The Option Investor Newsletter Sunday 03-02-2003 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: Holding Pattern Futures Market: Time for March Madness Index Trader Wrap: GROWING PAINS Editor’s Plays: Got Chips? Market Sentiment: Last Gasp? Ask the Analyst: Looking for triangles and stiff competition Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Not Impressed Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 02-28 WE 02-21 WE 02-14 WE 02-07 DOW 7891.08 -127.03 8018.11 +109.31 7908.80 + 44.57 -189.58 Nasdaq 1337.54 - 11.48 1349.02 + 38.85 1310.17 + 27.70 - 38.44 S&P-100 425.36 - 4.51 429.87 + 7.30 422.57 + 3.78 - 13.78 S&P-500 841.15 - 7.02 848.17 + 13.28 834.89 + 5.20 - 26.01 W5000 7972.62 - 63.35 8035.97 +139.03 7896.94 + 23.52 -251.65 RUT 360.52 - 3.84 364.36 + 5.86 358.50 - 0.28 - 13.39 TRAN 2049.05 - 47.36 2096.41 - 6.19 2102.60 - 37.37 - 33.38 VIX 34.15 + 0.01 34.14 - 2.96 37.10 - 1.35 + 3.02 VXN 45.65 - 0.45 46.10 - 2.28 48.38 - 2.59 + 1.45 TRIN 0.84 0.97 0.58 1.57 Put/Call 0.59 0.85 0.97 0.94 ****************************************************************** Holding Pattern by Jim Brown Great economic news failed to rally the markets on Friday as everyone holds their breath for the next chapter in the made for TV mini series "Iraqnaphobia". Everyone is in a holding pattern waiting for the climax. Joe Millionaire and The Bachlorette may have garnered 65 million viewers in their final episodes but Iraqnaphobia has a worldwide audience in the billions. In the greatest puppet show on earth the UN security council is playing out their roles while their strings are being pulled from thousands of miles away. Dow Chart - Daily Nasdaq Chart - Daily The economic story took a turn for the better Friday with the Q4 GDP revision coming in at +1.4% and significantly better than the +0.7% previously announced. This means the fourth quarter was better than expected and could have given us a stronger start on 2003. This took some of the pressure off the estimates for Q1 and suggests the Fed may be right about staying out of a recessionary second dip. The majority of the gains came from consumer spending and shows that despite the lackluster holiday sales the consumer was still alive and well. Also adding to positive investor sentiment was the Chicago PMI which came in at 54.9 compared to estimates of 52.9. Production and new orders expanded slightly, very slightly but they are starting an upward trend by building on last months gains. Employment was still in negative territory but marginally better than January. Profits were down due to increased marketing expenses and strong competition for available demand. Still it was a positive report. Consumer Sentiment fell again in February to 79.9 but it was better than expected. This is the lowest level since 1993. This nine-year low was based on higher gas prices, unemployment and market concerns. The nine-year low in the sentiment was still not as bad as the 64 in the confidence number earlier in the week. The markets traded up on the better than expected bad news. Hey, we will take what we can get! We may wish we had some extra goodwill stored up on Monday when we get the ISM report along with the Personal Income/Spending report. The New York version of the ISM was released on Friday and it took a serious hit from January levels. After showing signs of a recovery in January the numbers dropped to just barely above the Jan-2002 levels when the city was still digging out from the 9/11 attack. The -3.1% drop in the index was led by current conditions which fell from 51.9 to 34.5 and non-manufacturing conditions which fell from 51.5 to 33.0. Finished goods fell to 37 from 50. This is not a positive sign and could be a leading indicator for the national ISM on Monday. The ISM will be followed on Wednesday by the Beige Book, Thursday the Factory Orders and Productivity and on Friday by the Nonfarm Payrolls. ICI made it official this week. Equity mutual funds saw outflows of $466 million in January. This was the first time since 1990 that January had a negative cash flow. January is a strong retirement contribution month and normally sees inflows in the $7-$10 billion range. Several other fund flow companies had speculated on this over the last few weeks but ICI is the recognized authority. With brokers like Charles Schwab, Ameritrade, Goldman Sachs and Merrill Lynch laying off brokers in waves it does not take a call to Miss Cleo to know that trading volume has shrunk to very low levels. Many investors have simply given up on the market. This disgust also shows in the lack of conviction we have been seeing. Many will not be back when the market recovers because they have used the money for other investments like real estate. The oil saga continues but the prices have started declining as reality begins to sink into traders. With Venezuela coming back online and Saudi Arabia agreeing to make up any post war shortfall the traders have lost the incentive to run up the prices. Shorts are loading up again after bailing out at rape and pillage prices this week. Once the capitulation at $39.99 a barrel was over the reality begin to appear. Consumers will not be seeing any real price relief for about a month as that high priced oil works its way through the system. France was one of the biggest exporters of Iraq oil and part of their motivation, although they would never admit it, was the potential loss of oil and trade from Iraq. Russia, who announced on Friday that they WOULD veto any resolution that would lead to war is also a heavy trade partner with Saddam. There was a big photo session just last week with a bunch of Russian dignitaries hand shaking and backslapping with Saddam and his gang. It is nice to claim humanitarian reasons for antiwar vetoes but under the surface you are liable to find ulterior motives. The semiconductor index set a new six-week high on Friday after Dan Niles made some positive comments about Intel. Niles said he expected Intel to affirm the LOWER end of their guidance at their mid quarter update on March 6th. He said he expects them to raise low end guidance from $6.5B to $6.7B while leaving the high end of the range at $7B. Intel jumped on the news despite his warning that revenue for the next quarter could see a -3% drop due to worse than expected seasonal factors from the soft economy. Niles based his positive comments on the widening spread between Intel and AMD in chip performance. He felt that the leading edge chips were so far in advance of AMD that Intel would not need to lower prices to compete and could gain higher margins on the newer products. He also mentioned the broadening Intel product line. This how the next bull market starts. One little comment at a time followed by new products, upgraded guidance and even an increase in profits. I can't wait. The Dow posted its third losing month in a row and appears to have a total lack of direction. The index is stuck in a very narrow trading range growing narrower by the day. The 7900 level appears to be a very powerful price magnet and neither bulls or bears can move it off that number for more than brief periods. This is a true stalemate. The Nasdaq has fared better with the semi stocks helping to hold it up as well as a variety of misc techs. MSFT is not one of them. MSFT is closing in on $23 again after their 2:1 split two weeks ago. Still the Nasdaq managed to tack on another +13 points on Friday and has been in a steady uptrend for a week. 1350 to 1360 will still be a problem and with the Intel update on Thursday it is not likely to move significantly over those levels soon. The bargain hunters are out but they are being very picky. Some of the Nasdaq gains on Friday were due to short covering as nobody wanted to be long over the weekend if a random war broke out somewhere. I reported on Thursday that 57% of the S&P had warned about their 1Q outlook. There is a strong contingent of analysts that believe this is a severe overstatement out of performance fear. If company officers warn of possible shortfalls that never come to pass there is no harm done and no legal liability. With the economy cooling even further while everyone waits for the war to start, companies cannot predict any guidance due to limited visibility. To protect against disaster they are lowering guidance or canceling guidance completely. It does not mean the economy died. It only means they do not want to be optimistic in a cloudy environment. This sets us up for some positive surprises eventually if the war is over quickly and business returns to normal. Of course the question remains "what is normal"? With the current mixed economic reports and 57% of companies warning, what will happen after the war. If we had a seven day war followed by a seven day rally then what? If we have a post war rally from 7900 to 8900 by the end of March then there is a substantial risk for negative earnings surprises. Earnings would not yet have the benefit of any post war improvement AND we would be entering into the worst six months of the year on a historical basis. Positive surprises could only come after the economy had some time to take action after the war. I have not changed my outlook for a post war rally. I am only cautioning against any irrational exuberance in the weeks following that rally. If you still doubt there will be a war you would be surprised to hear that up to 20 B2 stealth bombers left Missouri on Friday for the gulf. These are the state of the art radar evading, very expensive aircraft. Each can carry 20 2,000-pound satellite guided bombs while entering and exiting undetected. It is interesting to note that they are going to be based somewhere near the gulf. In past conflicts they flew from Missouri to Kosovo and Afghanistan dropped their bombs and returned to Missouri without landing. That is one long ride. The Pentagon has already deployed the F117 fighter bombers and the B1 stealth bombers to the region over the last two weeks. One B2 can carry more precision guided ordnance than an entire squadron of F117s. The carrier Nimitz and its battle group was ordered to the gulf today and will be leaving on Monday. The full complement of ships, planes, missiles and bombers ordered deployed on Friday cost well over $100 billion. Doesn't sound like President Bush is concerned about the UN resolution and it does not look like he plans on backing down. Saddam is scheduled to "BEGIN" destroying missiles and components "IN PRINCIPLE" on Saturday under UN supervision. There are already cracks in the plans and I would not be surprised to hear that there is some delay over the weekend. Saturday was the deadline to have DESTROYED, past tense, the missiles. If Saddam delays then the US will be quick to point out that fact to all concerned. I would expect a highly visible destruction of several missiles with TV cameras rolling so Saddam can get maximum effect for the dollars lost. Getting past that initial group once the cameras stop rolling could be where the fun starts. In the end does it really matter? Not hardly. The US is coming and everything we are seeing now is just the pre-show. Speaking of shows, we all participate in the biggest reality show of all every day. The "Who Wants to be a Millionaire" investment challenge. Lately it could have doubled as segments for "Fear Factor" with the extreme danger and high volatility. Those celebrity investors who have not used their "Get me Out of Here" card will end up as true "Survivors" when the series ends. However, I doubt there will be much of a market for reruns. Playboy asked the girls of Starbucks "Are You Hot" and announced they were going to do a series on the coffee kittens. Obviously this is a "Bare Market" in which many traders will be glad to invest. Enter Passively, Exit aggressively! Jim Brown ************** Readers Write ************** Jim, Last week I wrote you concerning the effect of news on the market and whether it really has an effect at all. I purposed that the market has an agenda and will go about it regardless, and I also maintained that there is a bullish bias that is treating support and resistance differently than our friend (?) the bear used to. I think the market action this week bolstered my position, and while we didn’t set the world on fire by blazing into the stratosphere, we certainly did maintain the up bias as the market whipsawed it’s way north with higher lows and higher highs. I wanted to direct you attention to the Volatility Index. It’s something I think we should pay close attention to as I believe that it too is trying to tell us something. What it is, is open for interpretation but think about this. Everybody is talking about once the war gets started the unknown will become the known and the market will take itself off “hold” and get back to business. Many are saying that everybody is waiting for the shooting to start so we can get back to buying stocks again. Remember when everyone was saying as soon as Y2K is over, when we’re sure there won’t be any computer glitches to make our money evaporate, we’ll put our money in the market again? Remember all the predictions of a falling market prior to Y2K as money found a safe harbor until the bugs were all worked out? Remember while everybody was saying they were waiting to invest, the phenomenal rally that started in October of 1999 and the Dow gaining almost 3,000 points and peaking out on January 14th? The rally lasted just long enough to allow everyone who wasn’t in the market, to get in after January 1st, and the bears to start picking their pockets for the next three years. As we know, the market will do the exact opposite of what everybody predicts it will do. The fact that there is so much talk of the market rallying when the shooting starts, is starting to scare me. The market is rallying, believe it or not, right now. Oil has hit a high of $39 a barrel and the market refuses to go down. The economy is in tough shape, you certainly know as you write about it everyday, and that kind of price for oil is going to make it even tougher. Just to be the contrarian, which works more often than not, what happens if the market is rallying now and the Volatility Index (VIX) is telling us what is going to happen in the near future. The VIX has formed a perfect wedge. It’s getting tighter and tighter and acting just like any stock would in the same situation. It has banged perfectly against the top three times and perfectly against the bottom three times. It wants out, but which way does it want out? If its the bottom then happy days are here again, but out the top and look out below. I wrote you one time and apprised you of the fact that the 60 area has not always been our high for the VIX. In October of 1987 at the height of the crash, it hit a high of 172. Panic was rampant and the market was out of control. It was right after the crash that here in Florida an investor walked into his brokerage and killed his broker and his pregnant assistant and then killed himself. Not a pleasant subject but it happened and it highlights the number of the VIX and the fear that was present. Since then the VIX has hit a high of 60.63 in October of ’98, 57.31 in September of 2001 and 56.74 in July of 2002. Draw a line from the top of those three points and you’ll find the market has set up a resistance level that connects those points absolutely perfectly. Anytime the market sets up a resistance level it is just waiting for it to be broken. These levels were not by coincidence. Couple that with the fact that the VIX is building a perfect wedge and knocking on the walls trying to get out, and maybe that upper resistance level is giving us a clue as to which way the VIX may be headed. With that in mind, ask yourself two questions: The market is doing everything it can right now to hold itself up. Why? Maybe its because those who know its going down would certainly want to take it up as high as they can to maximize any new short positions. We saw that with Nasdaq 5000 and I guarantee there are still investors holding those positions. And while many have called various bottoms in the last three years “capitulation events”, have we ever really had a true “billion share” capitulation event since the bear market started? The answer is a resounding “NO”. In fact if you have to guess if it was a capitulation event, that is your first clue it’s not. A true capitulation event ended with three dead in a broker’s office. Not that it would happen again but it highlights the fact that when it does, we won’t be guessing if it was one or not. I know I wrote and said the market won’t go down because of the bullish undertones and we’ve seen the bottom, and while I believe the first part of that statement, I’m not sure after seeing the VIX that I believe the last. Look at a weekly bar chart of the Dow with the eyes that it might just be building itself up for a really big crash and you can start to see it. The market is a strange animal and I’ve found that it doesn’t work on a day to day or even week to week basis. It choreographs and preplans years worth of movement. I advise anybody to get some very long term charts going all the way back to the 1920’s and notice how several years in a row all fit together like a well designed puzzle. The problem we have is we never see the next piece until its already in place and most of us look way to closely to ever see the big picture. I’m sending you a picture of the wedge I’m describing along with the line of resistance in a daily bar chart. I just wanted to give you something to think about as we all talk about getting back into the market once the shooting starts and the uncertainty is over. That may well be but true investing involves navigating the uncertainty and it’s evident that not all players, the “true” players, have left the market in spite of the threat of war. And once the uncertainty was over concerning Y2K, the certainty only lasted for fourteen days and the market has been anything but certain since. I’m always anxious to hear your comments. Thanks for your time, Rick Utt ******* Wow, I think Rick is on a roll here. Let's look at it a different way. I am not sure I believe your argument based on the VIX. We have done quite a few articles on the VIX lately (Traders Corner) and while I do believe the Dow could drop back to just over 6000 to hit the 10 year uptrend line in the Dow I don't specifically believe it will be VIX related. The VIX reacts to market factors. The market does not react to the VIX. It is a derivative of option premiums only which reflects the fear in the market place as measured by high premiums. If you put a teapot on the stove to boil it will eventually whistle when it boils. The whistle is the result of the boiling not the reason it is boiling. The VIX is the result of something not the cause of something. The VIX spikes due to external factors like wars, terrorist attacks, currency devaluations, hedge fund failures, etc. When the market is simply going down calmly it stays in a range and loses some of its relevance. See the bear market period in the chart below. I think after the war we will get the rally for 7-10 maybe 14 days but not over 9000. I think this IS the setup for the next fall. The market ALWAYS over reacts to cyclic conditions. It over reacts going up and over reacts coming down. If you take a ten year chart of the Dow and draw some trend lines on it there is a clear stair step down at present and the next step is 6200+/-. With 57% of the S&P already warning about Q1 earnings there is not going to be much hope for the April earnings season. April is also the start of the worst six months of the year on a historical basis. Get the war over in the next three weeks, run the stocks up into the second week of April, crash on earnings and then a slow bleed until October. By then the recovery, if any, will be in progress and we could see a 4Q rally. If no recovery then we are doomed to a sideways market for another year. Did you notice that Mar/Apr and Sept/Oct have the highest incidence of VIX highs than any other months? This would lend credence to your theory of an impending drop but we really do not know what caused each of these spikes. We did not just wake up one morning and decide to crash. There was normally an external event to cause the spike. Notice on the chart below the VIX only touched 40 twice in the three year bear market that lost 50% of its value. The spike to 55 was the result of the attack and not market related. I would be more inclined to agree with your theory from looking at this chart. The Dow has completely rolled over and has failed at 9000 twice. I believe any post war rally will not break 9000 and once lousy April earnings are announced we will see 7500 again. This will be the make or break period. Everyone believes that markets always come back to their long term trend. That trend from the 1987 crash low is just over 6000 now. This does not mean we are going to 6000 next month. It could mean that we will hit that line sometime in the future as it rises and we descend. Either way it is not a pleasant thought. Rick I enjoy the discussion and you obviously have spent a lot of time looking at the overall picture. We both know that everyone has an opinion and that is what makes the markets. I think it is healthy to post different opinions as it causes our readers to think and form their own opinion. Right now half of everyone reading this thinks we are going back to 10,000 by year end and the other half is thinking when pigs fly. I would like to open this up to everyone else. What do you think? Email me or Rick at my address and I will forward it to him for a reply. Why should we have all the fun? Jim ************** FUTURES MARKET ************** Time for March Madness By John Seckinger jseckinger@OptionInvestor.com Both the ES and YM contracts have almost identical weekly and monthly pivots. This should give futures traders a great risk/reward opportunity during the first week in March. Friday, February 28th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7891.08 +6.09 7965.80 7855.44 YM03H 7920.00 +28.00 7962.00 7847.00 34,560 Nasdaq-100 1009.74 +14.94 1013.34 994.79 NQ03H 1010.50 +14.00 1014.50 991.50 213,733 S&P 500 841.15 +3.87 847.00 837.28 ES03H 841.00 +2.75 847.00 833.75 570,256 Contract S2 S1 Pivot R1 R2 Dow Jones 7793.75 7842.42 7904.11 7952.78 8014.47 YM03H 7795.00 7857.00 7909.00 7972.00 8025.00 Nasdaq-100 987.41 998.58 1005.96 1017.13 1024.51 NQ03H 982.50 996.50 1005.50 1019.50 1028.50 S&P 500 832.09 836.62 841.81 846.34 851.53 ES03H 827.25 834.25 840.50 847.50 853.75 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7554.00 7737.00 7889.00 8072.00 8224.00 NQ03H 947.25 978.75 1000.25 1031.75 1053.25 ES03H 803.00 822.00 836.25 855.25 869.50 Monthly Levels (February's High, Low, and Close) Contract S2 S1 Pivot R1 R2 YM03H 7374.00 7647.00 7890.00 8163.00 8406.00 NQ03H 906.75 958.75 990.25 1042.25 1073.75 ES03H 778.00 809.50 836.75 868.25 895.50 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: Long 841.50, exit 845.50, change +4.00 Short 844.25, exit 845.50, change -1.25 Long 844, exit 843.50, change -0.50 Short 838.75, exit 840.75, change -2.00 Long 840.50, exit 839.25, change -1.50 Total for the day: -1.25 Total for the week: -3.25 Total since inception: +55.75 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) A new week and a new month for ES traders. For those following pivot analysis, it means new weekly and monthly pivots, retracements, as well as support and resistance levels. It is my belief that computer programs are currently changing their models to use these new levels. The question is, "Do any of these levels stick out?" Interestingly enough, both the monthly and weekly pivot are between 836.25 and 836.75. With the ES closing at 841, longs are given a great risk/reward, while shorts can either wait until these levels are broken, or sell at resistance above and use these pivots as a downside objective. Looking at the chart below, the ES contract could simply be in a wedge pattern with a possible apex (mid-point) between the weekly pivot (836.25) to either 838.25 (mid-point of Bollinger Band) or 839.50 (popular daily retracement level). Another variable to consider is the ADX Directional Movement Index continuing to roll from above 40 to under 40, indicating that the market has lost its momentum and traders should look for a range bound market. Nevertheless, until the 836.25 area is taken out, least resistance does appear to be higher. Chart of ES03H, Daily Looking at a 120-minute chart of the ES contract, with the weekly and monthly pivot below, look for a move to 861.25. Some resistance should be found at the 850 area as well. If prices fall underneath this 836.25 to 836.75 area, there is a good chance traders will begin thinking about a retest of the "support zone" from 803 to 805. The daily S2 level comes in at 827.25. Chart of ES03H, 120-minute Taking things to a five-minute chart, the ES is above Monday's pivot of 840.50 and the mid-point of a recent bullish regression channel. It also came to the top of a possible short-term bearish trend line. The nice thing is that a test of the weekly and monthly pivot will put prices underneath the entire regression line; clearly shifting sentiment. I would use the daily R1 and S1 levels during the day on Monday, but keep the 'bigger picture' in mind. Chart of ES03H, 5-minute Bullish Percent of SPX: This indicator rose 0.20% to 33.80 on Friday, and remains just underneath a number of prior column of O's that stopped at the 36% level. Nevertheless, this indicator remains in "Bull Correction", column of O's 15 deep, and a reversal into a Column of X's will not be seen until a print of 40%. Note: The last column of "O's" ended at 20 percent. With that said, this indicator is intermediate term bearish for the SPX. Looking at P&F chart of the SPX, the contact did add one "X" as 845 was hit; however, resistance is still at 850 and then between the 860-865 area. The March E-mini Nasdaq 100 Contract (NQ03H) A daily chart of the NQ contract also has bullish implications, as Friday's settlement closed above the mid-point of the bullish regression channel, the 1003 area, and all highlighted moving averages. I would look for a test of the 1024.50 area, but it is a new week and month; therefore, we will have some new pivotal areas to deal with. Note: Both the MACD and Stochastics also are in a bullish trend as well. Chart of NQ03H, Daily Taking things to a 120-minute chart, the NQ is above both its weekly and monthly pivot (1000 and 990, respectively), as well as closing above a "support zone" from 1010 to 1012.75. This has bullish implications as well. If the 1024.50 is cleared, there remains resistance above at 1032.75 and then the 1042 area. Shorts could look for weakness under the monthly pivot, expecting softness down to the monthly pivotal level and possibly weekly S1 of 978.75. Chart of NQ03H, 120-minute Bullish Percent for NDX: The bullish percent for the NDX was unchanged at 35% on Friday, and will 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%. 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 is seen at 1025, with support at 1000 and 925. The March Mini-sized Dow Contract (YM03H) The YM contract, like the ES, has its weekly and monthly pivot almost exactly at the same level (7889 and 7890, respectively). Also like the ES, the YM is above this level (most likely its apex in the current wedge pattern) and portends a rise during trading on Monday. The objective above would place the index at the 8072 level, and then above from 8208 to 8225. These are intermediate objectives, and could be hit within the next few trading sessions (before Friday). If prices do fall back underneath the weekly and monthly pivotal levels, look for a move to 7809 in the near term. The daily S2 on Monday is at 7995; therefore, this level is definitely in reach. Chart of YM03H, 120-minute Bullish Percent of Dow Jones: Using P&F analysis, the Dow did add to its new column of X's on Friday, as 7950 was taken out. However, there is a pattern of lower highs and higher lows; therefore, the blue chips could be coiling with a possible apex of 7850. The bearish objective for the blue chips remains at 7100, while 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. Of course, it will 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 ******************** GROWING PAINS By Leigh Stevens lstevens@OptionInvestor.com Economic growth slowed in the forth quarter, but not by as much as the practitioners of the dismal science (economics) thought a month ago. As estimated and reported by the Commerce Department on Friday and adjusted for inflation, the nation's GNP rose at a 1.4% annual rate in the last three months of 2002. This compares to the 4% growth of Q3 of last year but is above the advance estimates for Q4 of a 0.7% growth rate. Hey, it's still above 1% its still a gain! Consumer spending was the surprise, rising 1.5% instead of the 1% originally estimated. Much of the spending gain was in energy - no kidding, as we paid more at the gas pumps! As was the case with the first GDP estimate in January, a combination of consumer spending, more government spending, continued investment in homes and some business equipment and software spending was what got us the GDP growth. THE MARKET BOTTOM LINE – Upside follow through I anticipated early last week didn't happen but the market was again rebounding by week's end which continues to suggest a bottom forming at long-term up trendlines. More back and forth seesaw action is anticipated within that process. Chart patterns suggest buying puts on further rallies as the next best trade in the SPX and OEX, while waiting to see how far current upside momentum might carry the Nasdaq Composite and 100 before another downswing there. FRIDAY AND LAST WEEK'S TRADING ACTIVITY – The numbers all came in essentially better than forecast. This being the end of the week and with a lot of traders net short, it led to some short-covering type buying. Nevertheless the Dow was down on the week by 127 points to 7891, off 1.6% from its prior weekly close at 8,018. The blue chip average is now down over 5% year to date. For the week, the S&P 500 (SPX) was off 8 points, losing just shy of 1% from its 848 close of the week before. (SPX has lost a little over 4% year to date.) The index did hold on to a gain of 3.5 points on Friday, ending at 840. The Nasdaq Composite (COMPX) held onto a Friday gain of 13 points, to close at 1,337. (Trader talk has focused on its repeated ability to hold 1300.) The COMP ended 11 points lower or just under 1% from its prior week 1,348 close. The Composite is trading about unchanged from the start of the year. Tech stock firmness and gains were sparked by a rally in Intel (INTC) and the chip stocks - INTC rallied to above $17 after Lehman Brothers raised its estimate for the semiconductor's Q1 earnings from 12 to 13 cents. This based on the expectation of an ability to hold to modest increases in pricing and by gaining market share. Intel was up nearly 3 and a half percent, while the Philadelphia Semiconductor Index (SOX) gained 2.8% on Friday. By the way, Intel's mid-quarter update is on March 6. Hewlett Packard (HPQ) rallied some 2% (to 15.85) as it recovered from a sell off on its quarterly results from earlier last week. Economic data released from the revised February U of M Consumer Sentiment survey and the February Chicago PMI gave an early boost to stocks on Friday. The Chicago Purchasing Managers Index fell in February, but the indicator of manufacturing activity remains above the 50 mark that suggests business expansion. The revised February Consumer Sentiment for last month was reported at 79.9, slightly higher than the previously reported 79.2. This figure (79.9) was below January's 82.4, but was a more modest decline when compared to the Conference Board Index's sharp decline from 78.8 in January to 64.0 in February. The smaller decline in the U of M Sentiment resulted in a less bearish view of what the consumer will do in the weeks ahead. Certainly, a sharp retrenchment in spending could derail the fragile and scant growth in the U.S. economy. The bulls were hoping that the Conference Board number was not as telling as the Michigan survey. Continuing the pattern of only limited bullish conviction and the great nervousness of traders, the Friday gains lasted as long as the next piece of bearish news. A negative omen on terrorism was the report that a gunman fired on the U.S. Consulate in Karachi, Pakistan, killing two police and injuring at least five other. The man was arrested and identified as a native of Afghanistan. This shooting attack was the first that targeted American officials in many months. Karachi has been a militant hotbed of Muslim fundamental extremists. Pakistani public opinion is quite negative on a possible U.S. invasion of Iraq, a fellow Islamic country. Moreover, this key ally in the war on terrorism has nuclear weapons and only a moderate military leader perhaps stands between those weapons and radical elements - who might want to use nukes as the ultimate terror weapon. IRAQ and the UN - Chief UN weapons inspector Hans Blix indicated on Friday that if Iraq carries out its pledge to begin destroying its Al Samoud2 missiles on Saturday -- as demanded by the UN it would be "a very significant piece of real disarmament." Mr. Blix indicated to reporters that if Iraq goes forward with the promised destruction, its cooperation on a major disarmament issue would be reflected in his next report to the council. He will appear before the Security Council next week to discuss the findings in his 17-page report on the past three months of inspections. Administration officials reiterated the president's dismissal of the importance to an Iraqi promise to destroy missiles banned by the United Nations. Not so in Russia - The Russian Foreign Minister said Moscow was prepared, if necessary, to cast a veto in the U.N. Security Council, which is discussing a U.S./U.K. resolution seen as "authorizing" war with Iraq. Any moves in the direction of keeping the inspection process going and stopping the second resolution is being viewed bullishly by the market or at least keeps the sellers at bay for now. OTHER MARKETS – The 10-year Treasury note rose about 3/8 a point, with its yield falling to 3.69%. Oil prices, a focal point of political and economic uncertainties (along with bonds), traded down about 25 cents to $36.95 a barrel on the New York Merc. However, natural gas futures jumped as much as 14 percent and heating oil hit an all-time high on reports of more cold winter weather in the U.S. Button up your overcoats! The dollar traded down a fraction of a percent against the Euro to 1.0784, but was up 0.3% against the Japanese yen at 118.14. Nearby gold futures were off about a buck on the week to $350.50 per ounce - its price is not collapsing but its strong upward price momentum is stalled. MY INDEX OUTLOOKS – Look to buy puts in the indexes if they continue to work higher - in terms of the bellwether S&P 500 (SPX), particularly back into the 850-855 resistance zone. Conversely, adopt bearish trading strategies on an hourly close under 840 - given the upward sloping pattern (probably bear flag or bearish wedge) on the hourly chart below, I think a break at this juncture would signal another downswing. [While I don't anticipate this, a close over 855 would yield somewhat higher objectives, possibly to 865-868.] S&P 500 Index (SPX) – Hourly 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. I wrote about the price/RSI divergence (RSI registered a lower peak at the double top) in my Trader's Corner "Putting it all together" column last week at - http://www.OptionInvestor.com/traderscorner/tc_022703_2.asp It's worth noting also that you'll find in this article an alphabetical listing of all my prior Trader's Corner columns. The above noted price/RSI "divergence" was a good tip off for a quick trade to the downside, proving the old trader's adage that "they slide faster than they glide". I didn't make the most of what was showing up on the hourly chart in that regard, but some quick-witted OIN viewers did. Now, the upward sloping price pattern noted suggests another downswing ahead in the SPX. 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. Unless there is a close over resistance at 432, I assess the most recent rally as a prelude to another downswing. If 432 was exceed, buy puts at 440. I anticipate another move to the 410 area and semi expect another test of major support around 400. The pattern I outline on the hourly chart is like a ledge that the index builds before falling off it. And, the "confirming" indicator is my Equities Call to put ratio of daily trading volume on CBOE equities options. This indicator reached an "overbought" or a minor extreme in bullish "sentiment" on Thursday. The record of this indicator, when added to a confirming chart picture is quite good. For those who may be unused to seeing a CALL to put ratio like mine, an explanation is at – http://www.OptionInvestor.com/traderscorner/tc_011903_2.asp Dow Industrial Index (DJX) – Hourly chart: The striking feature of the Dow charts is (especially apparent on the hourly chart) the symmetrical triangle outlined by a series of lower (up) swing highs and higher (down) swing lows. The triangle is one of the most common patterns showing a consolidation in the trend. As the dominant trend before the formation of the triangle on the Dow hourly chart above was down, it's a better than even chance that the next move is down again if 78.25 is pierced. If so, the next levels to watch are the prior lows at 77.25; then, 76.25. Some further upside can't be ruled out if the breakout is to the upside, above 79.5. In that event resistance is implied by the prior hourly peaks at 80.4, then 80.75. NASDAQ 100 Index (NDX) Daily chart – The chart still looks mildly bullish, with the rebound from the area of its 21-day moving average last week. However, resistance at 1020 still has to be overcome - if it was, I would like to buy puts on a further rebound that carried NDX back into its gap area around 1050. Buying and selling has been fairly well matched as shown by the 10-day Nasdaq TRIN or the Arms Index, which is still more or less at a neutral reading. QQQ Daily and Hourly chart: The chart of QQQ, on both a daily and hourly close basis, key resistance is suggested around 25.50 - if there is move above this level, the gap area on QQQI is even tougher resistance in my estimation. I suggest shorting of the stock in the 25.50 area and again especially on a move into the 25.9-26.3 gap area. At the end of the week before last, there was a "classic" bearish divergence that was the tip off to the weakness seen at the beginning of last week. It's a classic in terms of a new high in price with a clear cut lower low on the Relative Strength Index (RSI) - signaling a move to a new high on LESS relative strength. Near support looks to be 24.25; then, at 23.30-23.50. It's worth repeating - Notice how OBV turned up a few days ahead of the price rebound in the Q's. A valuable tip off to near-term reversals is when the On Balance Volume (OBV) indicator turns up before the market does, putting you on alert to a trend change that is coming. (Shows stock is under "accumulation".) Before that, the OBV turned down a couple days ahead of the 27.5 top back in January. (Indicated the stock was starting to be "distributed".) More on the On-Balance-Volume (OBV) indicator is 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 Chips? I put my money where my mouth is this week and took advantage of the dip back to the Dow 7700s to enter positions of an expanded PowerBall play in an account for my kids. More on that later. While I was doing some research on cheap stocks with January options I ran across a chip stock that is looking very strong. This stock is often over looked and tends to drop through the cracks of many investor screens. After trading as low as $3.60 and down from its 2000 high of $58 it appears to be back on the comeback trail. Cypress Semiconductor is the industry leader in USB embedded host controllers. Basically they make it possible for devices to talk to other devices without a host computer in the middle. Cell phones, PDAs, printers, cameras and music players can all talk without a PC. They also make devices that work in set top boxes, DVD players, print servers, etc. With the trend to inter connectivity they have the market cornered. Want to connect your digital camera to a printer without having to deal with a PC? They can do it. http://biz.yahoo.com/bw/030224/245273_1.html The Cypress CFO is going to speak at the Morgan Stanley Technology Conference next week on March 5th. I expect him to attract attention with several new products including a 2.5 gigabit network connectivity product. This could give the stock a boost and pickup some more institutional investors. The 4Q of 2002 was a bad quarter for them due to a product shift in their cell phone customer base but they still managed a 41% gross margin on sales. Not bad! When I bought CY options this week I bought the Jan-$7.50 calls for $1.25 but I noticed they are "ask" $1.45 this weekend. Still a bargain in my opinion. The range over the last 12 months has been from $25 to $3.60. I would be perfectly happy with a bounce back to $15 for a 500% return. I realize not everyone wants to buy 10-month calls. The April-$5.00 is $1.70 and the June $7.50 is only 75 cents. This is a cheap stock but the chart looks like it has a lot of potential to me. Pick the option of your choice and hope for chip demand to multiply. CY Chart - 90 min CY chart - Daily ******************************** Personal Powerball When the market dropped back under 7800 this last week I decided to make a long-term bet that we would be higher in Jan-2004 than we are today. Personally I think that is a safe bet even if we go lower between now and then. I took $10,000 and put it in an account for my four kids. I presented them with the PowerBall concept and a list of stocks that would fit the concept using the existing Editors Play from January as a base. I suggested they do some research and come up with the best way to maximize the $10K in a diversified manner. After several tries they ended up with the list below. We bought ten contracts of each, 20 of SUNW and spent $10,350. The concept was diversification, minimum expense, cheap options and the potential for several home runs. This is not an investment portfolio. It is a lottery ticket with far better chances than any ticket you pick up at the gas station. I need 10 to finish $1 in the money to break even or five $2 ITM or one $10 ITM. Out of the 14 stocks I actually expect at least 10 to finish ITM and at least four ITM by $5 or more. I am not suggesting that everyone rush out and duplicate our gamble. More than anything I am doing this to try and teach some options lessons and get my 20 something's interested in the market. We are going to sell everything in Jan-2004 and then they get to split it four ways. It is a late Christmas present for 2003 that they get to watch grow/shrink all year. Hopefully next year they can take their winnings and do it again on their own. I will print the results about once a month in this column so you can laugh, cry, say I told you so or cuss with them. If you can't have fun in life what is the point? Column "C" is what we paid for the options. This is the price for one contract of everything. ******************************** Play updates: HLTH - WebMD Call - Feb-21st ($9.78 when recommended) This one traded all over the map this week but ended up right back at $9.60 and only -18 cents from the pick price from last Sunday. We are using the July-$10.00 call, HUT-GB. I highlighted the very strong $10 resistance as well as the high short ratio. We need to get over $10 to make those shorts cover. Plenty of time. Microsoft Call - Feb-16th (MSFT $24.15 when recommended) Microsoft is slowly sliding into oblivion and should test its pre-split level of $23 sometime next week. This is called the post split depression and I erred in thinking that the lack of a presplit rally and the fact that it was MSFT at $23 would prevent it. Obviously I was wrong. We still have months on this play and at Friday's close of $23.72 it is only down slightly from when it was recommended. I am still a believer. Keep the faith! EMC Call from Feb-2nd ($7.70 when recommended) EMC finally succumbed to the market pressure and some comments that IT spending was going to be less than expected. We are playing the Jan-$10 call and 10 months to go. I am not worried about the drop to $7.37 NEM Put from Jan-26th ($30.15 when recommended) Newmont traded back down to $26.67 on Thursday and managed only a weak rebound. Even with the war only a week or two away gold cannot rally. Once the $26.50 level breaks we could see a significant drop. Looking good! BZH May $50 Put - From Feb-9th ($55 when recommended) Thank you New Home Sales. The report that new home sales dropped -15.1% in January knocked the bloom off the BZH rose. It was pressing resistance at $60 as a safe haven in times of confusion and the home sales report turned it back south again. The long-term trend is still in place and I am still confident. I would only close the play on a bounce over the trend line to something in the $60.50-$61.00 range. 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 eight weeks into it. It would cost you about $760 to buy one contract of each today. Any one contract could repay that $760 by 12/31/03 leaving the rest as profit. It is a high risk "LOTTERY" play but then $760 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 **************** Last Gasp? by Steven Price Did we finally see the last push higher before another rollover? It is certainly tough to tell, but we did get a snapshot of how the markets would react to better than expected economic data and so far that reaction looks bearish. We got a couple of economic reports that came in slightly higher than expected with the release of this morning's GDP, Consumer Sentiment and Chicago PMI reports. The GDP report showed a 1.4% increase in final quarter of 2002. That was a significant drop from the third quarter rate of 4%, but still came in higher than expectations. The consensus was for growth of 1.1%. For the year, the economy grew at a 2.4% clip, while inflation remained under control. One of the big factors in the increase was the higher than expected growth in consumer spending, which jumped 1.5% instead of the expected 1.0%. While the numbers were encouraging, the rate of growth still shows a fourth quarter slowdown and indicates a still very slow growing economy. Considering we are coming out of a recession, it may be a start, but it does not exactly elicit the feeling that everything will be just fine. Still, in the framework of recently disappointing data, it was an encouraging upside surprise. Much of the impetus for the increase was a result of aggressive monetary policy on the part of the fed, which kept interest rates low and spurred investment in new and existing homes; investments in residences grew 9.4%. Given the recent reduction in new home sales, which fell 15% in January, some of that spending increase is unlikely to last. The durable goods aspect of the report was actually quite disappointing, showing an 8.5% drop. Much of that drop was led by a 40% decline in auto sales, which finally dropped off from the third quarter's torrid pace. A significant portion of the increase was also due to government spending. Government spending increased 4.9%, much of it due to an 11.2% increase in federal spending. That was divided evenly between defense spending (11.4%) and non-defense spending (10.8%). The trade gap, which reached record proportions for December and January, took 1.4% from the reading, the largest drag in four years. All in all the report was better than expected, but a closer look still shows an economy in an uphill battle. The University of Michigan Consumer Sentiment was also better than expected, but still reflected a downward trend. The preliminary reading announced a couple of weeks ago was 79.2. The consensus was for a further drop to 79.0, but it came in at 79.9. More than 40% of those polled said the economy was poor and inflation expectations showed a slight rise, as well. This surprise was a welcome one after the Conference Board's Consumer Confidence report dropped 15 points in the last reading. The Sentiment reading was still a decline from January's 82.4 reading, registering a nine-year low, but it was nonetheless an upside surprise. There had been whispers that it might come in far below expectations, following the Confidence surprise and the market breathed a sigh of relief when that did not happen. The Chicago Purchasing Manager's Index (PMI) also came in above expectations. It measures manufacturing activity in the region and generally gives us a hint of what the more comprehensive ISM report will show on March 3. Expectations were for a reading of 52.5, and the actual number came in at 54.9. That is still down from the last reading at 56, which was an upside surprise, but any reading over 50 still indicates expansion. All of these reports coming in above expectations gave the markets a boost to start the day, with the Dow trading up over 80 points early on. It put the average back in the upper 7900s and once again approached 8000. However, it struggled to hold gains and eventually the dominoes started falling. The first signal was a steep drop in treasury yields, indicating a shift into buying bonds - generally a negative sign for stocks. Soon after, stocks followed suit and the morning gains were erased in a methodical sell-off. By mid afternoon, the Dow had ticked into the red and the U.S. dollar had done so as well. However, the big, bottom out sell-off never took place and we finally found some buyers around Dow 7850. The bulls defended that line strongly enough to bring the broader indices into the green by the end of the day, but we were left with an overall bearish feel as five and ten-year yields ended on their lows of the day and the Dow managed only a six point gain, well off its highs and back below 7900. That doesn't mean we won't get another bounce on Monday, particularly if Iraq begins to destroy its Al Samoud missiles as planned on Saturday. Chief U.N. weapons inspector Hans Blix referred to this act as "a very significant piece of real disarmament." Iraq called the order to destroy the missiles unjust and abusive, however it wants to avoid giving the U.S. the excuse it is looking for to launch an invasion. The White House is downplaying the gesture, with spokesman Ari Fleischer saying, "if someone takes one bullet out of the chamber of a gun while they have six other bullets in the gun, they haven't disarmed." For those readers following the point and figure charts, the recent Dow rebound to 7950 tacked on another box to its current column of "X." That box, if we don't cross 8000, completes the latest column in a bearish flag pattern and matches a descending trend line on that chart begun the last time it traded up to 8150. If we roll over from here, it would be the second higher low and a move down to 7750 would indicate a bearish breakdown of that pattern. A move back over 8200 would signal a big change in sentiment. However, even if it makes it that high, the 8300 level had provided strong closing support during the end of 2002 and could serve as resistance for bulls on the way back up. It appears that this morning's spike higher was just another lower high and a great opportunity for bears to enter short positions. However, as I have said on a regular basis over the past couple of months, anything can happen in the current geo- political environment. Blix is scheduled to submit a progress report to the U.N. on Saturday and if that report recommends ongoing inspections and suggests progress is being made, we may yet get another rally. It is difficult to predict too far into the future, but if today's reaction to "good news" was any indication, rallies are still shorting opportunities. however, if the specter of war is ever removed, traders may want to step out of the way and let the mother of all shorting opportunities run its course. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 7891 Moving Averages: (Simple) 10-dma: 7923 50-dma: 8251 200-dma: 8601 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 841 Moving Averages: (Simple) 10-dma: 839 50-dma: 872 200-dma: 910 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1010 Moving Averages: (Simple) 10-dma: 999 50-dma: 1011 200-dma: 1010 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The chip stocks got a boost this morning from Lehman analyst Dan Niles, who raised his first quarter estimates for Intel. Niles raised his revenue target from $6.5-$7.0 billion to $6.7-$7.0 billion, citing overseas strength, market share gains and lower than expected gross margin decline. He also raised earnings estimates for the first quarter and full year 2003 and 2004. Intel jumped 3.3% and carried the SOX along with it. The SOX jumped 8 points to 297.63, a new relative high. It is now flirting with an important level of resistance at 300. It also spurred the tech sector, leading to an advance in the Nasdaq Composite of 13.58. If the SOX can manage to break back over 300, bears that saw the initial broad market equity rally fail today should beware of further possible strength. 52-week High: 657 52-week Low : 214 Current : 297 Moving Averages: (Simple) 21-dma: 278 50-dma: 294 200-dma: 329 ----------------------------------------------------------------- Market Volatility The VIX traded all the way down to 33.39 intraday, which was new relative intraday low. IT broke the 35% support line that held it through much of Thursday's action and ended the day just over 34%. That 34% level has been tested on two prior occasions since the mid-January swoon began in the broader markets and a close below 34 could signal a further rally in equities. The next significant support level here is 26%, which would give the equities plenty of room to rally and might correlate to a Dow in the upper 8000s. That may be getting ahead of ourselves, since there is an awful lot of overhead resistance for equities to fight through, but it is something to watch out for if the VIX continues to sink. CBOE Market Volatility Index (VIX) = 34.15 -1.03 Nasdaq-100 Volatility Index (VXN) = 45.66 -0.50 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.59 532,838 312,768 Equity Only 0.50 413,453 208,120 OEX 1.11 16,542 18,419 QQQ 0.65 39,742 25,867 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 39.6 - 0 Bull Correction NASDAQ-100 34.0 - 0 Bear Confirmed Dow Indust. 13.3 - 0 Bear Confirmed S&P 500 33.8 - 0 Bull Correction S&P 100 28.0 - 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 1.16 10-Day Arms Index 1.08 21-Day Arms Index 1.29 55-Day Arms Index 1.30 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 1631 1174 NASDAQ 1583 1545 New Highs New Lows NYSE 81 63 NASDAQ 63 70 Volume (in millions) NYSE 1,552 NASDAQ 1,303 ----------------------------------------------------------------- Commitments Of Traders Report: 02/25/02 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 made few changes to either side of the equation, resulting in a net change of 200 short contracts. Small traders added 2300 contracts to the long side. Commercials Long Short Net % Of OI 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%) 02/25/03 424,276 482,476 (58,200) (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 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% 02/25/03 157,790 91,083 66,707 26.8% 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 added slightly to the long side and added 1,200 short contracts. Small traders left the long side alone and reduced shorts by 2,000 contracts. Commercials Long Short Net % of OI 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%) 02/25/03 38,787 51,745 (12,958) (14.3%) 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 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% 02/25/03 25,378 7,431 17,947 54.7% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials increased the long side by 1,000 contracts and left shorts relatively unchanged. Small Traders reduced the long side by 700 contracts and left the short side alone. Commercials Long Short Net % of OI 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% 02/25/03 19,985 11,866 8,119 25.5% 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 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%) 02/25/03 4,872 8,723 (3,851) (28.3% 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 $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** Looking for triangles and stiff competition Hi Jeff, It's been awhile since we've talked about triangles on the P&F charts. I think you had said we need to see 5 columns to form a triangle and then a break from it is playable. If SPX hits 825, thus creating a new column of O's, would this complete the triangle and then we wait for the break? Thanks for your help. The above question from a subscriber gave me flashbacks to the 2001 OptionInvestor.com spring seminar, where an attendee pulled me aside after I had given a presentation on point and figure chart patterns. That trader had brought his laptop computer with him, and the night after my presentation and he had been hard at work in his hotel room the previous night looking for chart patterns based on Professor Davis' probabilities study. I can't remember for certain, but I think during the presentation, we had looked at a point and figure chart of the S&P 500, but the discussion was how to tie in the bullish % with the actual S&P 500 chart itself, to understand MARKET risk as it related to the bullish % ($BPSPX), and how that risk would systematically be removed by "smart money" when levels became too "overbought," based on events or scenarios that would eventually unfold weeks or months later. Then when the "known" events were revealed, risk had been reduced (market indexes had fallen along with the bullish %), how "smart money" would begin turning more bullish, only to then be looking forward to a bullish scenario The attendee had noted the "triangle" in the S&P 500 at that time. Long story short, I think it was a couple of days into the seminar when the attendee approached me again, wearing a rather large smile on his face as he had played a call option trade when the SPX triggered the "bullish triangle" pattern and shot higher as the powder keg was lit. Now.... in our Index Trader Wraps at OptionInvestor.com, I've been showing the $5-box scale of the SPX and placing little "dots" on the chart, which does show a "triangle-like" pattern forming. Maybe the above subscriber is having "flashbacks" to the spring of 2001? Here's what was taking place in April of 2001 on the S&P 500 chart. At that time, the S&P 500 was trading near 1,130, which at that higher level of price had the conventional box scale being 10-points to reflect the higher values of trade. S&P 500 Index Chart (Spring 2001) - 10-point box Funny... I get another "flashback" as we've just completed the month of February, and getting ready for March. Two years ago, I was probably working on my spring seminar presentation. Well, I've marked the "triangle" formation on the SPX chart above, and has you can see, that was definitely a "triangle" pattern a trader would have been well served to have been monitoring. I've also marked various bullish % readings at the beginning of each month, which provides some "education" as to how the bullish % either confirmed or gave "heads up" to potential strengthening or weakening from the internals, which often times leads to price action. It's interesting to say the least that in April of 2001, when the triangle was forming, the SPX Bullish % ($BPSPX) had reversed up to "bear correction" status as some internal strengthening was taking place. When the SPX traded 1,155, the double-top buy signal was generated, and thee "bullish triangle" formation was triggered. Now.... Professor Davis' study was limited to stock chart patterns, but the "bullish triangle" is a POWERFUL bullish pattern and under bullish phase of bullish % readings, is profitable 71.4% of the time, for an average gain of 30.9% in 5.4 months. From 1,155, at the extreme high of 1,310, the SPX had "only" managed to gain 13%. Remember, there are 500 stocks in this index and would take one heck of a lot of bullishness to see a 30.9% gain in 5.4 months. Try doing this. Without moving your eyes, look at the above chart and simply nod your head and follow the green (up) and red (down) arrows. Then pretend you're watching a tennis match from one end of a tennis court and player #1 (bullish player) looks a little "fresher" (bullish % reverses up) and hits a shot from the baseline (1,100 to 1,180 : +7.27%). The tennis ball travels the length of the court, when player #2 (bear) returns the ball (1,170 to 1,100 : -6.36%). Player #1 returns the ball back again (1,110 to 1,150 : +3.6%). What! 1,150? Player #2 is approaching the net and looking to shorten the court and apply pressure, and in a quickening pace of action returns the ball (1,140-1,120 : -1.75%). What! 1,120? Now player #1 is also approaching the net, and makes for an even shorter court. Pressure builds as both players have come to the net. The crowd (market participants) is at the edge of their seats. Something has to give as the crowd eagerly waits to see who's going to get the winning shot. Player #1 looks "fresher" (bullish % was reversing up), returns the ball and this time, as the ball travels to 1,155 the crowd JUMPS to its feet in a roar of applause as a passing shot is found and a winning point by player #1 (bull) is achieved. Whew! That was exhaustive, but did you feel the "pressure" building? If trading the markets were ONLY as simple as calling a game of tennis. For us stock/index/commodity traders, a "triangle pattern" that begins to form is very much like a game of tennis, where bulls and bears approach the net and tension in the crowd (supply/demand) begins to build. The "one thing" that is a bit different is that in a tennis match, players aren't being bombarded with objects from the stands that they have to dodge during the game. In fact, if during a tennis match, if somebody in the crowd takes a picture with the camera's flash turned on, the tennis player that sees it will often times "shout down" that individual in the crowd as the spectator has just severely broken the tennis players concentration. Traders like you and I are constantly faced with "distractions" in the form of news events. What kind of "news" had driven the markets lower from February to April in 2001? I can't remember, but I'm sure it was important. What kind of "news" had driven the markets higher from April to mid-May? I can't remember, but I'm sure it was important too. So who's the "fresher" player right now? Or who looks to have the upper hand. In my opinion, simply "playing" a triangle pattern without having some type of "understanding" of who (bull or bear) might be in a more favorable position for a winning shot can be dangerous, if not costly. So, before we take a look at the "triangle" that may be forming in the SPX, or any stock, lets try and see if we can see who might be in a position to win the point, should we indeed look to trade a triangle pattern. Lets take a quick look at the S&P 500 Bullish % ($BPSPX), tie it in with the time period above (April 2001) when a triangle formation had formed in the SPX. S&P 500 Bullish % ($BPSPX) - 2% box scale If ONLY looking at the S&P 500 Bullish % to see who is in control of this tennis match, it would be my opinion, based on observation, that BEARS are still in control. However, as the bullish % has fallen from 68% to 33%, I'm also thinking that the bearish player might start getting a little "tired" in the not too distance future as he's been "rushing the net" and scoring a lot of points since early December (just after the red C). I think BEARS might have one last passing shot left in them. If this would be a correct assessment right now, then I would look for the bullish % to continue to decline as depicted by the "red ?" on the chart. Still, at the lower levels of bullish %, the observation of a triangle forming in the SPX is a very GOOD observation that TENSION may be building and BEARISH traders as well as BULLISH traders are on the alert! Now... I've said before that a trader/investor should NOT just look at the S&P 500 Bullish % ($BPSPX) as it contains 500 stocks and is very broad, and can take "time" to reverse it bullish or bearish direction. The case for a BULLISH move higher is the current OVERSOLD condition found in the S&P 100 Bullish % ($BPOEX), which is "bear confirmed," but at 28%, and now below the "oversold" level of 28%. It is this lower level of bullish percent, in the NARROWER S&P 100 Bullish %, that also has a trader on the alert for renewed strengthening from the internals. Here's the S&P 100 Bullish % ($BPOEX) chart from the spring of 2001. Would it have helped a trader/investor see that the BULLISH tennis player was looking "fresh?" I think so. S&P 100 Bullish % ($BPOEX) The narrower S&P 100 Bullish % ($BPOEX) looks "strikingly familiar" today, and at very SIMILAR levels of risk as that found in late March 2001, just prior to reversing up to "bull alert" status. This bullish %, while still weak and not yet showing a sign of internal strengthening also hints that BEARS would probably be looking for one last leg lower at this point, as the bulk of downside risk for bulls has been removed. S&P 500 Index (SPX.X) - 5-point box The subscriber's question regarding the potential formation of a triangle forming in the SPX can bee seen by the "blue" and "red" dots placed on the point and figure chart in 45-degree or 135- degree angles (depending on your view of things). The subscriber's question was posed on Thursday, before the recent "X" was traded on Friday at 845, but he would have been correct in further sign of triangle formation taking place at 825. Now however, for a triangle pattern to have potential, we'd look for a pullback to 830 and would NOT want to see a trade at 850. Even for a bullish trade in the SPX, especially for a STRADDLE or STRANGLE trader, the trader would PREFER the triangle formation to set up. Why? You want PRESSURE or TENSION to build. It's much more fun to watch or be a part of a HIGHLY COMPETITIVE event that a one-sided affair. To think that BEARS are in COMPLETE control of things would be a mistake after the recent double-top buy signal at 845, but so far, we have seen little CONFIRMATION of internal strengthening from the bullish %. I keep daily track of the various bullish % indicators and while we've seen some stability and firming in the bullish % since February 13th (when the SPX traded 810), we've yet to see much of a net gain of reversing point and figure buy signals from the 500 stocks in this index. After February 13th's trading session, the S&P 500 Bullish % was at 35.6% and currently reads 33.8%, with some improvement being seen from the February 25th relative low reading of 33.0%. The "triangle" pattern is definitely a pattern of "uncertainty," until some type of RESOLUTION to that pattern is found. In a previous Ask the Analyst column http://www.OptionInvestor.com/ask/ask_020203_1.asp, a subscriber asked if there was ever a time to just get out of the market. My answer was "NO," and that options allowed traders/investors to always be in the market, but by using the options strategy of "straddles" and "strangles" to establish a NEUTRAL positions (uncertainty=neutral), but allow for potential profit once resolution was found. What if.... back in April 2001, a trader had established a SPX straddle at SPX 1,150 with 2 or 3-month expiration. Could the trader have made some money on that type of NEUTRAL trade? How's the QQQ June "straddle" or "strangle" doing? NASDAQ-100 Index Tracking Stock - Option Montage Since our February 2nd Ask the Analyst column and thoughts on how a trader/investor could always stay in the MARKET with a "neutral" trade, the more volatile QQQ has gained $0.73, or 2.98%. The slight rise in price in the QQQ and decline in the VXN.X from 46.81 to 45.66 has the put side of a QQQ $25 straddle showing a loss, while the call side shows fractional gain. Initial 1 contract in each call/put of $505.00 (excluding commission) is currently "worth" $430 at the bid. If there's a "triangle" is going to form in the SPX, I do think it should be resolved before June. Is there any other "indicator" that you think might help in determining which way things are going to break? What about the bond market? What was it doing in February, March, April and May of last year? 10-year YIELD Chart (spring 2001) - 0.50-box One of the MAIN reasons I'm still rather bearish the indexes is based on the continued BUYING in Treasuries. Here's what the 10- year YIELD was doing in 2001. In our Index Trader Wrap from Thursday night at OptionInvestor.com, we made note that the 10- year YIELD gave a spread-triple bottom sell signal and fell one more box on Friday. That action on Friday was still a rather "defensive" posture from the bond market. If the 10-year YIELD "jumps higher" and gives us an alert to strength like it did on March 30, about one-week ahead of the SPX triggering a Bullish Triangle, we should all know what to do. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of March 3rd ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- CDX Catellus Devel Corp Mon, Mar 03 Before the Bell 0.40 CPG Chelsea Property Grp Mon, Mar 03 After the Bell 0.82 HRC Healthsouth Mon, Mar 03 -----N/A----- 0.11 HBC HSBC Holdings plc Mon, Mar 03 Before the Bell N/A PSO Pearson plc Mon, Mar 03 -----N/A----- N/A KPN Royal Kpn N.V. Mon, Mar 03 -----N/A----- N/A ------------------------- TUESDAY ------------------------------ AZO AutoZone Inc. Tue, Mar 04 Before the Bell 0.78 BNS Bank of Nova Scotia Tue, Mar 04 -----N/A----- N/A BVF Biovail Corporation Tue, Mar 04 Before the Bell 0.56 CHS Chico's FAS Tue, Mar 04 Before the Bell 0.16 CZN Citizens Comm Tue, Mar 04 Before the Bell 0.01 CRHCY CRH PLC Tue, Mar 04 -----N/A----- N/A DISH EchoStar Comm Corp. Tue, Mar 04 -----N/A----- -1.03 HSIC Henry Schein Tue, Mar 04 Before the Bell 0.65 JWa John Wiley & Sons Tue, Mar 04 -----N/A----- 0.40 RA Reckson Ass Realty Co Tue, Mar 04 After the Bell 0.59 ----------------------- WEDNESDAY ----------------------------- COST Costco Wholesale Corp Wed, Mar 05 Before the Bell 0.43 FTE France Telecom Wed, Mar 05 -----N/A----- N/A GLH Gallaher Group PLC Wed, Mar 05 -----N/A----- 1.62 GENZ Genzyme Wed, Mar 05 -----N/A----- 0.35 MIK Michaels Stores Wed, Mar 05 -----N/A----- 1.01 NMGa Neiman Marcus Group Wed, Mar 05 After the Bell 0.67 PETM PetsMart Wed, Mar 05 Before the Bell 0.27 AHO Royal Ahold N.V. Wed, Mar 05 Before the Bell N/A SKS Saks Incorporated Wed, Mar 05 Before the Bell 0.50 SPLS Staples, Inc. Wed, Mar 05 Before the Bell 0.33 TLM Talisman Energy Wed, Mar 05 After the Bell 1.00 TOY Toys R Us Wed, Mar 05 Before the Bell 1.27 ------------------------- THURSDAY ----------------------------- AEG AEGON N.V. Thu, Mar 06 -----N/A----- 0.27 MBG Mandalay Resort Group Thu, Mar 06 -----N/A----- 0.13 MDZ MDS Inc. Thu, Mar 06 Before the Bell N/A NSM National Semicon Thu, Mar 06 During the Market -0.03 NXL Nw Pln Excl Rlty Trst Thu, Mar 06 -----N/A----- 0.47 PT Portugal Telecom SGPS Thu, Mar 06 -----N/A----- N/A REXMY REXAM PLC Thu, Mar 06 -----N/A----- 1.52 SZE Suez SA Thu, Mar 06 -----N/A----- N/A ------------------------- FRIDAY ------------------------------- IPR International Power Fri, Mar 07 Before the Bell N/A ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable EXAC Exactech 2:1 Mar. 03rd Mar. 04th EXPE Expedia 2:1 Mar. 10th Mar. 11th ROL Rollins, Inc 3:2 Mar. 10th Mar. 11th FFLC FFLC Bancorp, Inc. 3:2 Mar. 14th Mar. 17th LNBB LNB Bancorp, Inc. 3:2 Mar. 14th Mar. 17th -------------------------- Economic Reports This Week -------------------------- Monday begins the last four weeks of the first quarter for 2003. Odds are consumers aren't going to be picking up their spending habits any time soon but Wall Street will be looking at the Auto Sales #s, Personal Income & Spending, Construction spending and the ISM (services) index on Monday/Tuesday. ============================================================== -For- Monday, 03/03/02 ---------------- Auto Sales (NA) Feb Forecast: 5.8M Previous: 5.9M Truck Sales (NA) Feb Forecast: 7.0M Previous: 6.9M Personal Income (BB) Jan Forecast: 0.4% Previous: 0.4% Personal Spending (BB) Jan Forecast: 0.2% Previous: 0.9% ISM Index (DM) Feb Forecast: 52.0 Previous: 53.9 Construction Spnding(DM)Jan Forecast: 0.4% Previous: 1.2% Tuesday, 03/04/02 ----------------- None Wednesday, 03/05/02 ------------------- ISM Services (DM) Feb Forecast: 53.0 Previous: 54.5 Fed's Beige Book (DM) Thursday, 03/06/02 ------------------ Initial Claims (BB) 03/01 Forecast: N/A Previous: 417K Productivity-Rev. (BB) Q4 Forecast: 0.1% Previous: -0.2% Factory Orders (DM) Jan Forecast: 0.4% Previous: 0.4% Friday, 03/07/02 ---------------- Nonfarm payrolls (BB) Feb Forecast: 20K Previous: 143K Unemployment Rate (BB) Feb Forecast: 5.8% Previous: 5.7% Hourly Earnings (BB) Feb Forecast: 0.3% Previous: 0.0% Average Workweek (BB) Feb Forecast: 34.2 Previous: 34.2 Consumer Credit (DM) Jan Forecast: -$1.5B Previous: -$4.0B 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 ********************* Not Impressed Not much happened you say? I beg to differ. In fact we got a snapshot of just how the market would respond to better than expected economic data and it wasn't terribly impressive. To read the rest of the Swing Trader Game Plan click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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 03-02-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: HD Put Play of the Day: SYY Dropped Calls: None Dropped Puts: CB ************************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 54.64 -1.16 0.71 -0.17 0.81 0.33 Trend in tact BDX 34.40 -0.75 0.39 -0.13 0.76 0.45 New support DGX 52.76 -0.55 1.50 0.02 -0.45 0.26 Pullback HD 23.45 -0.68 0.44 0.13 0.11 0.59 New, Reversal MME 35.75 -0.97 1.21 -0.38 0.05 0.75 Relative high SLAB 27.12 0.12 -0.13 -0.71 0.37 0.62 Closing high TECD 22.59 -0.66 0.30 0.06 0.22 0.27 New highs ZMH 44.39 -0.29 1.23 -0.27 0.16 0.43 Pause at $45 PUTS ATK 48.30 -1.96 1.34 0.25 0.01 -0.34 Holding $47.50 BBOX 40.66 -0.84 -0.25 -0.73 0.47 -0.78 Entry point? CB 47.82 0.04 -0.96 -1.51 1.72 -0.35 Drop, Overstay SYY 27.12 -0.60 0.64 -0.27 -0.10 -1.06 New, New lows UTX 58.58 -1.96 -0.09 -1.76 0.70 -3.02 Sell signal VZ 34.58 -0.20 0.14 -0.42 -0.13 -1.07 C'mon $34 ************************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: ********************* HD - Home Depot - $23.45 +0.34 (+1.04 for the week) See details in play list Put Play of the Day: ******************** SYY – Sysco Corporation $27.12 (-1.05 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 ^^^^ CB $47.82 (-0.45) After persistently grinding lower throughout the past couple weeks, it is time to bid farewell to our CB play. Following Wednesday's selloff to new lows, the stock rebounded sharply on Thursday and then extended that rally on Friday, trading as high as $48.35, violating both the 10-dma and our $48.10 stop. While the stock did pull back below the 10-dma at the end of the day, there just wasn't enough weakness to convince us to keep the play active. For those still holding open plays, we'd suggest using any weakness early next week as an opportunity to exit, and then look for fresh trade 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 03-02-2003 Sunday 3 of 5 In Section Three: New Calls: HD Current Calls: AMGN, DGX, MME, SLAB, TECD, ZMH, BDX New Puts: SYY ************************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 ************** HD - Home Depot - $23.45 +0.34 (+1.04 for the week) Company Summary: Founded in 1978, The Home Depot is the world's largest home improvement specialty retailer and the second largest retailer in the United States, with fiscal 2002 sales of $58.2 billion. The company employs approximately 300,000 associates and has 1544 stores in 50 states, Puerto Rico, seven Canadian provinces, and Mexico. (source: company release) Why We Like It: Home Depot has certainly had a year to forget. Lower revenues and sales have mirrored that of much of the retail sector. It's only saving grace was a strong housing market that led many homeowners to refinance and put money back into improving their homes. About the best thing going for Home Depot is that things weren't as bad as they appeared. After seeing the stock decline from a high of $52.60 to a low of $20.10, the stock finally found some support following a better than expected earnings report. HD released earnings on February 25, posting a profit of $0.30 per share. That beat Wall Street estimates by $0.03 and was enough to turn the sinking tide back up as the stock bounced off newfound support at $20. More importantly, the store has seen a big turnaround from a weak December to a stronger January. In December, comparable store sales fell in 10 out of 11 product categories, reflecting a terrible holiday season for most retailers. However, January was a stark contrast, with 7 out of 11 categories showing growth. CFO Carol Tome claimed that December was an anomaly and noted a 3.6% increase in customer transactions for the quarter on a 13-week basis. Whether an anomaly or not, the trend appears to have turned at least for the time being. The results have led to a steady uptrend in the price of HD, which has been working on filling a gap down from January 3, following a profit warning. The company is still growing earnings at a respectable 20% clip, but prior to the holiday season, even more was expected out of it. The stock has put together a consistent trend since the middle of February, establishing higher highs and higher lows for two straight weeks. While it is not exactly exploding higher, it is showing a consistent uptrend, in spite of the schizophrenic moves we are seeing in the broader markets and more specifically in the Retail Index (RLX.X). The RLX has traded much like the Dow, with each day bringing a new adventure. Retail bulls can be encouraged, however, by the fact that it has held recent gains after bouncing off a new 52-week low on February 13. HD had seen consecutive triple bottom breakdowns on the point and figure charts, but appears on the verge of reversing the most recent sell signal. While a buy signal is still a ways off (up at $28), a trade of $24 will put the stock back into a bullish column of "X" and can be used by more conservative traders as an entry trigger. Even if the stock eventually fails at that recent $27.50 resistance, it should still be good for a gain of over 10%. While $27.50 will be an initial target, we like the fact that the recent rally has taken HD through both its 21-dma and 50-dma. The 200-dma sits all the way up at $29.26 and we will use that average as out eventual target on the play. Our initial stop will be placed at $21.45, just below the 21-dma and 50-dma, allowing for a bounce off $21.50. BUY CALL MAR-20 HD-CD OI= 5100 at $3.60 SL=1.80 BUY CALL MAR-22.50*HD-CX OI= 46113 at $1.30 SL=0.65 BUY CALL APR-22.50 HD-DX OI= 6975 at $1.75 SL=0.90 BUY CALL APR-25 HD-DE OI= 6176 at $0.50 SL=0.25 Average Daily Volume = 14.0 mil ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** AMGN – Amgen, Inc. $54.64 (+0.04 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: Talk about dependability! Every time AMGN approaches its ascending trendline, the bulls defend that support line with a vengeance and the resulting bounce invariably takes the stock up to test its recent highs. Last week was no exception, with an early dip to support on Tuesday that met with vigorous buying after the company reaffirmed its revenue growth (30-32%) and EPS growth (25-27%) forecast through 2005 at its investor's conference. Trading a low of the day just above $52, that news was the catalyst to drive the stock steadily higher throughout the week, ending with a new 10-month closing high of $54.64 on Friday. The trend remains very much intact and barring some unforeseen event over the weekend, AMGN looks ready to break through the $55 level next week. The ascending trendline that began last September has now risen to $52.50 and should continue to support the stock on successive pullbacks. While aggressive traders may feel compelled to chase the stock higher on a breakout over $55, their enthusiasm should be tempered by the strong resistance that is looming just overhead near $56 and continuing up through the $60 level. Additionally, AMGN has not shown a recent pattern of being able to sustain a breakout, instead pulling back after each higher high to consolidate and confirm higher support. So the best approach for entering the play remains to take advantage of rebounds from the ascending support line. This weekend, we're leaving our stop in place at $52.25, but will consider raising it once AMGN is able to close over the $55 level. BUY CALL MAR-50 AMQ-CJ OI= 7028 at $5.10 SL=3.00 BUY CALL MAR-55*YAA-CK OI=33568 at $1.50 SL=0.75 BUY CALL APR-55 YAA-DK OI=34852 at $2.75 SL=1.50 Average Daily Volume = 12.0 mln --- DGX – Quest Diagnostics $52.76 (-0.05 last week) Company Summary: Quest Diagnostics was the result of a 1996 Corning spinoff, and currently holds the title of the world's #1 clinical laboratory. DGX performs more than 100 million routine tests annually, including cholesterol, HIV, pregnancy, alcohol, and pap smear tests. Operating laboratories throughout the US and in Brazil, Mexico, and the UK, DGX also performs esoteric testing (complex, low-volume tests) and clinical trials. The company serves doctors, hospitals, HMOs, and other labs as well as corporations, government agencies, and prisons. Why We Like It: Following its addition to the Call list on Tuesday, DGX made a convincing bullish move early on Wednesday, moving to within a few cents of the $55 resistance level and creating a new PnF Buy signal with the trade over $54. But after that, things didn't go so well. Since the opening bullish surge on Wednesday, the stock has been drifting back towards support in the $52.00-52.50 area. As the stock continued to drift lower, bulls were nowhere to be found, but there wasn't any rush to the exits either, with volume for the day coming in at only two-thirds of the ADV. While the daily chart certainly doesn't look encouraging, with the daily Stochastics starting to tip bearish, we're taking our cue from the new Buy signal on the PnF chart. That picture tells us that the bulls are in charge here, they just didn't have the conviction to keep pushing the stock higher ahead of a weekend with unknown geopolitical risks. Use the current weakness to establish new positions for the next push up towards resistance, with a bounce likely from above the $52 level. If that fails to materialize, we'll be left focusing on the $51 level as possible support. But entries taken on a dip that low will inherently carry greater risk due to the proximity of our stop at $50.50. Buy the rebound from support, not just a drop to a level where support should exist. BUY CALL MAR-50 DGX-CJ OI= 652 at $4.00 SL=2.50 BUY CALL MAR-55*DGX-CK OI=2039 at $1.10 SL=0.50 BUY CALL APR-50 DGX-DJ OI= 146 at $4.90 SL=3.00 BUY CALL APR-55 DGX-DK OI= 842 at $2.10 SL=1.00 Average Daily Volume = 1.33 mln --- MME – Mid Atlantic Medical Services $35.75 (+0.95 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: It seems like it took forever to do it, but on Friday our MME play finally pushed through the $35.25 level, triggering the play to active status. It didn't take long for the initial upward surge to fade, but confirming the breakout, the bulls defended the $35 support level and then pushed the stock up to close at $35.75, the high of the day. With light volume in the broad market, it has been difficult to gauge MME's action lately, as volume has been exceedingly light. But On Balance Volume has been in a consistent uptrend and the increase in volume on Friday (while still below the ADV) indicates that the breakout has some conviction behind it. The $34 level provided solid support earlier in the week and with the stock now solidly above the 200-dma ($34.44), we should see that level continue to provide support on any pullbacks from here. Those that decided not to enter on Friday's breakout move now can either wait for a pullback and rebound from the $34.50-35.00 area or dip their toes into the water on a continuation of Friday's bullish move above the $36 level. Now that we've gotten a solid breakout above resistance, it seems safe to raise our stop, which now moves to $33.50, just below last week's intraday lows. BUY CALL MAR-35*MME-CG OI=343 at $1.85 SL=1.00 BUY CALL APR-35 MME-DG OI= 2 at $2.80 SL=1.50 BUY CALL APR-40 MME-DH OI= 53 at $0.85 SL=0.40 Average Daily Volume = 445 K --- 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: Friday's session displayed the kind of move we've been waiting to see by SLAB. Our chip stock pick outperformed the sector, which did pretty well for itself, especially on a Friday with plenty of event risk in our future. What helped propel the $SOX up over 2% and ever so much closer to the 300 resistance level (and what the bulls hope will be the imminent breakout) was word from the infamous chip analyst, Dan Niles. Dan covers Intel, the largest chip maker in the world. Where Intel goes usually leads the chip sector. Fortunately for the bulls, Dan had somewhat positive things to say about INTC. Dan believes that INTC will actually raise their Q1 revenue guidance based on higher average selling prices (ASP) and market share gains. However, he actually gave himself a backdoor with possible concerns over Intel's Q2 due to potential European sluggishness and Asian holidays affecting demand in Japan and China. Thanks for talking out both sides of your mouth, Dan! Bulls took what they could get and ran with it, right into a brick wall with the 300 level of resistance for the SOX. SLAB took the lead and added 3.6% and managing a close over $27. The stock looks strong and we're still gunning for a continued channel riding higher to the $29-30 level. Watch that SOX for a breakout or failed rally. On a move above 300 in the SOX, we may be raising our eventual target. However, if we approach that target and the SOX fails at 300, then we may simply take our chips off the table. BUY CALL MAR-20 QFJ-CD OI= 99 at $7.30 SL=3.70 BUY CALL MAR-25*QFJ-CE OI= 982 at $2.95 SL=1.50 BUY CALL APR-22.50 QFJ-DX OI= 280 at $5.70 SL=2.90 BUY CALL APR-25 QFJ-DE OI= 1385 at $4.00 SL=2.00 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: Earlier this week, TECD pulled back to consolidate some of its rapid gains from the relative low of $19.07. Buyers moved in at the Tuesday lows near $21.00 and pushed the stock up to short- term resistance at $22.00. Yesterday's late-session breakout above that level had us looking for a test of the short-term high at $22.33, and the bulls did not disappoint. TECD zoomed higher on Friday morning before topping out at a new relative high of $22.78. Shares spent the second half of the session trading in a tight range near $22.50. Tech Data finished with a gain of 2.3%, easily outpacing the NASDAQ. Pulling back to the daily chart to get a look at the bigger picture, we see that TECD has broken above its 21-dma ($22.44) as it continues to fill in the February 7th gap. With both the MACD and daily stochastics (5,3,3) looking bullish, the stock looks poised to continue its uptrend and move closer to our profit-target at $23.99. Traders looking for new entries can watch for a pullback and successful test of the $22.00 level, which should now provide support. Our stop loss for this play is now located one cent under Tuesday's low at $20.94. BUY CALL MAR-20 TDQ-CD OI=888 at $3.10 SL=1.55 BUY CALL MAR-22 TDQ-CX OI= 15 at $1.35 SL=0.75 BUY CALL JUN-20 TDQ-FD OI= 3 at $4.60 SL=2.30 BUY CALL JUN-22 TDQ-FX OI= 3 at $3.10 SL=1.55 Average Daily Volume = 1.09 mln --- 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: ZMH has gone into a holding pattern since blasting through resistance at $43 and rallying all the way up to a new relative high at $45.55. It has pulled back over $1 since the new high, but is still holding onto most of its recent gains. Its new MINI - incision knee replacement procedure has been well received, as it not only involves less damage to surrounding tissue, but also reduces the length of hospital stays following the procedure. There has been no material change to the point and figure chart, which gave its last buy signal at $43. New entries can be targeted on continued support above $44, which is the last resistance level the stock encountered and now appears to be acting as support. If that level is broken, then watch for support at the buy signal level of $43. BUY CALL MAR-40 ZMH-CH OI=991 at $4.80 SL=2.40 BUY CALL MAR-45 ZMH-CI OI=1562 at $1.15 SL=0.55 BUY CALL APR-40 ZMH-DH OI= N/A at $5.20 SL=2.60 BUY CALL APR-45*ZMH-DI OI=84 at $1.60 SL=0.80 Average Daily Volume = 1.08 mln --- BDX - Becton Dickinson - $34.18 +0.76 (+0.10 for the week) Company Summary: Becton Dickinson is a medical technology company that serves healthcare institutions, life science researchers, clinical laboratories, industry and the general public. BD manufactures and sells a broad range of medical supplies, devices, laboratory equipment and diagnostic products. For the fiscal year ended September 30, 2002, BD reported total revenues of $4.033 billion. (source: company release) Why We Like It: BDX continued to build on recent gains today, finishing up slightly on the day. More importantly, however, is that after flirting with resistance at $34 over the past several days, BDX finally seems to have found support at that level. The stock traded as high as $34.50 intraday and then pulled back with the rest of the broader markets in the afternoon. The difference for BDX is that it bounced off $34, before moving higher into the close. While there was no company specific news, the recent analysis (Feb. 26) from large-cap fund manager William Batcheller of Armada equity group cites several catalysts for BDX's bullish potential. Those include valuations, earnings potential and new products. "The company's valuations are attractive at 15 times earnings, earnings estimates are going up and the catalyst is a new blood glucose monitor it is co-marketing with Medtronic." Recall form our last write-up that the PnF bearish resistance line sits at $35 and those momentum traders not yet in the play may want to wait for a breakthrough of that line before entering. With only a mild gain, we will leave our stop in place at $31.98, but more conservative traders may want to tighten things up to just below recent closing support, possibly at $32.98, now that we have seen evidence of newfound support at $34. BUY CALL MAR-30*BDX-CF OI=268 at $4.60 SL=2.30 BUY CALL MAR-35 BDX-CG OI=268 at $0.60 SL=0.00 BUY CALL APR-30*BDX-DF OI=N/A at $4.60 SL=2.30 BUY CALL APR-35 BDX-DG OI=N/Z at $1.00 SL=0.00 Average Daily Volume = 1.16 mil ************* NEW PUT PLAYS ************* SYY – Sysco Corporation $27.12 (-1.05 last week) Company Summary: Sysco Corporation is a North American distributor of food and food-related products to the foodservice or food-prepared-away-from-home industry. The company provides its products and services to approximately 415,000 customers, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. SYY has aggregated its operating companies into five segments, of which only Broadline and SYGMA are reportable segments. The company's other three segments include specialty produce, meat and lodging industry segments. Why We Like It: Based on the last set of earnings results out of the casual dining sector, it seems clear that consumers are in fact being more discriminating about how often they are willing to spend their hard-earned money on eating out. Rather than try to target the next restaurant stock likely to break down, why not go right to the supply chain? If business is weak in the sector, then there ought to be clear weakness in the stocks of companies that supply the restaurants and other eating establishments. A quick look at the chart of SYY indicates we just might be onto something good. Since August, the stock has built a broad topping formation, that can be roughly described as a Head & Shoulders top, with 2 right shoulders and 2 left shoulders. The base of that formation (major support) rested at the $27.50-28.00 level and over the last week, this support level has been giving way on strongly increasing volume. That volume hit nearly 2.5 times the ADV on Friday, as the stock finally broke below that supportive neckline. Just taking the measurement from the neckline to the top of the head at $33, gives us a downside measuring objective of $22, which is very close to the extreme lows seen last July and in September of 2001. The traditional PnF chart doesn't yet show a Sell signal, but drilling down to the $0.50 box size, shows that SYY is on a Sell signal, and the bearish price objective is $21.50, for a very nice correlation. With On Balance Volume plunging to its lowest level in over a year, SYY is clearly under distribution and momentum entries may be the best way to go, with entries taken on a drop under $26.75 (just below Friday's low). Traders willing to wait for a potential bounce before entry will want to watch for a failed rebound attempt in the $28.00-28.25 area. That looks like firm resistance, with the added reinforcement of the 200-dma at $28.74. Place stops initially at $29. BUY PUT MAR-27*SYY-OY OI=2498 at $1.15 SL=0.50 BUY PUT APR-27 SYY-PY OI= 350 at $1.65 SL=0.75 Average Daily Volume = 1.83 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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The Option Investor Newsletter Sunday 03-02-2003 Sunday 4 of 5 In Section Four: Current Put Plays: ATK, BBOX, MHK, VZ, UTX Leaps: The Dangers of Bias Traders Corner: Preparing For War – Keep A Gas Mask And A Straddle Handy ************************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 ***************** ATK – Alliant Techsystems, Inc. $48.30 (-0.59 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: Regardless of the gyrations in the broad market the Defense index (DFI.X) just continues its relentless southward trek, ending the week at a new all-time low, now below $439. The logic behind this move seems to be that any war in Iraq will be short-lived and is unlikely to have any meaningful impact to the bottom lines of any of the major Defense contractors. In Thursday's update, we expressed concern with our ATK play and its refusal to go along with the sector to the downside. Well, that rally attempt that failed below $50 on Thursday, continued back down towards strong support on Friday, but once again the bulls defended the $47.50 level. The relative strength chart of ATK vs. the DFI index is still in its month-long ascending channel, so bears still need to be careful with this play. That means we don't want to chase the stock lower until ATK can break convincingly (read:volume) below $47.50. Until that breakdown occurs, the best case for new entries is to fade the rally attempts like we saw on Thursday. Momentum traders will need to wait for the breakdown, confirmed by new lows in the DFI index before playing. We're lowering our stop this weekend to $50.50, just above Thursday's intraday high. BUY PUT MAR-50*ATK-OJ OI=163 at $2.90 SL=1.50 BUY PUT APR-50 ATK-PJ OI= 1 at $3.80 SL=2.25 Average Daily Volume = 622 K --- BBOX – Black Box Corporation $40.66 (-0.70 last week) Company Summary: As a technical services company, Black Box Corp. designs, builds and maintains network infrastructure systems. The Black Box team serves more than 150,000 clients in 132 countries, providing technical services on the phone, on site and online. Through its catalogs and Website, the company offers more than 90,000 infrastructure and networking products, and designs and builds more than 650,000 custom products each year. Why We Like It: With the persistent bid in the Technology arena on Friday, helped in part by Dan Niles raising his estimates on INTC, it is no great surprise that BBOX managed a decent rebound going into the weekend. When we initiate coverage of the play on Thursday, we were hoping for a bit of a rebound to give us a better entry, and it looks like that is just what we got. Gaining just under 2% on the day, BBOX found intraday resistance just under $41 and that resistance will only intensify as the stock nears the 200-dma (currently $41.45). The PnF chart paints a very clear picture, with the recent selloff from above $50 to below $40 generating a strong Sell signal and a current bearish price target of $26. We're not expecting to achieve that target in the near term, but once below $38, it looks entirely possible for the stock to fill its gap in the $33-35 area. The best case scenario for new entries appears to be a rollover below the 200-dma, which would be confirmed by the stock falling back under the $39 level. Traders looking for a momentum entry will need to wait for a decline under $38.50, or possibly the bottom of the 10/17 gap at $37.65 before playing. We're keeping our stop set at $41.75 for now. BUY PUT MAR-40*QBX-OH OI=249 at $1.55 SL=0.75 BUY PUT APR-40 QBX-PH OI= 20 at $2.50 SL=1.25 Average Daily Volume = 302 K --- MHK – Mohawk Industries, Inc. $49.38 (+0.55 last 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: Despite all the volatile gyrations, Friday's session was essentially a throwaway, at least in terms of our MHK play. You see, the stock's range has been narrowing over the past couple weeks, confined by the rising 2-week trendline (now at $48.90) and the descending 2-month trendline (now at $49.50). That's a very tight range, and the stock is bound to have a decisive move out of the pattern soon, perhaps as early as Monday. The bulls attempted to break out to the upside early on Friday, but eventually failed in that attempt, with the stock dropping just under that upper trendline, ending with a 6 cent gain on the day. One other technical point is the declining 20-dma ($50.07) which capped the rally attempt a couple weeks ago and successfully did so again on Friday. We've been suggesting new entries into the play on rollovers below the $50 level and continue to do so. Those with a more conservative nature though, will want to wait for a break below the bottom of that wedge and then a drop under $48 support before entering. Maintain stops at $51.10 until we get the break from that wedge pattern. BUY PUT MAR-50*MHK-OJ OI=52 at $2.10 SL=1.00 BUY PUT ARP-50 MHK-PJ OI= 3 at $3.20 SL=1.50 Average Daily Volume = 474 K --- VZ – Verizon Communications $34.58 (-1.06 last 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: While the broad market continues to bounce between recent support and resistance, our VZ play is getting ever closer to the breakdown we've been anticipating for the past week. The initial rebound following the big selloff on February 20th took the stock up to just above $36 and since then the bears have turned back each successive rally attempt at slightly lower highs. The $35.75 level is looking like an increasingly strong ceiling, and with another test at $34.25 (the low on 2/20) on Friday, the expected breakdown seems to be just around the corner. Selling volume has been on the rise over the past few days, and if VZ does trade below Friday's low, we're looking for selling volume to pick up speed. Patient traders that have been taking advantage of the failed intraday rallies over the past week are sitting in a good position, and they can use the still-declining 10-dma (now at $35.77) to gauge the strength of any rebound attempt. Another failed rebound below the 10-dma can still be used for entering new bearish positions ahead of the expected breakdown. If our bearish bias is correct, that level should hold against any weak rebound attempt. VZ's persistent weakness over the past couple days is also encouraging in light of the action in the North American Telecoms index (XTC.X), which is holding most of its recent gains from the rebound from below the $405 level. The best case for new momentum entries will be VZ breaking below $34.25 (let's use $34.10 to be safe), in conjunction with the XTC rolling over again and breaking back under the $412 level. The one cautionary note is that $34 is the PnF bullish support line, so we need to beware of the potential for a bounce attempt from anywhere in the $33-34 area. Maintain stops at $36.25. BUY PUT MAR-35*VZ-OG OI=11630 at $1.60 SL=0.75 BUY PUT MAR-32 VZ-OZ OI= 4009 at $0.75 SL=0.40 Average Daily Volume = 7.23 mln --- UTX - United Technologies - $59.55 -0.09 (-1.97 for the 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: Traders looking at the end result of UTX's trading day might conclude that not much happened. That would be short sighted, however, as the intraday chart tells a much different story. UTX followed an early pattern similar to that of the Dow. After positive economic reports this morning, UTX rallied, reaching a high of $59.45, a notch above yesterday's resistance at $59.00. That rally looked great on paper, but it was short-lived. In fact, UTX was one of the harder hit stocks in the afternoon fade, falling swiftly back down to a re-test of support at $58.00. The stock gave up $1.50 in just a couple of hours, but once again bounced just below $58. That level is proving strong, with recent daily lows of $57.85, $57.80 and today's low of $57.95. While the stock is looking anything but bullish, we would now recommend new entries only on a move below $57.50. While the PnF chart registered a new sell signal on the trade of $58, we'd like to be sure we don't get caught in a bear trap. The stock still has plenty of downside if it can give up that support level and if the Dow continues its late day fade on Monday, then there is a good chance UTX will test its next support level at $56. With the breakdown of bullish support on the PnF and the new sell signal, we are still targeting a bigger move, down to the next level of support below $56, which comes in the $50 area. BUY PUT MAR-60*UTX-OL OI=1943 at $2.70 SL=1.15 BUY PUT APR-60 UTX-PL OI= 65 at $3.80 SL=1.90 Average Daily Volume = 2.15 mil ************************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 ***** The Dangers of Bias By Mark Phillips mphillips@OptionInvestor.com You know, there just isn't a lot to be said about the current market action that I haven't already said a dozen times in the past few weeks. Rather than focusing on the economy or corporate earnings, the market has increasingly become fixated on what is going to happen in Iraq. Will they disarm or won't they? Will the U.S. attack regardless of what transpires at the U.N. When will hostilities commence? How long will it last? How much will it cost? How will it affect the markets? And on and on... I have my own opinions and biases but I don't see them as being germane to my approach to the markets. I don't have the slightest desire to attempt trading this rangebound slop. Bullish Percents are still depressed and showing little sign of life. Most weekly Stochastic oscillators are now emerging from oversold, but there isn't really corresponding price action to give me confidence that it is anything more than a relaxation of the oversold condition. Now if we were to get any sort of resolution to the Iraq situation, that could change in a hurry, and my bet would be to the upside. But the timing is a complete mystery. One of my biggest concerns about the likelihood of a sustained bullish move is the action in the VIX of late. It seems to be indicating a distinct lack of concern by market participants, ending at 34.15 on Friday. Rather than bore you with a rehash of my recent commentary on the topic, I'll refer you to my Options 101 article from last Wednesday. Here's the link. Best of Intentions It is my intention every week to share something that will help to make us all better and more informed traders. From that basis, we should all be more profitable traders as well. So I thought we should revisit a past play from the LEAPS Watch List that (thankfully) we never entered. With the understanding that we were likely going to war with Iraq, I had a bullish bias on the Defense sector and had expectations for a solid rally in the group leading up to the beginning of hostilities. My chosen target for a bullish play was GD, which had consolidated for several months in an ever-narrowing wedge after plunging earthward from above the $100 level. The important point though, is that I was looking for a bullish play. Take a look at the chart below. General Dynamics (GD) Weekly chart I was looking for a bullish breakout of that wedge pattern, and it never came. When price began to edge below the lower edge of that wedge, I abandoned the play and dropped it from the Watch List. Bad Move!! Dropping it from consideration wasn't an error, but ignoring the BEARISH possibilities was a huge oversight. I even speculated in the LEAPS column on the possibility that rather than a bottoming formation, the consolidation could be a bear flag continuation pattern. If so, a breakdown out of that consolidation pattern should have been good for a move in size roughly equal to the move that preceded the consolidation. That initial downward move covered about $30, from $110 to $80. So a bearish break from that wedge should have GD vulnerable to the vicinity of $50, right? Let's take a look. General Dynamics (GD) Daily chart Well now, would you look at that. The wedge broke to the downside and with a vengeance too. There's certainly no question in my mind that long-term puts opened in the $75-80 area would have performed quite nicely over the past few months. Why didn't we play it here in the LEAPS column? Because I refused to see both the bullish and bearish possibilities. I saw that the bullish scenario that I had envisioned did not appear to be setting up the way I wanted and dropped the play. But my BIAS got in the way of my seeing the real potential, which was to the downside. There were definitely some hints that the downside was going to win, but I ignored them. The Weekly Stochastics were tipping bearish before the break and we had already gotten a minor Sell signal on the PnF chart too. Blinded by bias is a very dangerous way to trade. Take an experienced trader and I'm sure he/she can give you a hundred stories just like this one. My intent isn't to elicit sympathy or pine about what might have been. There are always new trading opportunities waiting just around the next bend. My hope is that by walking through this example, you can see that we must always endeavor to leave our bias aside when making trading decisions, focusing only on the facts. The second point I hope is painfully clear is that no matter how experienced a trader is, they can always miss the proper play because of focusing so hard on seeing what they WANT TO SEE. That's what happened in this case. All righty then! Enough history, let's go take a look at the here and now. As you're about to find out, there was a lot that happened last week! Portfolio: QCOM - The past two weeks have certainly not been very productive for our QCOM play, as the stock continues to gyrate between support ($33) and resistance ($36), much like the rest of the market. It seems as though nothing of substance (at least to the upside) will occur until the geopolitical situation becomes less murky. That said, I think we have a favorable entry into the play and now it is just a matter of waiting. The 200-dma appears to be providing solid support and we have our stop in place down at $30. Successive dips and rebounds from above the 200-dma can still be used as solid entries into the play, while we wait and watch for a break from the current range. DJX - We got our entry early in the week, although I sure would have preferred that the DJX would have closed nearer to the $78 level on Tuesday (our day of entry) than where it did. Nonetheless, price action met our entry criterion and we're in. See below for details. MSFT - Pretty much the way we scripted it last week, MSFT fell to within a few pennies of the ascending trendline on Thursday, and with the slight rebound over $23.50 at the close we had the entry we were looking for. Now that the play is live, we watch and wait, trusting that the analysis we did ahead of time pays off over next several weeks. ADBE - Trying to watch too many things last week, I didn't notice that ADBE actually dipped into our targeted entry zone on Thursday and then rebounded a bit on Friday. That rebound came right on the ascending trendline from the August lows, and just above strong support near $26.50. So while I neglected to point it out in the Market Monitor, we'll take an entry into the play as of the close on Friday. More details below. Watch List: BEAS - Disappointment over earnings from the prior week coupled by more weakness in the broad market helped to finally break our BEAS play below that stubborn support at $10. In fact, the stock made it pretty close to the upper edge of our targeted entry zone, but not quite. The current rangebound nature of the broad market is serving to pull many stocks down to major support and I still think BEAS is going to deliver a better entry point. My other reason for not being in a hurry is that the PnF chart is still looking quite bearish. I won't be surprised to see the bullish support line down at $8 tested in the weeks ahead, but I don't expect much more downside than that with the weekly Stochastics now getting very close to oversold. I know it sounds like a broken record, but patience is the key. NVDA - Well that was certainly an interesting week! On Tuesday, Bear Stearns was out with a report citing an aggressive increase in NVDA's wafer orders at Taiwan Semiconductor (TSM). Shortly thereafter, Wedbush Morgan cut their rating on the stock from Buy to Hold. Then on Friday, Friedman, Billings, Ramsey trimmed their estimates on the stock based on their view that the design loss to ATYT at one of NVDA's prime customers (Micro-Star) is a sign of more to come. Of course, they only lowered their price target to $11, which is right where we're looking to get into the play. As you know, I view the ratings game as little more than a sideshow, with the charts giving us the clearest road map of what to expect. Friday's price action filled one of the gaps from the first part of February and now our attention turns to the second one, the top of which is at $10.95. Weekly Stochastics are extended here, and I'm more than happy to wait for NVDA to come to us. Leave the entry target zone at $10-11. AA - Did I miss the boat on a solid entry last Tuesday? AA dipped as low as $19.60 before short covering lifted the stock well above the $20 level at the close. As noted in the Market Monitor, I want to be stingy on this play. we're trying to pick it up on the cheap in anticipation of a solid upward move wants the broad market shakes off its current malaise. The better our entry point, the lower our risk in the play. So I really wanted to see what would happen closer to the bottom of our entry zone and opted to let it go last week. I still think that's the preferred way to go, so I'm leaving the entry target unchanged. For those of you that may have entered on the rebound following Tuesday's dip, there's nothing wrong with that entry at all. I'm just trying to err on the side of caution in what has become a wild and wooly market. Stops should be set at $17.50 for those already in the play. I could have just copied my final statements from last week and they would have fit just fine. To recap, we're unlikely to see any strong movements in the market until there is some sort of resolution to the international situation. In the meantime, our best approach is to initiate bullish positions when the stocks come into our sights. But you can bet, I won't be playing the chase game over the near term. Watch that VIX! I think it may have some surprises in store for us before too terribly long! And at the risk of sounding like a broken record, please keep those position sizes small, as risk is high for both the bulls and the bears. 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 $ 4.30 - 6.52% $30 '05 $ 40 ZLU-AH $ 7.90 $ 7.60 - 3.80% $30 DJX 02/25/03 '03 $ 80 DJX-LB $ 6.40 $ 6.70 + 4.69% $74.50 '04 $ 80 YDJ-LB $ 9.30 $ 9.70 + 4.30% $74.50 MSFT 02/27/03 '04 $ 25 LMF-AE $ 3.20 $ 3.20 + 0.00% $21 '05 $ 25 ZMF-AE $ 5.10 $ 5.10 + 0.00% $21 ADBE 02/28/03 '04 $ 30 LAE-AF $ 4.70 $ 4.70 + 0.00% $24 '05 $ 30 ZAE-AF $ 7.50 $ 7.50 + 0.00% $24 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 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 EMC 03/02/03 $6.50-7.00 JAN-2004 $ 7 LUE-AU CC JAN-2004 $ 5 LUE-AA JAN-2005 $ 7 ZUE-AU CC JAN-2005 $ 5 ZUE-AA PUTS: None New Portfolio Plays DJX - Dow Jones Industrials $79.09 **Call Play** Simply amazing! When I added DJX back onto the Call side of the Watch List 2 weeks ago, the closing price was $79.09. We were looking for an entry into the play on a rebound from the $77.50 level and got that handed to us on a silver platter on Tuesday. After an early drop to just above $77, the DJX traded sideways through the middle of the day and I commented in the Market Monitor that a close over $78 would be the confirmation we needed to enter the play. Sure enough, we got a nice upward move at the close, much more than I had expected. Not only did the DJX close above $78, it actually pushed through the $79 level by the close! Specifically, DJX closed at $79.09 -- what are the odds? I had hoped to log an entry closer to the $78 level, but hopefully those of you that followed my comments in the Market Monitor were able to grab that entry before the end of the day. As is our policy in tracking Portfolio plays, our entries and exits are always taken at the close. So where are we now? After that bounce on Tuesday, the DJX has continued to bounce around in its current range as the countdown to war continues. Weekly Stochastics have now firmly turned up, and it appears there is a persistent bid in the market in anticipation of a quick resolution to any war in Iraq. While everything looks good right now, I can't begin to guess if this was a good entry or not. Geo-political news has been trumping technicals for weeks now. We've done the best we can to pick a good entry and now it is up to the market to confirm the wisdom of our decision. I would still use successive rebounds from the $76-77 area as new entry points into the play, as that seems to have as much likelihood as a pre-war breakout over that first major level of resistance at $81.50. Until the DJX is able to break from its current range, we'll work with a rather wide stop at $74.50. BUY LEAP DEC-2003 $80 DJX-LB $6.40 BUY LEAP DEC-2004 $80 YDJ-LB $9.30 MSFT - Microsoft Corp. $23.58 **Call Play** Now that's a lot closer to the type of entry I was looking for! After realizing that the critical support level for MSFT was likely to be along the ascending trendline from the July and October lows, I raised the entry target on the play to the $23.00-23.50 level. By late last week, that trendline had risen to the $23.25 level and coincided nicely with the stock dipping as low as $23.30. I noted in the Market Monitor that if the stock could rebound back over the $23.50 level by the close, we'd list it as an entry point and Voila! We got that entry by only 8 cents. Pretty close to ideal if you ask me. Now all we have to do is wait for the market to shake off its pre-war funk and get moving higher and MSFT ought to go along for the ride. I'm not harboring any ideas of a huge PC replacement cycle looming on the horizon, but once past the war-uncertainty I do expect businesses to loosen their purse strings enough to give MSFT that boost we're waiting for. But just to be clear, this is a bottom fishing expedition, as there isn't so much a sign of strength on the charts, as there is a lack of weakness. Additionally price is at a level where it is very easy to manage risk, and it looks like a decent rebound from these levels could easily take us up to challenge the $29 resistance again. BUY LEAP JAN-2004 $25 LMF-AE $3.20 BUY LEAP JAN-2005 $25 ZMF-AE $5.10 ADBE - Adobe Systems, Inc. $27.50 **Call Play** Despite some weakness early in the week, the Software index (GSO.X) held above the important $102 support level throughout the week. Pressured by that weakness in its sector, ADBE fell right to its ascending trendline (just below $27) and rebounded into the close on Friday. I didn't even notice until writing the column this weekend that ADBE had fallen into our target entry zone, and when I saw that the rebound from the trendline also coincided with a rebound from the 50-dma ($26.88), I had no choice but to list it as a new Portfolio play. This play is very simple. ADBE has been showing good relative strength compared to the GSO index, which has in turn show good strength relative to the broader NASDAQ Composite. Not only that, but ADBE is showing some encouraging signs with weekly Stochastics just recently completing a short-cycle bullish reversal and On Balance Volume looking pretty strong on the daily chart. Throw in a bullish looking PnF chart with a current bullish price target of $50, and ADBE definitely has the potential to lead to the upside once the market breaks out of its current range. Our entry was logged as of the close on Friday, and successive rebounds from the vicinity of the 50-dma look good for new entries next week. To leave room for more wild gyrations driven by the geopolitical situation, we're initially placing our stop at $24, which is just below support that has held up well for the past four months. BUY LEAP JAN-2004 $30 LAE-AF $4.70 BUY LEAP JAN-2005 $30 ZAE-AF $7.50 New Watchlist Plays EMC - EMC Corporation $7.39 **Call Play** Despite its recent failure at resistance, EMC is a technology stock that I think has some real possibilities over the next year. It isn't going to move fast, but based on the price action over the past year and the steady, albeit pedestrian, improvement in earnings, I think we've seen the bottom for this stock. You've probably noticed that Jim has recently added the stock to his Powerball Lottery list and we recently had it listed on the regular Call list. I'm in no hurry to take a position in the stock, as I think we'll likely see another dip below $7 before the next upward push gets underway. Major support exists near the $6 level and there is significant resistance (both historical and from the year-long descending trendline near $8.50. Our goal is going to be to enter the play as close to support as possible and hold through the gyrations until the bulls can effect a breakout over resistance. The PnF chart still looks bullish and has a price target of $15.50. Interestingly, the bearish resistance line currently resides at $15, so that will be our target on the upside. It would take a trade of $5.50 to negate that price target, so we're going to look for a favorable entry in the $6.50-7.00 area, setting stops at $5.50. The reason I'm not in a hurry to enter the play is that weekly Stochastics are just starting to tip bearish and I expect we'll see some near-term weakness to allow us to enter at a better risk/reward price point. You'll notice that this is a recent theme in the LEAPS column, as we are trying to take entries into bullish plays near major support, which will allow us to benefit from a longer-term move than has been possible in the volatile gyrations that have been so common over the past several months. BUY LEAP JAN-2004 $7 LUE-AU BUY LEAP JAN-2004 $5 LUE-AA **Covered Call** BUY LEAP JAN-2005 $7 ZUE-AU BUY LEAP JAN-2006 $5 ZUE-AA **Covered Call** Drops None ************** TRADERS CORNER ************** Preparing For War – Keep A Gas Mask And A Straddle Handy By Mike Parnos, Investing With Attitude The world, and the financial markets, are waiting on pins and needles. Well, maybe not are on pins and needles. CPTI students are waiting on their sofas and La-Z-Boys. It won’t be long before the kielbasa hits the fan. We want to have the bread and mustard ready. With a large market move pending as we wait for war or for terrorists to do their thing, let’s look at a way we can position ourselves to take advantage of the inevitable reaction. Can we trust the markets to react? About as much as we can trust Winona Ryder in a department store. ______________________________________________________________ The CPTI Straddle Though this is familiar territory for many CPTI students, let’s review a sample of our low risk straddle strategy using the QQQs. (This is a hypothetical position in response to reader requests. It is not an official CPTI Portfolio position). With the QQQs trading at $25.16 we’ll: 1. Buy the September QQQ $25 calls for $3.00 2. Buy the September QQQ $25 puts for $2.70 Total out-of-pocket: $5.70 What Is Our Risk? These puts and calls have a seven-month life. As you know, options are wasting assets. Their erosion of time premium takes place on a curve. Only a small amount of erosion takes place during the early part of the option. Most of the value is lost rapidly during the option’s last month. Since we’re only going to be in our CPTI straddle for 30 days (or less), we’re only risking about 15% of the total cost ($5.70) of the straddle, or about $.85. How Do We Make Money? In a straddle we’re long both the put and the call. When a straddle is placed ATM (at-the-money), the deltas of both the puts and the calls are about 50%. When the QQQs go up $1, the September $25 call will go up $.50. As the QQQs continue to move up further, the delta increases as well. However, the delta of the QQQ $25 decreases more slowly than the delta of the QQQ $25 call goes up. For example: If the QQQs move to $27, the $25 call might now have a delta of about 65% while the $25 put may have a delta of 42%. Also in our favor would be volatility. When a large move is made, volatility is increased. When volatility increases, so does time premium – on both the puts and the calls. So, when the move happens, the value of the options could increase – which will help offset some of the value that has eroded away while waiting for the move. We’re not dealing with huge dollars here. But, then again, we’re not risking much either. As you can see, it would require a substantial move to be very profitable. But a $.50 profit on an $.85 risk is a huge percentage. Ways Of Exiting The Straddle There are a few different ways to exit the straddle. 1. Let’s assume that we get a large move in one direction or the other. When you hit your profit target, you can liquidate both the puts and calls and take your profits. It’s pretty cut and dried. 2. Once again, for example, let’s assume we get a large move up. The $25 call is now worth $5.70 and the $25 put is worth $.75 with two weeks left until our 30-day exit limit. You can sell the $25 call for $5.70 – that pays for the entire trade. Instead of selling the $25 put and taking a $.75 profit, you could hold the $25 put in anticipation of a reverse in the QQQs. It’s a free trade, but keep in mind that you are risking your profits (and picking a direction), which is something we’re reluctant to do. If profits aren’t taken, they tend to disappear faster than a pint of Haagen Daze from my freezer. 3. If we don’t get a major move within our 30-day time limit, we unwind the position and take our loss – hopefully near the projected $.85. That’s where our self-discipline comes into play. It’s risk management. It’s money management. And it keeps us in the game. If the scenario changes (a peaceful settlement, etc), reducing the likelihood of a large move, there is no need to wait the full 30 days (though you can). If the reason for the trade is no longer viable, take your risk off the table. If it’s not on the table, it won’t get eaten. Some other indexes/stocks may provide more lucrative returns. However, they might require tying up more funds and putting more time value at risk. CPTI Straddle Checklist I have created a checklist (a MS Word document) for the CPTI Straddle that will enable you to fill in the blanks and better evaluate a potential trade. For those of you who haven’t already received a checklist, I invite you to email your request to me and I’ll email you the document. Make copies. It can only help. _____________________________________________________________ New Position Preview: I’m thinking seriously of adding a new position to the CPTI Portfolio. It’s not official, but I’m leaning toward an April Iron Condor on our old friend BBH -- with a range of $80-$95. I’ll let you know in Thursday night’s column. If you have any thoughts or alternative ideas for new trades, send them along. Let’s discuss them. _____________________________________________________________ CPTI Portfolio Update Position #1 – OEX Bull Put Spread – Trading at $425.36. Believing the market is not likely to go down to retest its July and October lows near 400, we sold 10 contracts of the OEX March 400 puts and bought 10 contracts of the OEX March 390 puts for a credit of $1,400. If war breaks out, it might be a quickie. The market may spike up. How high? Who knows? That’s why we didn’t put a bear call spread on top to create an Iron Condor. We may put on the bear call spread at a later date. ______________________________________________________________ Position #2 – XAU Iron Condor – Trading at $71.99. 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 created an Iron Condor with a 15-point range $65 to $80 for March. We were able to place spread orders and increase our credit by $.30 to a total of $1,400 for our 10-contract position. _________________________________________________________________ Position #3 -- OIH -- Diagonal Calendar Spread – Trading at $57.75 It seems that there’s about $8-9 of uncertainty built into the 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. We bought 10 contracts of the July OIH $55 puts and sold 10 contracts of the March OIH $50 put at a debit of $3.85. 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 $26.16. 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 sold 10 contracts of the QQQ April $28 calls and 10 contracts of the QQQ April $22 puts for a credit of $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. ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 03-02-2003 Sunday 5 of 5 In Section Five: Covered Calls: You Can Be Successful In The Stock Market! Naked Puts: More Q&A With The Editor Spreads/Straddles/Combos: Stocks Drift Higher As Bears Digest Recent Gains Updated In The Site Tonight: Market Watch: Bullish Candidates Market Posture: Out of Gas or Finding Support? ************************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: You Can Be Successful In The Stock Market! By Mark Wnetrzak The dilemma facing many investors is simple: they want to own good stocks but yet they are afraid to buy amid bearish market conditions. History suggests that most market participants who use proven investing strategies will easily average 15-20% profit on an annual basis. Over the long-term, a 10-12% annual return is more typical for broad-market stocks, but the results can be improved with careful selection criteria. The key to success is to become proficient with the various types of analysis and use the one that best suits your skill level, risk tolerance and portfolio outlook. When professional traders discuss common traits, you will often hear how important it is to understand the elements of technical analysis and basic market timing. At the same time, many older investors are more comfortable with fundamental analysis. That is the process where one attempts to forecast the future profits of a company by analyzing their market share, revenue and sales, pricing structure, and other components regarding the operation of the company's business. Technical analysis, which is loosely defined as the study of historical prices and chart trends, has nothing at all to do with the daily operations of the company. Instead, technical analysis of past price patterns is used to help predict the future direction and magnitude of a company’s share value. Although each style is frequently viewed as less than adequate by the opposing group, there is an inherent value in both methods and either approach can yield favorable results. Technical analysis is generally the more common technique among option traders and it is better suited to markets with extreme volatility and unusual conditions, since it offers superior methods for timing position entries and exits. Unfortunately, new investors are so overwhelmed by the incredible number of chart patterns and indicators, they overlook the most common rule for achieving consistent profits; buy low and sell high! At the same time, fundamental analysis can provide an accurate picture of the long-range outlook, but it is miserably late in predicting the near-term movement of stock prices. However, analyzing the value of a company can help to forecast potential profits (or losses) and in the end, earnings usually determine share value. Quarterly reports will also affect the short-term outlook for a stock and the most significant changes occur when a company reports earnings that are different from the analysts’ consensus estimates. As we have seen in recent weeks, even a "met expectations" report will inevitably cause a stock's value to fall as soon as the information becomes public. When this happens, brokerages are often quick to change their opinions on the company, downgrading the issue and causing further damage to the stock price. This is one of the occasions when fundamental analysis can be helpful in a short-term trading scenario. While technical and fundamental analyses are important, it is also imperative to approach any investment activities with the right attitude and expectations, as well as a working knowledge of the stock market and a basic understanding of the techniques that are most successful in the long run. Here are some common guidelines that will help avoid the pitfalls of stock ownership. Before opening any position: Check the overall market indicators for direction. Analyze the sector and industry group in which your issue resides. Study the performance of similar issues and make sure it coincides with your outlook. Choose only those stocks with the most favorable technical formations. Once you have a candidate in mind, do your homework! Know the company and the calendar; any upcoming events, earnings dates, and scheduled announcements. Before entering an order: Double-check the chart! Make sure you are absolutely ready to own the issue at the target price. Don't buy a stock that's in a downtrend (Stage IV) and never open a position right after good news, especially if the chart shows a significant advance prior to the announcement. Never buy a stock just because it appears cheap after a big sell-off. Always use simple, proven techniques and develop target prices for potential plays. Take the human factor out of trading by using "limit" and "good-until-cancelled" orders. When news or events change the character of the play, make the necessary adjustments to avoid losses or lock-in gains. After you have established a position: The #1 rule: Know your exit point and use a mental or mechanical stop. Stay informed by monitoring all the news and announcements affecting your issue. Never hold on to a stock in an established downtrend, no matter how fundamentally sound the company appears to be. ("Hope" can be an expensive emotion!) Closing the position: Determining when to exit a play is a matter of personal preference and you are the only one who can decide how you will trade. The best advice is, be consistent! If you find that you're frequently buying and selling in similar situations, something is wrong with your system. There are a number of proven techniques for managing portfolio positions and maximizing gains while limiting losses is an important aspect of successful investing. The most difficult lesson is learning to close losing positions. It can be painful but the simple fact is: There is no reason to hang on to a losing position when there are so many other profitable positions that deserve your time and money. Accept your losses, learn from your mistakes and evaluate each one critically, then move on. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield ADLR 13.07 12.69 MAR 12.50 1.80 1.23* 11.9% CBST 7.57 8.22 MAR 7.50 0.75 0.68* 10.8% EMIS 5.48 5.62 MAR 5.00 0.90 0.42* 8.0% IMCL 13.72 13.33 MAR 12.50 2.00 0.78* 7.2% EMIS 5.66 5.62 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 12.36 MAR 10.00 1.90 0.73* 6.8% RSAS 5.90 7.08 MAR 5.00 1.25 0.35* 6.5% ASKJ 5.86 6.89 MAR 5.00 1.25 0.39* 6.1% MCDT 8.42 8.30 MAR 7.50 1.30 0.38* 5.8% OVTI 16.83 19.00 MAR 15.00 2.55 0.72* 5.5% GLW 5.18 4.92 MAR 5.00 0.55 0.29 5.4% RMBS 14.76 15.18 MAR 12.50 2.85 0.59* 5.4% ARRS 5.14 4.80 MAR 5.00 0.60 0.26 5.0% NFLX 14.24 17.11 MAR 12.50 2.30 0.56* 4.1% MSTR 21.28 19.30 MAR 20.00 2.60 0.62 3.6% ALA 7.58 7.09 MAR 7.50 0.65 0.16 2.0% DNDN 5.50 4.10 MAR 5.00 0.85 -0.55 0.0% CRY 8.25 6.25 MAR 7.50 1.25 -0.75 0.0% * Stock price is above the sold striking price. Comments: Two weeks later and nothing has changed! Can I go back to Hawaii now? Many of the March positions appear to be holding up fairly well as the Iraqi situation slowly, very slowly, unfolds. A couple stocks appear to be faltering and could be early exit candidates: Microstrategy (NASDAQ:MSTR) has failed to move above the early FEB high; Alacatel (NYSE:ALA) is testing its 50- and 150-dmas; Dendreon (NASDAQ:DNDN) had a bad reaction to its merger agreement with Corvas (NASDAQ:CVAS); and Cryolife (NYSE:CRY) continues to seesaw back and forth as it now must address FDA concerns surrounding SynerGraft. 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 HHL 12.57 MAR 12.50 HHL CV 0.75 188 11.82 21 8.3% IMCL 13.33 MAR 12.50 QCI CV 1.50 1671 11.83 21 8.2% TIVO 5.60 MAR 5.00 TUK CA 0.85 106 4.75 21 7.6% FEIC 15.70 MAR 15.00 FQE CC 1.40 36 14.30 21 7.1% MRVL 20.60 MAR 20.00 UVM CD 1.35 9799 19.25 21 5.6% OVTI 19.00 MAR 17.50 UCM CW 2.15 755 16.85 21 5.6% SBL 10.58 MAR 10.00 SBL CB 0.85 1553 9.73 21 4.0% 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). ***** HHL - Hurricane Hydrocarbons $12.57 *** The Hedge! *** 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). Shares of Hurricane Hydrocarbons continue to climb higher ahead of the company's quarterly earnings, due on 3/5/03. Investors can use this position hedge against the broader market as the threat of war grows and the price of oil climbs. MAR 12.50 CALL HHL-CV LB=0.75 OI=188 CB=11.82 DE=21 TY=8.3% ***** IMCL - ImClone $13.33 *** 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 last week 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=1.50 OI=1671 CB=11.83 DE=21 TY=8.2% ***** TIVO - TiVo $5.60 *** Forget Your VCR! *** TiVo (NASDAQ:TIVO) is engaged in the personal television industry. The company has created a personal television service that allows viewers to watch what they want when they want. The TiVo Service is a subscription-based service enabled by a personal video recorder designed and developed by the company. The TiVo Service provides viewers with greater control, easier navigation and a wider range of viewing options when watching television than what was formerly available. It also creates a new platform that enables television programmers, advertisers and network operators to deliver television programming, advertising and in-home commerce. TiVo has been in a trading range around $5 for a couple years and this position offers investors a conservative entry point from which to speculate on the company's future. Try target shooting a lower "net-debit" to lower the cost basis and raise the potential return. TiVo, whose president recently resigned, will report earnings on March 6. MAR 5.00 CALL TUK-CA LB=0.85 OI=106 CB=4.75 DE=21 TY=7.6% ***** FEIC - FEI Company $15.70 *** Bottom-Fishing! *** FEI Company (NASDAQ:FEIC) is a supplier of equipment and solutions to the high-growth segments of the semiconductor, data storage and industry and institute markets. The company's solutions are based on a combination of patented and proprietary technologies that produce highly focused electron and ion beams. These solutions enable FEI's customers to view and analyze structures in three dimensions and to measure, analyze, diagnose and modify sub-micron and atomic structures below the surface in semiconductor wafers and devices, data storage components and biological and industrial materials. This enables the firm's customers to develop products faster, control manufacturing processes better and improve their production yields. FEI's Structural Process Management Solutions include focused ion beam equipment, scanning electron microscopes, transmission electron microscopes and also DualBeam systems, which combine the various microscopes on a single platform. In January, FEI and Veeco Instruments (NASDAQ:VECO) terminated their $1 billion merger due to difficult market and economic conditions and traders reacted favorably to the news. The technical outlook for the issue suggests excellent upside potential and reasonable support near the cost basis in this conservative position. MAR 15.00 CALL FQE-CC LB=1.40 OI=36 CB=14.30 DE=21 TY=7.1% ***** MRVL - Marvell Technology $20.60 *** Post-Earnings Rally! *** Marvell (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for communications-related markets. Marvell offers its customers a wide range of integrated circuit solutions using proprietary communications mixed-signal processing and digital signal processing technologies. Marvell's product groups include: storage products, consisting of a variety of read channel, system-on-chip and preamplifier products; and broadband communications products, consisting of a variety of transceiver products, switching products, internetworking products and wireless LAN products. This week, Marvell posted a sharply narrower 4th-quarter net loss and said revenue jumped 82%. Investors were pleased and the stock rallied strongly on Friday. This position offers a low risk entry point for those investors who wouldn't mind having Marvell Technology in their long-term stock portfolio. MAR 20.00 CALL UVM-CD LB=1.35 OI=9799 CB=19.25 DE=21 TY=5.6% ***** OVTI - OmniVision $19.00 *** New 2-year High! *** 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 has jumped to a new 2-year high on heavy volume which suggests, market permitting, higher future prices. Investors can use this position to speculate conservatively on the company's future. MAR 17.50 CALL UCM-CW LB=2.15 OI=755 CB=16.85 DE=21 TY=5.6% ***** SBL - Symbol $10.58 *** Forging A Base *** Symbol Technologies (NYSE:SBL) is a global provider of wireless networking and information systems that allow users of its products to access, capture and transmit information over LANs, WANs and the Internet. Symbol offers in-house technology for the design and manufacture of products in its three core technologies: bar code reading devices, mobile computing devices and network systems. The company is engaged in two reportable business segments: the design, manufacture and marketing of scanner integrated mobile and wireless information management systems, and the servicing of, customer support for and professional services related to these systems. Investors were pleased with Symbol's higher quarterly profit when the company reported earnings on February 13. We simply favor the basing formation which offers a relatively low risk entry point in the issue. MAR 10.00 CALL SBL-CB LB=0.85 OI=1553 CB=9.73 DE=21 TY=4.0% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ENTU 2.76 MAR 2.50 EXH CZ 0.50 19 2.26 21 15.4% BONZ 7.62 MAR 7.50 QBN CU 0.50 25 7.12 21 7.7% CMVT 10.20 MAR 10.00 CQV CB 0.70 3764 9.50 21 7.6% VECO 15.27 MAR 15.00 QVC CC 1.00 328 14.27 21 7.4% CVC 17.79 MAR 17.50 CVC CW 1.05 10601 16.74 21 6.6% ERES 21.04 MAR 20.00 UDB CD 1.85 27 19.19 21 6.1% SCSS 10.45 MAR 10.00 QSL CB 0.85 191 9.60 21 6.0% CGNX 22.70 MAR 22.50 QCG CX 1.05 33 21.65 21 5.7% ISIL 15.65 MAR 15.00 UFH CC 1.20 817 14.45 21 5.5% COF 30.97 MAR 30.00 COF CF 2.05 11019 28.92 21 5.4% OMG 8.46 MAR 7.50 OMG CU 1.20 2781 7.26 21 4.8% CBST 8.22 MAR 7.50 UTU CU 0.95 254 7.27 21 4.6% DIGE 16.59 MAR 15.00 QDG CC 2.00 695 14.59 21 4.1% ***************** NAKED PUT SECTION ***************** Options 101: More Q&A With The Editor By Ray Cummins Last week’s article concerning risk-reward with uncovered options generated some excellent E-mails from our readers. Attn: Naked-Puts Editor Subject: An Opinion On Risk-Reward Hi Ray: Your strategy, if I understand you correctly, is [to achieve] small, consistent gains on selling naked puts while trying to avoid a major loss. I have thought of your strategy often in the last several days. You may wish to go to alfatrading.com and click on track-record. This service has an outstanding record of selling naked options on commodities. They have multiplied their investment almost five times in a little over a year. Their track-record was so compelling that I was prepared to close my eyes and take their trades. However, they recently suffered a major loss on one trade (natural gas $12,500) of twenty five percent of their account. That is too much risk for me. Thanks for the great columns. JS Hello JS, Indeed, the strategy of writing deep-out-of-the-money options is based on a high probability of achieving a small profit. With that approach, there will always be a few large losers, thus one requirement for success is to prevent them from being "catastrophic" to your portfolio. The best way to accomplish that task is through diversity, both in the number of contracts per position and in the underlying industries/sectors selected for each position. Another key to consistent profits with "premium selling" strategies is to understand the statistical nature of the strategy, which suggests that careful play selection and diligent position management can produce (over time) a reasonable return on investment. However, this technique is not for everyone and most professional traders admit that it is one of the most difficult strategies to master (due to human emotions) in the options market. Fortunately, there are plenty of other ways to trade and I hope you find one that works for your specific style and risk-reward outlook. I wish you much success! Ray Attn: Naked-Puts Editor Subject: Finding The Right Strategy Ray, Your article of last week was very informative and you talked about many of the things I already know about selling naked puts. My problem is not with that strategy but in deciding what type of trading to do in the current market, since it is not really conducive to writing puts -- you will probably own the stock. I have actually bought a few puts in recent weeks past but a bit late as the premiums were high and the downside moves were not as great as we had in early 2002 -- when I should have been buying puts instead of selling them. What are your thoughts on how to determine the best techniques for trading options in the conditions we have right now? EL Hello EL, The primary consideration for most option traders is risk versus reward. In the derivatives market, buyers of options have limited risk and unlimited reward while sellers of options have limited reward and unlimited risk. With this single perspective in mind, it's obvious why the majority of retail traders simply "buy" options. At the same time, most investors would never consider a position with unlimited risk and yet few understand that almost any trade that isn't fully hedged entails enormous speculation. A violent adverse move that doesn't allow for timely adjustments can quickly reduce any position to a fraction of its initial value. With this fact in mind, it's easy to understand why buying options is also one of the most difficult strategies to master when the market trend is not clearly defined. It also makes you wonder why traders would take an outright long or short option position under anything but the most optimal circumstances. The only possible explanation is they believe the probability of complete and total (catastrophic) loss is very small and the potential for profit is worth the risk. The average investor will normally do well with a position that has limited risk and the potential for large profits because one successful trade can easily offset a series of limited losses. An aggressive trader who is willing to take larger risks for the opportunity of making greater profits will probably buy index or equity options. The conservative investor, on the other hand, should probably not be an outright buyer of options. For him or her, a spread or LEAPS position with moderate profit potential and reduced risk would be more appealing. The wealthy investor might be attracted to methods that offer the opportunity to earn regular income against portfolio collateral. Writing uncovered (out-of-the-money) options may solve his needs. Some investors want very low maintenance plays with a chance to make reasonable profits without risking excessive amounts of money. Conservative combination positions on stock indexes would probably appeal to this group. The most important concept successful option traders understand is that the risk-reward characteristics of a position are not the only considerations. Equally important is the probability of profit or loss. When one evaluates a prospective position, the likelihood of each possible outcome must be factored into the assessment. After this evaluation has been made, another question must be resolved: Is the reward, even a limited one, sufficient to offset the risk? If the answer is not a resounding "affirmative," then it is probably best to repeat the process until a satisfactory candidate emerges. 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 20.83 19.30 MAR 17.50 0.80 0.80* 12.0% 4.2% CGNX 22.62 22.70 MAR 17.50 0.55 0.55* 9.4% 2.8% MSTR 20.69 19.30 MAR 17.50 0.75 0.75* 9.3% 3.2% SRNA 15.07 15.00 MAR 12.50 0.30 0.30* 8.7% 2.7% RMBS 13.69 15.18 MAR 10.00 0.30 0.30* 8.6% 2.7% OVTI 16.55 19.00 MAR 12.50 0.35 0.35* 8.3% 2.5% XLNX 23.04 22.90 MAR 20.00 0.50 0.50* 8.1% 2.8% MDCO 16.92 18.94 MAR 15.00 0.60 0.60* 8.0% 3.0% LRCX 12.56 13.33 MAR 10.00 0.25 0.25* 7.9% 2.2% ANSS 22.20 23.76 MAR 20.00 0.80 0.80* 7.7% 3.0% IRF 20.39 22.35 MAR 17.50 0.50 0.50* 7.5% 2.6% MACR 15.22 15.84 MAR 12.50 0.25 0.25* 7.5% 2.2% OVTI 16.83 19.00 MAR 12.50 0.25 0.25* 7.5% 2.2% DIGE 15.54 16.59 MAR 12.50 0.30 0.30* 7.5% 2.1% CGNX 21.84 22.70 MAR 20.00 0.75 0.75* 7.1% 2.8% ERES 22.46 21.04 MAR 17.50 0.30 0.30* 6.8% 1.9% HHL 11.56 12.57 MAR 10.00 0.20 0.20* 6.7% 2.2% CKFR 20.66 20.98 MAR 17.50 0.30 0.30* 6.0% 1.9% OTEX 27.14 28.14 MAR 25.00 0.75 0.75* 5.7% 2.2% ADBE 27.43 27.50 MAR 22.50 0.40 0.40* 5.4% 1.6% APPX 23.75 18.30 MAR 20.00 0.55 -1.15 0.0% 0.0% ** * Stock price is above the sold striking price. ** Summary data does not reflect a timely exit trade. Comments: The stock market posted its third consecutive bearish month as concerns about the impending war with Iraq overwhelmed positive economic data. The big surprise in our portfolio was the slump in American Pharmaceutical Partners (NASDAQ:APPX), which dropped like a rock after announcing quarterly earnings of $0.38 per share, $0.04 above analysts' estimates and more than 200% above last year's results. APPX shares tumbled despite the bullish fundamental news and the cause was attributed to the abundance of short sellers. Conservative traders should have closed the position early in the week, when the issue plunged 10% on heavy volume. Those who stayed for the "dead-cat bounce" have yet to be rewarded. Traders are advised to be extra vigilant in their portfolio management during the coming weeks as the conflict with Iraq becomes a reality. Previously Closed Positions: Possis Medical (NASDAQ:POSS) WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ***** Sequenced by Maximum Yield (monthly basis - margin) ****** Stock Last Option Option Last Open Cost Days Max Simple Symbol Price Series Symbol Bid Int Basis Exp. Yield Yield RMBS 15.18 MAR 12.50 BNQ OV 0.25 2863 12.25 21 9.9% 3.0% IART 19.39 MAR 17.50 UJI OW 0.35 111 17.15 21 8.2% 3.0% XLNX 22.90 MAR 20.00 XLQ OD 0.35 5852 19.65 21 7.7% 2.6% MDCO 18.94 MAR 17.50 MQL OW 0.30 80 17.20 21 6.8% 2.5% SLAB 27.12 MAR 22.50 QFJ OX 0.30 287 22.20 21 6.7% 2.0% AVCT 27.82 MAR 25.00 QVX OE 0.35 111 24.65 21 5.9% 2.1% EPIQ 19.10 MAR 17.50 FQU OW 0.25 10 17.25 21 5.8% 2.1% FAF 23.10 MAR 22.50 FAF OX 0.30 104 22.20 21 4.9% 2.0% 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). ***** RMBS - Rambus $15.18 *** Recovery Underway! *** 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 PUT BNQ-OV LB=0.25 OI=2863 CB=12.25 DE=21 TY=9.9% SY=3.0% ***** IART - Integra LifeSciences $19.39 *** Favorable Earnings! *** Integra LifeSciences (NASDAQ:IART) is a global, diversified medical device company that develops, manufactures and markets implants and biomaterials for use in neurosurgery, orthopedics and soft tissue repair. The firm's business is divided into two divisions, Integra NeuroSciences and Integra LifeSciences. Integra's NeuroSciences division is a provider of implants, devices and systems used in neurosurgery, neurotrauma and related critical care, and is also a distributor of disposables and supplies used in the diagnosis and monitoring of neurological disorders. Integra LifeSciences makes and manufactures a variety of medical products and devices based on the company's proprietary tissue regeneration technology, which are used to treat soft tissue and orthopedic conditions. Last week, Integra reported record revenues and net income for the fourth quarter and full year 2002. The fundamental outlook is favorable and investors who wouldn't mind owning the issue near a cost basis of $17 should consider this position. MAR 17.50 PUT UJI-OW LB=0.35 OI=111 CB=17.15 DE=21 TY=8.2% SY=3.0% ***** XLNX - Xilinx $22.90 *** 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 downtrodden semiconductor sector has recovered in recent sessions and one of the best looking chart patterns in the group is XLNX. The stock has a stable near-term trading range and excellent upside potential. Traders who agree with a bullish outlook for the issue can speculate on the company's future share value with this position. MAR 20.00 PUT XLQ-OD LB=0.35 OI=5852 CB=19.65 DE=21 TY=7.7% SY=2.6% ***** MDCO - The Medicines Company $18.94 *** New High! *** The Medicines Company (NASDAQ:MDCO) operates as a pharmaceutical company selling and developing products for the treatment of hospital patients. MDCO acquires, develops and commercializes biopharmaceutical products that are in late stages of development or have been approved for marketing. The company began selling Angiomax, its lead product, in U.S. hospitals in January 2001 as an anticoagulant replacement for heparin. MDCO is developing Angiomax for additional potential hospital applications as a procedural anticoagulant and for use in the treatment of ischemic heart disease. The Medicines Company shares rallied again last week despite a lack of catalysts in public news. The stock is trading at a 52-week high and investors who believe the rally will continue can profit from that outcome with this position. MAR 17.50 PUT MQL-OW LB=0.30 OI=80 CB=17.20 DE=21 TY=6.8% SY=2.5% ***** SLAB - Silicon Laboratories $27.12 *** Chip Sector Rally! *** Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and sells proprietary high-performance mixed-signal integrated circuits for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. The company's mixed-signal design engineers utilize standard complementary metal oxide semiconductor (CMOS) technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. Shares of SLAB rallied Friday in conjunction with the bullish activity in the chip sector and the strong upside move suggests the recent up-trend may continue. The cost basis in this position provides a good speculation opportunity for traders who like the outlook for the chip sector. MAR 22.50 PUT QFJ-OX LB=0.30 OI=287 CB=22.20 DE=21 TY=6.7% SY=2.0% ***** AVCT - Avocent $27.82 *** Up-Trend Intact! *** 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 switching and connectivity solutions provide information technology managers with access and control of multiple servers and network data centers from any location. In late January, Avocent reported higher sales, operating income and net income for the fourth quarter and the firm achieved sequential and year over year sales growth in both their domestic and international markets. Avocent also has a favorable fundamental base with $216 million in cash and investments and no long-term debt. Investors who like the outlook for the company can use this position to speculate on its future share value. MAR 25.00 PUT QVX-OE LB=0.35 OI=111 CB=24.65 DE=21 TY=5.9% SY=2.1% ***** EPIQ - EPIQ Systems $19.10 *** Bullish Outlook! *** EPIQ Systems (NASDAQ:EPIQ) develops, markets and licenses software solutions for workflow management as well as data communications infrastructure for the bankruptcy trustee market and the financial services market. The firm's specialized products streamline the customers' internal business operations and external communications and enable them to minimize operating costs through automation. In addition to its software products, the firm provides a high level of coordinated support, including network integration and industry specific value-added services. EPIQ Systems recently posted record results for the fourth quarter and full year, with revenue growth of 28% versus prior year. Net income increased 78% for the quarter and 54% for the year. Investors who agree with a bullish outlook for the company can speculate on its future share value with this position. MAR 17.50 PUT FQU-OW LB=0.25 OI=10 CB=17.25 DE=21 TY=5.8% SY=2.1% ***** FAF - First American Corporation $23.10 *** Own This One! *** The First American Corporation (NYSE:FAF) is a diversified provider of business information that supplies businesses and consumers with the information resources that affect the major economic events of people's lives, such as getting a job, renting an apartment, buying a car, house, boat or airplane, securing a mortgage, opening or buying a business, and planning for retirement. The First American Family of Companies operate within seven primary business segments: Title Insurance and Services, Specialty Insurance, Trust and Other Services, Mortgage, Property, Credit and Screening Information. The company has approximately 1,300 offices throughout the United States and abroad. First American Corporation appears to be in the next stage of a long-term up-trend and investors can establish a conservative cost basis in the issue with position. MAR 22.50 PUT FAF-OX LB=0.30 OI=104 CB=22.20 DE=21 TY=4.9% SY=2.0% ***** ***************** 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 ICST 23.86 MAR 22.50 IUY OX 0.70 98 21.80 21 11.4% 4.7% NOVN 10.86 MAR 10.00 NPQ OB 0.25 178 9.75 21 9.7% 3.7% CMCSA 29.22 MAR 27.50 CCQ OY 0.60 2274 26.90 21 8.2% 3.2% DISH 26.33 MAR 22.50 UAB OX 0.40 5678 22.10 21 8.2% 2.6% KLAC 35.75 MAR 32.50 KCQ OZ 0.60 4448 31.90 21 7.5% 2.7% FIC 48.84 MAR 45.00 FIC OI 0.75 76 44.25 21 6.6% 2.5% UOPX 37.38 MAR 35.00 UBY OG 0.60 155 34.40 21 6.6% 2.5% UNT 21.06 MAR 20.00 UNT OD 0.35 51 19.65 21 6.6% 2.6% SBUX 23.45 MAR 22.50 SQX OX 0.40 3939 22.10 21 6.6% 2.6% BVF 37.20 MAR 35.00 BVF OG 0.60 383 34.40 21 6.5% 2.5% USAI 24.53 MAR 22.50 QTH OX 0.35 559 22.15 21 6.2% 2.3% LLTC 30.67 MAR 27.50 LLQ OY 0.40 1103 27.10 21 6.1% 2.1% VIP 37.36 MAR 35.00 VIP OG 0.55 10 34.45 21 6.1% 2.3% NSCN 19.53 MAR 17.50 QKN OW 0.25 254 17.25 21 6.0% 2.1% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Stocks Drift Higher As Bears Digest Recent Gains By Ray Cummins The major equity markets finished the week on a bullish note as selling pressure gave way to bargain hunting amid a lull in the stand-off with Iraq and the release of favorable economic data. The Dow Jones Industrial Average closed up 6 points at 7,891 on strength in Walt Disney (NYSE:DIS), Intel (NASAQ:INTC), McDonalds (NYSE:MCD), and Hewlett-Packard (NYSE:HPQ). The NASDAQ added 13 points to end at 1,337 amid a surge in semiconductor and computer hardware shares. For the week, the broader market enjoyed gains in specialty retail, energy and mining, tobacco and broadcasting stocks. The S&P 500 finished February at 840 on Friday, down 4% for the year. Trading volume was moderate at roughly 1.3 billion shares on both the NYSE and the NASDAQ. Advancing issues outpaced decliners 3 to 2 on the Big Board while breadth on the technology exchange was almost neutral with a small bias to gaining stocks. In the U.S. Treasury market, the benchmark 10-year note rose 13/32 to 101-16/32, pushing its yield down to 3.69%. The 30-year bond climbed 26/32 to 110-28/32, while its yield fell to 4.67%. ***************** 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 SYMC 46.09 40.47 MAR 35 40 0.50 39.50 $0.50 Open? COP 48.72 50.70 MAR 43 45 0.25 44.75 $0.25 Open NKE 45.14 46.37 MAR 40 43 0.20 42.30 $0.20 Open CAM 53.03 52.00 MAR 45 50 0.65 49.35 $0.65 Open SII 35.34 34.86 MAR 30 33 0.25 32.25 $0.25 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Symantec (NASDAQ:SYMC) was a big mover Friday, sliding over 10% after the computer security and services provider said earnings for the first half of fiscal 2004 would be below expectations, even though it confirmed its full-year outlook. Conservative traders should consider closing the play on any further downside movement. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status HRB 35.80 40.57 MAR 45 40 0.50 40.50 ($0.07) Closed BUD 47.70 46.50 MAR 55 50 0.45 50.45 $0.45 Open MDT 44.15 44.70 MAR 50 48 0.25 47.75 $0.25 Open PEP 39.86 38.32 MAR 45 43 0.25 42.75 $0.25 Open BSC 59.90 62.64 MAR 70 65 0.50 65.50 $0.50 Open? BSC 61.69 62.64 MAR 70 65 0.55 65.55 $0.55 Open? NEM 27.51 27.33 MAR 33 30 0.25 30.25 $0.25 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss The previous bearish trend in H&R Block (HRB) ended Tuesday after the company reported record profits on strength in its mortgage origination segment. Profits quadrupled while sales surged 31%, and the firm raised its earnings forecast for the fiscal year. Our position was closed Thursday when the issue climbed through a recent resistance area (near $38.50) on increasing volume. Bear Stearns (NYSE:BSC) is on the "watch-list" as the issue will likely test its current trading-range top (near $65) in the coming week. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status AMGN 52.09 54.64 MAR 45 47 2.20 47.20 0.30 Open EXPE 66.57 69.79 MAR 55 60 4.35 59.35 0.65 Open NBR 40.13 39.65 MAR 35 37 2.20 37.20 0.30 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status WPI 29.22 30.93 MAY 35 22 (0.10) 0.65 Open UPL 10.11 9.15 MAR 10 10 0.10 0.00 Open? AFFX 27.14 26.39 MAR 30 25 0.15 0.00 Open Watson Pharmaceuticals (NYSE:WPI) was a big mover this week after the company said it had won U.S. FDA approval for Oxytrol, a patch to treat urinary incontinence. Our bullish synthetic position has reached favorable exit points twice since the play was initiated in January. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status AXP 33.70 33.58 APR-30P FEB-30P 0.75 1.20 Open? CI 43.02 42.97 APR-45C MAR-45C 0.85 1.00 Open BMET 28.52 30.23 JUL-30C MAR-30C 1.50 1.50 Open WFT 40.55 40.04 MAY-45C MAR-45C 1.25 1.40 Open OTEX 29.29 28.14 MAY-25C MAR-30C 4.50 4.20 Open The bearish position in American Express (NYSE:AXP) has yielded favorable short-term profits and Biomet (NASDAQ:BMET) has moved to within $0.20 of the maximum profit point. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ROOM 40.14 44.97 MAR 40 40 6.50 7.00 Open? The Hotels.com (NASDAQ:ROOM) straddle has provided a small profit but Friday's activity suggests additional upside potential in the near-term. Conservative traders should consider closing the bullish (MAR-$40 CALL) position on further downside movement. 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. ***** CMCSA - Comcast Corporation $29.22 *** Bullish Sector! *** Comcast Corporation (NASDAQ:SMCSA) is a cable operator involved in three principal lines of business: cable, through the development, management and operation of broadband communications networks; commerce, through QVC, its electronic retailing subsidiary; and content, through its consolidated subsidiaries Comcast Spectacor, Comcast SportsNet, Comcast SportsNet Mid-Atlantic, Comcast Sports Southeast, E! Entertainment Television, The Golf Channel, Outdoor Life Network, G4 Media, and through other programming investments. The company has deployed digital cable applications and high-speed Internet service to most of its cable communications systems. In November 2002, AT&T spun-off AT&T Broadband, which provided cable television, high-speed Internet services and telephone services. Immediately following the spin-off, AT&T Broadband combined with Comcast Corporation. Technical Outlook: Sharp bullish activity late in the week in conjunction with earnings report and sector rally; multi-month high; support near recent trading-range top at $27. Potential Catalysts: Recently reported a narrower fourth-quarter loss and issued a strong 2003 forecast on good subscriber numbers and a smaller capital spending budget than previously forecast. PLAY (less conservative - bullish/credit spread): BUY PUT MAR-25.00 CCQ-OE OI=6758 A=$0.30 SELL PUT MAR-27.50 CCQ-OY OI=2274 B=$0.60 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$27.20 ***** FIC - Fair, Isaac and Company $48.84 *** Up-Trend Resumes! *** Fair, Isaac and Company (NYSE:FIC) is a provider of creative analytics that unlock value for people, businesses and industries. The company's predictive modeling, decision analysis, intelligence management and decision engine systems power more than 14 billion decisions a year. The company helps thousands of firms in over 60 countries acquire customers more efficiently, increase customer value, reduce risk and credit losses, lower operating expenses and enter new markets more profitably. Major banks and credit card issuers rely on the Company's analytic solutions, as do many insurers, retailers, telecommunications providers and various customer-oriented companies. Fair, Isaac helps companies solve business problems related to customer acquisition, customer management and business process management. Technical Outlook: Shares drifting higher after consolidation from "all-time" high in January; resistance at current levels; near-team buying support at $46. Potential Catalysts: Recently listed with a 5-STAR buy rating in S&P's Stock Appreciation Ranking System for Internet software and services stocks; reported 73% year-over-year revenue growth in January. PLAY (conservative - bullish/credit spread): BUY PUT MAR-40.00 FIC-OH OI=116 A=$0.30 SELL PUT MAR-45.00 FIC-OI OI=76 B=$0.75 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$44.55 ***** PG - Proctor & Gamble $81.86 *** P&G Buying Wella? *** The Procter & Gamble Company (NYSE:PG) manufactures and markets more than 250 products to more than five billion consumers in 130 countries throughout the world. The company categorizes its business operations as follows: Baby, Feminine and Family Care, Fabric and Home Care, Beauty Care, Health Care, and Food and Beverage. Technical Outlook: Near-term bearish in a multi-month downtrend; minimal support near the current price; resistance near $84-$86; news-driven play with potential for volatility. Potential Catalysts: P&G shares have slumped on speculation the firm will purchase German hair-care company Wella. Boerse Online magazine reported that negotiations with P&G were well advanced and investors are unhappy about the 80 euros per share offer. PLAY (less conservative - bearish/credit spread): BUY CALL MAR-90.00 PG-CR OI=5788 A=$0.10 SELL CALL MAR-85.00 PG-CQ OI=13445 B=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$85.45 ***** TRMS - Trimeris $40.02 *** Next Leg Down? *** Trimeris (NASDAQ:TRMS) is engaged in the discovery and development of fusion inhibitors, a new class of antiviral drug treatments. Fusion inhibitors impair viral fusion, a complex process by which viruses attach to and penetrate host cells. If a virus cannot enter a host cell, the virus cannot replicate. By inhibiting the fusion process of particular types of viruses, the company's drug candidates under development offer a novel mechanism of action with the potential to treat a variety of medically important viral diseases. Trimeris is a development stage company. The firm has invested a significant portion of its time and financial resources in the development of T-20, its lead drug candidate. Technical Outlook: Short-term bearish in a lateral consolidation after recent gains on positive drug developments in Europe; some support near current price; volatility expected along with FDA approval in mid-March. Potential Catalysts: Shares have slumped over concerns that the company's new AIDS drug may be too expensive, possibly twice as much as many currently available treatments; also concerns over production limitations in the near-term. PLAY (less conservative - bearish/credit spread): BUY CALL MAR-50.00 RQM-CJ OI=512 A=$0.15 SELL CALL MAR-45.00 RQM-CI OI=808 B=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$45.45 *************************** 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 calendar spreads in this section are speculative with low initial costs and large potential profits. A diagonal spread is also a "time-selling" strategy but with a strong directional bias. Our conservative approach to this technique is based on the purchase of "in-the-money" options and position adjustments can boost the potential profit when the underlying issue moves as expected. ***** CMVT - Comverse Technology $10.20 *** Reader's Request! *** Comverse Technology (NASDAQ:CMVT) designs, develops, manufactures, markets and supports computer and telecommunications systems and software for multimedia communications and information processing applications. The company's subsidiaries are Comverse, Verint Systems and Ulticom. The company's products are used in a broad range of applications by wireless and wireline telecommunications network operators and service providers, call centers, and other public and commercial organizations worldwide. A large portion of the firm's research and development, manufacturing and other operations are located in Israel. Technical Outlook: Near-term "bullish" trend after late-2002 rally and consolidation; key test of buying support near current price (150-dma); upside potential limited by "double-top" at $12. Potential Catalysts: Positive sector/industry bias due to several optimistic economic reports; analysts say the telecom downturn has stabilized; CMVT's quarterly earnings due in mid-March. PLAY (speculative - bullish/diagonal spread): BUY CALL APR-7.50 CVQ-DU OI=398 A=$2.95 SELL CALL MAR-10.00 CVQ-CB OI=3764 B=$0.70 INITIAL NET-DEBIT TARGET=$2.20-$2.25 INITIAL TARGET PROFIT=11% B/E=$9.75 ***** ICST - Integrated Circuit Systems $23.86 *** Hot Sector! *** Integrated Circuit (NASDAQ:ICST) is engaged in the business of designing and marketing custom application specific integrated circuits (ASICs) for various industrial customers. The company's business is divided into 2 categories: Core and Non-Core Segments. The Core segment supplies a broad line of timing products for use in PC motherboard and peripheral applications. The Non-Core segment sells mixed-signal (analog and digital) ICs customized to the specific requirements of a broad range of customers and applications. Technical Outlook: Recent bullish activity on increasing volume; support near interim trading-range top at $22.50; rally should retest long-term resistance at $26 after necessary consolidation. Potential Catalysts: Semiconductor shares have outperformed the the broader market in recent sessions; traders say share values are priced for some upside at current levels. PLAY (speculative - bullish/diagonal spread): BUY CALL APR-22.50 IUY-DX OI=50 A=$2.85 SELL CALL MAR-25.00 IUY-CE OI=165 B=$0.70 INITIAL NET-DEBIT TARGET=$2.10-$2.15 INITIAL TARGET PROFIT=16% B/E=$24.65 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** UOPX - University of Phoenix Online $37.38 *** Rally Mode! *** University of Phoenix Online (NASDAQ:UOPX) is a provider of unique, accessible, and accredited educational programs for working adults. The firm began operations in 1989 by modifying courses developed by University of Phoenix's physical campuses for delivery via modem to students worldwide. University of Phoenix Online now offers 11 accredited degree programs in business, education, information technology and nursing. Students can participate in their online classes anytime via the Internet by using basic technology such as a Pentium-class personal computer, a 28.8K modem and an Internet service provider, thereby enhancing the accessibility of and the potential market for its programs. Technical Outlook: Short-term "bullish" trend with robust buying pressure; resistance near $39; previous trading-range top provides support at $36. Potential Catalysts: Recently listed by Zacks.com with a "strong buy" rating; expected to post favorable earnings in late March. PLAY (very speculative - bullish/synthetic position): BUY CALL MAR-40.00 UBY-CH OI=90 A=$0.80 SELL PUT MAR-35.00 UBY-OG OI=155 B=$0.60 INITIAL NET-DEBIT TARGET=$0.00-$0.10 INITIAL TARGET PROFIT=$0.45-$0.75 Note: Using options, the position is similar to being long the stock. The minimum initial margin/collateral requirement for the sold option is approximately $1,325 per contract. However, do not open this position if you can not afford to purchase the stock at the sold put strike price ($35). ***** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ Bullish Candidates To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_030203.asp ************** MARKET POSTURE ************** Out of Gas or Finding Support? 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