The Option Investor Newsletter Wednesday 02-26-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Uncertainty Reigns Futures Wrap: Mixed Signals Index Trader Wrap: (See Note) Weekly Fund Family Profile: AARP Investment Program (Scudder Investments) Options 101: Best of Intentions Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-26-2003 High Low Volume Adv/Dec DJIA 7806.98 - 102.52 7925.81 7793.89 1327 mln 1270/1965 NASDAQ 1303.68 - 25.30 1331.47 1302.83 1775 mln 1260/1912 S&P 100 418.72 - 4.68 425.75 418.14 totals 2530/3877 S&P 500 827.55 - 11.02 840.10 826.68 RUS 2000 380.53 - 2.64 383.44 380.20 DJ TRANS 2039.69 - 2.14 2052.18 2029.76 VIX 37.02 + 0.90 37.50 35.97 VIXN 46.97 + 2.64 47.11 44.86 Put/Call Ratio 0.82 ****************************************************************** Uncertainty Reigns by Kent Barton It may seem like a distant memory, but it wasn't too long ago that investors could focus almost exclusively on earnings results, economic numbers, sales reports, and other fundamental data. Even in the year following the 9/11 attacks, Wall Street seemed to be more focused on finding the answers to questions like "Are we in a double-dip recession?" and "When will the IT sector finally recover?" Those burning questions are still up in the air. But now, as words like "Blix," "Al-Samoud Missiles," and "Regime Change" become part of our daily lexicon, geo-political events have become the driving force behind the market's movement. Sure, earnings and economic reports still matter - just ask anyone who was holding long positions before the abysmal Consumer Confidence numbers were released on Tuesday morning. But recently the market seems to have its collective eyes glued to Fox News, CNN, and MSNBC instead of CNBC. The geo-political uncertainty has created a very choppy market environment that's enough to give even the most jaded trader a case of heartburn. To wit: The market experienced a steep reversal rally on Tuesday, in spite of that dismal Consumer Confidence data. There was no clear catalyst for that sudden round of buying. Depending on your bias, it was either short-covering or bargain hunting. In any case, many of those gains evaporated today as the U.S. moved ever-closer to war with Iraq. And with Dow Component HPQ gapping sharply lower this morning, the bulls never really had a chance to extend Tuesday's gains. Hewlett Packard's earnings report last night included a net profit of $0.29 cents per share - one cent better than the consensus estimate. What spooked investors was the fact that the company showed only a $17.88 billion increase in revenue. Analysts had been looking for growth of $18.47 billion. This shortfall was especially concerning because a large amount of the $17.88 billion figure was derived from HPQ's acquisition of Compaq, not actual revenue growth. Dissecting the results, industry analysts pointed out that cash flow from operations was quite weak. This prompted Goldman Sachs to downgrade the stock's rating from "outperform" to "in-line" while slashing its full-year estimates from $1.34 to $1.29. HPQ gapped down to a multi-month low of $16.60 after finishing yesterday's session at $18.18. Shares continued to drift lower throughout the day and ultimately finished with a loss of 15.4%. That weakness spread to fellow Dow techs IBM, INTC, and MSFT, making it very tough for the index to extend yesterday's gains. Annotated daily chart - Dow Jones: In keeping with the recent trend, the Dow was unable to build on Tuesday's powerful intraday reversal. The index finished near the worst levels of the session after giving back a large chunk of yesterday's gains. The bears will now be targeting the Tuesday lows at 7720. A violation of this level would set the stage for a test of the multi-month lows near 7630. In last night's Market Sentiment, Steve Price discussed how the Dow Transports (TRAN) are commonly used to gauge the conviction behind moves in the Industrials. Another sector that is thought to provide "confirmation" of broader market activity is the financials. Perhaps more than any other group, banking stocks reflect investors' opinion of where the economy is headed. Generally, any rally in the major equity indexes that isn't accompanied by a strong rebound in the financials is thought to be highly suspect. The performance of domestic financial stocks is gauged by the BIX.X, while worldwide money-center banks such as Citigroup and JP Morgan are represented by the BKX.X. The Iraq drama is being played out on an international stage with dozens of countries as the supporting cast. As such, it's not surprising to see that the index has come under pressure as war in the mid- east becomes increasingly likely. Annotated daily chart - BKX.X: This chart bears more than a passing resemblance to the Dow Jones, with the exception that the BKX.X has found short-term resistance at its 38% retracement, while the 50% retracement has put a ceiling on the $INDU. However, it's interesting to note that the BKX.X has recently shown a slight trend of relative weakness. From its relative high on February 21st to yesterday's low, the index gave back 4.7%. By way of comparison, the Dow lost 4.0% from its own relative high to yesterday's low. The BKX continued to underperform on Wednesday. On a technical basis, the bears will be waiting to take advantage of either a breakdown below the relative low of 690 or a rollover from resistance near 730. As if financial bulls didn't have enough problems to contend with, the brokerage group came under fire today after the Wall Street Journal reported that Morgan Stanley is looking at a possible SEC lawsuit accusing the company of "laddering." Laddering involves giving IPO's to large banking customers who have indicated a desire to buy more shares. Already reeling from an industry-wide decrease in trading volume, the last thing MWD shareholders want to see is an SEC lawsuit. The airlines, another beleaguered sector, were pressured today by speculation that AMR could soon join UAL in Chapter 11 bankruptcy. It's hard to imagine that things will get much better for the group as long as oil prices remain pegged at long-term highs. Meanwhile, the NASDAQ gave back 1.9% amid a relatively quiet news day for the tech sector. The technical picture for the Composite is similar to that of the Dow, with a clear downtrend emerging over the past four sessions. There are also some developments in the semiconductor index that should have the bulls on their toes. The SOX.X underperformed the broader market today with a loss of nearly 3%. Not only did the index retrace Tuesday's gains, but it also set a new relative low. Continued weakness in the SOX.X could send the NASDAQ down to its own relative lows near 1260. Annotated daily chart - SOX.X: Across the Atlantic, British Prime Minister Tony Blair is facing opposition from his own Labour party regarding the use of the country's military force in an Iraqi war. Blair has been one of America's staunchest allies in the aftermath of the 9/11 attacks. This loyalty has held firm, even while polls show that the overwhelming majority of the British public opposes war without the auspices of the U.N. Meanwhile, the minority Conservative party is largely in favor (favour?) of regime change. Strange bedfellows indeed! That support from the Tories was enough to pass a Parliament amendment today echoing President Bush's call for a second U.N. resolution. Still, with 199 members of Parliament voting for a separate amendment opposing the war, Blair is in some very hot water. There were other developments today that suggest military action will be taking place sooner rather than later. Turkey moved its ambassador out of Iraq and pulled its oil tankers away from the area. The U.S. has offered Turkey billions of dollars in aid in exchange for the use of the country's airbases. Saudi Arabia also said it would allow an American air force presence within their borders. In Baghdad, Saddam has inexplicably refused to comply with UN demands that he destroy the country's al-Samound missiles, which have a range beyond that of the mandated limit. Tony Blair speculated that he's keeping this as a trump card to use just before military action appears imminent. With several thousand troops knocking on the front door, Hussein might suddenly throw up his arms and say "Okay, I'll destroy the missiles! Look at how well I'm cooperating." However, there were reports today that the U.N. and independent weapons analysts believe this missile might be part of a secret effort to design a delivery system with enough range to hit Israel. Chief U.N. Weapons Inspector Hans Blix wants the missiles destroyed by Saturday. Will Hussein comply? Stay tuned. As a sweltering middle-eastern summer approaches, the timeframe for war in Iraq is ticking away. Hans Blix says that several more months of weapons inspections are needed to ensure that Hussein has fully disarmed - and that's assuming that they get full cooperation. This is simply unacceptable for President Bush. Despite its overwhelming military force, an Iraq invasion would become substantially more difficult during the summer. Analysts have even drawn parallels to World War II, when the German army was defeated on the frozen Russian tundra. While this situation is vastly different, the White House does not appear willing to delay the war much longer. At a speech in Washington tonight, Bush is going to discuss his belief that regime change in Iraq will lead to greater chances for peace in the middle-east; namely between the Israelis and Palestinians. The President is also slated to talk about other benefits of toppling Saddam while also seeking to allay concerns of other Arab governments that war will plunge the region into turmoil. To the contrary, Bush believes that regime change in Iraq will help spread democracy to surrounding countries such as Iran. Make no mistake: This approach represents a clear turning point in American foreign policy. It's true that the United States, particularly during the Reagan years, played an instrumental role in liberating the citizens of Eastern Europe from Soviet rule. The key difference is the fact that those people liberated themselves without direct assistance from the American military. In the post-9/11 world the U.S. is taking a more pro-active role towards eliminating perceived threats. What does this have to do with the stock market? Everything. Iraq will be the first test for the Administration's new strategy, and a fear of the unknown has given the market a serious case of the jitters. Some investors are looking for a repeat of 1991, when the market began moving higher shortly after the hostilities began. Until that happens we're likely to see a lot more choppy trading with a bearish bias. But it's equally uncertain whether Gulf War II will be an easy victory for the U.S. After all, urban combat with Saddam's elite Republic guard in Baghdad would prove to be far more difficult than the open-desert warfare that was seen twelve years ago. The other wild card is that Iraq could use biological or chemical weapons on U.S troops. But speculation aside, there are a few technical signs that traders can watch for to indicate that we may be approaching a market bottom. One such indication would be a large upward spike in the volatility index. So far the VIX hasn't punched through its long- term descending trend of lower lows. A powerful move up to the 45-50 area would suggest growing fear among investors. This was last seen in October, just before the Dow bounced back from a multi-year low. A large increase in volume, especially if it coincided with a steep broader market sell-off, would also help to confirm that the war worries have finally been conquered. Lately volume has been relatively light, indicating that many of the large institutional players are simply sitting on the sidelines and waiting for the right time to act. Until that occurs it looks like the market is doomed to continue its erratic and unpredictable behavior. But remember...with difficulty comes opportunity. Savvy traders have been able to profit from the recent gyrations. Large intraday swings will continue to provide actionable entry points. Just keep an eye on those short-term resistance/support levels, and as always, don't hesitate to cut your losses if a trade goes sour. ************ FUTURES WRAP ************ Mixed Signals By John Seckinger jseckinger@OptionInvestor.com Falling bullish percent figures seemed to portend Wednesday's decline; however, these indicators held firm as prices descended today. Should a trader expect a rebound on Thursday? Wednesday, February 26th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7806.98 -102.52 7925.81 7793.89 YM03H 7810.00 -110.00 7940.00 7788.00 28,708 Nasdaq-100 974.51 -24.77 1001.99 973.93 NQ03H 974.00 -24.00 1003.00 973.50 268,237 S&P 500 827.55 -11.02 840.10 826.68 ES03H 827.75 -12.00 843.25 825.75 669,267 Contract S2 S1 Pivot R1 R2 Dow Jones 7710.31 7758.65 7842.23 7890.57 7974.15 YM03H 7694.00 7752.00 7846.00 7904.00 7998.00 Nasdaq-100 955.42 964.97 983.48 993.48 1011.54 NQ03H 954.00 964.00 983.50 993.50 1013.00 S&P 500 818.02 822.78 831.44 836.20 844.86 ES03H 814.75 821.25 832.25 838.75 849.75 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 Jim Brown's day in the Futures Monitor. Recapping his signals: Short 830.00, exit 832.50, change -2.50 Short 830.00, exit 832.50, change -2.50 Long 833.25, exit 831.00, change -2.25 Total for the day: -7.25 Total for the week: -1.00 Total since inception: +60.75 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) The ES contract seemed to move in 'different' waves than expected on Wednesday. The contract gapped under Tuesday's pivot of 838 and the highly-discussed 839.50 area, bounced at Wednesday's pivot, and THEN rose above 839.50 before failing. The weekly pivot of 843.50 was only 0.25 above Wednesday's high. I honestly would have liked an open above 839.50 and THEN a failure. In that order. After the failure, the contract did eventually make its way to just above calculated S1 of 825.50 (low was 825.75). Looking at a daily chart below, we could be in the process of a long liquidation pattern (lowercase "b") with an apex of 839.50. If the contract remains above the 822 level, this possibility will most likely materialize during the next week. Chart of ES03H, Daily Looking at a 60-minute chart of the ES, the bottom of the profiled regression channel did provide solid resistance. Moreover, the ES simply moved from the green line to the blue (see chart below). It is interesting that the daily pivot of 832.25 is roughly the 50% retracement of this range. If the 826 area fails, look for a move to 822 and then the 817 area. Note: The weekly S1 is 833.50. Chart of ES03H, 120-minute Looking at a 5-minute chart, today's trading was simply in the 'wrong order' (grin). Tuesday's pivot, Wednesday's pivot, the halfway mark from 805.25 to 853.25, weekly pivot, and daily S1 all came into play and seemed to be traded with a psychological importance. I would rather like to see a move above the weekly S1 level of 833.50 before expecting more bids, and I would not be surprised if bids come into play at both 822 and 814.75 if weakness does develop. Aggressive bulls could look for the 830 area to become support, adding once above both the daily and weekly pivot. Chart of ES03H, 5-minute Bullish Percent of SPX: This indicator actually rose 0.20% to 33.40 on Wednesday, despite the index falling over 11 points. With internals rising on Wednesday, we could see an initial bid tomorrow. This indicator does remain in "Bull Correction" status with a column of O's rising to 15. The last column of "O's" ended at 20 percent. Looking at P&F chart of the SPX, the contract actually reversed back into a column of X's on Thursday as the index rose over 835. This column of X's grew to four after 840 was tested. Support is seen at 805, with resistance seen at 850, and then between 860-865. The March E-mini Nasdaq 100 Contract (NQ03H) Looking at a 30-minute chart of the NQ contract, Wednesday's settlement was underneath the 983 area (Thursday's pivot) and seems to be content trading within the bearish regression line drawn below. If weakness continues, look for bids to come in between the 961.50 to 964 area; moreover, a rise above Thursday's pivot should have bulls getting aggressive (with tight stops). The objective would be for a move to 1003; however, there could be some selling pressure at the 993 level along the way. I would be more surprised to see a test of 954 and the daily S2 level than a test of 1013 and daily R2. MACD, shown below, has now used the recent bearish trend line as support, and this coupled with a relatively strong bullish percent reading might be the catalyst for a slight recovery rally on Thursday. Chart of NQ03H, 30-minute Bullish Percent for NDX: The bullish percent for the NDX was unchanged at 35% on Wednesday, which is surprising since the overall index lost over 24 points. Internal strength, and something for shorts to be concerned about. This indicator does stay in "Bear Confirmed" status. It will take 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%. Things are still bearish on an intermediate-term basis, but starting to wonder about a bounce on Thursday. The NDX, according to P&F charts, will have to get a 1025 print in order to produce a new column of X's, or a 925 print to add to the recent column of O's. Resistance at 1000 and 1025, with support at 925. The March Mini-sized Dow Contract (YM03H) A daily chart of the YM contract shows the possibility that we are in a large long liquidation pattern. The possible apex seems to come in at 7915; Tuesday's pivot. This contract looks weaker than the other two, and I do expect some difficulty getting above Thursday's pivot (7846 and underneath the retracement area shown below at 7855). If the range from 7855 to 7884 is cleared, I would look for a move to this aforementioned 7915 level. The key for bulls should be keeping the contract above the 7754 level. Chart of YM03H, Daily Taking things to a 120-minute chart, things look a little bit more bearish, and certainly different than a chart of the NQ and ES. Harder to read, actually. I would start looking for a range Thursday between 7754 to 7848 area, and would be inclined to buy both levels with a very tight stop if done at 7754. If the 7754 does fail, then I am forced to look for a move down to 7700. Under 7700, the next area of support is 7625 (should be pretty strong). The possibility of a rally on Thursday is based on bullish percent charts AND apparent poor risk/reward at current levels. I am not looking for a significant rally, just back up to Tuesday's pivot. Chart of YM03H, 120-minute Bullish Percent of Dow Jones: Using P&F analysis, the Dow formed a new row of X's on Wednesday as 7900 was taken out to the upside. The bearish objective for the blue chips remains at 7100, and a buy signal will be given at 8200. Resistance is seen at 8150, with support still not seen until 7600. As far as the bullish percent is concerned, this indicator was unchanged at 13.33% but continues to show oversold conditions. This is reflective of relative strength, but it will still take a move to 20% in order to get the index into "Bull Alert" status. The column of O's remains at twenty-three. Note: The last column of O's ended at 10%. Good Luck. Questions are welcomed, John Seckinger ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_022603_1.asp ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************************** WEEKLY FUND FAMILY PROFILE ************************** AARP Investment Program (Scudder Investments) The American Association of Retired Persons ("AARP") Investment Program from Scudder Investments provides 38 no-load mutual funds spanning all asset classes. This specially created AARP Class of shares of the Scudder family of funds is designed to meet a broad range of investment objectives. All of the Scudder funds offered in the AARP investment program are "no-load" and have low minimum initial investments. Unlike many other investment programs, AARP class shares have no annual 12b-1 fees to support their marketing effort. The no-load, low minimum investment structure is designed to make mutual funds more accessible to AARP members. Members who invest in these specially created class shares of the Scudder funds know that 100% of their money goes to work for them. Each of the AARP mutual funds are managed by Scudder Investments, part of Deutsche Asset Management, a leading global money management firm with 500 plus portfolio managers and analysts worldwide. Fund investments span a range of asset classes and investing styles to meet a wide range of investment goals and risk profiles. If you are interested in becoming an AARP member, or to find out more information about the AARP organization itself, you can log on to www.aarp.com. Complete information on the AARP Investment Program from Scudder Investments, including fund fact sheets and fund prospectuses is available at aarp.scudder.com. If you want to learn more about Scudder as an investment firm, you can go to the Scudder website at www.scudder.com. AARP members can open a tax-deferred IRA account or Gift-To-Minors account for as little as $500. Non-retirement accounts generally require a minimum of $1,000 to invest initially. The Scudder Money Market Fund Prime Reserves (AARP Class) carry a $10,000 minimum initial investment. Fund Overview The money market funds offered in AARP's investment program seek to maintain a stable net asset value ("NAV") of $1.00 per share. However, there is no assurance that the constant net asset value will be maintained. For those that aren't aware, investments in money market funds are neither insured nor guaranteed by the U.S. government. As the AARP investment website states, investments in all mutual funds involve risk. Some mutual funds have more risk than other funds and vary depending on the asset class, investment style or strategy implemented. Because each fund has different portfolio characteristics, they each have a different risk-reward tradeoff to consider. For complete information on risk factors, cost and expenses, you should carefully read the fund's prospectus before investing. Generally, higher returns are associated with higher risk. The Scudder mutual funds provided in the AARP Investment Program are categorized into six broad investment objectives, as follows: -Money Market Funds (5) -Income Funds (10) -Growth and Income funds (4) -Growth Funds (8) -Global Funds (8) -Managed Portfolios (3) The money market funds we already talked about. The income funds (10 of them) provide investors exposure to various sectors of the bond market and are designed to provide current income consistent with a low risk strategy. They seek to provide a higher level of income than money market funds generally do. In exchange for the higher income level, bond funds will fluctuate in net asset value but generally not as much as stock mutual funds. Many bond funds pursue total return, which is the combination of the fund's yield plus (or minus) any price appreciation (or depreciation). Within the income fund group are conservatively managed funds as well as aggressively managed funds, allowing investors to choose the risk and reward potential that best matches their investment needs and risk tolerance. The growth and income funds and the growth funds (12 funds total) have similar risk and reward attributes. Both equity fund types seek long-term growth of capital as their primary objective, but growth and income funds emphasize stocks paying dividends, while growth funds emphasize growth (income isn't generally considered when making investment decisions). Within the equity fund group are funds investing in the various capital sectors of the market (large-cap to small-cap) and employing various management styles such as "value" and "growth." Some equity funds carry more risk than others and offer greater potential returns over time, so it is again important to read the fund's prospectus to see if it is a proper match for you and your situation. Equity funds usually are subject to significant share price fluctuations, but provide higher total returns over time than income (bond) funds or money market funds. AARP's global funds span the geographic markets of the world and provide additional long-term investment opportunities for mutual fund shareholders. Many people invest in global funds for their potential diversification benefit, since the U.S. market doesn't always lead the world markets. However, most global funds offer little or no diversification benefit for U.S. investors, so when investing in a global/international fund, it may be best to pick one based on its risk and reward attributes, not on the basis of its potential ability to protect against U.S. investment losses. As with the U.S. stock fund group, some global funds have higher risk, but offer the potential for greater long-term appreciation. The last broad category of funds in the AARP investment program are called "Managed Investment Portfolios." These funds invest in other Scudder funds in varying proportions in pursuit of the fund objective. They are great for people who know their "risk" profile but want to leave the selection of individual funds to a professional money manager. The Pathway Conservative Fund seeks income as its primary objective by investing in Scudder's income funds, and maintains small exposure to stocks as a hedge against inflation. On the other hand, the Pathway Aggressive Fund seeks growth as its primary objective by investing in Scudder's equity funds, and maintains small exposure to bonds for income and fund stability. The Pathway Moderate Portfolio seeks the combination of income and growth over time by investing in various stock and bond funds from Scudder. Fund Performance/Ratings Only three AARP mutual funds are currently rated by Morningstar: Scudder GNMA AARP (AGNMX), Scudder Capital Growth AARP (ACGFX), and Scudder Small Company Stock (ASCSX). These funds represent the first set of Scudder funds to offer AARP class shares. The Scudder GNMA AARP Fund and the Scudder Capital Growth AARP Fund have 3-star overall ratings from Morningstar, signifying average risk-adjusted returns relative to their respective category peer groups. The Scudder Small Company Stock Fund currently receives only 2 stars, signifying below average risk-adjusted performance. The $4.4 billion Scudder GNMA Fund is one of Scudder Investments' largest and most successful funds based on total assets. It has used a sizable stake in GNMAs, Morningstar indicates, to produce income and total returns that are competitive with other mortgage funds plus the Morningstar intermediate-term government category. The fund doesn’t make significant duration bets, which can raise volatility if those bets are wrong. Instead, it pegs its average duration to that of its benchmark the Lehman Brothers GNMA index, keeping volatility in check. Over the trailing 5-year period as of February 25, 2003, the Scudder GNMA Fund generated an average annual total return of 6.6% for investors, ranking in the second quartile of Morningstar's intermediate-term government category. For the 10-year period through January 31, 2003, the fund sports an average annual total return of 6.1%, ranking it in the second quartile for category performance. The $1.1 billion Scudder Capital Growth Fund received a new team of portfolio managers in December 2002 and has shown improvement in its relative performance since then. Since December 31, 2002, the fund has lost 2.5% of its value compared with a 4.7% decline by the broad S&P 500 index, ranking in the first quartile of the Morningstar large-cap growth category. Over the long term, this fund has produced nothing more than "average" investment results. For the trailing 10-year period through January 31, 2003, it had an annualized total return of 6.1%, ranking it in the category's 50th percentile. Hopefully, the new management team can turn it around. Scudder Small Company Stock Fund received two new co-managers in April 2002, and since then the product has performed better on a relative basis to other small-blend funds. For the 1-year period through February 24, 2003, the fund held its loss to 16.4%, about 6.1% better than the S&P 500 large-cap index and strong enough to rank in the small-blend category's first quartile. The long-term numbers leave something to be desired, however. Per Morningstar, the funds sports a trailing 5-year average annual decline of 5.1% and a 89th percentile rank within the category. It's no surprise that a manager change ensued here. Conclusion The other AARP class shares have not been around long enough (3 years) to receive a Morningstar star rating. While someone can look up the ratings for each fund's Class A, B and C shares, it may not be that effective since many of the Scudder mutual fund portfolios have received new managers or co-managers during the past year, or so. Some of that has to do with Scudder becoming part of Deutsche Asset Management, and the portfolio management changes that often ensue as synergies are reached. While I respect Deutsche Asset Management's global research and resources very much, it is my sense that the management changes require time to prove themselves. Sometimes when a mutual fund has performed relatively well, it's easier to make a management switch or addition. But when performance has been hit or miss, it is hard to know whether to tamper with the approach or those responsible for implementing the approach. Just because someone becomes an AARP member, doesn't mean they are obligated to use the AARP funds (from Scudder Investments). While recent performance has improved with some of the changes implemented in 2002 that isn't enough time to assess potential performance over the long term. Investors may want to proceed with caution here until some of the portfolio kinks are ironed out. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org *********** OPTIONS 101 *********** Best of Intentions by Mark Phillips mphillips@OptionInvestor.com Do you ever have one of those days where you know exactly what you want to accomplish and just as you sit down to get started, something comes up that requires you to change your focus? That's what happened to me this afternoon as I sat down to write this column. I originally was going to address a really interesting email from one of my newer readers, someone who is an experienced trader, but new to options trading. He asked a really insightful question about the pros and cons of option trading vs. stock trading, and I was really looking forward to sinking my teeth into the topic. Alas, something more urgent came up (at least in my opinion), so with apologies to Jerry, I'm going to postpone that topic until next week and spend the next couple pages talking about one of my favorite topics (at least you'd think that to see how many articles I've written on the topic over the years), the VIX. We're not going to talk about any of the basics today. I've covered that more times than I care to remember. Readers that are new to this column or just want to get more basic information on the VIX can check out the background articles I wrote back in 2001. Measuring the Mood of the Markets VIX Details for the Masochist For a quick peek at some of my recent musings on the VIX, you might also want to catch up on these articles, as it outlines some of my thinking on the potential for a change in the behavior of the VIX. Volatility Overload? Fixated On The VIX Alright, so what was so all-fired important that I needed to torture you with another treatise on what's going on with the VIX? Believe it or not, my inspiration came for a short piece on the VIX on CNBC this afternoon. It has gotten to the point where I rarely pay attention to what's on that channel, with the notable exception of any time Art Cashin is speaking, as I think he is one of the wisest people in our business to regularly get in front of the microphone. But there is another regular segment that I try to follow, and that is Jim Jubak's weekly piece. He frequently does a great job of taking a seemingly complex concept and breaking it down into terms that make sense to the average trader. Today the topic of his talk was that of the VIX, and I was stunned with the simplistic manner in which he presented it. Sure he made it understandable to all in his easy conversational style, but I feel he did a great disservice to the investing/trading community. Essentially, he described how fear drives the VIX up and complacency drives the VIX down, with readings above 30 indicating excessive fear and readings below 20 indicating excessive complacency. Since the VIX is now above 35, Mr. Jubak drew the conclusion for his viewers, that the VIX is indicating an excess of fear, as the markets prepare for a powerful rally should the right catalyst appear. You see, the missing component in his discussion is the very real development that the range of the VIX is changing, a topic that we've been actively discussing here for the past several months. Linda Piazza actually got me looking in the right direction with her frequent comments about the action of the VIX in relation to its 200-dma. Since all of the historical data on the VIX indicates that the floor for this measure of market volatility is tightly connected to the movement of the 200-dma. I recently postulated that a practical floor for the VIX appears to be about 18% below the level of the 200-dma, based on the historical data. Well, with the 200-dma at 34.54, the practical floor for the VIX is just above 28 (34.54 x 82% = 28.32). Look at the chart of the VIX below, and I think you'll see what I'm getting at, with respect to the rising range. The VIX hasn't been below 25 (historically the middle of its normal range) in over 8 months, and it shows no signs of going that low anytime soon. Weekly Chart of the VIX The reason this is significant is that if we as traders are watching the VIX for typical buy and sell signals at the historically normal points, we're going to be waiting a long time. We have to adjust our expectations about what the VIX is trying to tell us by attempting to realign the rising range with the extremes of sentiment (panic and complacency). The VIX still performs this function, albeit in a different range. Linda and I have been discussing (via email and in the Market Monitor) the implications of the descending trendline on the VIX that has been capping any upside move in the index since late January. That trendline (as shown on the chart above) is still very much in effect, continuing to press the VIX ever lower. What is strange about this action is that this consistent downward pressure in the VIX is coming at the same time that the broad market is continuing to post lower highs. This relationship can't hold indefinitely, and we are either going to see a powerful rally in the broad markets or something is going to cause the VIX to explode through that descending trendline (as the market falls). Based on the chart below, I think it is the latter development that will actually occur. Split Chart of OEX vs. the VIX You see, throughout the August-October timeframe, each time the OEX fell below the $430 level, the VIX responded with its own move above 40. And on the way back up (for the market), the VIX couldn't get back under 40 until the OEX was solidly above the $430 level. But that relationship has begun to change and change significantly in the past couple weeks. Look how the latest rally attempt stopped just above the $430 level before reversing back down, while the VIX is continuing to languish. As of today's close, the OEX is at $418, and the VIX is "only" 37! This is important because it tells us one of two things. One, the market "knows" that the worst case scenario for Iraq and the economy has already been factored in and we aren't going substantially lower, which is reflected in a lower reading in the "fear index". The second possibility is that market participants "Think" the worst has been factored in and are thus positioning themselves for the 'inevitable' rally when the Iraq uncertainty is removed. Guess what? That is a pretty good definition of complacency and I think an apt description of what we've been seeing in the market recently. Selloffs have little conviction or follow-through with willing buyers lurking just below broken support levels. And when we do get a decent selloff, it doesn't result in a sharp increase in the VIX like it has in the recent past. What I see in that second chart is a pattern of behavior that is DIVERGING from what was seen during the August-October timeframe. Lower prices on the OEX are not resulting in higher values for the VIX. I don't know about you, but that sounds like complacency to me. The reason I've gone through all of this in such excruciating detail is that clarity and understanding are paramount, especially in the crazy market conditions we've been subjected to over the past month. I don't claim to have all the answers, but based on the evidence, I sure don't think the market is telling us that there is an overabundance of fear in the market. It's all about defining the right levels as "high" or "low". I think Mr. Jubak did his viewers a great disservice this afternoon by basing his definitions of "high" and "low" on outdated thresholds that are no longer relevant in the current market. The risk is that traders/investors would view the current market as attractive from the long side, just based on the 'elevated' VIX. But we know better don't we? At best, the VIX is near the middle of its new, elevated range, and I take great satisfaction in knowing that while you don't necessarily have all the answers, at least you have enough information to make informed decisions about what the VIX is indicating about the relative level of fear among investors and the level of risk in the market. Questions are always welcome! Mark ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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The Option Investor Newsletter Wednesday 02-26-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: CB, UTX Dropped Calls: None Dropped Puts: None Play of the Day: Put - UTX Big Cap Covered Calls & Naked Puts: Market Bears Enjoy Another Feast! Updated on the site tonight: Market Posture: It's Getting Hot Market Watch: Bears Getting Hungry ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** CB - put Adjust from $49.50 down to $48.50 UTX - put Adjust from $63.10 down to $62.00 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************* PLAY OF THE DAY - PUT ********************* UTX - United Technologies $57.94 -1.61 (-3.58 this week) Company Summary: United Technologies Corp., based in Hartford, Connecticut, provides a broad range of high-technology products and support services to the building systems and aerospace industries. (source: company release) Why We Like It: UTX is diversified in the defense, elevator and jet engine sectors. While we don't have a bullish or bearish opinion on elevators, there has been weakness in the commercial real estate markets over the past year, in spite of strength in the residential market. That weakness has been highlighted in several Beige Book and Fed reports and would indicate fewer office buildings going up in the recent past or near future. Moving on to UTX's aerospace/defense business, this has not been an investor favorite when it comes to sector choices over the past couple of months. In fact, over the past six weeks, the Defense Index (DFI) has lost 20% of its value and now sits at multi-year lows. As the maker of Black Hawk Helicopters and jet engines for both commercial and military use, UTX has exposure to both industries. The commercial airlines have not fared well, either, with many delaying new plane deliveries and seeing a decline in the leasing business. While the troubles of the airlines have been well documented, companies that make the parts and engines for the planes have escaped some of the headlines. UTX is one such company and the bears have had it in their sights since the middle of January. After topping out just below $67, the stock rolled over hard, bounced from just below $60 and has now moved back below that level. The last rollover, touching down for the second time at $59 on the point and figure chart, constituted a breakthrough of the bullish support line, which rises at a 45-dgree angle and gave UTX its last bounce. With that line now broken, the only barrier to a more significant drop appears to be the $58.50 support level. It bounced from $58.50 on the last drop and again this morning. There is some support in the $55-$56 range, but we will be targeting another trip toward $49, which is its more recent support level. The current bearish vertical count is $51, which would coincide nicely with that support at $49. As a Dow stock, UTX will no doubt be carried or dropped along with other stocks in the group, as program trading scoops the group along. However, the stock under-performed the Dow today, dropping into the red, while the Dow's mid-day reversal took it up 50 points. UTX's exposure to the airline and defense business should continue to keep it heading south, but just to be sure we don't expose ourselves to another bounce in the same area, we will use a trigger at $58.24 to assure a support break. We will target $50 and place our stop at $63.10, just above the converging 21, 50 and 200-dmas. Why This is our Play of the Day As expected, Tuesday's feeble rally attempt provided the perfect opportunity to initiate new short positions in UTX this morning. Opening fractionally higher, the stock just couldn't hold its ground with the broad market dropping and then falling to close near its low of the day. UTX gave up 2.7% on the day, buy more importantly traded below $58, giving that new Sell signal on the PnF chart. With a vertical of $51 and the bullish support line now broken, the bears are going to be leaning more heavily on the stock from here on out. A failed rally below the $60 level would now provide the best entry into the play, although with the damage on the PnF chart, we may have to content ourselves with a rollover below $59. Today's break below $58 could have been used for entries as well, although more conservative traders may want to wait for a drop under $57.50, which will drop the stock into the gap left behind on October 17th. We're tightening our stop to $62 tonight, but still leaving it fairly wide to leave room for the expected continuation of the recent volatility seen in the broad market. On a sector note, the Dow Transports resumed their slide after Tuesday's miraculous late-day recovery. So long as the Transports remain weak, look for UTX to continue making headway towards our initial target of $55 and perhaps even lower. BUY PUT MAR-60 UTX-OL OI=1956 at $3.50 SL=1.75 BUY PUT APR-55*UTX-PK OI= 200 at $2.40 SL=1.25 Average Daily Volume = 2.16 mln ---------------------------------------------------------- WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Market Bears Enjoy Another Feast! By Ray Cummins The major equity averages slid lower today amid growing concerns over the situation with Iraq and a mediocre revenue outlook from Hewlett-Packard (NYSE:HPQ). The Dow Jones Industrial Average retreated 102 points to 7,806 as news of Hewlett-Packard's feeble quarterly revenues dominated the headlines. H-P said the revenue data reflected weak information technology spending in the U.S. and analysts translated that to mean "consumers are not willing to go out and spend." The NASDAQ fell in tandem with industrial issues, down 25 points to 1,303 as computer hardware, telecom and semiconductor shares slumped. In the broader market, chemicals, paper, healthcare, and oil service stocks enjoyed limited gains while brokers, utilities and airline shares saw the worst losses. The S&P 500 slid 11 points to 827. In commodities, concerns over the impending war with Iraq helped gold and crude prices remain firm. Breadth was markedly bearish as decliners led advancers by more than 3 to 2 on the Big Board and the technology exchange. Volume was light with 1.3 billion shares traded on the NYSE and 1.2 billion shares changing hands on the NASDAQ. In the U.S. bond market, demand for safe-haven investments boosted Treasuries. The benchmark 10-year note was up 19/32 at 101 19/32 to yield 3.77% while the 30-year treasury gained 18/32 at 109 23/32 to yield 4.74%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 2/25/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ANF MAR 25 24.40 28.23 $0.60 5.97% 2.46% CLX MAR 40 39.00 41.93 $1.00 5.01% 2.56% OTEX MAR 25 24.50 29.31 $0.50 4.97% 2.04% SYMC MAR 40 39.15 47.92 $0.85 5.10% 2.17% VIP MAR 30 29.40 35.81 $0.60 4.74% 2.04% ANF MAR 25 24.65 28.23 $0.35 4.66% 1.42% AVCT MAR 22 22.20 27.49 $0.30 4.59% 1.35% DISH MAR 22 22.00 26.50 $0.50 7.13% 2.27% IGEN MAR 30 29.50 33.49 $0.50 6.04% 1.69% PTEN MAR 30 29.45 34.16 $0.55 5.17% 1.87% RYL MAR 37 36.95 42.89 $0.55 4.42% 1.49% Naked Calls Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ESRX MAR 55 55.70 50.73 $0.70 5.07% 1.26% GM MAR 37 38.10 33.65 $0.60 4.60% 1.57% VIA MAR 40 40.95 36.66 $0.95 6.44% 2.32% CCMP MAR 50 50.55 41.90 $0.55 5.47% 1.09% KLAC MAR 40 40.50 35.01 $0.50 5.63% 1.23% QCOM MAR 40 40.45 34.77 $0.45 4.59% 1.11% VZ MAR 40 40.55 35.59 $0.55 4.73% 1.36% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status BHE 34.68 34.90 MAR 25 30 0.60 29.40 $0.60 Open PRX 33.67 34.25 MAR 25 30 0.40 29.60 $0.40 Open SLM 105.54 108.44 MAR 90 95 0.45 94.55 $0.45 Open EBAY 76.99 77.65 MAR 65 70 0.55 69.45 $0.55 Open CAT 45.95 45.82 MAR 40 42 0.25 42.25 $0.25 Open BRL 77.21 76.45 MAR 65 70 0.50 69.50 $0.50 Open Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status CCU 36.70 35.38 MAR 45 40 0.75 40.75 $0.75 Open FDX 50.87 49.85 MAR 60 55 0.55 55.55 $0.55 Open UTX 60.50 59.55 MAR 70 65 0.60 65.60 $0.60 Open BGEN 38.16 35.74 MAR 45 42 0.00 42.50 $0.00 No Play RD 39.56 39.61 MAR 45 42 0.25 42.75 $0.25 Open Biogen (NASDAQ:BGEN) gapped down at the open during the last Thursday's session, thus a credit near the target price was not available. Calendar Spreads (Reader's Request) Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status APA 60.74 63.09 APR-65C MAR-65C (0.40) 1.00 Open STJ 43.69 45.00 APR-45C MAR-45C 0.20 0.60 Open Apache Oil (NYSE:APA) and St. Jude Medical (NYSE:STJ) have both offered favorable "early-exit" profits. Credit Strangles No Open Positions Synthetic Positions: No Open Positions Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. *************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** AVCT - Avocent $28.34 *** Multi-Year High! *** Avocent Corporation (NASDAQ:AVCT), together with its wholly owned subsidiaries, designs, manufactures and sells analog and digital KVM (keyboard, video and mouse) switching systems, as well as serial connectivity devices, extension and remote access products and also display products for the computer industry. The firm's unique switching and connectivity solutions provide information technology managers with access and control of multiple servers and network data centers from any location. AVCT - Avocent $28.34 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 25 QVX OE 111 0.30 24.70 4.8% 1.2% * SELL PUT MAR 27.5 QVX OY 113 0.95 26.55 11.0% 3.6% ************** BJS - BJ Services Company $35.20 *** New Trading Range? *** BJ Services Company (NYSE:BJS) is a provider of pressure pumping and oilfield services serving the petroleum industry worldwide. The company's pressure pumping services consist of cementing and stimulation services used in the completion of new oil and gas wells and in remedial work on existing wells, both onshore and offshore. Other oilfield services include completion products and tools, completion fluids and tubular services provided to the oil and gas exploration and production industry, commissioning and inspection services provided to refineries, pipelines and offshore platforms, as well as specialty chemical services. In 2002, the company acquired OSCA, a completion services (pressure pumping), completion tools and completion fluids company with operations primarily in the Gulf of Mexico, Brazil and Venezuela. BJS - BJ Services Company $35.20 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 32.5 BJS OZ 142 0.55 31.95 6.1% 1.7% * SELL PUT MAR 35 BJS OG 5 1.45 33.55 12.5% 4.3% ************** DISH - EchoStar $26.31 *** Recession-Proof? *** EchoStar Communications (NASDAQ:DISH) operates through two major business units, the DISH Network and EchoStar Technologies. The DISH Network offers a direct broadcast satellite subscription TV service in the United States with almost 7 million DISH Network subscribers. EchoStar Technologies Corporation is engaged in the design, development, distribution and sale of DBS set-top boxes, antennae and other digital equipment for the DISH Network and the design, development and distribution of similar equipment for a range of international satellite service providers. DISH - EchoStar $26.31 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 UAB OX 5,631 0.35 22.15 6.6% 1.6% * SELL PUT MAR 25 UAB OE 2,526 0.90 24.10 11.8% 3.7% ************** NE - Noble Corporation $37.30 *** Hot Sector! *** Noble Corporation (NYSE:NE) is a provider of diversified services to the oil and gas industry. The firm performs contract drilling services with a fleet of 49 offshore drilling units located in key markets worldwide. Its fleet of floating deepwater units consists of nine semisubmersibles and three dynamically positioned drillships, seven of which are designed to operate in water depths greater than 5,000 feet. Its premium fleet of 34 independent leg, cantilever jack-up rigs includes 21 units that operate in depths of 300 feet and greater, four of which operate in depths of 360 feet and greater, and 11 units that operate in depths up to 250 feet. Its fleet also includes three submersible drilling units. Over 60% of the fleet is deployed in global markets, principally the North Sea, Brazil, West Africa, the Middle East, India and Mexico. The firm also provides labor contract drilling services, site and project management services, and engineering services. NE - Noble Corporation $37.30 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 35 NE OG 359 0.65 34.35 6.5% 1.9% * SELL PUT MAR 37.5 NE OU 1,800 1.60 35.90 12.7% 4.5% ************** NBR - Nabors Industries $40.97 *** Bullish Oil Industry! *** Nabors Industries (NYSE:NBR) operates in two primary business segments within the oilfield services industry, contract drilling and manufacturing and logistics. The company provides drilling, workover, well-servicing and related services on land and offshore in the lower 48 states of the United States (lower 48 states), Canada and Alaska, as well as international markets. The company also manufactures and leases (or sells) top drives, drilling instrumentation systems and rig-reporting software domestically and internationally, and provides oil rig construction, logistics services and marine transportation and support services in Alaska and the lower 48 states. NBR - Nabors Industries $40.97 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 35 NBR OG 1,735 0.35 34.65 4.3% 1.0% * SELL PUT MAR 37.5 NBR OU 2,800 0.70 36.80 6.8% 1.9% ************** PTEN - Patterson-UTI Energy $34.56 *** Oil Service Soars! *** Patterson-UTI Energy (NASDAQ:PTEN) is an operator of land-based drilling rigs in North America. Formed in 1978 and reincorporated in 1993, the company focuses its contract drilling operations in Texas, New Mexico, Oklahoma, Louisiana, Mississippi, Utah and Western Canada (Alberta, British Columbia and Saskatchewan). Patterson-UTI's operates in three industry segments: contract drilling, which the company markets to major and independent oil and natural gas producers and operators; drilling and completion fluids services, which provides drilling fluids, completion fluids and related services to oil and natural gas producers, and pressure pumping services, which provides pressure-pumping services in the Appalachian Basin. PTEN - Patterson-UTI Energy $34.56 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 30 NZQ OF 1,086 0.25 29.75 3.5% 0.8% TS SELL PUT MAR 32.5 NZQ OZ 310 0.55 31.95 5.9% 1.7% * SELL PUT MAR 35 NZQ OG 1,078 1.75 33.25 14.5% 5.3% ************** VLO - Valero Energy $39.35 *** 8-Month High! *** Valero Energy Corporation (NYSE:VLO) is an independent petroleum refining and marketing company in the United States. Valero owns and operates six refineries in Texas, California, Louisiana and New Jersey with a combined throughput capacity of one million barrels per day. Valero produces premium, environmentally clean products such as reformulated gasoline, low-sulfur diesel and oxygenates, and is able to achieve the specifications of the California Air Resources Board (CARB) for gasoline. Valero also produces a substantial slate of middle distillates, jet fuel and petrochemicals. Valero markets its products in 34 states through an extensive wholesale bulk and rack-marketing network, and in California through approximately 350 retail locations. Earlier this year, the company acquired Ultramar Diamond Shamrock, an independent petroleum product and convenience store merchandise marketing company. VLO - Valero Energy $39.35 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 35 VLO OG 1,385 0.40 34.60 4.5% 1.2% * SELL PUT MAR 37.5 VLO OU 1,114 0.80 36.70 7.2% 2.2% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** AGN - Allergan $63.82 *** Rally Mode! *** Allergan (NYSE:AGN) is a technology-driven, global healthcare company that develops and commercializes specialty pharmaceutical products for the ophthalmic, neurological, dermatological and other specialty markets, as well as ophthalmic surgical devices and contact lens care solutions. Its worldwide, consolidated revenues are generated by prescription and also non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intraocular lenses and other ophthalmic surgical products, and contact lens care products. The company's products are sold to drug wholesalers, independent and chain drug stores, pharmacies, commercial optical chains, opticians, mass merchandisers, food stores, hospitals, ambulatory surgery centers and medical practitioners, including neurologists, dermatologists and plastic surgeons. AGN - Allergan $63.82 PLAY (conservative - bullish/credit spread): BUY PUT MAR-55.00 AGN-OK OI=235 A=$0.20 SELL PUT MAR-60.00 AGN-OL OI=1470 B=$0.65 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$59.50 ************** CTSH - Cognizant Technology $69.62 *** Recovery In Progress? *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. CTSH - Cognizant Technology $69.62 PLAY (less conservative - bullish/credit spread): BUY PUT MAR-60.00 UPU-OL OI=276 A=$0.50 SELL PUT MAR-65.00 UPU-OM OI=871 B=$1.05 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$64.40 ************** EOG - EOG Resources $42.14 *** Higher Gas Prices = Rally! *** EOG Resources (NYSE:EOG), together with its major subsidiaries, is engaged primarily in the exploration for, and the development, production and marketing of, natural gas and crude oil in the United States, Canada and Trinidad, and, to a lesser extent, selected other international areas. EOG's U.S. operations are organized into eight largely autonomous business units, each focusing on one or more basins. The Midland, Texas Division operations are primarily focused in the Delaware, Val Verde and Midland Basin areas of West Texas, and Southeast New Mexico. EOG - EOG Resources $42.14 PLAY (conservative - bullish/credit spread): BUY PUT MAR-35.00 EOG-OG OI=145 A=$0.15 SELL PUT MAR-40.00 EOG-OH OI=668 B=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$39.50 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** OMC - Omnicom $53.96 *** Moody's Downgrade! *** Omnicom Group (NYSE:OMC) is a worldwide marketing and corporate communications company. Omnicom has grown its strategic holdings to over 1,500 subsidiary agencies operating in over 100 countries. The firm's wholly and partially owned businesses provide a range of communications services to clients on a global, pan-regional and national basis. The company's agencies provide an extensive variety of marketing and corporate communications services, as well as advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, direct marketing, directory and business-to-business advertising, employee communications and environmental design. Omnicom also provides field marketing, healthcare communications, marketing research, media planning and buying, multi-cultural marketing, non-profit marketing, promotional marketing, public affairs, public relations, recruitment communications, specialty communications and sports and event marketing. OMC - Omnicom $53.96 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 60 OMC CL 2,284 0.55 60.55 4.5% 0.9% * SELL CALL MAR 55 OMC CK 3,895 1.85 56.85 10.9% 3.3% *************** QCOM - Qualcomm $33.47 *** Wireless Inventory Glut! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $33.47 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 37.5 AAW CU 10,374 0.35 37.85 4.8% 0.9% * SELL CALL MAR 35 AAW CG 7,337 1.00 36.00 10.3% 2.8% ************** QLGC - QLogic $33.07 *** Premium Selling! *** QLogic Corporation (NASDAQ:QLGC) designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers. The company's products are based on SCSI, iSCSI, Fibre Channel and Infiniband standards. The company is the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Their products include its SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool Kit management software. QLogic is the only HBA vendor that supports SCSI, Internet Protocol, Virtual Interface and FICON protocols with the same Fibre Channel HBA. In addition, the company designs and supplies controller chips used in a variety of hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure. QLGC - QLogic $33.07 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 37.5 QLC CU 2,594 0.40 37.90 5.8% 1.1% * SELL CALL MAR 35 QLC CG 5,213 1.05 36.05 11.2% 2.9% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** AZO - Autozone $64.86 *** Earnings Due Next Week! *** AutoZone (NYSE:AZO) is a specialty retailer of automotive parts and accessories primarily to do-it-yourself customers. During the fiscal year ended August 31, 2002, the company operated 3,068 auto parts stores in the United States and 39 in Mexico. It also sells parts and accessories online at autozone.com. Each auto parts store carries an extensive product line for cars, vans and light trucks, including new and remanufactured automotive parts, maintenance items and various accessories. AutoZone also has a commercial sales program in the United States, AZ Commercial, which provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers and service stations. In addition, the company sells automotive diagnostic and repair software through ALLDATA and through alldatadiy.com. The company's quarterly earnings are due on 3/5/03. AZO - Autozone $64.86 PLAY (conservative - bearish/credit spread): BUY CALL MAR-75.00 AZO-CO OI=827 A=$0.15 SELL CALL MAR-70.00 AZO-CN OI=2825 B=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$70.50 ************** MRK - Merck & Co. $52.10 *** Next Leg Down? *** Merck & Co. (NYSE:MRK) is a global, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. (Merck-Medco). The firm's operations are managed principally on a products and services basis and are comprised of two business segments: Merck Pharmaceutical, which includes products marketed either directly or through joint ventures; and Merck-Medco. Merck Pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. Pharmaceutical benefit services provided by Merck-Medco include sales of prescription drugs through managed prescription drug programs as well as services provided through programs to manage patient health and drug utilization. MRK - Merck & Co. PLAY (conservative - bearish/credit spread): BUY CALL MAR-60.00 MRK-CL OI=6143 A=$0.10 SELL CALL MAR-55.00 MRK-CK OI=9598 B=$0.60 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$55.55 ************** SEE DISCLAIMER - SECTION 1 ************** ************** MARKET POSTURE ************** It's Getting Hot To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_022603.asp ************ MARKET WATCH ************ Bears Getting Hungry To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_022603.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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