The Option Investor Newsletter Wednesday 03-05-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Unclear Signals Futures Wrap: Breaking Channels Index Trader Wrap: (See Note) Weekly Fund Family Profile: Buffalo Funds (Kornitzer Capital Management) Options 101: Reality Check Updated on the site tonight: Swing Trader Game Plan: Which Way Did He Go? Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 03-05-2003 High Low Volume Advance/Decl DJIA 7775.60 + 70.73 7775.60 7661.32 1517 mln 915/576 NASDAQ 1314.40 + 6.63 1317.69 1302.05 1330 mln 578/735 S&P 100 420.30 + 4.94 420.31 413.98 totals 1493/1311 S&P 500 829.85 + 7.86 829.87 819.00 RUS 2000 356.54 + 0.03 357.06 354.64 DJ TRANS 2036.97 + 2.61 2040.49 2020.83 VIX 34.23 - 2.35 36.54 34.20 VIXN 44.34 - 0.63 46.05 44.34 Put/Call Ratio 0.74 ******************************************************************* Unclear Signals by Steven Price With no clear signals today, traders were left wondering if we had seen another short-term bottom, or if the lower lows signaled further weakness. After a sell-off of over 300 Dow points since the last failed test of the 8000 level, it appeared this morning as though the nightmare would continue. The Dow broke down below the 7700 level that held it on Tuesday's close. However, just as it appeared we were going to sink to new levels and possibly test the relative intraday low of 7628, the bulls came back and swept it back over 7700. Of course, that wasn't the end of the story, as traders were left with a case of whiplash before we eventually finished the day near our highs. The main piece of economic data we got this morning came from the ISM services data. After the ISM manufacturing report came in below expectations and showed a barely expanding sector, the services index was a little more soothing. It came in just above estimates, at 53.9, versus the consensus 53.6, and indicated more decisive expansion. Any reading over 50 indicates expansion, while any reading below 50 indicates contraction. The ISM manufacturing index had come in at 50.5, which send shivers through the market, as it bordered on contraction. The services index was certainly better, but it also showed a trend toward slowing down. The previous reading had been 54.5. A look at the internals of the report also raised some red flags. Although this is the 13th straight month of expansion, the backlog orders number was much better than the new orders data. Backlogs increased 2%, but new orders decreased 3.2%. That data brought out the bears, at least temporarily. One of the other factors weighing on the market this morning was weakness in the U.S. dollar. The greenback has been on a slide lately, which has been a good indication of why the dollar denominated stock market has been in a funk. As war expectations continue to escalate, it appears more money is leaving the U.S., reflected by both the dollar index and the stock market. On the other hand we are seeing an influx of cash into U.S. treasuries. However, given higher returns in Eurobonds, and the sinking dollar, it is likely that the U.S. bond market is seeing a lower level of investment than we might otherwise see. The dollar got no help this morning when Treasury Secretary John Snow said he didn't see anything wrong with the sinking dollar. Snow said, "The dollar is in the marketplace. Everything in the marketplace goes up some and falls some. It's within normal ranges." While he tried backpedaling later, saying he supported a strong dollar, the damage was done, letting investors know that the administration was in no rush to take defensive measures. With Hans Blix set to speak to reporters, we saw some short covering, since many of Blix's speeches have resulted in short- term rallies. However, those rallies have turned out to be gifts for the bears that shorted them as they ran out of steam. When Blix finally gave his news conference, he discussed progress in the weapons inspections in Iraq. He said that the investigators had conducted seven interviews with scientists, completely on the U.N.'s terms, without the presence of monitors or tape recorders. That was progress from earlier efforts which had both and were eventually suspended. He also implied the possibility that the hotel rooms in which the interviews were conducted could have been bugged and that the scientists could have been prepped for their responses, but he still called it progress. He also said that Iraq's destruction of al-Samoud missiles was a proactive step in disarmament. Another telling revelation was that he had renewed his contract with the U.N. through the end of June. While this would imply an extended period for inspections, beyond the U.S. timetable for an invasion this month, he also said that with the U.S. build-up, the inspectors had evacuation plans in place in the case of a U.S. attack. The U.S. appears to be preparing the public for its invasion. A news conference from Donald Rumsfeld and Gen. Tommy Franks described possible strategy and weapons that would be used in a U.S. invasion. Colin Powell then followed their presentations with a speech of his own in which he said Saddam was once again playing a game of distraction and confusion. Powell said the point of 1441 was to show everything the country had, not show as little as possible. He said that Saddam's response to resolution 1441 was deceit and deception and that his "too little, too late efforts" have been meant to divide the international community and that those efforts must fail. Powell took shots at fellow Security Council members, as well, saying they essentially had short memories. He also said he had new evidence that Iraq was still moving weapons of mass destruction around the country to avoid detection. It certainly seems as though Hans Blix will not have the opportunity to fulfill his contract - I certainly hope it came with an upfront signing bonus. Following the conclusion of Colin Powell's speech, in which he concluded that Iraq had not complied with resolution 1441, we headed back into the red as traders were left with the impression that we were likely to be going to war without a coalition. The fact that a weak Beige Book report came out during the speech didn't help either. Of course, like every other move today, it eventually reversed itself. By the end of the day, we finished on a positive note, with the Dow putting on 70 points, but still falling short of the recent support break at 7800. The Beige Book report said that growth in economic activity for the past two months remained subdued and that few districts reported any notable changes. Consumer spending remained weak and business spending remained very soft, with little change in capex or hiring plans. It also said manufacturing activity remained lackluster, although half the districts reported some improvement. Rising energy and insurance costs were a concern and the agricultural sector was negatively affected by poor weather. The lone bright spot was refinancing activity, which continues to drive growth in residential loans. The problem looming on that front, however, was highlighted earlier in the week when Alan Greenspan implied that the housing market had peaked last year and we shouldn't expect the same level of economic support this time around. Business loans remained weak. When we got our mid-morning reversal ahead of Blix' testimony, it still came at a lower level than the last few bounces. When a 300-point Dow sell-off results in a bounce 70 points, it is hard to conclude that we have seen anything but an oversold bounce. Remember we are coming off a drop of 1200 Dow points that saw a 400 point bounce that has now almost evaporated. In the big picture it seems little has changed. 60 Minute Chart of the Dow Daily Chart of the Dow However, we do need to be aware that we are getting to the point where our recent head and shoulders objectives have been approached and nearly achieved. While we did achieve the objective from the summer-fall pattern when the Dow traded down to 7197, the objective of the current pattern is right around 7500. While this morning's low of 7664 is not a full achievement, we are getting close, just as the bullish percents are stretching themselves deep into oversold territory and approaching the July and October lows. The Dow bullish percent has reached 13%, which actually rests on the ascending bullish support line at 12%. The fact that we have not reversed up yet still looks bearish, but we are definitely into territory where risks are shifting less in favor of bearish positions. When you combine that extension with the fact that we have nearly achieved the H&S objective and the fact that we are nearing the start date for a U.S. invasion, we need to be aware that a bounce is possible and we should begin to protect short positions with tighter stops. Chart of the Dow Bullish Percent Notice I have not recommended shifting to the long side. That is because the downtrend is still in effect. I am simply raising our bounce alert to "orange." With today's lower high and the fact that each recent bounce has been a shorting opportunity, I am not ready to declare a reversal based on today's action. Let's face it; my earlier point about the 400-point bounce nearly erasing itself still looks awfully bearish. Last week I highlighted a possible bearish triangle forming on the point and figure chart in the Dow on its recent rebound to 7950. The reversal down from that level has continued and appears to be showing a bearish breakdown of that pattern. It followed another bearish breakdown - a triple bottom sell signal, and the trade down through 7700 simply extended that breakdown and underscored the overall bearish picture. Point and Figure Chart of the Dow The techs are presenting a slightly different picture. The Nasdaq Composite continues to hold up relatively well. I say relatively because it did drop decisively from its last test of 1350 and is now flirting with support at 1300. That support has so far been firm. Today's low of 1302 indicates that the bulls are continuing to defend that level and so far winning the battle. Bulls and bears alike can keep their eye on that support, as a breakdown could lead to another test of recent lows around 1260. So far, we have little reason to be bullish. However, some of our analysts have raised the possibility of the formation of a bullish head and shoulders formation, with the left shoulder at the July lows, the head at the October lows, and the right shoulder currently forming right about where we are trading now. While I am not subscribing to this theory just yet, the oversold bullish percents require us to at least look at that pattern. We wouldn't reach a neckline until around 9000, but in order to avoid being labeled a dyed in the wool bear, I thought I'd at least share the observation with readers. After all, being "right" should not be a concern, only adjusting to the current action and riding it to as large a profit as possible. I'm still leaning short, but I am also making myself aware of the shift in risks. It is possible that as numerous factors all come to a head (war, H&S target, extended bullish percents), the confluence could lead to a change of direction. Certainly today's sprint to closing highs tells us that the bulls are still lurking and saw something promising in today's developments that left them looking for more at the close. Keep your stops tight and your eyes open to all possibilities. ************ FUTURES WRAP ************ Breaking Channels By Larry Wales Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 7775.60 +70.73 7775.60 7661.32 YM03H 7771.00 +59.00 7772.00 7660.00 Nasdaq 100 990.23 +7.25 995.19 978.40 NQ03H 988.00 +2.50 996.50 978.00 S&P 500 829.25 +7.86 829.87 819.00 ES03H 829.50 +7.25 830.00 818.25 Daily Levels Contract R2 R1 Pivot S1 S2 Dow 7851.90 7813.79 7737.56 7699.44 7623.21 YM03H 7846.38 7808.68 7734.30 7696.60 7622.22 Nasdaq 100 1004.69 997.45 987.92 980.69 971.16 NQ03H 1005.97 996.98 987.51 978.52 969.05 S&P 500 836.92 833.07 826.03 822.19 815.14 ES03H 837.65 833.57 825.90 821.82 814.15 Weekly Levels Contract R2 R1 Pivot S1 S2 YM03H 8224.00 8072.00 7889.00 7737.00 7554.00 NQ03H 1053.25 1031.75 1000.25 978.75 947.25 ES03H 869.50 855.25 836.25 822.00 803.00 Monthly Levels Contract R2 R1 Pivot S1 S2 YM03H 8406.00 8163.00 7890.00 7647.00 7374.00 NQ03H 1073.75 1042.25 990.25 958.75 906.75 ES03H 895.50 868.25 836.75 809.50 778.00 ES03H March S&P E-mini Today we saw the ES break out from it’s descending channel ( if you want to call it that ) from Monday’s highs on the 5 min chart. The ES traded within the boundaries of S1 at 817.25 and the pivot at 826.25 all morning while finally breaking out over the lunch hour when most of us are sitting on our hands. While this looks like it might have some legs I beg to differ. We got an old fashioned oversold bounce. The trin was over 3.00 and the bears just got disgusted with all the geo political nonsense going on in the world. Next thing we will hear will be a Hans Blix indicator for the markets. The ES is still in a down trending channel from the beginning of the year on the daily chart and while she broke the S1 Weekly level at 822.00 it has the weekly pivot to contend with at 836.25. If we get enough buying to take us over 836.25 if probably will induce some short covering. But there is a lot of overhead resistance especially at 850 area. What I will look for tomorrow is a test back to the upper value area of 826.00 and if we get through that I expect the contract to trade back to the point of control which is 823.75 and back to weekly S1 of 822.00. NQ03H March Nasdaq E-Mini The NQ managed to squeak out a small gain today with the 1000.00 level keeping a lid on any attempt to move the contract higher. This is also a key level as it is the weekly pivot as well. The NQ traded in a tight range between R1 and S1 .The weekly S1 just happens to be 978.75 just where the NQ bounced from today. This definitely lends credence to the fact that a computer buy program was set to trigger at the weekly support level just mentioned. Even if the NQ does manage to break the 1000.00 mark, the 1022 area will be a tough nut to crack in my opinion. The NQ is in a descending channel from back in December and the upper trend line as seen on the daily chart will make formidable resistance as well. With that said we have a bear flag on the 5 min but we closed right on the bottom channel. What we will look for tomorrow is a move back to the lower value area of 978.00 and if we get past the pivot, which is 987.50, the 1000.00 mark should be quite a battle. YM03H March Dow E-Mini ($5) The YM traded today in a tight range and is on a road to nowhere as well. It did trade above the S1 weekly level of 7737.00 but finished directly at the bottom trend line of the bear flag that it broke yesterday. I expect the bears to test that S1 weekly level again and see if the bulls have any resolve .The Dow seems to be fighting for every single point these days and resistance levels at the 8000 and 8050 seem almost insurmountable. Good Trading Tomorrow Larry Wales ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_030503_1.asp ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************************** WEEKLY FUND FAMILY PROFILE ************************** Buffalo Funds (Kornitzer Capital Management) The Buffalo Funds are a family of no-load funds run by Kornitzer Capital Management (KCM) of Shawnee Mission, Kansas, a research- driven investment firm that closely analyzes the industries and companies that they invest in. John Kornitzer, a veteran of 35 years in the investments industry, founded KCM in 1989 to serve the needs of institutional clients. Other key members of KCM's management team joined in the early 1990s; namely, Kent Casaway in 1991 (now, chief fixed income strategist), and Tom Laming in 1993 (now, chief equity strategist). A fourth key team member is Robert Male. He joined KCM in 1997 and assists on the equity portfolios and funds. Each member of KCM's management team has an extensive background in securities and investments. Kornitzer's 35 years of investment management experience includes portfolio management stints with GE, Texaco, and Employers Reinsurance Corporation. Gasaway's 20 plus years in the business includes ten years with the United Mutual Funds Group. Laming served as a technology analyst at Waddell & Reed and as a spacecraft engineer for TRW and Martin Marietta before joining KCM. In 1994, approximately five years following the firm's founding, KCM started its first mutual fund, Buffalo Balanced Fund (BUFBX), a unique balanced product investing in equity securities and in high-yield debt securities. Most balanced funds concentrate the fund's bond allocation in investment-grade debt securities. KCM likes the high-yield market because the research process is very similar to that used to analyze stocks and high-yield securities offer greater risk/reward potential than investment-grade bonds. Three more funds were added in 1995, including the Buffalo High Yield Fund (BUFHX), Buffalo Large Cap Fund (BUFEX), and Buffalo USA Global Fund (BUFGX). The USA Global Fund is unique also in that it seeks to provide global growth exposure by investing in the equity securities of U.S. companies, which do a big portion of their business abroad. This strategy is similar to the Papp America-Abroad Fund (PAAFX), which began operations in 1991. A small-cap equity fund was added in 1998, and a mid-cap fund was added in 2001 to provide investors exposure to the various "cap" sectors of the U.S. stock market. The Buffalo Funds family of funds have no front-end or back-end load charges, and are available on a no-load, NTF basis through Charles Schwab's OneSource program as well as the other leading fund networks. Expense ratios are below average, slightly more than 1.00% in most cases, per Morningstar. That compares to an annual expense ratio of 1.40% for the average mutual fund. The Buffalo funds are open to new investment and require a minimum initial purchase of $2,500 for regular accounts ($250 for IRAs). For more information or to download a fund prospectus, the fund website is www.buffalofunds.com. For further info on Kornitzer Capital Management, Inc. as an investment firm, go to the About Buffalo Funds section. Fund Overview We have already talked a little bit about the history of the firm and when the various mutual funds started operations. KCM offers seven no-load mutual funds in the retail marketplace, as follows: Buffalo Funds (Managed by Kornitzer Capital Management): Buffalo Balanced Fund (BUFBX) Buffalo High Yield Fund (BUFHX) Buffalo Large Cap Fund (BUFEX) Buffalo Mid Cap Fund (BUFMX) Buffalo Small Cap Fund (BUFSX) Buffalo Science & Technology Fund (BUFTX) Buffalo USA Global Fund (BUFGX) The Buffalo Science & Technology Fund, which we have not talked about yet, got its start in 2001 along with the mid-cap product. Like other tech funds, it has fallen on hard times, losing near 23% a year on an annualized basis since inception. The Buffalo Mid Cap Fund has struggled in its infancy too, losing about 25% per year on average since inception. Those numbers are through February 28, 2003 per the Buffalo Funds' website. So, cautious investors might want to wait until these two new offerings have longer track records of performance. In terms of equity strategy, KCM starts by identifying "trends" that they believe are developing with a high level of certainty. They place emphasis on those trends, which may provide positive operating environments for companies over the next three to five years. KCM's managers then seek to identify companies that will benefit the most from the subsequent development of these trends. The fund website offers some examples of trends they may look at. Final stock selection is based on price valuation, the company's business model and potential profitability, and ongoing analysis of each company and its industry. Companies that pass all of KCM's criteria are then candidates for purchase in client portfolio and mutual funds. When a firm fails to pass any of the above KCM analyses, it becomes a candidate for sale. In terms of its fixed income strategy, KCM's managers constantly seek out the best risk/reward potential in the high-yield market, looking at the relative value relationships among different bond groups as they change over time. These changes, they state, are based on variables such as the state of the U.S. economy, supply and demand for new bond issues, the health of the equity markets, and changing tax rates. In bond selection, the KCM managers focus on issuers that have favorable long-term growth trends in the business and in their industry. Their research seeks the best risk-reward potential, even if that leads them to distressed debt situations in which there may be considerable negative sentiment. Here, KCM seeks value opportunities within the high yield market that may have less to lose and more to gain, using their research to "buy in" when others may be capitulating. It's an area that requires a lot of research, but offers strong growth potential if managed well. So, the bond strategy seeks to purchase strong companies at bargain yields. In the next section, we'll see how well the various strategies have performed relative to appropriate benchmarks. Fund Performance KCM's most successful mutual fund on the basis of assets is the Buffalo Small Cap Fund (BUFSX), co-managed by Kent Gasaway, Tom Laming, and Bob Male since 1994. It currently has $717 million in net assets, per Morningstar. This manager trio has produced high returns with just average risk relative to other small-cap growth managers, according to Morningstar, for a 5-star overall (highest) performance rating. The above chart shows what can happen over a shorter time period. However, a look at the Small Cap Fund's returns "since inception" paints a better picture of what you may expect to receive a year. According to the fund website, the Buffalo Small Cap Fund had an annual average return of 9.5% since fund inception (as of month- end). Since the fund hasn't been around the full five years yet, we can't say with certainty where its trailing 5-year return may rank but it's likely to be high. For the trailing 3-year period, the small cap fund ranked in the top 5% of the Morningstar small- cap growth category, losing just 4.3% a year on average compared with an annualized loss of 15.2% for the S&P 500 large-cap index. In 1999, 2000 and 2001, the Buffalo Small Cap Fund earned annual returns of 34.8%, 33.7% and 31.2%, respectively, so it has shown that it can capture some big returns for investors. Although it has slipped a notch this year, the fund has made a good case for itself as a supporting player in one's long-term financial plan. Below is a performance summary for the trailing 3-year period as of March 4, and where applicable, for the trailing 5-year period, using data from Morningstar. 3-Year Average Annual Returns and Rankings: - 6.9% Buffalo Balanced (BUFBX) 6th Percentile + 6.3% Buffalo High Yield (BUFHX) 3rd Percentile -12.9% Buffalo Large Cap (BUFEX) 25th Percentile -- Buffalo Mid Cap (BUFMX) N/a - 4.3% Buffalo Small Cap (BUFSX) 5th Percentile -- Buffalo Science & Technology (BUFTX) N/a -15.4% Buffalo USA Global (BUFGX) 44th Percentile 5-Year Average Annual Returns and Rankings: - 3.5% Buffalo Balanced (BUFBX) 37th Percentile - 2.9% Buffalo High Yield (BUFHX) 6th Percentile - 3.4% Buffalo Large Cap (BUFEX) 37th Percentile -- Buffalo Mid Cap (BUFMX) N/a -- Buffalo Small Cap (BUFSX) N/a -- Buffalo Science & Technology (BUFTX) N/a - 1.1% Buffalo USA Global (BUFGX) 14th Percentile You can see here that, for the most part, the Buffalo Funds have performed relatively well against similar funds. The high-yield product has done very well, producing total returns that rank in the first decile of the Morningstar high-yield category over the trailing 3-year and 5-year periods. All periods shown here, the Buffalo Funds' performance is either first quartile, or at worse second quartile. So, while there are negative numbers, we think the Buffalo Funds management team has made a strong case for why you may want to consider investing with them. Five of the seven Buffalo funds have Morningstar ratings, and of those five funds, one is 5-star highest rated, three have 4-star (above average) ratings, and only one fund is 3-star (or average) rated for risk-adjusted return performance relative to their fund category peers, per Morningstar. While the average international equity fund has been somewhat of a disappointment during the past five years, the Buffalo USA Global Fund's "stay at home" approach has helped to control fund losses relative to pure foreign equity funds. Conclusion It would appear from the relative performance figures that KCM's various investment strategies are worth consideration. The firm has performed especially well in the high-yield markets relative to other high-yield managers; so, risk-tolerant income investors may find the Buffalo High Yield Fund to be a suitable option for their investment needs. For long-term equity investors who want some "international" exposure but don't want to invest in a non- U.S. stock fund may wish to consider the Buffalo USA Global Fund for their investment program. The success of KCM's earlier funds suggests that the newer funds may eventually do all right relative to similar funds. For more information, go to the fund family site at www.buffalofunds.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org *********** OPTIONS 101 *********** Reality Check by Mark Phillips mphillips@OptionInvestor.com Sometimes, I don't know what I'd do for article ideas if it weren't for all the great questions I get from readers. That's certainly the case today, as one of my regular readers reminded me of some comments I made around the start of the year, wondering if they're still valid. When I was in my predictive mode (with the rest of the Financial community) around the first of the year, I talked about my expectations for 2003 and whether we would get an unprecedented fourth down year, or if the markets would somehow stumble their way to a positive close this year. As is so often the case, I bit off more than I could chew with that topic, and the discussion took two articles to cover. If you missed the articles the first time around, I'd suggest taking a look here. 'Tis The Season http://www.OptionInvestor.com/traderscorner/tc_010603_1.asp 'Tis The Season, Part II http://members.OptionInvestor.com/options101/opt_010803_1.asp Since writing those articles, Buzz Lynn has done a great job of handling the many big-picture items that I didn't get to, saving me that Herculean effort. Some of my near-term views have been proven correct and others, well, not-so-correct. GRIN Fortunately, today's question deals with an aspect of my prognostication that I think is still very much in force. So without further delay, let's get to it! My question this time is with regard to the amazing resilience I see in the QQQ's. I recall you mentioning sometime ago in one of your Sunday writings that you don't expect much weakness in the NASDAQ stocks. This is what I now see. The only breakdown (if we can call it that) in the QQQ's occurred on February 13th when they went down to 23.25. Since then I have not seen the Q's below the 24 level. Do you think this is genuinely bullish scenario or we could see the Q's suddenly giving way and overtaking even the SPX to the downside? I am puzzled as to what to make of this. NASDAQ stocks with no earnings outperforming the Dow and the S&P. Now see, that's a great observation. The NASDAQ IS holding up better than the rest of the market lately. I don't know that I'd exactly call it strong, but it is exhibiting strength relative to the broader market. This is the kind of behavior I expected when I wrote those articles back in January, and I've got a couple primary reasons for that view. First off, Technology stocks fueled the irrational mania that took the NASDAQ to its peak in early 2000, and while the rest of the market certainly went along for the ride, the extreme over-valuations were primarily concentrated in the Technology arena. So it only makes sense that the bulk of the ensuing carnage in the market was focused in the Technology space as well. At its depth last October, the NASDAQ Composite had shed 78% of its peak value from March of 2000. By that time the COMPX had fallen back to levels not seen since July of 1996! By contrast, at the October lows, the SPX had "only" given back 50% of its peak value from early 2000 and still had more than 130 points to go before challenging its own July 1996 levels. By my way of thinking, that meant the broader market had more potential downside in store than did the Technology sector. The other factor influencing my bias of greater downside potential away from Technology was the weekly chart patterns of the COMPX and the SPX. The SPX has been mired in a persistent descending channel since topping out in 2000, and has been methodically working its way lower in that channel. By contrast, the COMPX got the bulk of its decline out of the way by early 2001 and since then has been declining at a much more pedestrian rate than the SPX. An argument can be made for a descending channel in the COMPX as well, but note how much shallower it is than that seen on the SPX. Weekly Chart of the SPX Weekly Chart of the COMPX We could look at the daily chart of either the COMPX or the SPX and draw an ascending trendline from the October lows to the February 13th low and in both cases, we can see that price action is holding above those trendlines. But I think a more useful way to view the difference between the strength in these two indices is through the application of one of my favorite tools, the relative strength chart. Below, I have shown a chart of the COMPX relative to the SPX, and the relative strength jumps out at us, don't you think? Relative Strength Chart of the COMPX vs. the SPX - Weekly Note how this chart bottomed just above 1.40 (don't try to figure out the scale) in late 2001 and that defined a floor again last October. And while both indices would be classified as weak right now, the upward trend since December indicates less selling pressure in the COMPX than the SPX. This developing trend is even more apparent if we look at a daily chart. Relative Strength Chart of the COMPX vs. the SPX - Daily I think this series of charts goes a long ways toward explaining why the QQQ has been rather resistant to selling off, even in the midst of what is clearly weakness in the rest of the market. Watch the center lines on the channels shown on those weekly charts, as that will be the key for further downside from here. I think it is highly unlikely that the COMPX will break down into the lower half of its channel without the SPX leading the way with a break below its channel center line. I wouldn't say that the QQQ makes for a great bullish trade, but I would suggest that bears would do well to look for a better target for playing the downside in the current environment. Here's a concrete measurement we can use in the future to gauge whether the NASDAQ is continuing with this relative outperformance. Watch the top of those channels for a breakout to the upside. I'm betting that the bulls will be able to crest the top of the COMPX channel before they can clear the top of the SPX channel. Time will tell! What it really comes down to is an issue of financial performance RELATIVE TO expectations. In my opinion, expectations in the Technology arena were taken so low over the past couple years, that successive disappointments aren't having the pronounced effect they did in the recent past. On the other hand, expectations for financial performance outside of the technology market have come down at a more controlled rate, leaving further room to the downside as this bear market continues and expectations continue to be reduced. The possibility still exists for another significant leg down in the broad market, and when that materializes, it is highly likely that the NASDAQ market will be pressured below recent support. One thing I do not expect is for the COMPX to suddenly plunge and play catch up with the rest of the market. I think the days of the NASDAQ leading to the downside are behind us. If I'm correct, the better bearish play will clearly be found in areas of the market that are not exhibiting this relative strength. Any ideas what those might be? Take a look at some relative strength charts over the weekend and send your ideas along. Please put "Relative Weakness" in the subject line. We'll take a look at some of your ideas next week. Questions are always welcome! 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The Option Investor Newsletter Wednesday 03-05-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: SLAB, ZMH, SYY, UTX Dropped Calls: None Dropped Puts: None Play of the Day: Call - AMGN Spreads, Combinations & Premium-Selling Plays: A Market Gripped By Fear And Apprehension! Updated on the site tonight: Market Posture: Those Middling Markets Market Watch: Shifting to the Middle ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** Call SLAB Adjust up from $23.24 to $24.50 ZMH Adjust up from $39.75 to $40.75 Put SYY Adjust down from $28.50 to $27.25 UTX Adjust down from $60.00 to $58.75 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************** PLAY OF THE DAY - CALL ********************** AMGN – Amgen, Inc. $55.33 +1.21 (+0.69 for the 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. Most Recent Write-Up: 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. Why This Is Our Play of the Day: It's been a long time coming, but OI call play AMGN finally broke out above the $55 mark. After testing this level unsuccessfully numerous times over the past couple of weeks, the stock finally appears to be breaking out. The fact that it has remained in a strong uptrend since last November, in spite of a schizophrenic market and sinking Biotech Index (BTK), underscores its achievements. It not only broke out above that resistance, but finished there on a closing basis, as well. We will need to be cautious of the current channel, which the stock is nearing the top of and the most profitable entries may come on a pullback to a higher level of support around $54 to $54.50. However, momentum traders can look to enter on support at $55, which we got this afternoon. There is quite a bit of noise on the weekly chart between $55 and the 200-pma on that chart sits at $55.49. Conservative traders looking to enter on momentum can look for support above $55.50. However, the next level of resistance appears to be $60 and that will be our target from this level. BUY CALL MAR-50 AMQ-CJ OI= 7028 at $5.70 SL=3.00 BUY CALL MAR-55*YAA-CK OI=33568 at $1.70 SL=0.75 BUY CALL APR-55 YAA-DK OI=34852 at $2.85 SL=1.50 Average Daily Volume = 12.0 mln ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* A Market Gripped By Fear And Apprehension! By Ray Cummins Stocks ended higher today even as concerns over terrorism, the war with Iraq and challenging world politics continued to dominate the headlines. The Dow Jones Industrial Average gained 70 points to end at 7,775 amid strength in AT&T (NYSE:T), Citigroup (NYSE:C), Exxon-Mobil (NYSE:XOM), General Electric (NYSE:GE), Wal-Mart (NYSE:WMT), Johnson & Johnson (NYSE:JNJ), and SBC Communications (NYSE:SBC). The NASDAQ Composite rose 6 points 1,314 on bullish activity in semiconductor and telecom-equipment stocks. The S&P 500 index added 7 points to finish at 829 with biotechnology, insurance, bank, construction and utility shares among the best performers. Trading volume remained light, as it has in recent weeks, with shares exchanged totaling only 1.3 billion on the NYSE and 1.37 billion on the NASDAQ. In the overall market, breadth was upbeat as gainers outpaced losers 17 to 15 on the Big Board. Technology stocks were less popular with decliners dumping advancers by the same margin, 17 to 15. U.S. Treasury prices rose for an eighth session as a downbeat Federal Reserve report on the economy drove investors into safe-harbor debt. The 10-year bond rose 5/32 with its yield closing at 3.63%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 3/04/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ANF MAR 25 24.40 27.02 $0.60 5.97% 2.46% CLX MAR 40 39.00 41.62 $1.00 5.01% 2.56% OTEX MAR 25 24.50 27.55 $0.50 4.97% 2.04% SYMC MAR 40 39.15 41.57 $0.85 5.10% 2.17% VIP MAR 30 29.40 37.50 $0.60 4.74% 2.04% ANF MAR 25 24.65 27.02 $0.35 4.66% 1.42% AVCT MAR 22 22.20 28.00 $0.30 4.59% 1.35% DISH MAR 22 22.00 27.65 $0.50 7.13% 2.27% IGEN MAR 30 29.50 32.00 $0.50 6.04% 1.69% PTEN MAR 30 29.45 32.28 $0.55 5.17% 1.87% RYL MAR 37 36.95 38.67 $0.55 4.42% 1.49% AVCT MAR 25 24.70 28.00 $0.30 4.78% 1.21% BJS MAR 32 31.95 33.42 $0.55 6.10% 1.72% DISH MAR 22 22.15 27.65 $0.35 6.56% 1.58% NE MAR 35 34.35 35.86 $0.65 6.48% 1.89% NBR MAR 35 34.65 39.43 $0.35 4.30% 1.01% PTEN MAR 32 31.95 32.28 $0.33 3.55% 1.72% VLO MAR 35 34.60 39.82 $0.40 4.49% 1.16% Stocks in the oil segment are suspect right now as they retreat to near-term support areas after the recent rally. Issues on the early-exit list include Noble (NYSE:NE) and Patterson-UTI (NASDAQ:PTEN) at the $32.50 strike. Ryland (NYSE:RYL) was hurt by reports of a potential construction slump in new homes, thus conservative traders should consider closing that position on any further downside movement. Naked Calls Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ESRX MAR 55 55.70 51.04 $0.70 5.07% 1.26% GM MAR 37 38.10 31.27 $0.60 4.60% 1.57% VIA MAR 40 40.95 35.41 $0.95 6.44% 2.32% CCMP MAR 50 50.55 40.84 $0.55 5.47% 1.09% KLAC MAR 40 40.50 34.21 $0.50 5.63% 1.23% QCOM MAR 40 40.45 34.45 $0.45 4.59% 1.11% VZ MAR 40 40.55 34.41 $0.55 4.73% 1.36% OMC MAR 60 60.55 51.97 $0.55 4.52% 0.91% QCOM MAR 37 37.85 34.45 $0.35 4.77% 0.92% QLGC MAR 37 37.90 34.76 $0.40 5.75% 1.06% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status BHE 34.68 32.25 MAR 25 30 0.60 29.40 $0.60 Open PRX 33.67 37.60 MAR 25 30 0.40 29.60 $0.40 Open SLM 105.54 107.70 MAR 90 95 0.45 94.55 $0.45 Open EBAY 76.99 78.08 MAR 65 70 0.55 69.45 $0.55 Open CAT 45.95 45.22 MAR 40 42 0.25 42.25 $0.25 Open BRL 77.21 76.21 MAR 65 70 0.50 69.50 $0.50 Open AGN 63.82 64.32 MAR 55 60 0.50 59.50 $0.50 Open CTSH 69.62 70.01 MAR 60 65 0.60 64.40 $0.60 Open EOG 42.14 40.90 MAR 35 40 0.50 39.50 $0.50 Open Eog Resources (NYSE:EOG) is on the watch-list for "early exit" as the oil service sector consolidates. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status CCU 36.70 33.83 MAR 45 40 0.75 40.75 $0.75 Open FDX 50.87 51.76 MAR 60 55 0.55 55.55 $0.55 Open UTX 60.50 56.98 MAR 70 65 0.60 65.60 $0.60 Open BGEN 38.16 34.73 MAR 45 42 0.00 42.50 $0.00 No Play RD 39.56 40.14 MAR 45 42 0.25 42.75 $0.25 Open AZO 64.86 63.00 MAR 75 70 0.50 70.50 $0.50 Open MRK 52.10 51.61 MAR 60 55 0.55 55.55 $0.55 Open Biogen (NASDAQ:BGEN) gapped down at the open during the session after the play was offered, thus a credit near the target price was not available. Calendar Spreads (Reader's Request) Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status APA 60.74 65.00 APR-65C MAR-65C (0.40) 1.10 Open STJ 43.69 45.68 APR-45C MAR-45C 0.20 0.60 Open Apache Oil (NYSE:APA) and St. Jude Medical (NYSE:STJ) have both offered favorable "early-exit" profits. Credit Strangles No Open Positions Synthetic Positions: No Open Positions Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. *************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** CELG - Celgene $23.00 *** Bullish Outlook! *** Celgene (NASDAQ:CELG) is a commercial-stage biopharmaceutical company. The company is primarily engaged in the discovery, development and commercialization of small molecule drugs that are designed to treat cancer and immunological diseases through gene and protein regulation. Small molecule drugs are man-made, chemically synthesized drugs that, because of their relatively small size, can typically be administered orally. The firm's drugs are designed to modulate multiple disease-related genes, including cytokines (which are proteins) such as Tumor Necrosis Factor alpha, or TNF(alpha), growth factor genes such as those that control angiogenesis, blood vessel formation and apoptosis genes. Because the company's drugs can be administered orally, they have the potential to advance the standard of care beyond current injectible protein drugs that inhibit TNF (alpha) and other disease-causing cytokines. CELG - Celgene $23.00 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 LQH OX 851 0.65 21.85 13.2% 3.0% SELL PUT APR 22.5 LQH PX 568 1.25 21.25 8.7% 5.9% SELL PUT APR 20 LQH PD 300 0.45 19.55 4.7% 2.3% * ************** ERES - eResearch Technology $23.20 *** New All-Time High! *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently. The company offers a range of products and services, including Diagnostics Technology and Services and Clinical Research Technology. Their Diagnostics Technology and Services include centralized diagnostic services and clinical research operations, including clinical trial and data management services. Their Clinical Research Technology and Services include the developing, marketing and support of clinical research technology and services. ERES - eResearch Technology $23.20 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 20 UDB OD 42 0.20 19.80 6.1% 1.0% SELL PUT MAR 22.5 UDB OX 47 0.80 21.70 16.2% 3.7% SELL PUT APR 20 UDB PD 7 0.80 19.20 8.0% 4.2% * ************** LLTC - Linear Technology $30.02 *** Chip Sector Strength? *** Linear Technology (NASDAQ:LLTC) designs, manufactures and sells a broad line of standard high-performance linear integrated circuits (ICs). Applications for the company's products include telecommunications, cellular telephones, networking products, optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products, digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control and military and space systems. LLTC - Linear Technology $30.02 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 27.5 LLQ OY 3,069 0.35 27.15 6.8% 1.3% * SELL PUT MAR 30 LLQ OF 1,803 1.20 28.80 17.3% 4.2% SELL PUT APR 27.5 LLQ PY 56 1.20 26.30 7.8% 4.6% SELL PUT APR 25 LLQ PE 55 0.55 24.45 5.0% 2.2% ************** MXIM - Maxim Integrated $34.34 *** Chip Stock Recovery! *** Maxim Integrated Products is a worldwide leader in design, development, and manufacture of linear and mixed-signal integrated circuits. Maxim circuits provide an interface between the real world and the digital world by detecting, measuring, amplifying, and converting real-world signals, such as temperature, pressure, or sound, into the digital signals necessary for computer processing. Maxim's products are used in a wide range of microprocessor-based electronics equipment, including personal computers and peripherals, test equipment, hand-held devices, wireless communicators, and video displays. MXIM - Maxim Integrated $34.34 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 30 XIQ OF 5,275 0.30 29.70 5.9% 1.0% * SELL PUT APR 30 XIQ PF 685 1.10 28.90 7.2% 3.8% ************** SLAB - Silicon Laboratories $26.86 *** Entry Point! *** 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. SLAB - Silicon Laboratories $26.86 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 22.5 QFJ OX 356 0.20 22.30 5.8% 0.9% * SELL PUT MAR 25 QFJ OE 621 0.50 24.50 10.1% 2.0% SELL PUT APR 22.5 QFJ PX 2,227 1.05 21.45 9.8% 4.9% ************** XLNX - Xilinx $22.69 *** Another Good Chip Stock! *** 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. XLNX - Xilinx $22.69 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAR 20 XLQ OD 7,267 0.25 19.75 7.2% 1.3% * SELL PUT MAR 22.5 XLQ OX 2,987 0.95 21.55 18.4% 4.4% SELL PUT APR 20 XLQ PD 589 0.90 19.10 8.5% 4.7% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** AMGN - Amgen $55.33 *** Break-Out! *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and sells human therapeutic products including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. The company has research facilities in the United States and has clinical development staff in the United States, the European Union, Canada, Australia and Japan. Amgen has acquired Immunex, a biopharmaceutical firm dedicated to developing immune system science to protect human health. Immunex has developed two major products, Enbrel and Leukine, and has two other products, Novantrone and Thioplex, which can be used in treating multiple indications. AMGN - Amgen $55.33 PLAY (conservative - bullish/credit spread): BUY PUT APR-47.50 AMQ-PW OI=3308 A=$0.60 SELL PUT APR-50.00 AMQ-PJ OI=15889 B=$0.90 INITIAL NET-CREDIT TARGET=$0.35-$0.40 POTENTIAL PROFIT(max)=16% B/E=$49.65 ************** LXK - Lexmark Intl. $62.82 *** Lateral Consolidation? *** Lexmark International (NYSE:LXK) is a developer, manufacturer and supplier of printing solutions, including laser and inkjet printers, multifunction products and associated supplies and services for offices and homes. The company also markets dot matrix printers for printing single and multi-part forms for business users and develops, manufactures and markets a broad line of other office imaging products. LXK - Lexmark Intl. $62.82 PLAY (moderately aggressive - bullish/credit spread): BUY PUT MAR-55.00 LXK-OK OI=1653 A=$0.30 SELL PUT MAR-60.00 LXK-OL OI=2867 B=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$59.40 ************** NKE - Nike $46.48 *** Stage I Base *** Nike (NYSE:NKE) principally is engaged in the design, development and worldwide marketing of footwear, apparel, equipment and other clothing accessory products. Nike sells its products to over 17,000 retail accounts in the United States and through a mix of independent distributors, licensees and subsidiaries in over 140 countries around the world. Virtually all of Nike's products are manufactured by independent contractors. Most of the company's footwear products are produced outside the United States, while apparel products are produced in the United States and abroad. NKE - Nike $46.48 PLAY (conservative - bullish/credit spread): BUY PUT APR-40.00 NKE-PH OI=579 A=$0.50 SELL PUT APR-42.50 NKE-PH OI=874 B=$0.75 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$42.20 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** COF - Capital One $27.71 *** Premium Selling! *** Capital One Financial (NYSE:COF) is a holding company whose major subsidiaries market a variety of financial products and services to consumers using its proprietary information-based strategy. The company's primary business is consumer lending, with a focus on credit cards, but including other consumer lending activities such as unsecured installment lending and automobile financing. The company's principal subsidiary, Capital One Bank, a limited purpose, state-chartered credit card bank, offers credit card products. Capital One, F.S.B., a federally chartered bank, offers consumer lending and deposit products. Capital One Services, the other major subsidiary, provides various operating, administrative and business services to the company and its subsidiaries. COF - Capital One $27.71 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 30 COF CF 13,771 0.50 30.50 10.2% 1.6% SELL CALL APR 30 COF DF 500 1.30 31.30 8.9% 4.2% SELL CALL APR 35 COF DZ 1,446 0.55 35.55 6.2% 1.5% * ************** MERQ - Mercury Interactive $29.96 *** Bearish Trend Reversal? *** Mercury Interactive (NASDAQ:MERQ) is a provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Its software products and hosted services help Global 2000 companies enhance the user experience by improving the performance, availability, reliability and scalability of their Web-based applications. Its many hosted services provide its customers with a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. Its integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. The company also provides outsourced load testing and Web performance monitoring services that complement its software products. MERQ - Mercury Interactive $29.96 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 30 RQB CF 548 1.40 31.40 19.9% 4.5% SELL CALL APR 30 RQB DF 2,945 2.70 32.70 12.7% 8.3% SELL CALL APR 35 RQB DG 2,979 0.80 35.80 7.1% 2.2% * ************** PHM - Pulte Homes $45.98 *** Sell-Off In Progress! *** Pulte Homes (NYSE:PHM) is a holding company whose subsidiaries engage in the homebuilding and financial services businesses. The company's direct subsidiaries include Pulte Diversified Companies, Inc. (PDCI), Del Webb Corporation and others that are engaged in the homebuilding business. PDCI's operating subsidiaries include Pulte Home Corporation (PHC), Pulte International Corporation and other subsidiaries that are engaged in the homebuilding business. The company also has a mortgage banking company, Pulte Mortgage Corporation, which is a subsidiary of PHC. PHM - Pulte Homes $45.98 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAR 45 PHM CI 14 2.15 47.15 19.0% 4.6% SELL CALL APR 45 PHM DI 393 3.30 48.30 10.1% 6.8% SELL CALL APR 50 PHM DJ 433 1.10 51.10 4.9% 2.2% * ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** CTX - Centex $50.03 *** Construction Industry Slump? *** Centex Corporation (NYSE:CTX) is a multi-industry company with operates in six principal business segments. Conventional Homes operations involve the construction and sale of single-family homes, town homes and low-rise condominiums, and the purchase and development of land. Investment Real Estate operations involve the acquisition, development and sale of land, and the development of industrial, office, retail and mixed-use projects. Financial Services operations involve the financing of homes, home equity and sub-prime lending, and the marketing of insurance coverage. Construction Products involves cement production and distribution, and the production, distribution and sale of gypsum wallboard, concrete, aggregates and recycled paperboard. Contracting and Construction Services involves the construction of buildings. Centex HomeTeam Services is involved in pest and termite control, lawn and landscape care, electronic security, alarm monitoring and homewiring services. The company's quarterly earnings are due July 18. CTX - Centex Corporation $50.03 PLAY (conservative - bearish/credit spread): BUY CALL APR-60.00 CTX-DL OI=615 A=$0.20 SELL CALL APR-55.00 CTX-DK OI=1868 B=$0.80 INITIAL NET-CREDIT TARGET=$0.65-$0.75 POTENTIAL PROFIT(max)=15% B/E=$55.65 ************** LEN - Lennar $49.40 *** New Home Demand Slowing? *** Lennar (NYSE:LEN) is a homebuilder and a provider of residential financial services. The company's homebuilding operations include the sale and construction of single-family attached and detached homes as well as the purchase, development and sale of residential land directly and through its unconsolidated partnerships. The company's financial services operations provide mortgage financing, title insurance and closing services for both its homebuyers and others, resell the residential mortgage loans it originates in the secondary mortgage market and also provide Internet access, cable television and alarm monitoring services to residents of its many communities. Lennar has acquired Patriot Homes, a homebuilder in the Baltimore marketplace, and expanded into the Carolinas with the acquisition of Don Galloway Homes as well as the assets and operations of Sunstar Communities. LEN - Lennar $49.40 PLAY (conservative - bearish/credit spread): BUY CALL APR-60.00 LEN-DL OI=110 A=$0.15 SELL CALL APR-55.00 LEN-DK OI=671 B=$0.65 INITIAL NET-CREDIT TARGET=$0.55-$0.70 POTENTIAL PROFIT(max)=12% B/E=$55.55 ************** LEH - Lehman Brothers $53.42 *** Weak Brokerage Sector! *** Lehman Brothers Holdings (NYSE:LEH) is a global investment bank serving institutional, corporate, government and high-net-worth individual clients and customers. The firm is engaged primarily in providing financial services and operates in three business segments: Investment Banking, Capital Markets and Client Services. Other businesses in which the firm is engaged represent less than 10% of consolidated assets, revenues or pre-tax income. Lehman's business includes capital raising for clients through securities underwriting and direct placements, corporate finance and other strategic advisory services, private equity investments, stock sales and trading, research and the trading of foreign exchange and derivative products and certain commodities. The firm acts as a market-maker in all major equity and fixed-income products in both the domestic and international markets. LEH - Lehman Brothers $53.42 PLAY (conservative - bearish/credit spread): BUY CALL APR-65.00 LEH-DM OI=4924 A=$0.25 SELL CALL APR-60.00 LEH-DL OI=6374 B=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$60.55 ************** SEE DISCLAIMER - SECTION 1 ************** ************** MARKET POSTURE ************** Those Middling Markets To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_030503.asp ************ MARKET WATCH ************ Shifting to the Middle To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_030503.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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