks - ones I mentioned two weeks back were GE, CSCO and INTC - all having nice bounces off recent lows. Stocks opened mostly unchanged in spite of a Labor Dept. report (Consumer Price Index) that eased some recent inflation worries. There was then a sharp sell off on the news of a fire at a Staten Island oil-storage facility - the fact that New York traders could SEE a thick cloud of black smoke was enough to spoke them and the market. With the fire reported as an accident, stocks rallied again. A move way into plus territory was limited by a lack of much positive corporate news and continuing uncertainty over Iraq. It was well known that the U.S. and the U.K. were preparing a new resolution for the Security Council on Monday. Volume stayed low but enough stock buying continued to put the indices plus on the week - for only the second time this year. The Dow blue chip index was up 2 weeks running - by 1.4% in the week just ended. The percent gain was similar in the S&P 500 (SPX) - up 1.6%. Tech continues to lead the rally and this was shown by the even healthier Nasdaq Composite gain of 3% for the week. The Market's inflation concern was of course generated by the Producer Price Index or PPI, which was reported on Thursday as being up a whooping (in annual terms) 1.6% for January - this versus an expectation for an increase of 0.4%. But the Friday Consumer Price Index or CPI was up only 0.3%. Even more heartening was the fact that the CPI rise was mostly due to a sharp run up in fuel-oil and gas prices. The so-called "core" index which excludes the more volatile and seasonal food and energy prices, was only up a scant 0.1%. The PPI tends to be based on data gathered earlier in the month and the CPI on info culled later in the month, so the news on CPI was taken as more indicative of January than was the PPI. On hope of course in this kind of discrepancy, is that U.S. Companies are unable to pass on much in the way of higher costs for energy. Given that a big fear and worry of the market is that a big oil price jump will derail a fragile recovery - and, just when there is some pick up in business output and spending as suggested by the substantial 0.7% jump in Industrial Production reported the week before. After the encouraging news on inflation and the Staten Island Fire - if an "accident" is encouraging news - some comments made by a Federal Reserve Governor helped keep some bullish momentum going. The Fed governor in question, Ben Bernanke, indicated that he believes that the Fed can only raise interest rates once the economy is on a "clear footing". During a talk Mr. Bernanke also suggested that once the uncertainty lifts on Iraq, investment may be poised to increase - but, it will take to then to better assess the true picture of the economy. The magic words were that rates would continue to be LOW and there will be no "head em off at pass" type preemptive move to raise rates to dampen possible inflation. U.S. equities mutual funds took in perhaps $200 million in new money during the week ended Feb. 19 - this versus outflows of $5 billion during the prior week. Well, as I've been suggesting - traders got a little TOO bearish as highlighted by my option sentiment readings. The rally continues to be lead by tech. Investors welcomed Dell's announcement last week that its profit rose 32 percent in Q4. Hey, earnings are the linchpin of the market and this was real money - and, I bought my last laptop from Gateway! The Chip (SOX) and Computer (sym: BMX) sectors were among the best performing groups. OTHER MARKETS - Bonds declined, with the 10-year T-note falling about 1/4 a point. Positive inflows (net new money) continued in Bond funds for the week ended Friday. The dollar firmed up a bit - the greenback is holding steady around $1.07 - 1.08 against the Euro, but far above the buck it was trading at not too long ago. Oh well, Europe is still relatively cheap, especially Spain, where I continue to be paid well (in Euros) for my condo - that it's down on the Mediterranean doesn't hurt. In the words of the immortal Lex Luthor, "they're not making more beach front property". Gold also ended flat or unchanged price wise for the week. The XAU (Philly Gold and Silver Index) held at its 40-week moving average but momentum slipped enough to generate a bearish downside crossover on the MACD Indicator. See - http://www.OptionInvestor.com/traderscorner/080802_1.asp for more on the Moving Average Convergence Divergence (MACD) Indicator. The gold bulls figure that this is just a pause also, as Gold has been the best performing asset class in the new millennium. Merrill Lynch raised its 2003 price forecast on crude oil to $28.50 per barrel from $24. Well, as long as it's not more than $30-32, I am still hoping to fill up my gas tank for less than I make an hour. MY INDEX OUTLOOKS - I have some further modest upside expectations for the indexes, especially the Nasdaq 100 or NDX - that and the Composite are showing the best relative strength among all the indices. S&P 500 Index (SPX) - Daily chart: Technically, the break out above the minor consolidation of last week (the "bull flag") was suggested that the OEX may be about mid point in a move. This kind of "measured move" objective suggests upside potential to the 880 area. Get itchy to buy puts in the 880-890 price zone. My CBOE Call-Put readings on daily equities options volumes have retreated from the oversold area, but this extreme of bearish sentiment is still having its "seeds of the opposite" EFFECT. For more on my Call to Put Indicator and about all of this topic of trader "sentiment" see - http://www.OptionInvestor.com/traderscorner/tc_011903_2.asp S&P 100 Index (OEX) - Daily and Hourly charts: The OEX level to watch in the short-term is 432 - a push through this area, particularly on a closing basis is suggesting that OEX will advance to 450. 420 is key near support. I would concentrate on bullish trading strategies as long as OEX stays above 430 this week. The Index has potential to 450 on the upside, with downside to near support at 420-425. Major support looks like 400 still. NASDAQ 100 Index (NDX) Daily chart - As befits the volatility king, the Nas 100 or NDX, has the most raging bullish chart. Ya could have been a contender. A bullish note was seen in the Friday NDX rebound from the 21-day moving average - resistance "becoming" support (classic technical analysis). 1065 looks to be an upside objective based on a move of the Index into the upper trading band - This picture I'm painting here, as to the key-ness of the 21-day moving average, also suggests that the ability for NDX to hold above 985 is also KEY to maintaining my current mildly bullish outlook - at least for the coming 1-2 weeks. Hey, that's LONG- term in this market! The Nasdaq TRIN is not showing that buying or selling pressures have been in any recent extremes in terms of heavy buying or overly much selling for any sustained periods. QQQ Daily chart: As is one of the nifty things about OBV, sometimes it tips you to when accumulation of the stock "tipped" to the buy or what has often been called the "accumulation" side. Meaning, that this was when buying interest was more active on up days, then selling interest was on down days. Upside potential can easily be projected here back up to the $27 area. Sell rallies (short stock; buy puts) that take QQQ into the $27-28 price zone. Conversely, a break of 24.5 this coming week might suggest a rapid collapse to the $23 area. More on On-Balance-Volume (OBV) and the unique uses of this Indicator can be found at - http://www.OptionInvestor.com/traderscorner/112102_2.asp ************************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 ************** Got Health? A survivor of the Internet bubble has found a niche and appears to be prospering. WebMD (HLTH) currently has 1.6 million health care professionals and 575,000 doctors registered with their service. They are providing electronic transaction services to process claims, determine eligibility, handle patient billing and provider reimbursement. They also provide integrated physician practice management systems including administrative, financial and clinical management. Since most doctors are just doctors and not managers or IT professionals there has always been a cottage industry of providing scheduling, billing and bookkeeping for small offices, mostly on a regional scale. It appears WebMD has capitalized on this need on a nationwide basis and is doing well. They also provide an objective source of healthcare information to more than 15 million consumers each month. HLTH has rebounded from $3.25 when it was dumped with the rest of the Internet stocks and is now threatening to break over $10.00. This is a strong resistance area and could provide a challenge. However, once over $10 I believe we could see some serious short covering. As of Jan-31st HLTH had 23 million shares shorted, which amounts to roughly 6.5 days of average volume. With the strong ramp of the last week and the potential for the Nasdaq to lead us out of the bear market I am betting that we could see a real pop soon. The problem with this plan is the earnings on March 13th. We all know what happens if earnings are bad or the conference call stinks. However, with a positive surprise those 23 million shorts are going to be running for cover. HLTH is in the top 10 heaviest shorted stocks and the number of shorts are at a 12-month high. This is a high-risk play just like everything in this section but the July $10 call is only $1.25. I have risked more than that for the bid/ask spread on some options recently. I think this is a lottery play with substance and the only pothole in our path is the potential for an earnings miss. Buyer beware! I thought about putting a trigger of $10.25 or so on the play but that is only 50 cents away and the option could be up +50 cents by the time it gets there. I think we just bite the bullet and go for it. 23 million shorts could be wrong. (grin) ******************************** Play updates: Microsoft Call - Feb-16th (MSFT $24.15 when recommended) Microsoft surged at the open on Tuesday on strong trading volume but weakened by the end of the week to close at $24.61 and up only slightly from the recommendation. This is a long term play and once the volatility from the 2:1 split is over this stock should rise nicely. Any economic recovery would help! MSFT Chart - Daily EMC Call from Feb-2nd After peaking at $8.59 on Tuesday EMC pulled back to close just over $8.00 on Friday. This is a long term play and with the market still unstable I feel EMC is doing just fine. NEM Put from Jan-26th ($30.15 when recommended) Newmont traded as low as $26.51 on Tuesday when investors were convinced the war would be called off. Now that the war appears imminent gold rose slightly again to close at $351 on Friday. Well off its $390 highs but still holding the $350 level. Once the shooting starts and favorable reports appear it should continue downward. BZH May $50 Put - From Feb-9th ($55 when recommended) Buying opportunity! BZH has climbed to strong resistance at $59 and failed despite good home buying news this week. This is a long-term play and this would be my ideal entry point. The May $55 put at $3.20 is now the same price as the May-$50 when first recommended. The $50 put is now $1.85. BZH Chart - Daily Powerball - From 12/29/02 There was no material change in the Powerball Lottery play this week. Several of the stocks are showing signs of life and any further Nasdaq gains could put us back to breakeven quickly. Remember this is a 12 month play and we are only seven weeks into it. It would cost you about $775 to buy one contract of each today. Any one contract could repay that $775 by 12/31/03 leaving the rest as profit. It is a high risk "LOTTERY" play but then $775 is not much risk. 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 **************** Back from the Edge by Steven Price The geo-political arena threw us another pitch today and reminded us just how sensitive the markets are to those events. What started out as a day in which the markets hovered close to unchanged took some quick turns that left intraday traders with a case of whiplash. The Techs spent most of the morning in the red and the Dow had been climbing higher until our first event of the day splashed across the news screens and just outside the NYSE's windows. An oil tanker carrying 100,000 gallons of gasoline exploded off the coast of Staten Island, sending the markets plummeting as dark clouds of smoke rose just outside of New York. Terrorism fears sent bulls scrambling as the Dow dropped 100 points in less than thirty minutes. As reports came out as to the cause of the explosion, soothing terrorism fears, we rallied back strong and not only made up the loss, but sent the Dow up into the triple- digit gain region. More importantly, the Nasdaq Composite also reversed its earlier weakness and headed into the green. That broad based buying came as a surprise after Thursday's economic data gave investors little to cheer. The rally eventually ran out of steam, but did not give back the gain, holding near the highs of the day. However, after the Dow fell back below 8000, it seemed to have a ceiling at that level. At least until our second event of the day hit the wires. Iraq said it was willing to negotiate with the U.S. directly, if the U.S. pulled troops out of the region. That was all that was needed to break back above that 8000 level and set new intraday highs. While it is unlikely the U.S. will respond to such a request by pulling out troops, it was a bullish development for the markets as it showed evidence that Iraq was softening its stance. Colin Powell said war could be averted if Saddam stepped down. Combine the developments with expiration Friday and we got an intraday environment that left both bulls and bears confused after two days in which it appeared that the bounce from last week had failed and we were headed lower. Just yesterday we were contemplating the just how far the drop might take us, following the terrible economic data. Today, all appeared rosy. The only real economic data we got this morning was the Consumer Price Index (CPI), which rose 0.3% in January. While it was the largest jump in 9 months, it was mild compared to the wholesale inflation level we got on Thursday and indicated that inflation at the consumer level is not a big concern. Like the PPI, it was led by increases in fuel costs, as gasoline prices rose 6.6%, oil prices rose 8.6% and natural gas increased 4.6% - its largest gain in 2 years. By the end of the day, the point and figure reversal down in the OEX had reversed course and turned back up into a column of "X" when it traded 430 (using 2.5-point box). The OEX also just missed that level on the close with a finish of 429.86. The Dow had reversed lower into a column of "O" on Thursday, when there were no international developments, but bounced strongly once we were hit with those factors again. It did not move high enough to reverse back into a column of "X," but did close above the pivotal 8000 level, finishing the day at 8017. The SPX has never reversed back down and ended just shy of 850. We are approaching some pivotal levels that should give us an idea of whether we are just seeing an oversold bounce, or the beginning of a significant reversal. As I mentioned last week, the bullish percents are in oversold territory in the Dow and OEX and some of the risk has shifted less in favor of the bears. A reader (thanks Frank) pointed out today that although those bullish percents have yet to reverse, more of the stocks still on sell signals are now in columns of "X". That is certainly a red flag for bears, but does not tell us whether we are seeing short entry opportunities, or the beginning of an internal shift. The red flag is up, the bullish percents still have some room to fall before hitting the July or October lows. We have yet to see the signs of an economic turnaround and even the economy's biggest cheerleaders admit that until the Iraq situation is behind us, we are unlikley to see things get better. The theory goes that businesses are holding off on spending and hiring until they see how the war possibility plays out. However, that theory seems to hang its hat on a scenario that ignores the fact that things had been getting worse before we re- focused on Iraq last year. While we may be due for a cyclical upturn in the economy, so far there is little evidence as to why that upturn will take place any time soon, even without a war. Certainly we can expect to see a decline in fuel prices, which have been the biggest price inflators in the price indices released the past couple of days. However, if that reduction in cost doesn't spur spending on hiring and an increase in production, then we will be out of excuses. With interest rates as low as they are now, it will be harder to continue to spur consumer spending with more rate cuts and although the Fed has other options, they are becoming fewer. Until the economy does show some signs of a real turnaround, it will be tough to sustain a rally. However, the market often reacts to short-term phenomena and as traders that is what we are faced with deciphering. I still favor shorting the bounces, but we must remember to trade what we see, as we don't want to short the bounce all the way back to Dow 9000. If we do get an upturn in bullish percents, accompanied by PnF buy signals and a move over the congestion levels in late January - early February, then I may relent and accept an up move for whatever reason it occurs. However, until that time, I'm still looking over the edge. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8018 Moving Averages: (Simple) 10-dma: 7890 50-dma: 8328 200-dma: 8665 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 848 Moving Averages: (Simple) 10-dma: 835 50-dma: 879 200-dma: 916 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1016 Moving Averages: (Simple) 10-dma: 982 50-dma: 1015 200-dma: 1017 ----------------------------------------------------------------- The Gold and Silver Index (XAU): The XAU dropped hard Friday after attempting a rebound throughout the middle of the week. It actually rallied solidly when the refinery explosion on Staten Island took place, as traders moved quickly out of traditional stocks and into gold. Once it became apparent that the explosion was not due to a terrorist act, the shift went back in the other direction and gold stocks were sold off. Interestingly, though, the drop in the XAU was more severe than that in the gold futures. It did stop, however, right at the 200-dma, bouncing at the end of the day. The move in the XAU also mirrored the opposite move in the U.S. dollar, which sank on the explosion and then rallied strong throughout the afternoon, eventually closing over 100 for the first time since Feb 9. The XAU has now bounced off the 200-dma (71.68) for six of the last eight days, closing below that level once. As long as it holds above that level, it appears that the defensive play is still alive and well. If it begins to break down below that level, look for it to mirror a continued rise in equities and a possible resolution to the Iraq situation, whether it is peace or war. 52-week High: 89 52-week Low : 53 Current : 72 Moving Averages: (Simple) 21-dma: 75 50-dma: 76 200-dma: 71 ----------------------------------------------------------------- The VIX finally gave up the 35% support level, breaking down on today's equity rally to 34.14. 35% had been a bearish indicator for equities as drops in premium levels to this support often signaled a coming pullback. On February 3, it dropped to a closing low of 33.98 and gave a false indication that the equity rally at that time would continue. This time, however, it also broke down below the 200-dma (34.35) While this is certainly not an exact indicator, it is giving bullish signs. The next support level is 30% and if it happens to coincide with Dow 8150, which is strong resistance, that may be the next indication of a pullback and the bears next short entry point. CBOE Market Volatility Index (VIX) = 34.14 -1.53 Nasdaq-100 Volatility Index (VXN) = 46.10 -2.46 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.85 758,896 648,782 Equity Only 1.23 179,118 220,935 OEX 1.11 59,408 66,108 QQQ 1.32 93,474 123,688 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 40.2 + 0 Bull Correction NASDAQ-100 35.0 + 1 Bear Confirmed Dow Indust. 16.7 + 0 Bear Confirmed S&P 500 34.8 + 0 Bull Correction S&P 100 29.0 + 0 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 1.00 10-Day Arms Index 1.18 21-Day Arms Index 1.32 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 2046 780 NASDAQ 1934 1138 New Highs New Lows NYSE 66 55 NASDAQ 84 70 Volume (in millions) NYSE 1,626 NASDAQ 1,305 ----------------------------------------------------------------- Commitments Of Traders Report: 02/18/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added 11,000 contracts to the long side and 9,000 to the short side, for a net reduction to the overall short position. Small traders took 5,600 contracts off the long side and 4,000 off the short position. Commercials Long Short Net % Of OI 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%) 02/18/03 423,871 481,871 (58,000) (6.4%) 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 01/28/03 142,734 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% 02/18/03 155,475 91,102 64,373 26.1% 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 the long side by 1,000 contracts and the short side by 3,000. Small traders reduced long positions by 4,000 contracts and added 500 contracts to the short side. Commercials Long Short Net % of OI 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%) 02/18/03 38,486 50,501 (12,015) (13.5%) 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 01/28/03 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% 02/18/03 25,482 9,425 16,057 46.0% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials reduced long positions by 1,000 contracts and left the short side close to unchanged. Small traders reduced the net short position by 500 contracts. Commercials Long Short Net % of OI 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% 02/18/03 18,812 11,939 6,873 22.4% 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 01/28/03 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%) 02/18/03 5,561 8,973 (3,412) (23.5%) 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 *************** Setting profit stops when target is near I have a question re: a small short position that I took in FD at 29.18. At that time, I did a vertical P&F count (having just 'discovered' the concept from my friend, Jeff) and got a count of $21. We're now getting within reasonable striking distance of my target. What to do? What to do? My inclination is to simply watch until I think we're within intraday range of my target, enter a limit buy to cover, and take the target and the money to the bank. BUT.... (pleeeeaaasseee) what would my friend Jeff do? I received this trader's e-mail on February 7th and while I'm not able to give individual direction on any type of trade via e- mail, I will give my opinion on how to handle this type of predicament. Instead of making up my own "trade," I wanted to use this subscribers situation as an example of one tool, or line of thinking, I use when handling underlying stock trades. The above question is regarding a short position, but bullish traders can use the following explanation as a way to set profit stops. Not only in underlying stock positions, but options too. Two weeks ago (02/09/03) in our "I wouldn't change a thing" Ask the Analyst column, another trader asked a question about letting a profitable trade run, instead of locking in a 30% gain on each option trade when a 30% target was achieved. I think the following "technique" would also be useful to a trader. To use this technique, you the trader must have done what all good traders do before they initiated the trade. You must have established not only an entry point, but also set a stop loss that made some type of "technical sense" (RISK) and had a potential trade target for profitability (REWARD). The subscriber used the point and figure chart to establish his target of $21 after initiating his bearish position at $29.18. Here's the technique I described and a little later we'll see how things have worked out. Here is a copy of my response and something you can test for yourself to see if it makes sense. If so, then it may be something you'd be comfortable with and perhaps be able to implement into your own trading strategy. I'd also argue that the following technique is very useful for that trade we all put on from time to time that has inched ever so slowly toward a target, but just isn't moving at the "rate of speed" we might of thought it should based on market conditions or whatever scenario we had for the trade that should have unfolded within a specific timeframe we had for the trade. Reply: Measure risk/reward to price target. Let's say your target was the vertical count of $21. Current reward to target is $2.91. How much RISK are you willing to take (check your MINIMUM risk/reward from business plan). If you're only allowed to risk $1 to make $2, then just lower your stop $1.46 above current trading and forget about it. Since the trader used the point and figure chart to establish his trade setup, lets take a look at the p/f chart as it looked on February 7th. (Note: As of today, there has been no change in the p/f chart since February 7th). Federated Department Store (FD) - $1 box FD must have looked like it was starting to reverse lower from its bearish resistance trend when the trader initiated his short position at $29.18. I would have liked the risk reward at that point with the stock below a bearish trend, stop just above at $32 (risking roughly $3) and having a potential reward target of $21 based on the bearish vertical count. Even if the stock is able to achieve the bearish vertical count, a questionable bulls might cut lose their holdings on a break at $27 as a bull's risk was immediately assessed to the 52-week lows near $24. However, as the trade progressed, we're now at the February 7th date and FD has closed at $23.91. RISK to a point and figure buy signal is still to $32, so RISK in the trade is no longer just $3, RISK is now roughly $8. And to what potential reward? REWARD is $3 if based on the bearish vertical count, which was used in the trade setup. A trader that has set forth a MINIMUM risk/reward allowable of $1 risk for every $2 reward suddenly understands that the profitability of the bearish trade in FD has created an unfavorable risk/reward scenario as it relates to the trader's business plan. There's only two ways that I know of to have the trader get the risk/reward profile back inline with his stated discipline, and that would be to either close the trade out immediately, or snug down a stop to a level where risk/reward then becomes $1/$2 once again. The first option has the trader making the decision as to closing the trade, while the second method of lowering a stop to $25.50 ($1.50 risk from $24, to potential $3 reward to $21) allows a winning trade to still run, but will have the MARKET eventually making the decision as to when the trade is stopped out. It's always understood that by holding a trade overnight, a stock can always gap above or below a protective stop and something to consider as a stock gets closer to a profitable target. Now. Not all of us are astute pointandfigurtoligists like the above subscriber. However, if we've at least learned how to calculate bullish and bearish vertical counts to help establish potential targets which are useful in assessing risk/reward in a trade, then we can perhaps use that knowledge along with a bar chart, and tools available there, to also understand how a systematic approach to just snugging down stops from time to time can help a trader systematically try and reduce risk as a trade works in our favor and nears a target. Here's how a bar chart of FD looked on February 7th. I've placed a conventional retracement bracket on the chart of FD, where the levels of retracement may have been used in unison with the p/f chart to not only establish an action point, but also monitor levels over time. Federated Department Store (FD) - Daily Interval I'm assuming the trader initiated his bearish trade on January 16th. I'm not sure if he was using the above retracement bracket or not, but his entry point was darned close to the 21-day SMA and 50% retracement level of $29.17. A bearish trader would have been feeling pretty good the very next day when FD gapped down from $30.19 to $27.80. On January 17th, at roughly $28, risk to a stop at $32 from p/f chart would have been $4, while potential reward to $21 would have been $7. To keep risk/reward at a minimum of 1:2, a stop could have been lowered to just above the 50% retracement level of $29.17. Potential reward would have remained the same, but simply based on a technical level, risk to a stop of $29.25 would be an attempt at reducing risk to $1.25. When FD fell to $25.72, risk/reward could have once again been measured, then reduced with a stop just above 61.8% retracement of $27.85 (stop #3). I call this type of systematic snugging down of profit stops the "python approach" to squeezing profits from a trade, while still allowing a winning trade some room to work in the direction of trade. Let's now "scroll forward" to today, or Friday's close. In my initial reply to the subscriber, the technique of placing a stop based on a $1:$2 risk/reward from $23.91 might have had a trader weighing a stop of $25.37 ($23.91 + $1.46 = $25.37) against a more technical profit stop of $25.72 or just above that level, and still leaving some downside potential to initial target of $21. Federated Department Store (FD) - Daily Interval Well... a trader using conventional retracement, or the mathematical approach of systematically computing risk/reward from a stock's closing price to trade target may have been stopped out of his bearish trade in Federated Department Stores by now. The trader never really initiated the stop loss order himself, but simply placed the stop with his broker's computer and let the market decide when it was time to stop out. Here's one last little retracement technique that I've shown in other commentary where a bar chartist can use retracement along with point and figure vertical counts to still trade levels that might correlate with vertical counts. This also allows for a very systematic approach to trading levels. Let's assume for a minute that FD will eventually trade $21. Couldn't we "drag down" the 100% level to $21 as our target? Federated Department Stores (FD) - Daily Interval The technique of still anchoring a retracement bracket at a high point, but dragging the 100% down to the point and figure bearish vertical count of $21 does show some correlation of levels being traded in the last couple of weeks. I don't know if you think this technique has an advantage over conventional retracement, but it may when stocks threaten to break to new 52-week lows and an additional level or two is desired. The same technique could be used for stocks that break to new 52-week highs, or upside targets or trailing stops become difficult to define. Well, that $26.25 level in the above chart is kind of interesting. A trader still short and holding out for $21, might give it one more day. But no more than a 5-minute close above its DAILY R2 of $26.27. Federated Department Stores - Pivot analysis matrix S2 S1 PIVOT R1 R2 Daily 24.93 25.26 25.60 25.93 26.27 Weekly 24.52 25.05 25.63 26.16 26.74 Monthly 21.84 23.93 27.59 29.68 33.34 And if FD gets anywhere close to this MONTH's S2 of $21.84 and the bearish vertical count of $21, then I'd be using the mathematical risk/reward analysis to really be squeezing down a profit stop. Now... a trader that trades levels may all of a sudden be thinking... "Holy cow, there's more levels discussed in FD than I can keep track of." My reply. When it comes to trading levels, YOU the trader will chose a technique for establishing LEVELS to trade, that the MARKET appears to be trading. ALL THAT MATTERS is that YOU be able to control RISK in the account, and in the course of doing so, may "stumble" across a LEVEL that suddenly becomes IMPORTANT as it relates to YOUR trade. Don't begin wondering... should I have my stop in FD at $25.37, or $25.72, or $26.28 on a 5-minute close above $26.27. All you're really wanting to do is systematically and with some sense of confidence determine a level by which you can protect a gain. I dare say that a trader short at $29.18 cares all that much if he takes a profit at any of the above stopping points a trader might chose. All you're doing as a trader is assessing risk/reward as the trade progresses, placing a stop profit with your broker, then letting the MARKET decide if you've closed the trade. Past articles that relates to this weeks column: "Your account is your business" http://www.OptionInvestor.com/ask/ask_111702_1.asp which discusses a trader's stated discipline of using risk/reward analysis in their account management and trade discipline. "The BULLISH vertical count" http://www.OptionInvestor.com/baileysbasics/bb_091401_1.asp which teaches the trader how to calculate a bullish vertical count from a point and figure chart. Gives the trader/investor a POTENTIAL longer-term bullish price objective, based on the science of ballistics and helps a trader decide if there's still some upside room to a longer-term target the MARKET may have in mind for a stock. "The BEARISH vertical count" http://www.OptionInvestor.com/baileysbasics/bb_091401_2.asp which teaches the trader how to calculate a bearish vertical count from a point and figure chart. Give the trader/investor a POTENTIAL longer-term bearish price objective, based on the science of ballistics and helps a trader decide if there's still some downside room to a longer-term target the MARKET may have in mind for a stock. "Retracement levels" http://www.OptionInvestor.com/baileysbasics/bb_022001_1.asp was a "fun" article where you the trader were forced to make buy/sell decisions based on LEVELS of retracement, just like a market maker or specialist might have to as they provide liquidity to market participants without getting crushed as they manage their long/short stock inventory. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of February 24th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ABV AmBev - Comp Be Am Mon, Feb 24 -----N/A----- 0.44 BFb Brown-Forman Corp Mon, Feb 24 Before the Bell 0.93 BNL BUNZL PLC Mon, Feb 24 Before the Bell N/A CHK Chesapeake Energy Mon, Feb 24 After the Bell 0.15 HRB H&R Block, Inc. Mon, Feb 24 After the Bell 0.49 LOW Lowe's Companies Mon, Feb 24 Before the Bell 0.33 MGA Magna International Mon, Feb 24 -----N/A----- 1.42 MDG Meridian Gold Inc. Mon, Feb 24 After the Bell 0.10 TRI Triad Hospitals, Inc Mon, Feb 24 After the Bell 0.47 WTW Weight Watchers Intl Mon, Feb 24 After the Bell 0.25 WRI Weingarten Realty Mon, Feb 24 Before the Bell 0.82 WRC Westport Res Corp Mon, Feb 24 -----N/A----- 0.07 WPPGY WPP Group PLC Mon, Feb 24 Before the Bell 0.94 ------------------------- TUESDAY ------------------------------ AEOS American Egl Otftrs Tue, Feb 25 Before the Bell 0.53 ADSK Autodesk, Inc. Tue, Feb 25 After the Bell 0.05 BMO Bank Of Montreal Tue, Feb 25 -----N/A----- N/A BTI British Am Tobacco Tue, Feb 25 Before the Bell 0.50 BG Bunge Limited Tue, Feb 25 Before the Bell 0.87 CCU Clear Channel Comm Tue, Feb 25 Before the Bell 0.27 CSR Credit Suisse Group Tue, Feb 25 Before the Bell N/A FD Federated Depart Strs Tue, Feb 25 -----N/A----- 1.95 FMS Fresenius Med Care Tue, Feb 25 -----N/A----- 0.25 HPQ Hewlett-Packard Tue, Feb 25 -----N/A----- 0.27 HIW Highwoods Properties Tue, Feb 25 After the Bell 0.82 HD Home Depot Inc Tue, Feb 25 Before the Bell 0.27 ORLY O'Reilly Automotive Tue, Feb 25 After the Bell 0.35 PUK Prudential PLC Tue, Feb 25 Before the Bell N/A RCI Renal Care Group, Inc Tue, Feb 25 After the Bell 0.49 REP Repsol YPF Tue, Feb 25 -----N/A----- N/A SFD Smithfield Foods Tue, Feb 25 -----N/A----- 0.04 TRLY Terra Lycos Tue, Feb 25 -----N/A----- -0.02 TOL Toll Brothers Tue, Feb 25 Before the Bell 0.61 ----------------------- WEDNESDAY ----------------------------- APPX American Pharm Part Wed, Feb 26 -----N/A----- 0.34 AHM Amersham Wed, Feb 26 Before the Bell N/A CNQ Canadian Natural Res Wed, Feb 26 Before the Bell 0.81 CYH Community Health Sys Wed, Feb 26 After the Bell 0.27 RIO Comp Vale do Rio Doce Wed, Feb 26 -----N/A----- 1.47 DRYR Dreyer's Ice Cream Wed, Feb 26 Before the Bell 0.13 EV Eaton Vance Corp. Wed, Feb 26 Before the Bell 0.40 ELE Endesa, S.A. Wed, Feb 26 -----N/A----- N/A HMT Host Marriott Wed, Feb 26 -----N/A----- 0.30 CLI Mack-Cali Realty Corp Wed, Feb 26 Before the Bell 0.87 MRH Mont Re Holdings Ltd. Wed, Feb 26 After the Bell 0.73 NXTP Nextel Partners Wed, Feb 26 -----N/A----- -0.24 OKE ONEOK Inc. Wed, Feb 26 After the Bell 0.35 PAA Plains All Am Pipe Wed, Feb 26 Before the Bell 0.36 ROP Roper Industries Wed, Feb 26 After the Bell 0.27 TLD TDC A/S Wed, Feb 26 -----N/A----- N/A TNE Tele Norte Leste Part Wed, Feb 26 -----N/A----- -0.02 TOC The Thomson Corp Wed, Feb 26 -----N/A----- 0.49 TJX The TJX Companies Inc Wed, Feb 26 Before the Bell 0.30 TIF Tiffany & Co. Wed, Feb 26 Before the Bell 0.59 ------------------------- THURSDAY ----------------------------- ABB ABB Ltd. Thu, Feb 27 -----N/A----- N/A AU Anglogold Limited Thu, Feb 27 -----N/A----- N/A AXA AXA Thu, Feb 27 -----N/A----- N/A BCM CDN IMP BK COMMERCE Thu, Feb 27 -----N/A----- N/A CMCSA Comcast Holdings Corp Thu, Feb 27 Before the Bell -0.11 BVN Compania Minas Buen Thu, Feb 27 -----N/A----- 0.49 E ENI SpA Thu, Feb 27 -----N/A----- 1.80 ERIE Erie Indemnity Thu, Feb 27 -----N/A----- 0.49 GPS Gap Inc. Thu, Feb 27 After the Bell 0.27 IRM Iron Mountain Incorp Thu, Feb 27 Before the Bell 0.19 LR Lafarge Thu, Feb 27 -----N/A----- N/A LTD Limited Brands Thu, Feb 27 Before the Bell 0.64 MRVL Marvell Tech Group Thu, Feb 27 After the Bell 0.16 NOVL Novell Thu, Feb 27 After the Bell N/A PCG PG&E Corporation Thu, Feb 27 -----N/A----- 0.45 PDE Pride International Thu, Feb 27 After the Bell 0.00 SHPGY Shire Pharm Group Thu, Feb 27 Before the Bell 0.40 TEF Telefonica de Espaņa Thu, Feb 27 Before the Bell N/A TD Toronto Dominion Bank Thu, Feb 27 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- AAUK Anglo American PLC Fri, Feb 28 -----N/A----- N/A FIA Fiat S.p.A. Fri, Feb 28 -----N/A----- N/A PSS PAYLESS SHOESOURCE Fri, Feb 28 Before the Bell 0.15 RY Royal Bank of Canada Fri, Feb 28 -----N/A----- N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable 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 BWINB Baldwin & Lyons 5:4 Mar. 03rd Mar. 04th -------------------------- Economic Reports This Week -------------------------- Q4 Earnings reports continue to stream in but everything will be overshadowed by the looming Iraqi conflict. Economic reports that the street will be watching are the Existing Home Sales, Consumer Confidence, New Home Sales, Sentiment and the PMI. ============================================================== -For- Monday, 02/24/02 ---------------- Treasury Budget (DM) Jan Forecast: $10.0B Previous: $43.7B Tuesday, 02/25/02 ----------------- Existing Home Sales(DM) Jan Forecast: 5.80M Previous: 5.86M Consumer Confidence(DM) Feb Forecast: 77.0 Previous: 79.0 Wednesday, 02/26/02 ------------------- None Thursday, 02/27/02 ------------------ Initial Claims (BB) 02/22 Forecast: 392K Previous: 402K Durable Orders (BB) Jan Forecast: 1.0% Previous: -0.2% New Home Sales (DM) Jan Forecast: 1045K Previous: 1082K Help-Wanted Index (DM) Jan Forecast: 40 Previous: 39 Friday, 02/28/02 ---------------- GDP-Prel. (BB) Q4 Forecast: 1.1% Previous: 0.7% Chain Deflator-Prel.(BB) Q4 Forecast: 1.8% Previous: 1.8% Mich Sentiment-Rev. (DM)Feb Forecast: 79.2 Previous: 79.2 Chicago PMI (DM) Feb Forecast: 52.6 Previous: 56.0 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 ********************* Slippery Handle Just when it looked like we had a handle on the market, after a day in which we got no untimely world news and were left to focus on the economy, international forces burst back on the scene. 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The Option Investor Newsletter Sunday 02-23-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: MME Put Play of the Day: ATK Dropped Calls: None Dropped Puts: OSI ************************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 54.60 0.00 1.02 1.39 0.01 0.61 Still going EMC 8.04 0.00 0.59 -0.22 0.07 -0.08 Holding over $8 MME 34.80 0.00 1.58 0.71 0.72 3.75 New, 200-dma ZMH 43.96 0.00 0.94 -0.75 1.02 2.16 New, Right time SLAB 26.58 0.00 1.02 -0.16 1.31 1.02 Holding Up TECD 22.32 0.00 0.44 0.02 0.20 0.60 Slow but sure TRMS 43.54 0.00 0.68 0.55 0.29 2.38 $43 Breakout PUTS ATK 48.89 0.00 -0.93 -0.69 -0.81 -2.21 New, Gap fill CB 48.27 0.00 0.70 -0.32 -0.90 -0.98 Lower low MHK 48.83 0.00 0.52 -1.36 -0.62 -1.82 No bounce OSI 30.96 0.00 -0.62 0.00 -0.29 -0.24 Drop, no entry VZ 35.64 0.00 0.55 -0.80 -1.84 -1.71 Entry point ************************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: ********************* MME – Mid Atlantic Medical Services $34.80 (+3.60 last week) See details in play list Put Play of the Day: ******************** ATK – Alliant Techsystems, Inc. $48.89 (-2.15 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 ^^^^ OSI $30.96 (-0.49) Just to avoid getting caught in a bear trap, when we added OSI, we set a trigger at the $30 level and it's a good thing we did. While the stock proceeded to drift a bit lower after we added it on Tuesday, it was interesting that it bounced strongly on Friday after a morning low of $30.05. With the solid volume backing the bounce and a failure to hit our trigger, we're dropping the play this weekend in favor of better candidates. *********** 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 02-23-2003 Sunday 3 of 5 In Section Three: New Calls: ZMH, MME Current Calls: EMC, SLAB, TECD, AMGN, TRMS New Puts: ATK ************************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 ************** ZMH - Zimmer Holdings - $43.96 +0.95 (+2.16 for the week) Company Summary: Zimmer, based in Warsaw, Indiana, is a global leader in the design, development, manufacture and marketing of reconstructive orthopaedic implants and fracture management products. Orthopaedic reconstruction implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and elbows. Fracture management products are devices used primarily to reattach or stabilize damaged bone and tissue to support the body's natural healing process. Zimmer also manufactures and markets other products related to orthopaedic and general surgery. For the year 2001, Zimmer recorded worldwide revenues of approximately $1.2 billion. Zimmer was founded in 1927 and has more than 3,600 employees worldwide. (source: company release) Why We Like It: What does an aging population need? Replacement parts, of course. And if a company can provide those parts with minimum discomfort and at a lower cost than its rivals, then it seems to be providing the right product at the right time. Zimmer fits that bill, as it specializes in orthopaedic reconstructive implants and fracture management products, as well as products used for orthopaedic and general surgery. It got some attention recently when it revealed a new procedure for hip implants that relies on two small surgical incisions just 1.5 inches long. It is in stark contrast to the industry norm that uses an eight inch cut and tears both muscles and tendons. ZMH's new method harms neither. It results in less discomfort, quicker healing and hospital stays of only a day, as opposed to the typical 4-5 days. In the current environment where HMOs pay for a procedure, but hospitals eat the cost of longer stays due to infections or other complications, ZMH is likely to see its new methods implemented in increasing numbers. The company saw a 34% percent increase in earnings year over year and a revenue increase of 16%. The company's big sellers include both hip and knee products. Analyst Kate Sharadin of Gerard Klauer Mattison recently said she expects ZMH is currently taking market share from competitors and that it can continue. Industry prices jumped about 5% last year and the number of hip and knee transplants is growing about 6% a year. The average patient is just over 60 years old and as baby boomers move into that range, ZMH's business should only accelerate. The daily chart shows ZMH struggling to break out above $43.00, going all the way back to last October. It tested that level in October (high of $43.00), November ($42.93), December ($42.09) and now February. The only difference is that this time it finally climbed the wall. After a $43.01 close on Thursday, it headed up to $43.96 on Friday and added to the $43 buy signal with another box at $44 with an intraday high of $44.03. With the exception of the July 2001 dip, the stock has been in an ascending channel on the weekly chart since September 2001. Going long a stock that breaks out to all-time highs on a big reversal day in the broader markets can be risky and because of that risk we favor two different entry strategies. The first would be a trigger above $44.25, which should show continuing momentum and with no resistance above, could get us rolling toward our $50 target. The alternative would be buying a dip to the rising trend line that connects the February lows and would come into play in the $42- $42.50 range. The dip buying strategy would be the lowest risk and most favorable risk/reward ratio. We are placing our stop at $39.75 to allow for a bounce from $40 on a market pullback, but more conservative traders may want to use a stop of $41.50, which would amount to a break of that short-term trend line. BUY CALL MAR-40 ZMH-CH OI=991 at $4.50 SL=2.25 BUY CALL MAR-45 ZMH-CI OI=1562 at $1.00 SL=0.00 BUY CALL JUN-40 ZMH-FH OI=103 at $5.70 SL=2.85 BUY CALL JUN-45 ZMH-FI OI=473 at $2.40 SL=1.20 Average Daily Volume = 1.08 mln --- MME – Mid Atlantic Medical Services $34.80 (+3.60 last week) Company Summary: Mid Atlantic Medical Services is a holding company for subsidiaries active in managed healthcare and other life and health insurance related activities. MME and its subsidiaries offer a broad range of managed healthcare coverage and related ancillary insurance and other products and deliver these services through health maintenance organizations, a preferred provider organization, and a life and health insurance company. MME owns a home healthcare company, a pharmaceutical services company and a hospice company. The company also owns a collections company and maintains a partnership interest in an outpatient surgery center. Why We Like It: Between scandals and regulatory changes, the past several months haven't been particularly kind to health care related stocks, as demonstrated by the persistent deterioration in the Morgan Stanley Health Care index (HMO.X). The index is off sharply from its October highs, but is just now beginning to show renewed signs of life. After falling just fractionally below the late-November lows, the bulls have been pretty active over the past week and the index looks like a Buy. So we went searching for one of the index components that had a similar chart, and up came MME. The stock has performed better than the HMO index, posting a series of higher lows since late November. With Friday's push through the 200-dma ($34.44), MME looks like it is ready to break out over the $35 resistance level. Actually, the intraday high on January 23rd was $35.20, so the bulls will need to clear that level before we can truly call it a breakout. The PnF chart shows the stock already on a Buy signal (target of $46) and currently edging above the bearish resistance line. We're setting a trigger on the play at $35.25, and we'll wait until the stock can break through that level before making it active. Aggressive traders can buy the breakout, while those with a more conservative approach will want to target new positions on a pullback to support after the breakout. If looking to enter on a pullback, look for support to hold in the $34.50-35.00 on the pullback, with the 200-dma providing additional support. The 20-dma and 50-dma are both starting to curl upwards, just above strong support at the $32.50 level, and should provide a solid base to support the stock on any pullbacks. Accordingly, our initial stop is set at $32.50. BUY CALL MAR-30 MME-CF OI=108 at $5.30 SL=3.25 BUY CALL MAR-35*MME-CG OI=263 at $1.75 SL=1.00 BUY CALL JUN-35 MME-FG OI=237 at $3.50 SL=1.75 BUY CALL JUN-40 MME-FH OI= 60 at $1.55 SL=0.75 Average Daily Volume = 513 K ************************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 ****************** EMC - EMC Corporation - $8.04 -0.21 (+0.13 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: EMC has not had any company specific news in several days and has been at the whim of basic supply and demand. The stock has actually held up well since breaking out over $8. Those traders with charts showing a low of $7.01 will note that this was a bad tick on the open and the stock actually traded an intraday low of $7.80. The break below $8 was discouraging, but as the stock continues to consolidate and finish above that level, it has remained above an ascending support trend line stretching back to December 31. After recovering from the morning dip and moving back above $8, it tested support there on two intraday occasions, bouncing slightly higher each time. However, $8.20 also provided a ceiling with a round top intraday. The most recent storage sector analyst rating came from CSFB on February 11. While it gave it a ho-hum 'market-weight' rating, it rated EMC as one of its two 'outperform' stocks in the sector. There has been no change to the PnF chart, which shows a bullish vertical count of $17.75 and remains on a buy signal which came at $8. While the stock has not moved much recently, new entries may want to wait for a move back above today's resistance at $8.20, possibly on a trade of $8.25. BUY CALL MAR-5 EMC-CA OI= 926 at $3.20 SL=1.60 BUY CALL MAR-7.50 EMC-CU OI= 13653 at $1.00 SL=0.50 BUY CALL APR-5*EMC-DA OI= 3492 at $3.20 SL=1.60 BUY CALL APR-7.50 EMC-DU OI= 28479 at $1.25 SL=0.65 Average Daily Volume = 15.7 mln --- SLAB - Silicon Laboratories - $26.58 -0.07 (+1.98 for the week) Company Description: Silicon Laboratories Inc. designs, manufactures, and markets proprietary high-performance mixed-signal integrated circuits (ICs) for a broad range of communications markets. Silicon Laboratories is an ISO9001-certified manufacturer and has applied for more than 161 patents on its mixed-signal technology. (source: company press release) Why We Like It: As the SOX.X goes, so goes the NASDAQ. At least...that's usually the case. Today was the exception to the rule, when the semiconductor index underperformed the Composite and posted only a fractional gain. A daily chart for the SOX.X shows what might be keeping the bulls restrained. There's overhead resistance at the 300 level, just above the converging 50-day and 100-day moving averages. A lack of sector buyers was evident immediately after the opening bell when the index quickly retraced yesterday's gains. SLAB started off the trading day on a more positive note when it moved through $27.00 and tagged a new relative high of $27.36. Shares then pulled back to what became intraday support at $26.20 and traded under with a slight upward bias for the rest of the session. Whether SLAB can continue to set new highs will likely depend on the SOX's ability to break above resistance. If the index does move above 300, traders looking for new entries in Silicon Labs can think about taking action on a move above today's high. Those with a conservative risk strategy can continue to use a stop slightly below $25.00. BUY CALL MAR-20*QFJ-CD OI= 90 at $6.80 SL=3.40 BUY CALL MAR-25 QFJ-CE OI= 884 at $2.70 SL=1.35 BUY CALL APR-22.50 QFJ-DX OI= 250 at $5.30 SL=2.40 BUY CALL APR-25 QFJ-DE OI= 1329 at $3.70 SL=1.85 Average Daily Volume = 1.22 mil --- TECD – Tech Data Corporation $22.32 (+0.81 for the 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: Slowly but surely, TECD continues to fill in its February 7th gap. The stock worked its way higher throughout the week without much regard to what the rest of the market was doing. After this steady uptrend the bears weren't in much of a mood to hold short positions over the weekend. TECD enjoyed heavy buying during the final half hour of trading today, which pushed the stock up to a new relative high of $22.33 - not a bad way to close out the week. The daily chart shows that TECD is approaching the descending 21- dma at $23.34. Other than this moving average, there are no visible obstacles standing in the way of a rally up to our profit- target at $23.99. But with the daily stochastics (5,3,3) at overbought levels, it wouldn't come as a surprise to see some backing and filling of the recent gains. If shares do pull back, we'll be looking for buyers to emerge at short-term support/resistance near $21.60. Very conservative traders could use a stop just below this level. Traders considering new entries should note the extended daily stochastics on the (5(3)3) setting. The same indicator on the (14(1)3) setting shows a mid-range uptrend. BUY CALL MAR-20 TDQ-CD OI=888 at $3.10 SL=1.55 BUY CALL MAR-22 TDQ-CX OI= 15 at $1.45 SL=0.75 BUY CALL JUN-20 TDQ-FD OI= 3 at $4.00 SL=2.00 BUY CALL JUN-22 TDQ-FX OI= 3 at $2.60 SL=1.30 Average Daily Volume = 1.09 mln --- AMGN – Amgen, Inc. $54.60 (+2.00 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: The bulls finally did it! After several failed attempts in the past few days, AMGN finally broke over the $54 resistance level with conviction, closing just off its high of the day. Now if the Biotechnology index (BTK.X) can just give us some follow through next week, we'll really be cooking. Speaking of the BTK, it did post a respectable gain on Friday, but it is once again butting up against that $327-330 resistance zone. It almost seems as though AMGN has single-handedly dragged the sector higher and if the bulls can continue to bid this stock higher next week, then the BTK ought to follow suit and finally clear that resistance. Traders that didn't enter on today's breakout move will now want to look for entries on the next pullback to a higher low. Ideally we'll get a dip into the $53.50-54.00 area, which will likely be met with buyers again. One other piece of bullish evidence is the fact that Friday's push to new highs was accompanied by solid volume. While Friday's 11.1 million shares is still below the ADV, note that volume has been gradually expanding over the past four days, as the stock has continued to work higher. The ascending trendline that has been supporting the stock since last September has now risen to $52, so we're raising our stop to $51.75 this weekend. BUY CALL MAR-50 AMQ-CJ OI= 3688 at $5.50 SL=3.50 BUY CALL MAR-55*YAA-CK OI=27391 at $1.90 SL=1.00 BUY CALL APR-55 YAA-DK OI=32147 at $3.00 SL=1.50 Average Daily Volume = 12.2 mln --- TRMS – Trimeris, Inc. $43.54 (+2.42 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: In typical expiration Friday fashion, the broad markets provided plenty of excitement early in the day, followed by a lackluster close. The Biotechnology index (BTK.X) has continued to lack the strength of other technology sectors lately, but did manage to push right up to the lower edge of that $327-330 resistance zone we've been focusing on over the past week. TRMS moved up strongly after a bit of early weakness and proceeded to clear the 20-dma ($42.78), the 50-dma ($42.87) and then the important $43 resistance level before stalling out just below $44. But we got the move through resistance and bulls have got to be smiling about that victory this weekend. Next up is the $45-46 resistance that provided a cap in January, and the 200-dma ($45.48) will likely reinforce that resistance level. Traders already in the play can look to harvest gains on a test of that resistance, especially if the BTK index can't convincingly push above the $330 level. We can still target new entries on intraday pullbacks to support, likely in the vicinity of $42.00-42.50 area. But chasing new entries higher is not a favorable approach due to the proximity of that overhead resistance. Buy the dips and ride TRMS higher as long as the trend lasts. Raise stops this weekend to $41.50. BUY CALL MAR-40 RQM-CH OI= 235 at $5.40 SL=3.50 BUY CALL MAR-45*RQM-CI OI= 370 at $2.25 SL=1.25 BUY CALL APR-40 RQM-DH OI= 309 at $6.40 SL=4.50 BUY CALL APR-45 RQM-DI OI= 752 at $3.20 SL=1.50 Average Daily Volume = 501 K ************* NEW PUT PLAYS ************* ATK – Alliant Techsystems, Inc. $48.89 (-2.15 last week) Company Summary: Alliant Techsystems is a supplier of aerospace and defense products to the U.S. government, America's allies and major prime contractors. The company also supplies ammunition to federal and local law enforcement agencies and commercial markets. ATK designs, develops and produces solid rocket propulsion systems for a variety of U.S. government and commercial applications. ATK is the sole supplier of the reusable solid rocket motors used on NASA's Civil Manned Space Launch Vehicles. The company also designs, develops and manufactures small-, medium- and large-caliber conventional munitions for the U.S and allied governments as well as for commercial applications. Why We Like It: While just over a year old, the action in the Defense Industry index (DFI.X) tells us a lot about what the market thinks about potential war with Iraq. Namely, it isn't going to last very long, and it won't have a significant impact on the bottom lines of the majority of Defense-related stocks. After several tests of the $485 level in the past 6 months, that support finally gave way big time last week and the sellers really piled aboard on Thursday, driving the index below $460. There are a lot of individual Defense stocks that have a similar chart pattern, but few look as bearish as ATK. And the bears have another thing going for them with the impact to the shuttle program from the loss of the Columbia shuttle at the end of January. The stock broke down hard following that tragedy and after a feeble rebound to find resistance at prior support near $52, has reversed course and is very close to dropping to new 52-week lows. The PnF chart will generate another Sell signal with a trade at $47, and that development should really get the stock moving towards its bearish price target of $40. The $50 level is now looking like pretty firm resistance and another failed rebound below that level would provide a great entry into the play. Those with a more cautious approach will want to wait for a breakdown under the $47 level, which is just below the September 2001 low. Initial stops are set at $51.50, just below the steeply descending 20-dma at $51.32. Monitor the DFI index for confirmation of continued sector weakness before playing. BUY PUT MAR-50*ATK-OJ OI=82 at $3.00 SL=1.50 BUY PUT MAR-45 ATK-OI OI=59 at $1.00 SL=0.50 Average Daily Volume = 614 K ************************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 02-23-2003 Sunday 4 of 5 In Section Four: Current Put Plays: CB, MHK, VZ Leaps: On Shaky Ground Traders Corner: Perfection Is Overrated – But Profits Are Not Traders Corner: Inflating Deflation: Some causes and effects ************************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 $48.27 (-0.42 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: Despite the bullish action in the rest of the market, our CB play keeps delivering for the bears. After popping higher on Monday, the stock has returned to its familiar pattern of posting lower highs and lower lows. In fact that failed rally attempt on Monday was the best shot we had at an attractive entry point all week, as the stock rolled over just below the $50 level. Aside from the bearish chart pattern, CB is continuing to be pressured by negative comments, most recently on Thursday when Wachovia downgraded the stock to Underperform and lowered EPS estimates and cited a fair valuation range of $39-41. Looks like we've got some more room on the downside before getting there, but the PnF chart says it just might be possible, although the current bearish price target only projects down to the $44 level. Friday's session started out with a bang and by the end of the first hour, CB had traded a new relative low at $47.18, breaking below the $47.50 level we had recommended for new momentum entries. But then a funny thing happened. The broad market caught a bid and lifted CB gradually higher throughout most of the day before a bit of late day selling came in. By the time the dust settled, CB had posted another lower high and lower low, finding resistance below $49 and not even challenging the 10-dma (now at $48.98). Another rally failure below the 10-dma can be used for new entries, as well as a drop under the $47 level (breaking Friday's intraday low). We're keeping our stop in place at $50 until the stock closes below the $47.50 level. BUY PUT MAR-50*CB-OJ OI=746 at $3.20 SL=1.50 BUY PUT MAR-45 CB-OI OI=155 at $1.00 SL=0.50 Average Daily Volume = 1.39 mln --- MHK – Mohawk Industries, Inc. $48.83 (-1.25 this week) Company Summary: Mohawk Industries and its subsidiaries, are producers of floorcovering products for residential and commercial applications in the United States. The company is the second largest carpet and rug manufacturer, and a manufacturer, marketer and distributor of ceramic tile and natural stone. Through its carpet and rug business, MHK designs, manufactures and markets carpet and rugs in a broad range of colors, textures and patterns and is a producer of woven and tufted broadloom carpet and rugs, principally for residential applications. Why We Like It: Housing stocks may have advanced on Friday, but you sure wouldn't know it to look at shares of MHK. Trading sharply lower shortly after the open, even with the support of a broad market rebound, it was all the bulls could do to claw their way back to the opening level, just below $49 by the close. The stock is still struggling with the negative reaction to their cautious guidance issued with earnings earlier in the month, and even the strong housing numbers last week weren't enough to get the bulls interested. Since MHK managed to rebound from the $48 level (right at the top of last Thursday's range), we can reasonably infer that there is significant support at that level. That means we don't want to try chasing the stock lower until it breaks below the recent low of $46.64. Aggressive traders can target new entries below $48, but our preferred momentum entry would be to wait for a break under $46.50 before playing. On the other hand, a rebound on Monday could give us an attractive entry on a failed rally below the $50 level. the descending 20-dma (currently $51.06) should continue to provide a barrier to any rally attempts, so we're lowering our stop to $51.10 this weekend. BUY PUT MAR-50*MHK-OJ OI=34 at $2.85 SL=1.50 BUY PUT MAR-45 MHK-OI OI=30 at $0.80 SL=0.40 Average Daily Volume = 463 K --- VZ – Verizon Communications $35.64 (-1.70 this week) Company Summary: Formed by the merger of Bell Atlantic and GTE, VZ is one of the world's leading providers of communications services. As the largest provider of wireline and wireless communications in the United States, VZ has 95 million access lines and 26 million wireless customers. Outside the United States, Verizon affiliates serve 6 million wireless customers and operate 4 million access lines in 40 countries throughout the Americas, Europe, Asia and the Pacific. Why We Like It: If that isn't a mark of indecision, what is? After dropping to fill its opening gap early in the day, VZ rallied up to exactly $36.25 and then relaxed into the close, producing an almost perfectly balanced doji candlestick pattern. Not only that, but after yesterday's large range day, Friday's slightly smaller range produced a classic inside day. So for resolution of this pattern of resolution, all we have to do is see which way the stock breaks out of the inside day next week. A rally through Thursday's high ($37.06) and we'll know the bulls have the ball and it will be our cue to leave the field. That will be especially true because a trade over $37 will have to break out $36.75 stop first. But based on the turmoil being created in the Telecom industry because of uncertainties induced by the deregulation flap at the FCC, we're betting that the bears will rule on the break from the inside day pattern. That means a breakdown under Thursday's low ($34.25) can be used for momentum-based entries into the play. We mentioned in the initial writeup that a rally failure in the $36 area could be used to initiate new positions and Friday's rally failure from the $36.25 level certainly qualifies. Another pop and rollover from that area can still be used to enter the play, keeping in mind that our stop is still set at $36.75. Despite closing near its high of the day, the North American Telecom index (XTC.X) is still well below the 200-dma, and as long as this behavior persists, the bears should remain in control in our VZ play. By definition, that means a breakout in the XTC over the 200-dma will be an early warning to tighten those stops. BUY PUT MAR-35*VZ-OG OI=9584 at $1.40 SL=0.75 BUY PUT MAR-32 VZ-OZ OI=2658 at $0.75 SL=0.40 Average Daily Volume = 7.23 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 ***** On Shaky Ground By Mark Phillips mphillips@OptionInvestor.com Sometimes I struggle to come up with a title for this weekly column and sometimes the topic hits me like a ton of bricks. This week, it actually woke me up out of a sound sleep! Any of my readers that live in Southern California know exactly what I'm talking about, as we got a not-so-gentle reminder of what it means to live in this part of the world. About 4:30am, a moderate (5.4 magnitude) earthquake hit about 30 miles from where I live, and it woke me out of a sound sleep, along with all the four-legged members of my family. It struck me at the time, that "Shaky Ground" was also an apt description of the broad market lately. The tepid rebound of the past 6 days has been all about short covering, not about any concerted buying. One of the metrics I use to track this is the Buying/Selling power that is tracked by Lowry's. This indicator is confirming my anecdotal observation, as buying power is not showing any signs of life, last week falling to its lowest level since 1996. So the lift in the market is coming from a slight relaxation in the levels of selling pressure. Shorts are covering to mitigate any event risk to the upside. No matter which index you happen to track, the market looks weak to rangebound. This is also borne out by the bullish percent indicators, which continue to drift lower. There just isn't any interest in being long in this market with the terrorism/Iraq event risk right now, and the economy still looking weak. Longs have little conviction, but shorts are not aggressive either, as they know they carry the bulk of the risk with the bullish percent readings so low. I have a hard time seeing much of a change in this situation until the Iraq situation is resolved. Then attention will shift back to the issue of the economy, and that doesn't provide much conviction for the bulls either. So with my less than enthusiastic view for the upside, you may ask why there are only call plays listed in the Portfolio and Watch List. It is all about risk control. I can't make a convincing case for significant downside for any longer-term plays right here. But any significant improvement on the geopolitical and/or economic fronts will have the markets moving forward with another bear-market rally. Like I said above, the market is currently resting on shaky ground, but I believe that with the right catalyst, another rally like we saw in August and October of last year could provide a nice tradable move for longer-term positions. So the prudent approach is to pick some stocks with decent upside potential, enter on pullbacks to strong support and then wait for the expected upward move. The VIX is confirming a lack of fear of the downside, but is not yet giving the all-clear signal for the bulls either. That descending trendline (now at exactly 40) once again turned back the VIX just over a week ago and the VIX actually closed back under its 200-dma (34.35) on Friday at 34.14. My view is that the VIX could go either way next week, much like my view of the broad markets, which I think could continue their painful upward grind or fall victim to renewed selling pressure. Should selling return next week, we'll want to take advantage of that weakness to initiate new longer-term positions near strong support. With that as the backdrop, let's take a look at the list of plays, updating them for the shortened week just completed. Portfolio: QCOM - Well, it was a rather quiet week for our QCOM play, as it vacillated in a range of only $1.50 between the high and low. But I think we managed to nab a good entry in this bullish play. Weekly Stochastics still haven't started to show any bullish signs yet, so we're still on the edge, but that 200-dma just below $33 should provide a solid floor, as demonstrated by the snapback move from that level just over a week ago. The first obstacle for the bulls to overcome is the 20-dma ($36.39), which happens to coincide with the broken ascending trendline that started with the August 2002 lows. Intraday dips to the $33-34 area should still provide decent entries into the play, and until QCOM recovers back over that trendline on a closing basis, we'll maintain a wide stop at the $30 level. Things should really start moving in our favor once the stock is able to reclaim the upper side of the 50-dma, and we'll be able to start looking for a push back over $40. Watch List: DJX - The DOW bullish percent really hasn't shown any signs of life, as most of the buying appears to be confined to short-covering so far. With the daily Stochastics trying to tip bearish and the weekly Stochastics not yet really looking strongly bullish, I'm still optimistic we're going to get our entry at the listed $77.50 trigger. I believe we're still early to be entering new bullish plays on the broad market unless we can enter on a significant pullback. If we see a breakout over the $81.50 level AND see some improvement in the bullish percent reading, then we might consider raising our entry target, but not until then. Should we get filled next week, we'll be running with a wide stop of $74, just below the downside target specified by the H&S pattern that confirmed in late January. BEAS - "Sell the News" was the apparent result after BEAS beat consensus estimates, both on an EPS and revenue basis Thursday night. Weighing heavily on the stock in Friday's session was the Pacific Growth downgrade to Underweight due to disappointing guidance for Q1. There are a couple of interesting technical observations we can make here. After finally breaking below the 50-dma in late January, BEAS dropped to find strong support near the $10 level. Then last week's pre-earnings rally was turned back at this moving average on three consecutive days. Support becomes resistance. Despite the negative reaction to earnings, there just wasn't enough selling interest to drive BEAS below the important $10 level. I still think we'll eventually crack that level, and I'm content to wait for it to happen. The combination of the 200-dma ($8.88), historical support near $9 and the PnF bullish support line should work together to provide strong support in the $8-9 area. We're just looking to target shoot our entry into the play when that level first gets tested and holds as support. NVDA - Too aggressive on the entry target is definitely the case here, as the stock really got a strong bounce following earnings and really hasn't come back at all since then. It is worth noting though, that the PnF chart still hasn't generated a new Buy signal, so I don't think we need to move into "Chase" mode just yet. The Semiconductor sector (SOX.X) is looking a bit top-heavy right now and it ought to come in a bit before the next leg of the rally takes hold. NVDA has a tempting gap in the $10-11 area and I would expect the stock to at least test the top of that gap before continuing higher. We'll continue to wait for that pullback to give us our desired entry. MSFT - As noted in the Market Monitor on Tuesday, I erred in my analysis on MSFT and raised the entry trigger to $23.50-23.50, as this is the site of the ascending trendline that connects the July and October lows. The early selloff on Friday came close to fulfilling our entry parameters, but not quite. Based on the tenuous nature of the current rebound, I'm content to wait for MSFT to come back to that trendline to give us the optimum entry. If we do see a strong rebound in the broad markets, MSFT is likely to lead the way, but we want to make sure we get a good entry first. Once filled, we're going to work with a stop at $21. Whether we like it or not, this remains a treacherous and rangebound market. The VIX relaxed somewhat throughout last week as the market rose in agony. But as noted above, the buying is predominantly shorts covering, not buying conviction. This is not the sort of environment in which to be opening full positions or to be chasing stocks higher. We'll continue to expand our list of bullish candidates, taking the entries that come our way and letting the others go. Pickiness will be rewarded, and it goes without saying that greed will be punished. Remember, our primary goal is capital preservation, and when we have successfully accomplished that task, we can then focus on the job of steadily growing our accounts. Have a great 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 $ 4.80 + 4.35% $30 '05 $ 40 ZLU-AH $ 7.90 $ 8.20 + 3.80% $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 $23.00-23.50 JAN-2004 $ 25 LMF-AE CC JAN-2004 $ 22 LMF-AX JAN-2205 $ 25 ZMF-AE CC JAN-2005 $ 20 ZMF-AD 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 ADBE 02/23/03 $26-27 JAN-2004 $ 30 LAE-AF CC JAN-2004 $ 25 LAE-AE JAN-2005 $ 30 ZAE-AF CC JAN-2005 $ 25 ZAE-AE AA 02/23/03 $19-20 JAN-2004 $ 22 KJP-AX CC JAN-2004 $ 20 KJP-AD JAN-2005 $ 25 XAP-AE CC JAN-2005 $ 20 XAP-AD PUTS: None New Portfolio Plays None New Watchlist Plays ADBE - Adobe Systems, Inc. $29.11 **Call Play** The key to finding good long-term bullish plays in a weak overall market is to find both a stock and a sector that have held up better than the rest of the market and are showing distinct bullish signs. The Software index (GSO.X) has certainly done better than the rest of the Technology group and confirmed strong support at the $99-100 level, 6 trading days ago. While I'm not overly excited about the overall group, I do like the fact that it is showing relative strength as compared to the NASDAQ Comp. But within the GSO index, ADBE has really been shining, particularly in the past few months. Repeatedly finding support near $25, the stock is once again pushing up towards resistance in the $29-31 area. And the relative strength chart of ADBE relative to the GSO is a thing of beauty, and on Friday it pushed to its best level since last July. ADBE recently pushed back over its 200-dma and the 50-dma just turned up and pushed through the 200-dma as well. Granted, the 200-dma is still headed south, so this isn't a perfect setup, but ADBE is definitely in the minority of stocks, just by being above both its 50-dma and 200-dma. Add in the fact that buying volume is on the rise (with On Balance volume pushing to its highest level since late November), and ADBE looks to be under steady accumulation. A trade at $30 will give us one more factor in our favor, as it will generate a new Buy signal for the stock, which already has a bullish vertical count of $50. Of course, I would be remiss if I didn't point out that weekly Stochastics are well on their way towards overbought territory. So while we aren't getting in at the bottom of this move, it certainly looks like it has more room to run. In line with expectations for some rangebound action over the near-term, we're going to look for one more pullback to support to give us a favorable entry into the play. If this accumulation pattern is for real, ADBE should have pretty solid support now in the $26-27 area, so a dip into that area followed by renewed buying interest will be our trigger. After entry, we'll set a stop at $24, as that level looks like very strong support. BUY LEAP DEC-2003 $30 LAE-AF BUY LEAP DEC-2003 $25 LAE-AE **Covered Call** BUY LEAP DEC-2004 $30 ZAE-AF BUY LEAP DEC-2004 $25 ZAE-AE **Covered Call** AA - Alcoa, Inc. $20.77 **Call Play** Are you ready to go bottom fishing in a stock (and sector) sitting right on major support? After topping out near the $26 level in early December, AA has fallen right back to solid support near the $19 level and has been gradually working its was off those lows for the past couple weeks. Normally, this type of stock wouldn't catch my attention for a long-term bullish play, but the combination of the picture on the PnF chart and the price action in the Morgan Stanley Cyclical index (CYC.X) was enough to convince me it had some decent potential. First up, let's look at the PnF chart. While currently in a column of O's, AA isn't anywhere near giving a new Sell signal. In fact, it is the big column of X's that really caught my attention. The vertical count from that column produces a bullish price target of $44. That lines up perfectly with the stock's all-time highs, so I don't hold any expectations that we're going to see that level any time soon. But a return to the high $20s, possibly up to major resistance near $30 certainly seems possible. Weekly Stochastics are just starting to turn bullish and we can see from the weekly chart that the $18-20 level is very strong historical support. Turning to the weekly chart of the CYC index shows how it just bounced from the $400 level, which has provided strong support on 3 other occasions since 1998. AA isn't going to take off like a rocket, but I like the risk/reward for this play. Entries taken in the $19-20 area offer a solid $8-10 of upside potential and a downside risk of roughly $2.50 to our $17.50 stop. I picked that level for the stop, as a trade at $17.50 would create a new Sell signal on the PnF chart, negating the current bullish vertical count. There are numerous overhead obstacles like the 50-dma ($21.76) and the 200-dma ($25.32), but AA looks like a good way to play an expected rebound in the broad market, as it is already showing strength after a successful defense of important support. BUY LEAP DEC-2003 $22 KJP-AX BUY LEAP DEC-2003 $20 KJP-AD **Covered Call** BUY LEAP DEC-2004 $25 XAP-AE BUY LEAP DEC-2004 $20 XAP-AD **Covered Call** Drops None ************** TRADERS CORNER ************** Perfection Is Overrated – But Profits Are Not By Mike Parnos, Investing With Attitude OK, so we’re not perfect. The law of averages caught up with us this month – a little. Overall we did just fine. We tried a few experiments and now we’re wiser for the experience. Experimentation can be good. Hence, my first born. As you know, profits are not guaranteed. It used to be only death and taxes were certain. Now, of course, there’s shipping and handling, too. But we have to work for our profits – not too hard, though. We don’t want to get carried away. So What Have You Done For Me Lately? The February option cycle is behind us and another 1,300 dead presidents have joined 12,910 of their friends in the CPTI profit piggy bank. Now there are 14,210 and we haven’t had a sleepless night yet. We never missed even a half-hour of prime time programming – except the Michael Jackson interviews. He’s more than creepy. I’m saving up for a down payment on a new house. My next house won't have a kitchen - just vending machines and a large trash can. So I’m going to need a lot of quarters if I’m going to eat – and eating is one of the two things in life that provide instant gratification. Can you guess the other? Here is how our February trades worked out . . . _____________________________________________________________ Breakdown Of February Trades: First, the good news: Position #1 -- BBB Iron Condor – A Narrower Range. We established an Iron Condor consisting of both a bull put spread and a bear call spread below and above the $85 - $90 trading range. For our ten- contract position we collected $1,550. BBH, bless its heart, behaved well and finished at $89.32 – comfortably within the range. The collected $1,550 can now be moved from the “collected premium” category to the “profit” category. _____________________________________________________________ Position #2: MMM Iron Condor – A Narrower Range. We established an Iron Condor consisting of both a bull put spread and a bear call spread below and above the $120 - $130 trading range. For our ten- contract position we collected $1,000. MMM was also cooperative, finishing at $126.85, also comfortably inside the range. As above, the 1,000 is now profit. Now for the “less than” good news Position #3: SMH Straddle – War, no war, war, no war, war, no war – I hate procrastinators. CPTI students know I hate to pick a direction – so I didn’t! SMH (semiconductor index) was approaching a support level at about $22.50. With Iraq tiptoeing around its weapons of mass destruction, it was inevitable that there would be a war – and soon. There would, undoubtedly, be a dramatic market reaction. So we put on a May $22.50 straddle – buying the May $22.50 puts and calls for a total of $5.85. We were going to hold the position until February expiration – today. The risk would only be about $.85. So, what happened? A big fat nothing! Were we asking a lot? Just a few bombs. A minor invasion. A measly two-week war. Hell, Dustin Hoffman did it in “Wag The Dog.” Well, we closed the trade on Friday and ended up losing $1,000 ($1 x 10 contracts). We had no luck, but we had discipline. Position #4 – XAU Calendar Spread We also had high hopes for the AMEX Gold/Silver index. With XAU at $74, we bought the June $80 calls and sold the February $80 calls. With world turmoil on the menu, it seemed logical that investors would rotate to gold – and they did – but too damn fast. In less than a week, XAU charged through $80, the deltas were no longer in our favor. We unwound the spread for a loss of $250. Wouldn’t you know that XAU soon reversed and spent most of the rest of the month well below $80? Hindsight is 20-20. Take it from me. I’ve seen plenty of hinds in my time. But, once again, we had discipline – a trait of which CPTI students can be proud. Position #5 -- QQQ ITM Strangle – Currently trading at $25.17. 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 owned the February $29 calls and February $21 puts and they both expired worthless. (See “New Positions” for play update). ____________________________________________________________ NEW POSITIONS FOR MARCH New Position #1 – OEX Bull Put Spread – Trading at $429.87 The market is confused, but it’s not likely to go down to retest its July and October lows near 400. If war breaks out, it might be a quickie. The market may spike up. How high? Who knows? That’s why I’m not putting a bear call spread on top to create an Iron Condor. So lets establish a bull put spread. Sell 10 contracts of the OEX March 400 puts Buy 10 contracts of the OEX March 390 puts The OEX trades only on the CBOE. The bid and ask spreads are $.30 - $.40. If this position is placed as a spread order, it’s likely that you can work within the spreads and shave about $.10 on both sides. Currently, the posted bid ask would yield $1.20. Add the additional $.20 and you have a total of $1.40 or $1,400 for 10 contracts. If you want a little more cushion, you can do the 395/385 or 390/380 bull put spreads. The return will be slightly less, but it would be slightly safer. ______________________________________________________________ New Position #2 – XAU Iron Condor – Back to the well. An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The collected premium will come into your account the very next business day. The objective is for the underlying, at expiration, to finish anywhere within the spread. So we will create an Iron Condor with a 15-point range. Sell 10 contracts of the XAU March $65 puts (XAUOM) @ $1.05 Buy 10 contracts of the XAU March $60 puts (XAUOL) @ $.50 Sell 10 contracts of the XAU March $80 calls (XAUCP) @ $1.25 Buy 10 contracts of the XAU March $85 calls (XAUCQ) @ $.70 The posted credit for our bull put spread is $.55 and for the bear call spread is $.55. Total posted credit for the position is $1.10. However, since XAU trades only on the PHLX exchange, with wide bid/ask spreads. You should be able to place the orders as a spreads for an additional $.15 on each – resulting in an extra $.30 in premium taken in for a total of $1.40 or $1,400 for ten contracts. Total margin requirement is $10,000 ($5,000 for each credit spread). Risk is $3.60 ($5.00 - $1.40). _____________________________________________________________ New Position #3 -- OIH (Oil Holders Trust) Diagonal Calendar Spread OK. This is a reader’s request. Here’s the scenario. It seems that there’s about $8 of uncertainty built into the $35.50 price of a barrel of oil. When, and if, the war is resolved, the price of oil should work its way down, along with the price of oil stocks. With the OIH trading at $57.60, and the anticipation of a drop to around $50, lets: Buy 10 contracts of the July OIH $55 put @ $4.30 = $4,300 Sell 10 contracts of the March OIH $50 put @ $.45 = $450 Total debit is $3.85 = $3,850 We have an almost 30-point delta advantage and we have five months to sell short-term puts and reduce our cost basis while we’re waiting for oil to fall. ______________________________________________________________ Position #4 -- QQQ ITM Strangle – Currently trading at $25.17. This is a long-term position we created two months ago to generate a monthly cash flow. We own the January 2005 $21 LEAPS call and the January 2005 $29 LEAPS puts. We owned the February $29 calls and February $21 puts and they both expired worthless. So lets: Sell 10 contracts of the QQQ April $28 calls @ $.50 Sell 10 contracts of the QQQ April $22 puts @ $.45 Total credit of $.95 = $950 We moved our short sells in by one point because a lot of premium has disappeared from the QQQs in the last two months. Never fear, it will be back. Our initial risk was $7.20. We have since reduced it by $1.90 ($.95 x 2). Our adjusted risk is now only $5.30. I gave serious thought to closing this position because it is tying up a lot of money that could be used for other trades. However, there is relatively little risk and monitoring a long- term trade like this is a good teaching tool. If you choose to unwind this trade, you will have lost nothing and it is perfectly understandable. ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************** TRADERS CORNER ************** Inflating Deflation: Some causes and effects Jonathan Levinson Inflating Deflation: Some causes and effects Jonathan Levinson The Producer Price Index was released Thursday before the open. The full text of the release can be found at http://www.bls.gov/news.release/ppi.nr0.htm. The Consumer Price Index was released on Friday at http://www.bls.gov/news.release/cpi.nr0.htm. On Thursday, the price of gold spiked modestly higher immediately following the release, and on Friday gold remained flat after holding its gains from Thursday. I will not discuss the price of equities or equity futures, given the "noise" created by other contemporaneous economic reports as well as the price distortions caused by the usual options expiration week antics. The question posed by these reports concerns inflation and deflation. A bit of background first: The Federal Funds rate remains at multidecade lows, and consumer debt is at record highs. The Federal Reserve has been discussing deflation with increasing regularity and, more importantly, clarity of late. Chairman Greenspan opened an address to the New York Economic Club with a discussion on gold, and recent inductee Governor Bernanke went so far as to tell the public that it needn’t fret over a possible deflation, because the Fed "has a printing press" and will inflate money supply as much as necessary, thereby putting the famous Greenspan Put under gold and other commodities. Unfortunately, as traders we have learned to take comments from central bankers, even clear comments, with a large grain of salt, given that these comments tend to be forgotten quickly, most often by the central bankers themselves. Nevertheless, even the lip-service paid to deflation is significant, given the seriousness of the its threat. Inflation causes gradual damage to our collective wealth by diminishing the real value of our savings, but it also diminishes the real value of our debts. What is inflation? Where a single breadwinner was able to support a family with a house, cars and a white picket fence in the 1950’s, it now takes two breadwinners working longer hours to support a family. This anecdotal observation attempts to present a different perspective on inflation from that implied by the government’s data. We work harder today than we did decades ago. That, to me, is the ultimate effect of inflation. That, and the diminishing real value of our savings. Deflation, on the other hand, is a quick and lethal blow, as the real value of our debts rises, the amount of our debt service payments remains fixed, and the amount we are paid for our work diminishes. While inflation hurts us slowly, deflation’s effects are far more rapid and violent. Without engaging in an exhaustive review of the Fed’s speeches, I have heard it said that Chairman Greenspan used to express the theory that the Kondratieff Winter could be averted with sufficient inflation of the money supply. Very briefly, Nicholai Kondratieff, who was banished to Siberia for his views in the early 20th century, asserted that economies are governed by a "long wave" credit cycle of approximately 20 years, and that during the winter of that cycle, the previously massive debt expansion reverses, its contraction characterized by war, bankruptcies, and a general economic slowing. For those interested, Kondratieff’s theories were further developed by Harvard economist Joseph Schumpeter. We see the effects of Mr. Greenspan’s handiwork in the chart above. Yet, despite these gargantuan efforts, and the harm to our society’s savers caused thereby as the value of their savings continues to be eroded, the Kondratieff Winter rages on, as record bankruptcies continue to stack up (ie. WCOM, ENE) and the overall bankruptcy rate continues to set new records (as announced last week regarding the year just ended). It is for this reason that the value of commodities has rallied. If the Fed is on a mission to print as much paper as the system can absorb, despite the bubbles it has created, first in equities, then in housing and credit, it is inevitable that items of limited supply such as commodities will sell for greater quantities of that increasingly available paper. Thus, the price of gold in dollars has rallied, as has the commodity index, the CRB, as the US Dollar Index has dropped. Interestingly, real estate is explained by this same effect, and I would hesitate to refer to it as a bubble, except that it has been fueled in large part by debt, unlike the rally in commodities. Without the aggressive expansion of mortgage debt, real estate prices would not be what they are today. The Producer Price Index, which measures wholesale prices, jumped unexpectedly, igniting inflationary concerns. Predictably, gold spiked higher following the news. Much of the gain in the PPI was attributed to higher fuel and energy prices, which points to cost- push inflation rather than demand-pull inflation. This interpretation is further reinforced by the surprise jump in initial jobless claims for the week just ended and the persistent rate of roughly 400,000 new claims per week for the past several months. While the increase in fuel and energy prices can be attributed to a host of geopolitical factors, including the strike in Venezuela, tensions in the middle east, the hard winter on the east coast, and, anecdotally, the seemingly limitless of SUV’s clogging North America’s roads, a rise in commodity prices is already implied by the above chart. More money equals less value per dollar with which to purchase commodities of limited supply. The Consumer Price Index remained flat, and posted the lowest year over year increase since 1966. Gold did not fall, but remained flat on the news, as it was presumably no surprise that consumers remain sensitive to price increases, and are thus impeding the pricing power of corporations. The US consumer is driving all the car and living in all the house that s/he can currently borrow, and I’ve been hearing anecdotes from far and wide to confirm it. Most impressively, smokers in increasing numbers have been switching to generic cigarettes, despite the fact that cigarettes enjoy the highest brand loyalty of any consumer product. Witness the "zero down, zero interest, zero payments for one year" offers from auto manufacturers. My conclusion based on the above is that input prices continue to rally, fed ultimately by inflation in commodities, while deflation in consumer prices remains a concern, fueled by excessive indulgence in low interest credit, and, to a lesser extent, imported price deflation from low-cost exporters such as China. All of my conclusions share the same causal link, which is the inflation of the money supply and the aggressive reduction of the Federal Funds rate- the Fed’s "easy money" policy. As traders, we need to be cognizant of the possible effects of these forces on the prices of the securities we trade. Given the increase in producer prices and the softness in pricing power, I see corporate profits being squeezed by high costs and the inability to pass those costs on to the consumer. This should prove to be bearish for equity prices. On the other hand, commodities have rallied and it appears that the forces responsible for that rally are continuing to assert themselves. The US Dollar should remain weak given all of the above. With little to motivate foreigners to loan to the US by buying its bonds at multidecade low coupon rates, combined with a weak equities market and the implication that persistent unemployment will threaten productivity, the US Dollar does not look like a good bullish bet at all. My recipe: Long commodities, including gold and silver, short US equities, and possibly long euro bonds and foreign currencies. My own portfolio reflects the above, through Canadian mutual funds and US options. I have no position in euro bonds or foreign currencies (other than Canadian dollars) at this time. It is important to note the attendant trading risk associated with an inflating money supply. While some continue to assert that there is no housing bubble, the fact of significantly higher prices fueled by cheap and readily available credit remains. We saw the same thing with equity prices in the 1990’s, most blatantly in the prices of dotcom stocks and the attendant record expansion in margin debt. With this much liquidity currently in the financial system, there exists the risk of inflation finding its way into paper assets anew. It is for this reason that equity bears need to be careful. Fueled by the relentless, endless bullishness for stocks in the mainstream financial media, most egregiously on the GE telethon, CNBC, along with 401K plans sending a steady stream of money to fund managers each week, the anticipated drop in equities has so far demonstrated an impressive reticence. Unlike during other bear markets of the past, there is a lot more money available to avert the liquidity crunch that has traditionally caused or at least been associated with the crashes that so many bears anticipate. Doing so with time-sensitive options can be a very costly, disheartening mistake. For this reason, taking profits regularly from open put positions is a wise strategy, as is shorting the markets by selling premium instead of buying it. ************************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 02-23-2003 Sunday 5 of 5 In Section Five: Covered Calls: One Trader's Approach To Covered-Calls Naked Puts: Selling Puts -- Is It "Right" For You? Spreads/Straddles/Combos: Optimism Prevails As Stocks Recover Updated In The Site Tonight: Market Watch: Planning For Your Future Market Posture: News Driven ************************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: One Trader's Approach To Covered-Calls By Mark Wnetrzak With the editor of this section away on vacation, we've decided to publish another informative article on one of the most popular stock-option strategies for conservative traders. The Conservative Covered-Write Commonly referred to as the "most conservative option strategy available," this technique has cost uneducated investors billions of dollars since options were invented. Don't get me wrong: writing covered calls can be a very profitable strategy when implemented correctly. It is all in the technique! Generally, covered calls are written on stock an investor holds in his portfolio. The concept is to produce cash flow by selling premium for income while obtaining downside protection. The underlying stock can be held in either a cash or margin account. The advantage of trading on margin is that the potential return on investment is doubled. The disadvantage of using margin is that additional capital (margin call) may be required in the account if the portfolio value falls below a certain percentage, usually 30%. Many investors are very successful in this strategy because they are not greedy. They understand the "magic" of compound interest and strive to consistently increase the value of their investment portfolios each month. Yet others constantly lose money by implementing the technique incorrectly. The term "covered" is used when describing the sold (short) calls in this strategy because the investor owns the stock on which he is writing the calls. For every 100 shares of stock the investor owns, he can "write" one (1) call-option contract. Typically, investors will pick the next strike price above the current price of the stock to maximize the potential return on investment. A conservative investor will pick an in-the-money (ITM) strike price, choosing an acceptable return that offers reasonable downside protection. Aggressive investors tend to focus on the higher returns of using out-of-the-money (OTM) strike prices at the expense of downside protection. These OTM positions do offer greater "potential" rewards, but depend on an increase in price by the underlying stock and do not really benefit from writing the call. If you're expecting the stock to move, why "limit" your profit potential? Just trade the stock! Return On Investment The target-yield or return on investment (ROI) for covered calls is determined by two circumstances: Return if Called (RC), and return not called (RNC). Most traders use the RNC to evaluate plays since there is no assumption made on the movement of the underlying equity. To calculate the return, you take the net premium received and divide it by the cost basis. The cost basis would be the price paid for the stock, minus the premium received; this is the maximum amount of equity required for the duration of the play (not using margin). In the covered-call section, we use generally accepted formulas to calculate the return as shown below. For an ITM covered call, the net premium would be the option premium received minus the difference between the cost of the stock and the strike price. ITM RNC will be the same as RC, since the sold strike is already "in-the-money," and is the maximum return possible. ITM example: XYZ @ $12.00, strike = $10.00, option premium = $2.50 Net premium = 2.50 - (12 - 10) = 0.50 Cost basis = 12.00 - 2.50 = 9.50 RC = 0.50/9.50 = 5.26% after multiplying by 100. RNC = the same. For an OTM covered call, the premium for a RC calculation would be the option premium plus the difference between the cost of the stock and the strike price and assumes the stock price will move up to the sold strike! An OTM RNC calculation uses only the option premium and assumes the stock price remains unchanged. OTM example: XYZ @ $12.00, strike = $12.50, option premium = $1.00 Potential premium = 1.00 + (12.50-12) = 1.50 Cost basis = 12.00 - 1.00 = 11.00 RC = 1.50 / 11.00 = 13.64% RNC = 1.00 / 11.00 = 9.09% Remember, you do not get the benefit of the stock price moving up to the strike price. All of the candidates in the Covered Calls section are ITM as the goal is to obtain the highest probability of making an acceptable (and consistent) return. Using the above ITM example of 5.26% and say an expiration of 3 weeks (21 days), I would calculate the target yield (TY) as follows: TY = 5.26 / 21 * 365 / 12 = 7.61%. Essentially the return is annualized and divided by 12. This helps to visualize the value of compounding a seemingly small return over and over again. Covered-Call Comparisons Say an investor holding a $16 stock could possibly write three different calls: the $15 call for $1.75; the $17.50 call for $1; and the $20 call for $0.50. Assuming 30 days until expiration, using the above formulas (or the OIN Calculator) we calculate the potential returns as follows: $15-call: RC=0.75/14.25= 5.3% RNC=0.75/14.25= 5.3% $17.5-call: RC=2.50/15.00= 16.7% RNC=1.00/15.00= 6.7% $20-call: RC=4.50/15.50= 29.0% RNC=0.50/15.50= 3.2% Notice the ITM the position at the $15 strike-price offers a maximum return of 5.3%, but also provides downside protection to $14.25. Generally, when comparing covered-call positions, investors should concentrate on the return achieved if the stock price remains unchanged. In this manner, no assumption is made regarding the future movement in the underlying equity and the overall position reflects the benefit of just selling the call. The potential yield of the $20 strike-price is less impressive when the stock remains unchanged, and gets fairly ugly quickly if the stock were to fall. The cost basis is important as it identifies the break-even point and the amount of downside protection. As you can see, the $17.50 strike offers a slightly higher “static” return but only half of the downside protection of the $15 strike. Clearly, the $15 strike offers the best of both worlds; a reasonable return with acceptable downside protection. Why choose OTM positions? It simply depends on your risk- reward tolerance. If you're that good at picking stock movement, wouldn't it be better to just trade the stock instead of capping your potential profits with a covered- call position? Writing Covered Calls: The Drawbacks Assume you bought a stock at $50 that had fallen drastically (to the $20 range), and you're trying to recover some of your losses by writing OTM covered calls using a $25 strike. Now, if the stock unexpectedly rises above the sold strike price before expiration, the issue could be called away and you would have locked-in a loss. Though covered-calls do hedge against a bearish move, they are not a panacea for a protracted bear market or catastrophic move lower. Trying to recover a losing position usually requires moving to strikes with more time (LEAPs) and is a tedious at best. If you become bearish on an issue, it is usually best to simply buy back the calls and sell the stock. Why tie-up your money in a low-probability effort at recovery. Or, assume you bought a stock at $10 a few months ago and now you think it is going to $50. You want to hold it for the long term but you would also like some downside protection. You sell some short-term OTM calls to generate cash flow but the stock rockets higher and is called away. Not only did you lose your stock and limit your profit potential, but you probably will incur a short-term capital gain too. Many investors become disillusioned with the covered-write strategy when one of their positions moves drastically higher (or lower). Generally, the covered-call strategy works best in a neutral to slightly bullish environment. If you’re extremely bullish on a company and do not want to lose the stock – DO NOT sell covered-calls. Risk Versus Reward! The Covered-Call strategy isn't foolproof as there is risk in all trading but it does have less risk than outright stock ownership. At OptionInvestor.com, we favor a very conservative approach and in my opinion, it is the only way to use the covered-call strategy. We (almost) always recommend writing ITM covered-calls as we are not interested in stock ownership or bullish movement, but prefer the higher probability of making a low yet reasonable return. The fact that we really can't predict stock movement reinforces our reasoning for choosing to hedge stock ownership with ITM covered writes. We generally target a monthly return near 5% (10% using margin), and of the 30 or so covered-calls we recommend each month, most will expire profitably. The ITM covered-call strategy usually requires a "buy-write" order to open the position at or near the listed net debit (cost basis), since trying to leg-in (buying the stock and selling the call later) may only see the overvalued premium disappear. Generally, the newsletter recommendations would require a purchase of 500 to 1000 shares in order to reduce the impact of commissions. On a 1000 share order, the cost of commissions at E*trade (2 stock and 1 option) would be about $78.00, or $0.08 a share. Here are some general guidelines for Covered-Writes: 1. Never buy a stock you don't want to own. 2. Never write calls on a stock you don't want to lose. 3. Never write calls as a cost-recovery tool on a stock you don't want to lose. 4. Always write covered calls on STOCK YOU BOUGHT FOR THIS PURPOSE. 5. Always plan on being called-out EACH month. 6. Always write in-the-money calls. 7. Always write calls on neutral to bullish stocks. 8. Always use sound money-management techniques. A Winning Strategy! Is there a correct way to write covered calls? Earning even 1% per month may not seem like "big" money but 12% per year is definitely better than the average investor's return for 2002. Many investors lose sight of the magic of compound interest and start to focus on excellent single transaction returns. In short, they become greedy! Again, the key points in this strategy are as follows: 1. Use only on stocks you buy for this purpose 2. Write in-the-money calls to minimize risk. 3. Plan on getting called-out every month. 4. Write calls only on neutral to bullish stocks. 5. Maintain stop-losses on the underlying equity whenever possible. There Is Risk In All Trading Remember, there is no "Holy Grail" in option trading. Even with this conservative approach, it is possible to lose money. The probability of loss is much lower with covered-calls but unforeseen events do occur. Whenever possible, maintain a (mental) stop-loss on the underlying issue to limit losses. Should negative news come out during the day, or if the stock changes character, trading stops may save you from needless loss and months of attempting to recover lost capital. To reduce the impact of these unavoidable, horrid events, we recommend that you never invest more than 10% - 20% of your overall portfolio in one stock. This is an important concept of money management -- so that one stock will NOT have a significant impact on your overall portfolio value. No one can know what a particular stock is going to do in the future unless they have "insider" information. Therefore, you do not want to have "one ship that sinks the whole fleet." Even with one or two unanticipated, catastrophic events in a year, we have found that a diversified ITM covered-call strategy, when used in a disciplined manner, historically will generate a 15-30% yearly return. The ITM covered-write strategy is for conservative investors who prefer to target the high probability of obtaining an acceptable return, which correlates with a low risk-reward tolerance. Greed is for those other guys! Editor's Note: Today's narrative was courtesy of OIN Chief Editor Jim Brown, who has penned a plethora of comprehensive articles on profitable option-trading strategies. 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 7.47 FEB 5.00 0.65 0.29* 8.9% MSTR 20.78 21.28 FEB 20.00 1.85 1.07* 8.2% CKFR 18.25 20.66 FEB 17.50 1.25 0.50* 6.4% ORB 5.02 5.17 FEB 5.00 0.35 0.33* 6.1% LSS 15.01 17.82 FEB 15.00 0.80 0.79* 6.0% SPN 7.95 8.22 FEB 7.50 0.75 0.30* 6.0% EMIS 5.44 5.40 FEB 5.00 0.75 0.31* 5.7% RCOM 5.71 5.50 FEB 5.00 0.90 0.19* 5.7% NFLX 13.20 14.90 FEB 12.50 1.15 0.45* 5.4% ALKS 8.07 7.91 FEB 7.50 1.00 0.43* 5.3% ALA 5.76 7.21 FEB 5.00 1.10 0.34* 5.3% WEBM 10.89 11.95 FEB 10.00 1.55 0.66* 5.1% ALO 16.00 15.94 FEB 15.00 1.95 0.95* 4.9% FTS 8.39 9.39 FEB 7.50 1.20 0.31* 4.7% MVK 15.34 17.38 FEB 15.00 0.80 0.46* 4.6% ADLR 13.45 13.07 FEB 12.50 1.45 0.50* 4.5% ALN 13.15 13.35 FEB 12.50 0.90 0.25* 4.4% OSUR 7.85 7.11 FEB 7.50 0.65 -0.09 0.0% ** EFII 17.46 16.64 FEB 17.50 0.70 -0.12 0.0% ** LMNX 5.16 4.08 FEB 5.00 0.60 -0.48 0.0% ** JDEC 13.86 11.19 FEB 12.50 2.05 -0.62 0.0% ARRS 5.14 5.45 MAR 5.00 0.60 0.46* 8.8% EMIS 5.48 5.40 MAR 5.00 0.90 0.42* 8.0% EMIS 5.66 5.40 MAR 5.00 1.10 0.44* 7.0% JDSU 2.68 2.87 MAR 2.50 0.40 0.22* 7.0% SEPR 11.17 11.97 MAR 10.00 1.90 0.73* 6.8% GLW 5.18 4.99 MAR 5.00 0.55 0.36 6.8% RSAS 5.90 6.40 MAR 5.00 1.25 0.35* 6.5% ASKJ 5.86 7.47 MAR 5.00 1.25 0.39* 6.1% DNDN 5.50 6.24 MAR 5.00 0.85 0.35* 5.5% NFLX 14.24 14.90 MAR 12.50 2.30 0.56* 4.1% ALA 7.58 7.21 MAR 7.50 0.65 0.28 3.5% * Stock price is above the sold strike price. ** LMNX, EFII, and OSUR were last week's "early exit" candidates. Comments: The drums of war receded just long enough for the market to mount a respectable rally and the timing was excellent for option traders. A number of February positions benefited from the bullish trend and all the March plays are currently positive. The most obvious "watch-list" members are Corning (NYSE:GLW) and Alacatel (NYSE:ALA) and both will likely test recent technical support in the coming sessions. Positions Previously Closed: Globespan-Virata (NASDAQ:GSPN), Regeneron Pharma (NASDAQ:REGN), Cubist Pharma (NASDAQ:CBST), Med-Design (NASDAQ:MEDC), Abiomed (NASDAQ:ABMD), Curative Health Services (NASDAQ:CURE), and McMoran (NYSE:MMR). 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 ADLR 13.07 MAR 12.50 UAH CV 1.80 477 11.27 28 11.9% CBST 7.57 MAR 7.50 UTU CU 0.75 148 6.82 28 10.8% CRY 8.25 MAR 7.50 CRY CU 1.25 252 7.00 28 7.8% MSTR 21.28 MAR 20.00 EOU CD 2.60 223 18.68 28 7.7% IMCL 13.72 MAR 12.50 QCI CV 2.00 1432 11.72 28 7.2% MCDT 8.42 MAR 7.50 DXZ CU 1.30 192 7.12 28 5.8% OVTI 16.83 MAR 15.00 UCM CC 2.55 518 14.28 28 5.5% RMBS 14.76 MAR 12.50 BNQ CV 2.85 1858 11.91 28 5.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ADLR - Adolor $13.07 *** Drug Speculation! *** Adolor (NASDAQ:ADLR) is a therapeutic-based biopharmaceutical company engaged in the discovery, development and commercialization of proprietary pharmaceutical products for the treatment of pain and the side effects that are caused by current pain treatments. The company has a portfolio of small-molecule product candidates that are in various stages of development. Adolor's lead product candidate, alvimopan (ADL 8-2698), is designed to selectively block the effects of narcotic analgesics on the gastrointestinal tract. The company's initial drug discovery and development activities focus on three aspects of pain management: reversal or prevention of gastrointestinal effects of narcotic analgesics administered during or following surgical procedures or for the treatment of pain; novel mu and kappa opioid receptor-based analgesics that act on peripheral opioid receptors and not in the central nervous system, and narcotic analgesic products with significantly reduced side effects. The company expects to announce results late in this quarter of its recently completed enrollment of the first Phase 3 trial of alvimopan. Two other Phase 3 clinical studies continue to accrue patients and the company expects their enrollment will be completed later this year. Speculation over Phase 3 results have boosted the stock in recent sessions with institutions said to be buying large blocks of shares. Investors can use this play to speculate on the current trend at the risk of owning ADLR near a cost basis of $11.25. MAR-12.50 CALL UAH-CV LB=1.80 OI=477 CB=11.27 DE=28 TY=11.9% ***** CBST - Cubist $7.57 *** Priority FDA Review! *** Cubist Pharmaceuticals (NASDAQ:CBST) is a pharmaceutical company focused on the research, development and commercialization of novel anti-microbial drugs to combat serious and life-threatening bacterial and fungal infections. Cubist is conducting multiple Phase III trials for Cidecin, its lead product candidate in a new class of anti-microbial drug candidates called lipopeptides. The company is also conducting trials for oral formulations of ceftriaxone and daptomycin, and initiated a lipopeptide program aimed at discovering other clinically useful products. Shares of Cubist rallied this week after US pharmaceutical regulators said they would give priority to approving Cidecin, Cubist's new antibiotic. The technical outlook is recovering and our position offers excellent reward potential at the risk of owning the issue at a favorable cost basis. MAR-7.50 CALL UTU-CU LB=0.75 OI=148 CB=6.82 DE=28 TY=10.8% ***** CRY - Cryolife $8.25 *** FDA Says CRY is Clean! *** CryoLife (NYSE:CRY) is engaged in the preservation of human tissues for a range of cardiovascular, vascular and orthopaedic transplant applications. Additionally, the firm develops and commercializes implantable medical devices, including BioGlue Surgical Adhesive, glutaraldehyde-fixed stentless porcine heart valves, and tissue engineered SynerGraft porcine heart valves and bovine vascular grafts. The firm uses its expertise in biochemistry, cell biology, immunology and protein chemistry and its understanding of the needs of the cardiovascular, vascular and orthopaedic surgery medical specialties, to continue expansion of its core preservation business and to develop or acquire complementary implantable products and technologies for these surgical specialties. CRY shares soared this week after the company said it would soon resume processing human tissue for orthopedic use. Federal regulators have re-inspected its facilities and said it has complied with safety measures spelled out in a warning letter issued last year. Investors who think the trend will continue when the company reports earnings next week should consider this position. MAR-7.50 CALL CRY-CU LB=1.25 OI=252 CB=7.00 DE=28 TY=7.8% ***** IMCL - ImClone $13.72 *** Rally Mode! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company whose mission is to advance oncology care by developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company's lead product, Erbitux, is a therapeutic antibody that inhibits stimulation of epidermal growth factor receptor upon which certain solid tumors depend in order to grow. In addition to the development of its lead product candidates, the company conducts research in a number of areas related to its core focus of growth factor blockers, as well as cancer vaccines and angiogenesis inhibitors. IMCL has also developed diagnostic products and vaccines for certain infectious diseases. IMCL's shares rallied Wednesday amid optimism that new data about the company's experimental cancer drug Erbitux will be released shortly and prove positive. ImClone's European partner, Merck KGaA has been conducting its own trials of the drug and now expects to file for European marketing approval of Erbitux in the first half of this year, probably in advance of the annual meeting of the American Society of Clinical Oncology in May, where it will present its data. U.S. regulators have said they will consider reviewing the drug based on the results of Merck's upcoming report. MAR-12.50 CALL QCI-CV LB=2.00 OI=1432 CB=11.72 DE=28 TY=7.2% ***** MCDT - McDATA Class B $8.42 *** Bottom-Fishing: Telecom *** McDATA Corporation (NASDAQ:MCDTA) is a provider of open-storage networking solutions and provides highly available, scalable and centrally managed storage area networks (SANs) that address enterprise-wide storage problems. The company's core-to-edge enterprise solutions consist of hardware products, software products and professional services. Its SAN solutions improve the reliability and availability of data, simplify the management of SANs and reduce the total cost of ownership. The recent rally suggests that investors are expecting to hear good news at the annual Goldman Sachs Technology Investment Symposium next week. We simply favor the move above the 30- and 150-dmas on increasing volume, which suggests further upside potential. This position offers reasonable risk-reward in a stage I telecom stock. MAR-7.50 CALL DXZ-CU LB=1.30 OI=192 CB=7.12 DE=28 TY=5.8% ***** MSTR - MicroStrategy $21.28 *** Solid Outlook! *** 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 January after the business software maker reported better than expected profit and rising software sales. A number of analysts also raised their 2003 outlooks for the company and bullish traders can profit from continued upside activity in the issue with this position. MAR-20.00 CALL EOU-CD LB=2.60 OI=223 CB=18.68 DE=28 TY=7.7% ***** OVTI - OmniVision Technologies $16.83 *** Solid Earnings! *** 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 Technologies exceeded consensus earnings estimates of $0.10 per share and revenue projections of $22.2 million, aided by exceptionally strong demand from makers of digital still cameras and cameras for cell phones. The stock is now consolidating some of the recent gains and investors who believe the issue will soon resume its upside activity can profit from that outcome with this position. MAR-15.00 UCM-CC LB=2.55 OI=518 CB=14.28 DE=28 TY=5.5% ***** RMBS - Rambus $14.76 *** 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 investors who think the upside activity will continue can speculate on that outcome with this position. MAR-12.50 BNQ-CV LB=2.85 OI=1858 CB=11.91 DE=28 TY=5.4% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield PLUG 5.40 MAR 5.00 PQL CA 0.95 1059 4.45 28 13.4% MACR 15.22 MAR 15.00 MRQ CC 1.45 969 13.77 28 9.7% IBIS 5.05 MAR 5.00 UIB CA 0.45 52 4.60 28 9.4% AYE 7.89 MAR 7.50 AYE CU 0.90 575 6.99 28 7.9% JDAS 12.68 MAR 12.50 QAH CV 0.95 91 11.73 28 7.1% CRAY 7.69 MAR 7.50 HQC CU 0.65 1195 7.04 28 7.1% WDC 7.51 MAR 7.50 WDC CU 0.45 1089 7.06 28 6.8% BOBJ 17.64 MAR 17.50 BBQ CW 1.15 8 16.49 28 6.7% CHKP 15.22 MAR 15.00 KEQ CC 1.05 5518 14.17 28 6.4% SONE 5.33 MAR 5.00 FBZ CA 0.60 177 4.73 28 6.2% SMTC 13.37 MAR 12.50 QTU CP 1.50 526 11.87 28 5.8% SOHU 8.48 MAR 7.50 UCL CU 1.35 10 7.13 28 5.6% ADIC 7.79 MAR 7.50 QXG CU 0.65 321 7.14 28 5.5% VRST 11.20 MAR 10.00 UVQ CV 1.65 530 9.55 28 5.1% ARRS 5.45 MAR 5.00 AQC CA 0.65 67 4.80 28 4.5% ***************** NAKED PUT SECTION ***************** Options 101: Selling Puts -- Is It "Right" For You? By Ray Cummins One of the primary requirements for new readers is the need to evaluate risk versus reward before using any trading strategy. Risk is a fact of life for all traders and it is important to consider the potential losses along with the possible rewards when choosing a specific trading style or technique. Different strategies have varying levels of risk and understanding this concept is the first step to long-term success. Of course, everyone knows you have to assume a certain amount of risk to earn a reward but the key to profitable option trading is to minimize your exposure to the perils of the market and that typically involves utilizing methods which yield lower returns. In addition, some techniques are simply not appropriate for all traders thus another essential step in determining the best way to approach the market is identifying your personal comfort zone or risk-tolerance level. Some of the best option traders earn the bulk of their annual profits in just a few plays but is that the right style for you? These traders comfortably accept the possibility that the value of their portfolio will rise and fall substantially over very short periods while others would simply panic and bail-out of the market at the worst possible instant. That is why the tolerance for risk varies so much from person to person and it also changes over time, based on each individual's financial circumstances. Conservative traders generally prefer relative stability more than higher returns and that is why the OIN provides candidates for "in-the-money" covered-call writing and out-of-the-money "naked" puts, both of which offer a high probability of achieving a limited, but acceptable profit. Many investors can't get past the fact that earning 3-6% monthly is an "acceptable" return and one that will generate wealth in the long run. The key to this concept is Compound Interest; a function of capital accumulation that Albert Einstein described as the "greatest invention of mankind." Of course, we all know how it relates to our savings accounts and mortgage loans but few traders thoroughly assess its subtle, long-term affect on their portfolio value. As an investor, you benefit financially from compound interest when you reinvest not only the original capital, but also the returns from each successful trade. The total profit you earn on your investments will vary based on the the gains from each trade and on the number of times you achieve that return in a given time period. Most traders are surprised to learn that a 6% monthly return is roughly equal to a 100% yearly profit after adding the gains from compounding. Another bonus is that, unlike a bank account, you do not have to reinvest the profits in the same instrument (such as a savings account), but rather you can move the money from stocks to options or other issues as opportunities present themselves. This means you can diversify your portfolio as well as compound the returns. Obviously, anyone who has followed the market in recent months knows that stock prices do, in fact, go down and that is why it is so important to enter new positions only when the conditions are optimal. That means initiating a trade only when favorable technical or fundamental indications are present and there is a relatively high probability of a reasonable profit. It is also essential for the position to be one in which the trader feels comfortable, not only in terms of the initial cost or margin requirement, but also with regard to the underlying strategy and its overall risk characteristics. With uncovered options, the risk can be substantial, thus traders who are not absolutely convinced about the outlook for a specific candidate, or who are not completely knowledgeable about a particular strategy (and the potential adjustments), should probably not initiate a new position until those issues are resolved. Trading just for the sake of being "in the game" is never appropriate and although it is difficult to remain on the sidelines when others are talking about recent winners, the consequences of careless decisions can be financially devastating to participants who ignore the reality of the stock market. 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 21.28 FEB 17.50 0.45 0.45* 11.9% 3.8% SEPR 12.99 11.97 FEB 10.00 0.35 0.35* 10.3% 3.2% REGN 20.63 17.50 FEB 17.50 0.50 0.50 9.7% 3.2% FTE 25.50 23.04 FEB 22.50 0.70 0.70* 9.6% 3.5% TVX 15.08 15.45 FEB 12.50 0.40 0.40* 9.0% 2.9% TVX 16.98 15.45 FEB 15.00 0.40 0.40* 8.3% 3.0% QCOM 37.66 35.22 FEB 35.00 0.75 0.75* 8.3% 3.2% ANF 27.84 29.30 FEB 25.00 0.50 0.50* 8.2% 3.0% FTE 25.98 23.04 FEB 22.50 0.40 0.40* 7.9% 2.6% CKFR 19.53 20.66 FEB 17.50 0.45 0.45* 7.8% 2.9% VRTS 18.30 18.37 FEB 15.00 0.30 0.30* 7.5% 2.2% SEPR 13.20 11.97 FEB 10.00 0.30 0.30* 7.4% 2.2% CURE 17.49 17.10 FEB 15.00 0.40 0.40* 7.1% 2.4% VECO 15.39 14.92 FEB 12.50 0.35 0.35* 7.0% 2.1% APPX 24.18 22.92 FEB 22.50 0.55 0.55* 7.0% 2.7% CVC 19.44 17.49 FEB 15.00 0.40 0.40* 6.8% 2.0% FTE 24.40 23.04 FEB 20.00 0.45 0.45* 6.7% 2.0% AVCT 25.10 27.05 FEB 22.50 0.35 0.35* 6.5% 2.3% ANF 27.97 29.30 FEB 25.00 0.25 0.25* 6.4% 2.2% MATK 23.93 24.47 FEB 20.00 0.35 0.35* 6.3% 1.9% GTRC 19.63 20.45 FEB 17.50 0.45 0.45* 6.3% 2.3% CURE 17.06 17.10 FEB 15.00 0.25 0.25* 5.4% 1.8% ANF 27.11 29.30 FEB 22.50 0.40 0.40* 5.2% 1.6% MRCY 32.11 29.95 FEB 30.00 0.45 0.40 5.2% 2.0% EASI 37.00 35.50 FEB 33.38 0.40 0.40* 5.0% 1.8% RGLD 26.67 21.55 FEB 22.50 0.35 -0.60 0.0% 0.0% S 26.45 21.84 FEB 22.50 0.30 -0.36 0.0% 0.0% MSTR 20.83 21.28 MAR 17.50 0.80 0.80* 12.0% 4.2% ANSS 22.20 23.09 MAR 20.00 0.80 0.80* 9.9% 3.0% CGNX 22.62 22.16 MAR 17.50 0.55 0.55* 9.4% 2.8% MSTR 20.69 21.28 MAR 17.50 0.75 0.75* 8.6% 3.2% RMBS 13.69 14.76 MAR 10.00 0.30 0.30* 8.6% 2.7% OTEX 27.14 29.29 MAR 25.00 0.75 0.75* 8.6% 2.2% OVTI 16.55 16.83 MAR 12.50 0.35 0.35* 8.3% 2.5% LRCX 12.56 13.14 MAR 10.00 0.25 0.25* 7.9% 2.2% IRF 20.39 21.87 MAR 17.50 0.50 0.50* 7.5% 2.6% DIGE 15.54 17.02 MAR 12.50 0.30 0.30* 7.5% 2.1% APPX 23.75 22.92 MAR 20.00 0.55 0.55* 7.3% 2.0% CGNX 21.84 22.16 MAR 20.00 0.75 0.75* 7.3% 2.8% MDCO 16.92 17.92 MAR 15.00 0.60 0.60* 5.7% 3.0% ADBE 27.43 29.11 MAR 22.50 0.40 0.40* 5.4% 1.6% POSS 19.50 16.58 MAR 17.50 0.55 -0.37 0.0% 0.0% * Stock price is above the sold striking price. ** Summary data does not reflect timely exit trade. Comments: Blue-chip stocks led the market higher Friday after a favorable report on consumer price data swayed investors into a "buying" mood. The upside activity gave the market a much-needed boost on the last day of the February expiration period. Most of the March positions are faring very well except for Possis Medical (NASDAQ:POSS), which has slumped to a recent support area near its 150-dma. Conservative traders should consider closing the position and are advised to maintain extreme caution in their play selection over the new few weeks as the impending Iraqi conflict approaches. Previously Closed Positions: Quest Software (NASDAQ:QSFT), FEI Company (NASDAQ:FEIC), Capital One Financial (NYSE:COF), Xylinx (NASDAQ:XLNX), and Network Associates (NYSE:NET), all of which are currently positive. Impath (NASDAQ:IMPH) and Med-Design (NASDAQ:MDCO) finished negative. 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 Company ***** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield SRNA 15.07 MAR 12.50 NHU OV 0.30 57 12.20 28 8.7% 2.7% XLNX 23.04 MAR 20.00 XLQ OD 0.50 4152 19.50 28 8.1% 2.8% OVTI 16.83 MAR 12.50 UCM OV 0.25 138 12.25 28 7.5% 2.2% MACR 15.22 MAR 12.50 MRQ OV 0.25 72 12.25 28 7.5% 2.2% ERES 22.46 MAR 17.50 UDB OW 0.30 0 17.20 28 6.8% 1.9% HHL 11.56 MAR 10.00 HHL OB 0.20 1 9.80 28 6.7% 2.2% CKFR 20.66 MAR 17.50 FCQ OW 0.30 64 17.20 28 6.0% 1.9% 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). ***** SRNA - Serena Software $15.07 *** Bottom-Fishing! *** Serena Software (NASDAQ:SRNA) is the Enterprise Change Management (ECM) industry leader. For over twenty years Serena has focused exclusively on providing application change management solutions to the world's leading enterprises, and today its products are in use at over 2,750 customer sites, including 42 of the Fortune 50. Serena leads the way in ECM by offering a single point of control to manage software code and Web content changes throughout the enterprise, from the mainframe to the Internet. This ensures the application's availability and speeds time to market, while also reducing development costs. With headquarters in California, the firm serves customers worldwide through local offices and an international network of distributors. Serena recently reported that its fourth-quarter net profit rose from a year earlier as revenue increased. The CEO also said the company was "entering fiscal 2004 in the strongest financial condition in our history" and that bolstered investor's interest in SRNA shares. Traders who want a conservative speculation plays on a relatively stable issue should consider this position. MAR-12.50 PUT NHU-OV LB=0.30 OI=57 CB=12.20 DE=28 TY=8.7% SY=2.7% ***** XLNX - Xilinx $23.04 *** Semiconductor Sector *** Xilinx (NASDAQ:XLNX) is the world's leading supplier of complete programmable logic solutions. Xilinx develops, manufactures, and markets a broad line of advanced integrated circuits, software design tools and intellectual property. Their customers use the automated tools and intellectual property, which are predefined system-level functions delivered as software cores, from Xilinx and its partners to program the chips to perform custom logic operations. The beleaguered semiconductor sector was upgraded this week by Merrill Lynch and one of the issues mentioned in the research note was XLNX. The stock has a stable near-term base and excellent upside potential. Traders who agree with a bullish outlook can speculate on the company's future share value with this position. MAR-20.00 PUT XLQ-OD LB=0.50 OI=4152 CB=19.50 DE=28 TY=8.1% SY=2.8% ***** OVTI - OmniVision Technologies $16.83 *** Premium Selling! *** 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 Technologies exceeded consensus earnings estimates of $0.10 per share and revenue projections of $22.2 million, aided by exceptionally strong demand from makers of digital still cameras and cameras for cell phones. The stock is now consolidating some of the recent gains and investors who believe the issue will soon resume its upside activity can profit from that outcome with this position. MAR-12.50 PUT UCM-OV LB=0.25 OI=138 CB=12.25 DE=28 TY=7.5% SY=2.2% ***** MACR - Macromedia $15.22 *** New 9-Month High! *** Macromedia (NASDAQ:MACR) provides software that empowers millions of developers and designers to create effective user experiences on the Internet. The company's integrated family of software technologies enables the development of a wide range of Internet solutions including Websites, rich media content, and Internet applications across multiple platforms and devices. With an installed base of more than 3 million developers and designers, and with Macromedia Flash Player available to 98% of Web users, the company is a strategic information technology supplier to customers in the business, government and educational markets. There's not much news on MACR but the company recently announced some new software titles and said it will begin selling access to development tools on a subscription basis. The announcement was followed by an upgrade from DB Securities, which said it would start coverage of Macromedia with a "buy" rating. The technical indications suggest the issue has successfully completed a recent consolidation and is poised for future gains. This play offers excellent reward potential at the risk of owning MACR at a cost basis near $12.25. MAR-12.50 PUT MRQ-OV LB=0.25 OI=72 CB=12.25 DE=28 TY=7.5% SY=2.2% ***** ERES - eResearch Technology $22.46 *** New All-Time High! *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently. The company offers a range of products and services, including Diagnostics Technology and Services and Clinical Research Technology. Their Diagnostics Technology and Services include centralized diagnostic services and clinical research operations, including clinical trial and data management services. Their Clinical Research Technology and Services include the developing, marketing and support of clinical research technology and services. ERES is one the few stocks to achieve a new 52-week high in the bearish market and the recent robust volume suggests the trend will continue in the near term. MAR-17.50 PUT UDB-OW LB=0.30 OI=0 CB=17.20 DE=28 TY=6.8% SY=1.9% ***** HHL - Hurricane Hydrocarbons $11.56 ** Low Risk = Low Reward! ** Hurricane Hydrocarbons (NYSE:HHL) is an international energy firm engaged in the exploration, development, production, acquisition, refining and marketing of oil and refined products in the Republic of Kazakhstan. As of January 1, 2002, the company's proved plus probable reserve base had been assessed at 512 million barrels. Hurricane's dominant position in exploration and production (E&P) operations is evident through its participation in 87% of the E&P licenses in the 80,310 kilometers of Turgai Basin. The basin is located in South Central Kazakhstan, approximately 1,300 km west of Almaty. The company has interests in 10 fields, five that are producing (Kumkol South, South Kumkol, Kumkol North, Qyzylkiya and Akshabulak), three that are under development (Aryskum, Maybulak and East Kumkol) and two that are in the appraisal stage (Nurali and Aksai). HHL is trading at a 9-month high and the possibility of the stock retreating to the sold strike at $10 seems rather remote. The company's quarterly earnings are due on 3/5/03. MAR-10.00 PUT HHL-OB LB=0.20 OI=1 CB=9.80 DE=28 TY=6.7% SY=2.2% ***** CKFR - Checkfree $20.66 *** Bullish Fundamental Outlook! *** Checkfree (NASDAQ:CKFR) is a provider of electronic billing and payment services. The company operates its business through 3 independent but inter-related divisions including Electronic Commerce, Investment Services and Software. CKFR's electronic commerce services are primarily targeted to consumers through financial institutions and Internet portals. Checkfree is also a provider of electronic commerce and financial applications software and services for businesses and financial institutions. Shares of CKFR rallied in January after the company raised its earnings outlook for the rest of the fiscal year. A number of analysts upgraded the stock after the report and based on the bullish fundamental outlook, a cost basis near $17 appears to be a reasonable price at which to own the issue. MAR-17.50 PUT FCQ-OW LB=0.30 OI=64 CB=17.20 DE=28 TY=6.0% SY=1.9% ***** ***************** 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 ADLR 13.07 MAR 10.00 UAH OB 0.40 3088 9.60 28 14.4% 4.5% ICST 22.53 MAR 20.00 IUY OD 0.70 54 19.30 28 10.6% 3.9% PHTN 16.99 MAR 15.00 PDU OC 0.50 82 14.50 28 10.2% 3.7% MSTR 21.28 MAR 17.50 EOU OW 0.45 86 17.05 28 9.4% 2.9% NVDA 12.86 MAR 10.00 UVA OB 0.20 9301 9.80 28 7.8% 2.2% ITMN 20.15 MAR 17.50 IQY IW 0.40 49 17.10 28 7.5% 2.5% IMCL 13.72 MAR 10.00 QCI OB 0.20 688 9.80 28 7.4% 2.2% DAKT 16.36 MAR 15.00 QKC OC 0.35 106 14.65 28 6.9% 2.6% BOBJ 17.64 MAR 15.00 BBQ OC 0.25 300 14.75 28 5.8% 1.8% AVCT 27.05 MAR 22.50 QVX OX 0.25 50 22.25 28 4.2% 1.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Optimism Prevails As Stocks Recover By Ray Cummins The major equity averages advanced Friday amid favorable economic news and another round of "short-covering" by bearish traders. The Dow Jones Industrial Average climbed 103 points to close at 8,018 with retailers Wal-Mart (NYSE:WMT) and Home Depot (NYSE:HD) among the issues benefiting from the tame consumer price report. Johnson & Johnson (NYSE:JNJ), International Paper (NYSE:IP) and Alcoa (NYSE:AA) also enjoyed new buying interest. The composite index of technology stocks gained 17 points to 1,348 on strength in semiconductor, computer hardware, wireless and Internet shares. The broader S&P 500-stock index added 11 points to close at 848 with oil service and drilling, long-term healthcare, gaming and sporting goods stocks among the best performers. Airline issues traded near their lows for the year because of concerns about ticket pricing and fuel costs. Trading volume was thin, despite the options expiration, with roughly 1.3 billion shares changing hands on both the Big Board and the NASDAQ. Advancers outpaced decliners on the New York Stock Exchange by a little more than 2 to 1. On the technology exchange, slightly less than two issues rose for every one that fell. In the U.S. Treasury bond market, the benchmark 10-year note slipped 6/32 to 99-27/32, nudging its yield up to 3.89%. Money flow was favorable and Trim Tabs said that funds investing primarily in U.S. stocks received over $200 million in new money during the week ended February 19, versus outflows of $5 billion during the prior week. ***************** 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 27.65 FEB 20 23 0.40 22.60 $0.40 Closed XAU 79.51 72.05 FEB 65 70 0.75 69.25 $0.75 Closed BHE 35.30 35.40 FEB 25 30 0.45 29.55 $0.45 Closed INTU 50.40 45.21 FEB 40 45 0.60 44.40 $0.60 Closed AET 43.86 42.73 FEB 35 40 0.45 39.55 $0.45 Closed PRX 31.50 34.56 FEB 25 30 0.45 29.55 $0.45 Closed APA 62.41 65.72 FEB 55 60 0.60 59.40 $0.60 Closed NBR 36.85 40.13 FEB 33 35 0.30 34.70 $0.30 Closed BVF 31.15 34.25 FEB 25 30 0.40 29.60 $0.40 Closed SYMC 46.09 47.81 MAR 35 40 0.50 39.50 $0.50 Open COP 48.72 49.94 MAR 42 45 0.25 44.75 $0.25 Open NKE 45.14 46.36 MAR 40 42 0.20 42.30 $0.20 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Previously closed positions include: HCA Inc. (NYSE:HCA), Intuit (NASDAQ:INTU), Cerner (NASDAQ:CERN) and Forest Labs (NYSE:FRX), all of which finished positive. The only losing play was Chiron (NASDAQ:CHIR). CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status ABK 57.56 49.21 FEB 70 65 0.55 65.55 $0.55 Closed KBH 44.01 47.87 FEB 55 50 0.55 50.55 $0.55 Closed BZH 61.98 59.00 FEB 75 70 0.50 70.50 $0.50 Closed ITW 65.70 59.59 FEB 75 70 0.60 70.60 $0.60 Closed BGEN 37.93 35.06 FEB 45 42 0.25 42.25 $0.25 Closed PIXR 53.76 54.12 FEB 65 60 0.55 60.55 $0.55 Closed RE 51.70 53.89 FEB 60 55 0.50 55.50 $0.50 Closed ROAD 36.43 32.85 FEB 45 40 0.30 40.30 $0.30 Closed ATK 54.75 48.89 FEB 65 60 0.45 60.45 $0.45 Closed CAT 43.92 46.54 FEB 50 47 0.25 47.75 $0.25 Closed IBM 78.94 79.95 FEB 90 85 0.50 85.50 $0.50 Closed MER 36.81 34.70 FEB 42 40 0.25 40.25 $0.25 Closed LXK 60.54 62.50 FEB 70 65 0.45 65.45 $0.45 Closed QLGC 33.28 35.68 FEB 40 37 0.25 37.25 $0.25 Closed BSC 59.90 61.69 MAR 70 65 0.50 65.50 $0.50 Open HRB 35.80 37.62 MAR 45 40 0.50 40.50 $0.50 Open BUD 47.70 47.89 MAR 55 50 0.45 50.45 $0.45 Open MDT 44.15 45.15 MAR 50 47 0.25 47.75 $0.25 Open PEP 39.86 39.40 MAR 45 42 0.25 42.75 $0.25 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss PUT DEBIT SPREADS ****************** Symbol Pick Last Month LP SP Debit B/E G/L Status SNPS 40.00 41.15 FEB 50 45 4.50 45.50 0.50 Closed VIA 38.72 38.62 FEB 45 42 2.25 42.75 0.25 Closed 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 47.81 FEB 35 40 4.50 39.50 0.50 Closed EBAY 73.36 78.35 FEB 60 65 4.45 64.45 0.55 Closed AMGN 52.09 54.60 MAR 45 47 2.20 47.20 0.30 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Previously closed positions include: PacifiCare Health Systems (NASDAQ:PHSY), Omnicare (NYSE:OCR) and University of Phoenix Online (NASDAQ:UOPX), which finished at maximum profit. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status VAR 50.38 51.64 FEB 55 45 0.10 0.20 Closed ANF 26.39 29.30 FEB 30 22 0.05 0.60 Closed WPI 29.22 29.02 MAY 35 22 (0.10) 0.50 Open UPL 10.11 9.89 MAR 10 10 0.10 0.00 Open AFFX 27.14 25.63 MAR 30 25 0.15 0.00 Open NVDA 12.04 12.86 JUN 15 10 (0.25) 0.50 No Play Nvidia (NASDAQ:NVDA) gapped-up at the open of trading on Tuesday, thus no entry was available near the target credit. We will watch the issue for a consolidation in the near future, which may allow another entry opportunity. Previously closed positions: Pioneer Resources (NYSE:PXD) and CTI Molecular Imaging (NASDAQ:CTMI). SYNTHETIC (BEARISH) ******************* Stock Pick Last Expir. Long Short Initial Max Play Symbol Price Price Month Put Call Credit Value Status BGEN 35.52 35.06 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 33.65 APR-30C FEB-30C 0.75 1.20 Open? CI 43.02 43.19 APR-45C FEB-45C 1.35 1.50 Open BMET 28.52 30.19 JUL-30C MAR-30C 1.50 1.30 Open 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 45.66 MAR 40 40 6.50 7.00 Open IGT 74.84 76.30 FEB 75 75 3.20 3.00 Closed 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. ***** CAM - Cooper Cameron $53.03 *** Rally Mode! *** Cooper Cameron (NYSE:CAM) is an international manufacturer of oil and gas pressure control equipment, including valves, wellheads, controls, chokes, blowout preventers and assembled systems for oil and gas drilling, production and transmission used in onshore, offshore and subsea applications. Cooper is also a producer of centrifugal air compressors, integral and separable gas compressors and turbochargers. The firm's operations are organized into four separate business segments, Cameron, Cooper Cameron Valves, Cooper Energy Services and Cooper Turbocompressor, each of which conducts business as a division of the company. Technical Outlook: Brisk upside activity Friday in conjunction with sector rally; multi-month high; support near sold strike at 150-dma. Potential Catalysts: Friday's fire at a Staten Island fuel storage facility put oil service and equipment companies in the headlines; recent upgrade by Jeffries and Co. PLAY (moderately aggressive - bullish/credit spread): BUY PUT MAR-45.00 CAM-OI OI=200 A=$0.35 SELL PUT MAR-50.00 CAM-OJ OI=940 B=$1.00 INITIAL NET-CREDIT TARGET=$0.65-$0.80 POTENTIAL PROFIT(max)=15% B/E=$49.35 ***** SII - Smith International $35.34 *** Hot Sector! *** Smith International (NYSE:SII) is a worldwide supplier of premium services to the oil and gas exploration and production industry, the petrochemical industry and other industrial markets. The firm provides a comprehensive line of technologically-advanced products and engineering services, including drilling and completion fluid systems, solids-control equipment, waste-management services, three-cone and diamond drill bits, fishing services, underreamers, casing exit and multilateral systems, packers and liner hangers. The company also offers supply-chain management solutions through an extensive branch network providing pipe, valve, tool, safety and other maintenance products. Technical Outlook: Long-term lateral trading range between $28-$37; recent buying activity culminated with Friday's sharp rally on heavy volume; near-team technical support at $33. Potential Catalysts: U.S. commercial oil inventories have fallen to historically low levels and the potential conflict with Iraq is putting the focus on oil and gas equipment companies. PLAY (conservative - bullish/credit spread): BUY PUT MAR-30.00 SII-OF OI=93 A=$0.25 SELL PUT MAR-32.50 SII-OZ OI=310 B=$0.50 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$32.25 ***** BSC - Bear Stearns Companies $61.69 *** Premium Selling! *** The Bear Stearns Companies (NYSE:BSC) is a holding company, which, through its subsidiaries, principally Bear, Stearns & Co. Inc., Bear, Stearns Securities, Bear, Stearns International Limited and Bear Stearns Bank PLC, is an investment banking, securities and derivatives trading, clearance and brokerage firm. The company serves corporations, governments, institutional and individual investors worldwide. BSC provides professional and correspondent clearing services, in addition to clearing and settling customer transactions and certain proprietary transactions of the company. The firm is primarily engaged in business as a securities broker and dealer operating in three principal segments: Capital Markets, Global Clearing Services and Wealth Management. Technical Outlook: Near-term "neutral" in a lateral trading range with support near $58-$60; resistance near multiple tops at $65. Potential Catalysts: Brokerage sector slump has affected even the top companies in the group and no fundamental improvements are expected until the market begins to recover. PLAY (less conservative - bearish/credit spread): BUY CALL MAR-70.00 BSC-CN OI=700 A=$0.20 SELL CALL MAR-65.00 BSC-CM OI=1386 B=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$65.55 ***** NEM - Newmont Mining $27.51 *** Bullish Market Ahead? *** Newmont Mining (NYSE:NEM), along with its subsidiaries, is a worldwide company engaged in the production of gold, exploration for gold and acquisition of gold properties. The company also has an interest in a copper/gold mine that commenced production in late 1999. In addition, the company produces zinc, lead and copper concentrates at its property in Western Australia. The company approved earlier this year a restructuring to facilitate the acquisitions of Normandy Mining Limited and Franco-Nevada Mining Corporation Limited, and to create a flexible corporate structure. Technical Outlook: A lateral consolidation after recent gains on the rise in gold prices; near-term upside potential is somewhat limited; rallies should stall near resistance at the sold strike. Potential Catalysts: Profit-taking underway in "overbought" gold market; initial military conflict with Iraq could reverse trend; for market "bulls" only! PLAY (less conservative - bearish/credit spread): BUY CALL MAR-32.50 NEM-CZ OI=15245 A=$0.30 SELL CALL MAR-30.00 NEM-CF OI=15338 B=$0.60 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$30.30 ************* DEBIT SPREADS ************* These candidates offer a risk/reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** EXPE - Expedia $66.57 *** 2-For-1 Split Coming! *** Expedia (NASDAQ:EXPE) is a provider of travel-planning services. The company's travel marketplace includes direct-to-consumer Websites offering travel-planning services located at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl and Expedia.it. Expedia also provides travel-planning services through Voyages sncf.com, as part of a joint venture with the state-owned railway group in France. In addition, the company offers travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is now a division of Travelscape, one of Expedia's primary subsidiaries. In February 2002, a controlling stake in the Expedia was acquired by USA Networks. Technical Outlook: Lengthy downtrend (from DEC-2002) has finally subsided; near-term bullish bias with Friday's closing price above the 150-dma on heavy volume. Potential Catalysts: Profit and sales have dramatically improved in recent quarters; upgraded by Legg Mason earlier in February; 2-for-1 split on 3/11/03. PLAY (less conservative - bullish/debit spread): BUY CALL MAR-55.00 UED-CK OI=588 A=$12.30 SELL CALL MAR-60.00 UED-CL OI=1023 B=$8.00 INITIAL NET-DEBIT TARGET=$4.25-$4.35 POTENTIAL PROFIT(max)=15% B/E=$59.35 ***** NBR - Nabors Industries $40.13 *** Break-Out! *** Nabors Industries (NYSE:NBR) is a land drilling contractor, with over 550 land drilling rigs. The company conducts oil, gas and geothermal land drilling operations in the lower 48 states, Alaska and Canada, and internationally, primarily in South and Central America, the Middle East and Africa. Nabors also is a land well-servicing and workover contractor in the United States. Technical Outlook: Short-term "bullish" on the break-out to a new 9-month high; recent trading range top near $38 provides a solid support area. Potential Catalysts: Fourth-quarter profit exceeded consensus expectations; "much improved" outlook for first quarter and 2003; Lehman Brothers upgrade; oil-equipment sector rally. PLAY (conservative - bullish/debit spread): BUY CALL MAR-35.00 NBR-CG OI=514 A=$5.80 SELL CALL MAR-37.50 NBR-CU OI=3555 B=$3.60 INITIAL NET-DEBIT TARGET=$2.20-$2.25 POTENTIAL PROFIT(max)=14% B/E=$37.20 *************************** CALENDAR & DIAGONAL 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. ***** WFT - Weatherford International $40.55 *** Trading Range! *** Weatherford International (NYSE:WFT) is a provider of equipment and services used for the drilling, completion and production of oil and natural gas wells. The company conducts operations in approximately 100 countries and has approximately 485 service and sales locations, which are located in nearly all of the oil and natural gas producing regions in the world. The company's business is divided into three operating divisions: The Drilling and Intervention Services Division provides drilling systems, well installation services, cementing products and underbalanced drilling. Technical Outlook: Spread based on technical indications only; bullish near-term outlook in an intermediate-term trading range; resistance near the spread strike and maximum profit point ($45). Potential Catalysts: Upside sector/industry bias; oil and natural gas prices at historic highs; recent upgrade by Jeffries and Co. PLAY (speculative - bullish/calendar spread): BUY PUT MAY-45.00 WFT-EI OI=1047 A=$1.70 SELL PUT MAR-45.00 WFT-CI OI=155 B=$0.40 INITIAL NET DEBIT TARGET=$1.25-$1.30 INITIAL TARGET PROFIT=$0.40-$0.70 ***** OTEX - Open Text $29.29 *** Reader's Request! *** Open Text (NASDAQ:OTEX) develops, markets, licenses and supports collaboration and knowledge management software for intranets, extranets and the Internet, enabling users to find electronically stored information, work together in creative and collaborative processes, perform group calendaring and scheduling and distribute or make available to users across networks or the Internet the resulting work product and other information. The firm's principal product line is Livelink, a collaboration and knowledge management software for global enterprises. Livelink offers several engines, including, but not limited to, search, collaboration, workflow, group calendaring and scheduling and document management. As an extension to its solutions-based offerings, the firm also provides professional services, training, documentation as well as technical support services to accelerate its customers' implementation of, and satisfaction with, its products. Technical Outlook: Near-term "bullish" on robust volume, support near 150-dma at $25 and at 50-dma near $26; Friday's 52-week high suggests further upside after necessary consolidation Potential Catalysts: Recently topped consensus expectations with sharply higher second-quarter profit; also raised future guidance; multiple upgrades. PLAY (speculative - bullish/diagonal spread): BUY CALL MAY-25.00 QFT-EE OI=66 A=$5.60 SELL CALL MAR-30.00 QFT-CF OI=426 B=$1.00 INITIAL NET-DEBIT TARGET=$4.45-4.50 INITIAL TARGET PROFIT=11% B/E=$29.50 ***** ************************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”. 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