The Option Investor Newsletter Sunday 03-09-2003 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: Trading on Rumors (Debt Trap Article Below Wrap) Futures Market: It's Pivotal, Again. Index Trader Wrap: WHAT IF? Editor’s Plays: Ladder Time! Market Sentiment: What Day Is This? Ask the Analyst: The best book on trading stocks and options Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: Focusing on the Charts Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 03-07 WE 02-28 WE 02-21 WE 02-14 DOW 7740.03 -151.05 7891.08 -127.03 8018.11 +109.31 + 44.57 Nasdaq 1305.29 - 32.25 1337.54 - 11.48 1349.02 + 38.85 + 27.70 S&P-100 420.12 - 5.24 425.36 - 4.51 429.87 + 7.30 + 3.78 S&P-500 828.89 - 12.26 841.15 - 7.02 848.17 + 13.28 + 5.20 W5000 7857.32 -115.30 7972.62 - 63.35 8035.97 +139.03 + 23.52 RUT 354.18 - 6.34 360.52 - 3.84 364.36 + 5.86 - 0.28 TRAN 2042.48 - 6.57 2049.05 - 47.36 2096.41 - 6.19 - 37.37 VIX 35.65 + 1.50 34.15 + 0.01 34.14 - 2.96 - 1.35 VXN 46.39 + 0.74 45.65 - 0.45 46.10 - 2.28 - 2.59 TRIN 1.29 0.84 0.97 0.58 Put/Call 0.75 0.59 0.85 0.97 ****************************************************************** Trading on Rumors by Jim Brown If you are an intraday trader that swing trades on rumors then Friday was your perfect trading environment. Rumors, denial of rumors, more rumors and more denials had bulls and bears chasing their tails around the charts. The 180-point swing from lows not seen since October and complete with a double bounce kept traders guessing right up until the close. It was not a day for the indecisive. Nasdaq Chart - 60 min SPX Chart - 30 min Dow Chart - 30 min I mentioned Thursday night that the very high Jobless Claims was painting a bleak picture for the Nonfarm payrolls on Friday. How bleak was a surprise to everyone. The economy lost -308,000 jobs in February compared to estimates for a gain of +10,000. To say it was a disaster would be a gross understatement. Unemployment rose to 5.8% and there were job losses across all sectors. Even the retail sector lost -92,000 jobs when they were expected to show gains from seasonal factors. Manufacturing lost -48,000 jobs with construction losing -48,000 as well. The services component lost -86,000 jobs and the biggest drop since the 1974 recession. Restaurants lost -85,000 jobs as fewer people ate out due to less spending cash, terror alerts and weather. Analysts tried to blame the drop in jobs on the 150,000 reservists called up during February but they were obviously grabbing at straws. The survey week was in mid February and had little or no impact from the call up. Plus, vacant jobs from reserves going to active duty would have been filled by temp help. The jobs were not eliminated. Companies adding employees to payrolls fell to 41.1% from 49.6% in January. The percentage of workers unemployed for more than six months increased to 22% and only 1% below the high for the last economic downturn. Considering the pace of layoffs currently this number should be easily broken over the next couple months. This entire report was VERY bearish and indicates an economy rushing headlong into a second recessionary dip. The Economy.com Business Confidence Survey for the week shows a very dismal picture of fading business sentiment. The index came in at 75.9 for the week and has fallen -25% since the beginning of the year. Confidence is fading and demand is slipping. The clearest sign of cash strapped consumers was the increase in Consumer Credit by +$13.2 billion in January. The estimate was for a drop of -$0.5 billion. This was nearly a +10% gain for the month. Does this show that the refinancing bubble has burst and paying off bills by taking equity out of your house has run its course? According to the recent mortgage applications it appears this trend is winding down. Greenspan warned about this earlier in the week. The next casualty will be the home builder market as unemployment builds and confidence continues to fall. See some additional comments about debt at the end of this article. The fallout from the war worries and the Jobs report was severe. We started out with a negative tone after the Nikkei closed at a 20 year low at 8144 and a loss of -225. The stage was set for a rocky open and the Jobs report just increased the volatility. After an opening drop of -111 points bonds soared and the yield on the 5yr note dropped to a 48 year low of 2.5%. The dollar dropped to a four year low of $1.10 against the Euro and is destabilizing markets around the globe. While everyone is pointing to the war as the reason for weakness the economy is already self destructing on its own. Earnings are quickly turning to losses and the outlook for this quarter is dismal at best. 55% of the S&P have already warned for this quarter with only 18% raising guidance. That is a 3:1 ratio of warnings to positive guidance. This is not good! Intel joined the party on Thursday when they warned that margins and revenue would be lower than previously expected. JPM warned that they were cutting their 1Q GDP estimates to 1.5% from 2.5% which is about time considering the dismal outlook. Earnings estimates for the year have plummeted from the +15% to +18% range to +7% to +8% and are still dropping. When investors wake up and smell the economy and I guarantee you won't find many willing buyers. There is still a strong bid under the market and I think they have no clue what they are bidding on. The general consensus is that there will be a market rally once the shooting starts just like 1991 but there is no fundamental justification at this point. According to President Bush the bets have been made and it is time for all the nations in the Security Council to show their cards. For President Bush this is a life and death gamble. He has played every chip in his pile and tried to bluff, out bid or face down the dissenting nations. It is like the final poker hand of the night when caution goes to the wind everybody ups the bids to their maximum pain threshold. For Bush it is political life and death. If all goes well and the invading troops find scores of weapons not declared and peace comes to Iraq then it will be an automatic reelection and voters will applaud his stand on principle. If things go bad and scores of Americans come home in body bags and Iraq ends up being a house to house fight then he could be impeached for pressing the issue against world opinion. For the US it is a gamble have to take after coming so far. If we back down now we will not be taken seriously in the future and every two bit dictator will take his shot at 15 min of fame beginning with North Korea. However we got to this point, and I am sure that will be debated for years to come, it is a point of no return. Short of a Saddam retirement in the next ten days the die is cast. Britain submitted an amendment to the current resolution calling for a deadline of March 17th for total disarmament and active cooperation as the only criteria to avoid war. This resolution is not likely to pass but as Bush said, we want everyone to stand up and be counted in the court of world opinion and let the chips fall where they may. Germany, France and Russia have all vowed to veto it and by doing so will send ripples worldwide for years to come. Either way the clock for starting the war is winding down. The economic conditions being blamed on the war took a substantial turn for the worse with the Jobs report. The Fed often keys on the Jobs report for immediate changes in Fed policy. This is sure to be the topic of conversation when the Fed meets on March 18th. The Fed funds futures are now showing a 100% chance of a Fed funds rate of 1% by July. This is a drop of -25 basis points under the current 1.25% level. If the current rate was higher the Fed has a history of cutting rates on the Monday following a disastrous Jobs report but at 1.25% another quarter point cut would not really send a material signal. Still Monday will be a walking on eggshells day as older traders will be expecting the unexpected. We also have the potential for some asset allocation events next week. With bond yields so low there is little benefit to buying bonds now and many portfolios could be reallocated to a heavier weighting in stocks. There might not be a rush to do this because of the potential for a further drop in the stock market. The potential for a retest of the October lows over the next five days is very good. Touching those lows at 7200 could however trigger these asset allocation events. Leaning on the Dow on Monday will be Altria (MO) when an Illinois judge with rule on a $7 billion verdict against the company. There are also punitive damages for 30 years of refunds for smokers who bought Marlboro and Cambridge Light brands. This award could run into the tens of billions of dollars and MO would have to put up billions, as much as the total value of the judgment just to appeal. Based on comments during the case MO is not expected to win. This could weigh heavily on the stock and on the Dow. Technically the markets are in serious danger. The Dow closed at 7740 and the high of the day but right under very strong resistance. There is a solid down trend in place and very little to cause any bullish sentiment to appear. The morning crash to 7562 cleared buy stops for the next 175 points and weakened any potential support for the next dip. The real resistance is on the S&P at 830, which is only slightly above the 829 close. The 830 level has not been broken for the last three days despite repeated tests. The Nasdaq is clinging by the slimmest of margins to the 1305 level and is clearly showing a new down trend in place. The end of day short covering rally was based solely on the potential for the capture of Osama Bin Laden this weekend. With the new information gained in the capture of Khalid Mohammed, almost everyone believes the authorities are hot on his trail. There were numerous rumors that they expected to close the noose this weekend. Other analysts scoff at this and claim they always have a backup plan and once Mohammed was captured everyone related to the group bolted to their next safe house leaving no tracks. Still traders were not ready to take that chance by holding shorts over the weekend. The recent pattern is clear. The last two Mondays have been big down days as traders who closed shorts on Friday reopened them on Monday when no news appeared over the weekend. This Monday should be no different especially after the disaster in the Jobs report. Most mutual funds and institutional traders are not reaction traders. When bad news appears they analyze how the market reacts for the balance of the day and then decide a course of action for the next trading day. With the potential for a double dip recession stronger than ever the odds for a retest of the October lows or lower are better than ever, we could see a concentrated move out of stocks on Monday. This is pure speculation on my part and based on no earth moving news events over the weekend but I think this is as close to the perfect storm as we are going to get. When the only potential for positive market news is the capture of a crippled terrorist there is not much reason to be long the market. Check your parachute you may need it next week. Enter Very Passively, Exit Very Aggressively! Jim Brown ********* Debt Trap ********* There is a rising concern that we are entering into a period of economic peril brought about by debt deflation. The rise in consumer credit is but one symptom of the problem. Many analysts already believe we are suffering from this problem and the lack of demand and lack of earnings is the result. Debt deflation occurs when debt levels are unmanageable. Money that would ordinarily be spent on capital investment or returned to the shareholders as profit is instead spent on debt. 1990s Japan suffered debt deflation first and the price deflation followed. The US in the 1930s suffered the same scenario. Currently we have the highest levels of debt relative to GPD since 1933. Bankruptcy and foreclosures are at 30 year highs. Declining equity as Greenspan pointed out shows that consumers are spending it faster than it is appreciating. It is another bubble waiting to burst. Once housing prices stop rising and providing chance after chance to re-mortgage for more than before the ability to solve problems by borrowing more money will cease. Once property values begin to decline many over leveraged homeowners will be stuck owing more money on their property than it is worth. Another cycle of foreclosures and bankruptcy will begin. The current ratio of debt to GDP is now about 160%. There are only two ways to handle the problem. We must generate more income or acquire more wealth through some other means. With unemployment at 5.8% and rising rapidly it is unlikely we are going to solve the problem through income. The high unemployment depresses salary levels and lowers income through competition in the hiring process. We have lost -2.2 million jobs since December-2000 and have the weakest wage increases since 1993. The market has ceased to be a producer of wealth and is actually draining wealth from the economy through margin calls, shrinkage of buying power and losses due to over trading while trying to make back previous account balances. Retirees are being forced back into the work place due to losses in retirement income. This further depresses the workforce by adding extra workers willing to work for minimum wages due to age. The outlook is grim because the prospects for a quick recovery are slim. Manufacturing capacity is operating at 73% and falling but corporations have 57 cents of debt per dollar of corporate net worth. Corporations are paying out $1.65 in dividends for every dollar of corporate profits. In essence they are going into debt to finance dividend payments to preserve the precious unbroken dividend string. The expansion in the late 1990s was an investment led expansion as companies replaced nearly every piece of computer hardware to avoid Y2K and to capitalize from the Internet revolution. This was the first expansion of this type since the 1920s and that was the only once since the Civil War. Both were reconstruction efforts where we renovated the country using cheap unemployment labor and massive government projects. All three periods had great excesses, corruption and bad investments. The global fiber optic build out is an example. Suddenly companies were spending billions of dollars to lay fiber virtually everywhere in anticipation of an exploding Internet. Some networks built for over $100 billion have been sold for less then $1 billion. The Internet excesses and expectations produced massive amounts of public and private debt and eventually all that debt must be handled either through repayment, bankruptcy or write offs. Writing off the debt passes the cost to the shareholders in the form of devalued stock. Debt is debt and somebody has to pay the piper. The government has tried to attack the problem by shifting into heavy stimulus mode. We have gone from a 2.2% of GDP surplus to a -1.8% of GDP deficit in three years. That is a 4.0% shift in position. State governments also shifted nearly 1% making the total stimulus shifting a whopping 5%. That well is now dry. There is nothing left that the government can do without going bankrupt itself. The administration is pressing tax cuts and additional spending but soon, very soon, somebody will have to pay for all the stimulus. The government only gives back the money we give it and a reduction in governmental income means a reduction in spending eventually or the government will end up with the same debt problem itself. The state and local governments are raising fees to compensate for revenue loss and cutting services. The cycle is self-defeating and will produce a prolonged period of economic stress and prevent a quick rebound. If government spending was the answer then Japan would have been the strongest nation in the world long ago as it tried to buy its way out of its economic spiral. I wrote this article not to scare anyone or be a preacher of doom and gloom. I am simply struck by the massive disconnect between the economic reality and the stock market. Everyone believes the new bull market will begin once the war starts. Unfortunately the basis for any bull market is earnings growth and that growth cannot occur without an increase in demand. Demand cannot increase with companies paying on debt instead of building their business. Granted this is not every business and there will be superstars in any environment. The Fed is trying to short circuit this problem in the only way it knows how. That is making capital even more available by lowering rates and printing money at a blistering pace. Unfortunately that just produces more debt and adds to the current burden. The long-term impact is clear. Markets tend to take long periods to digest excesses and we have a monster binge to pay for before we can move on. Don't look for Dow 12,000 anytime soon. ************** FUTURES MARKET ************** It's Pivotal, Again. By John Seckinger jseckinger@OptionInvestor.com Weekly and monthly pivots should be critical once again this week for all three futures contracts. Throwing in bullish percent analysis will further allow traders to understand risk. Is a full short position now too much? Friday, March 7th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7740.03 +66.04 7743.82 7562.65 YM03H 7735.00 +60.00 7755.00 7556.00 33,261 Nasdaq-100 986.82 +2.86 992.11 964.25 NQ03H 986.50 +2.00 993.00 964.50 292,790 S&P 500 828.89 +6.79 829.55 811.23 ES03H 828.50 +6.75 829.75 809.00 863,148 Contract S2 S1 Pivot R1 R2 Dow Jones 7501.00 7620.52 7682.17 7801.69 7863.34 YM03H 7483.00 7609.00 7682.00 7808.00 7881.00 Nasdaq-100 953.20 970.01 981.06 997.87 1008.92 NQ03H 952.75 969.75 981.25 998.25 1009.75 S&P 500 804.90 816.89 823.22 835.21 841.54 ES03H 801.75 815.00 822.50 835.75 843.25 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7333.00 7534.00 7757.00 7958.00 8181.00 NQ03H 932.25 959.25 991.75 1018.75 1051.25 ES03H 786.25 807.25 830.25 851.25 874.25 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 810.00, exit 816.50, change +6.50 Long 826.25, exit 828.50, change +2.25 Short 826.25, exit 822.75, change +3.50 Long 824.50, exit 823.00, change -1.50 Total for the day: +10.75 Total for the week: +13.50 Total since inception: +69.25 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) Starting with a daily chart of the ES contract, notice how the weekly pivot is just above Friday's settlement. Were traders calculating next week's levels during trading on Friday? This is a good possibility. If this weekly pivot is taken out, look for a move back towards the monthly pivot at 836.75. Resistance should extend up to 841, as the chart below shows. If bears are able to keep prices under pressure, support should come in from 820 to 823. This is above even the daily S1 for Monday. As long as prices fail to close above the 831 area, the intermediate bearish objective is much lower from 801 to 805. More conservative traders can use a support range from 800 to 810. With this said, it is really neutral at current levels. Slight bearish at best. There is a catch. The bullish percent indicator for the SPX is at 30.80% and just above the extremely important 30% level. 30% means oversold conditions. Therefore, shorts should now be thinking about a quarter to a half position, with tight stops in place. It does not, however, mean to take a full long position. We would need a close above both 831 in the ES AND a reversal back to a column of X's in the bullish percent. Chart of ES03H, Daily Taking things to a 120-minute perspective, notice how the weekly pivot is close to the 19.1% retracement level of the move from January 13th to February 13th. This should increase this area's significance going forward. The reason why the 801 to 805 support zone was increased to 810 was because of both the weekly and monthly S1 levels (see chart below). Chart of ES03H, 120-minute Bullish Percent of SPX: This indicator fell 0.80 to 30.80 on Tuesday, edging that much closer to the 'magical' 30% level. This indicator remains in "Bull Correction", and a reversal into a Column of X's will still not be seen until a print of 40%. Note: The last column of "O's" ended at 20 percent; however, reaching 30% does force shorts to watch stops more closely. There are still intermediate-term bearish implications for the SPX, but under 30% traders can consider using less than a full position. Looking at P&F chart of the SPX, the contact added to its column of O's (seven total) as 815 was tested. Going forward, support is not seen until the 805-801 area. Resistance is still seen at 835, and then above at 850. The March E-mini Nasdaq 100 Contract (NQ03H) The NQ contract has remained between the 1024.50 and 941.50 area for a significant amount of time, and currently is just above the 983 level. As the chart below shows, a simple long-term retracement analysis from the October low to December high produced such important levels. Since the NQ is above the 50% area, bulls appear to have the slight advantage. However, we should dig deeper (see second chart). Chart of NQ03H, 120-minute Adding in both weekly and monthly retracement analysis, we can now get a better feel for sentiment. Resistance is just above from 990 to 992, and a move under 983 should have bears getting aggressive. If 992 is cleared, look for a move towards the 1006 to 1010 area. Of course, there might still be psychological resistance near 1000. If 983 is taken out, the downside objective would be to both the weekly and monthly S1 level. Chart of NQ03H, 120-minute Bullish Percent for NDX: The bullish percent for the NDX was fell 1% to 34 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 1000, with support seen below at 925. The March Mini-sized Dow Contract (YM03H) The YM contract has the most confusing of the three charts, but risk for shorts should be back to the 7768 area. Support is seen below at 7650 and near the monthly S1 area. If 7768 is cleared, look for a move back to the monthly pivot area. Underneath monthly S1, support is not seen until the weekly and monthly S2 areas. Chart of YM03H, 120-minute Taking a look at the chart used earlier this week, it is impressive that the profiled support levels worked fairly well in determining risk and objectives for both bullish and bearish traders. The profiled resistance is the aforementioned 7768 area, and will continue to hold importance. Note: Bullish percent in the Dow is still at oversold conditions, but has yet signaled a "Bull Alert" to traders. Nevertheless, short traders should only be looking at quarter to a half positions in the near term. Chart of YM03H, 120-minute Bullish Percent of Dow Jones: Using P&F analysis, the Dow added to its recent column of O's on Friday. This bearish column now stands at seven as the 7600 level was touched. As noted a few weeks ago, it was likely that the old low of 7650 would be taken out. With this being the case, and the bullish percent very low, shorts should begin to evaluate risk going forward. The bearish objective for the blue chips remains at 7100, while a buy signal will be given at 8200. Support is not seen until the 7600 area. 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 ******************** WHAT IF? By Leigh Stevens lstevens@OptionInvestor.com What if the market, contrary to "consensus" expectations (my own included) right now, doesn't get much of a sustained lift once the uncertainties related to an Iraqi invasion are known? The war may be much more messy than the best-case military outlook being presented publicly with the financial burden mostly ours now. We will still come back to the reality of the same sluggish economy and the fact that stocks aren't cheap, with the S&P trading at 18 times trailing 12-month earnings and maybe 15 times expected earnings for the year ahead. The sage from Omaha, Warren Buffet, suggested the same last week and was buying more junk bonds. I note below that we are near important long-term up trendlines, so the coming month (or two) is crucial. Meanwhile, periodic trading opportunities continue in this seesaw market. THE BOTTOM LINE – As I suggested prior to last week's trading, the trade to do was to buy puts as the charts predicted the downswing. The indices did rebound from the area of prior lows on continued (relatively) low volume. Now? - it looks like prices are about where they will stay until the aforementioned (Iraq conflict) outcome. A relatively narrow trading range looks to be ahead. On balance, I would rather buy puts on rallies into resistance than buy calls at recent support. FRIDAY'S TRADING ACTIVITY – Stocks ended higher Friday after the U.S. called for deadline on weapons inspections in Iraq and unconfirmed reports that two of Osama bin Laden's sons were arrested. The arrest rumor and the Iraq deadline, which could take away some uncertainty from the market, offset the bearish effect of a big drop in non-farm payrolls and a diminished revenue outlook from big chip maker Intel (INTL). The Dow Jones Average gained 66 to 7740, while the Nasdaq Composite Index gained only 2.40, closing at 1305.29, held down by the Intel news. In a news conference late Thursday, President Bush said that the United States would not be deterred from attacking Iraq even without UN backing. The President made clear that he wouldn't tolerate much of a delay in the inspections process, and U.S. and U.K. officials said that they were speaking about days, not weeks. To the extent that the rally was related to a March 17th deadline, this could resolve the uncertainty as to what happens next. After an attack of course the market would be very prone to trading up and down on war news and whether the war is going quickly or gets bogged down with a lot of casualties. Discouraging economic news hit the market when the Labor Dept. said the U.S. unemployment rate, which had fallen to 5.7% in January, was measured at 5.8% in February. The key non-farm payroll figure for the month fell by 308,000, more than wiping out the gain of 185,000 recorded in January. The market is most focused on the creation of NEW jobs and this was a dismal reading. The expectations were actually for a slight increase in the payroll numbers. However, traders found a way to take this news bullishly to the extent that the report convinced many that the Federal Reserve will once again be forced to lower interest rates - hopefully we don't wind up like Japan, where it seems like you pay the banks for the privilege of them holding your money. Shortly after the jobs data was released, fed-funds futures called for about a 92% chance that the Fed will cut rates again, compared to a 72% chance of a cut priced in on Thursday. The talk was that the Fed would lower rates by a quarter percent at a March 18 meeting and by the same amount in May. I mentioned Intel - the company said that its chip business is doing better than expected earlier, but warned that its profit margins could be hurt by lower flash-memory sales. The company also lowered its Q1 revenue outlook to between $6.6 billion and $6.8 billion, which is the lower end of the $6.5 billion to $7.0 billion target set in January. The stock gave back about 4% on the news - technically, the stock gapped lower on above average volume, falling below its 50-day moving average. OTHER MARKETS – Crude oil (April contract) rose 10 cents to $37.10 a barrel on the New York Merc. Gold for April delivery traded as low as $352.80, but ended at $353.60 an ounce, down $3.30 for the day, but finishing about $3 higher on the week. The dollar slipped - the euro climbed against the dollar to $1.1006 from $1.0974. We have not seen 1.10 on the euro in some time, but money is flowing into the Euro as the U.S. appears poised to go against other key western countries on Iraq. LONG-TERM CHART VIEWS - It's good to review the long-term monthly chart picture from time to time. I expected that the indexes would come back down and retest the long-term up trendlines; on the semi-log charts where equal percentage are of equal length. This is almost always the pattern on major bottoms - if this is one - and major tops. On the indices, they rarely spike up to a top or spike down to a bottom and then reverse. Especially, in the case of the bubble we saw ending 3 years ago. These things cause distortions and extremes in the market that take a long time to work out. Witness the still relatively high P/E ratios. Time will tell on these trendlines relative to the S&P 500 (SPX) monthly chart above. Not too many more weeks is needed to tell the story on this. Either the low-800 area holds as SPX major support or not. The scale is the semi-logarithmic or "semi-log" scale for short, which is the effective way to measure a really big price move like this. The "internal" trendline is one that is drawn through the greatest number of lows, whereas a conventional trendline is (more or less) drawn touching only the extremes - connecting 2-3 extreme lows in this case. And the Nasdaq (Composite - COMPX) is not all that different in terms of recent months' lows defining a possible long-term up trendline - MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Hourly chart: Sure enough, the rally to resistance produced a slam-dunk down the prior low which acted as support - I don't "count" the one spike to below support in the sense that this was probably the result of "running" stops and some panic type selling. Looks like the 820 area is the low end of a trading range for now, with 837-840 the high end. More major support can be expected on dips to below 810. It would take a weekly close UNDER 800 to turn the charts really bearish and suggest that a new down "leg" was beginning. Buy puts on move up to the 840 area - if 840 is pierced, especially on a closing basis, then a move could be anticipated back up to what looks like the high end of the trading range, around 850, where I would repurchase puts. S&P 100 Index (OEX) – Daily and Hourly charts: 420 is near resistance and there is some upside momentum, but whether there is any follow through depends on the how the perceived closeness to war on Monday. With overbought readings on the stochastic models, 420 may be the cap or top of any further rally attempt near-term. 430-432 looks like the high end of the S&P 100 (OEX) trading range, with an outside chance that this could extend up to 440. I suggest buying puts in these resistance areas. Only an hourly close or two above 832 would suggest potential to 840. On the downside, support is most evident at 415, then around 410, with more major support at 400-405 of course. I would take a very short-term trade on the call side if 405 was seen and both stochastic models were again fully oversold - in that case my stop out point would be on a close below 400 and my trade objective would be (again) 420. Dow Industrial Index (DJX) – Hourly chart: 76.5, on an hourly closing basis, again proved to be support, but its unclear for how long. 78.50 looks like the most significant technical resistance, then around 78.25 where the down trendline intersects. A close over 79.5 is needed to suggest that the Dow could get back to the 8000-8050 area again. The 78.50 area is my choice as an attractive area to buy puts, with an objective to 76.5. I made a note last week of the triangle on the Dow hourly chart and to expect follow through on a move to below or above those converging lines. We got the down move when the breakout was to the downside. Based on the measuring implications of this (triangle) pattern, there could be more downside potential than has been realized already, to 75.5 approximately. NASDAQ 100 Index (NDX) Daily chart – To become is a bit of a broken record is to say that the Nas 100 technical pattern still looks mildly bullish, as noted on the chart below, based on its ability to keep popping back above its 21-day moving average. Repeating from last week however, I suggest put purchases if the NDX got back up into the chart gap area around 1050. The Index would have to clear near resistance at 1020 first. If it doesn't this looks like the area for a bearish play on NDX. Right now I don't see what news could take the Index through 1020, but the big tech stocks are getting a play here as some business and consumer spending is going into replacing aging software and hardware. Hey, I succumbed to it last week, replacing my 3-year old PC with a new zippy-fast one - the prices are cheap! Repeating also from the week before, buying and selling has been fairly well matched without heavy volume on either side, which can be seen by the 10-day Nasdaq TRIN, which is in neutral territory. Lots of traders standing aside for anything more than a 1 or 2-day trade. QQQ Daily and Hourly chart: Not a lot to say here - for new positions short the Q's at 25- 25.30 if reached. Looks like the trading range near-term may be 23.5 on the downside, 25.50 on the upside. In this kind of market its best to wait for a move up the high or low end of the trading range to do anything, as trading in the middle of the range is tough. Momentum is DOWN based on the daily stochastic model and the volume indicators are waffling back and forth on low volume, which is typical of a market that is waiting for outside events after which traders might come in with more conviction. I might take a trade on the long side of QQQ and buy the stock around 23.50 again. In which case my objective would be for a move back up to 25-25.50 area again. A close under 23.00 would suggest exiting however. Support implied by the low end of the daily chart doesn't come in until 21.50. And, major support is not implied before 20, at least based on October bottom - A FINAL NOTE: Complete explanations/examples on such things as: - Price Scales - Triangles - Wedge patterns - My Call-to-Put ratio as overbought/oversold indicator - TRIN - etc. can be found in a list of my past Trader's Corner articles at: http://www.OptionInvestor.com/traderscorner/tc_022703_2.asp This "Putting it all Together" column has an A-Z listing of these and other topics involving technical analysis. ************************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 ************** Ladder Time! I had several readers email me this week asking if it was time to climb the ladder again. After looking at the option prices for April I decided it was definitely time. The way this works is that we buy index call options at different times as the index touches certain points. In this case we will be buying DJX calls as the Dow tries to retest its October lows. The trump card here is the war. With everyone expecting a rally once the shooting starts and with the ten day deadline proposed on Friday we have a pretty good chance of knowing when the rebound will occur. The ideal scenario would be for the Dow to retest 7200 this week and then rally back to 8150-8300 or higher the week after the war starts. The risk is no war or a delayed start or even a lack of a bounce. With the economics so bad it would not surprise me to see a small bounce and a sell the news event. But that is not the plan we are outlining here. The plan: Place GTC buy orders at market based on the index price not the anticipated option price. Buy 5 Apr-$78 Calls DJX-DZ at DJX 76.00 (est price $1.75) Buy 5 Apr-$78 Calls DJX-DZ at DJX 75.00 (est price $1.50) Buy 10 Apr-$78 Calls DJX-DZ at DJX 74.00 (est price $1.25) Buy 10 Apr-$78 Calls DJX-DZ at DJX 73.00 (est price $1.00) Buy 20 Apr-$78 Calls DJX-DZ at DJX 72.00 (est price $0.75) Total estimated outlay at 72.00 = $5,375 The risk here is a total failure of the Dow below 7000 or a failure to rally when the shooting starts. It is also possible the war could be delayed again and time will decay against us. The partial solution to this problem is to buy insurance. I would suggest buying 20 contracts of the April-$70 put AT THE OPEN on Monday. They are showing an ask of $1.00 and you might be able to get them a little cheaper then. This adds $2,000 to the total cost but provides you insurance against a total loss. The value of the puts at Dow 7200 are estimated to be $2.50 each or $5,000. If the Dow hits 7200 and bounces as everyone believes it should then you sell the puts immediately on the bounce to defray your cost in the total position. Assuming you get $2.00 your cost is reduced by $2000 and the market is going in your favor. If the Dow hits 7200 and keeps going down then sell them at 7000. The estimated price would be $4.00 and you would get $8000 back which would cover your entire investment. You now have 50 contracts of the Apr-78.00 call for free. Any rebound and you can get out with a profit. THERE IS RISK IN THIS PLAY As always there is risk. If the Dow fails to fall, falls and stops at 7200-7300 without a rebound or any of several scenarios you can lose money. The concept is predicated on a REBOUND from 7200 or somewhere above that level when the war starts. Nobody can predict exactly where is will stop or we would just buy 50 contracts at that level and be done. We have had some very successful laddered entry plays in this section and a couple that broke even or had a minor loss. We have never had a major failure but buyer beware. If the Dow does rebound to 8000 by April 1st the anticipated value of the calls will be $4.00 each. Since we do not know how many contracts we got filled it is impossible to know what the potential profit will be. We can estimate based on all 50 contracts being filled at the $5,375 estimate above and 50 contracts at $4.00 ($20,000) but there is no way in heck the outcome will be exact. This does not consider any cost/reward from insurance puts. ******************************** Play updates: Beginning next week I am only going to list the current recommendations with a link to the initial write up and not go into detail unless the play changed substantially. CY - Cypress Semi Call - 3/2/03 ($6.41 when recommended) Yes, it went down. The market went down, the SOX went down and Intel warned. CY closed -35 cents below last Friday's close. I had several emails with the "what should I do" question. I have no complaints with CY. How could I? They raised estimates on Tuesday and said they were continuing to cut costs as business increased. Even a helium balloon loses altitude in a down elevator. This is a long term play and I suggested the Jan-$7.50 call. -35 cents in a down market is not going to shake me out. HLTH - WebMD Call - Feb-21st ($9.78 when recommended) HLTH traded up to slightly over the price when recommended despite the down market. At $9.80 I have no complaints here. Microsoft Call - Feb-16th (MSFT $24.15 when recommended) Microsoft appears to have bottomed and actually closed up on Friday. The dive to the $23 level at the open took out the sellers and triggered buy stops on the retest. EMC Call from Feb-2nd ($7.70 when recommended) EMC also appears to have bottomed and closed at $7.39 only -31 cents below the recommended price despite the down market. NEM Put from Jan-26th ($30.15 when recommended) Outstanding! NEM traded down to close at 25.96 on Friday and the March $27.50 put doubled in value to $2.20 from the $1.10 when recommended. The trend is still with us and with gold prices falling we are in great shape. BZH May $50 Put - From Feb-9th ($55 when recommended) BZH tanked on the Lenar sales warning and fell to $53 and managed only a weak recovery to close at $54 on Friday. This play is right on track after a close call with the down trend line at $59. This is a long term play but things are working out great. Both options are profitable and the trend is our friend here. The only cloud on the horizon is the interest rates. If the Fed does cut rates again it could spark one more buying frenzy but I think the spark has left the sector. Powerball - From 12/29/02 There was no material change in the Powerball Lottery play again this week. RFMD is the biggest loser and GLW is showing a gain despite the down market. Remember this is a 12-month play and we are only nine weeks into it. It would cost you about $700 to buy one contract of each today. Any one contract could repay that $700 by 12/31/03 leaving the rest as profit. It is a high risk "LOTTERY" play but then $700 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 **************** What Day Is This? OI Staff Did we say Thursday was a day for rumors? Little did we know that Friday's rumor mill would be doing double-duty. Rumors that Osama had been captured were denied and replaced by rumors that his sons had been captured, which were also later denied. On top of it all the world was reacting to President Bush's speech Thursday night and the back room dealing at the UN was reaching a frenetic pace. It would appear that the bounce today doesn't have much support behind it. Once Monday rolls around Wall Street will likely focus on the crushing jobs report that came out Friday morning. Add to the recipe a war with Iraq that is bound to start in ten days time and there is little reason to buy stocks. The volatility indices aren't offering us much clues right now and they shouldn't considering how the markets continue to trade sideways. The new COT report is out as well. Overall there was little change as futures traders appear to be standing firm or standing on the sidelines as we wait for some direction. Oil continues its march higher and we wouldn't be surprised to see it hitting $40 a barrel (again) by the end of the week. Market sentiment would probably best be considered wary and weary. The markets are weary of the sideways chop but there's no reason to buy and all signs are pointing to a double-dip recession at the moment. Plus, the markets are wary as the tension between the US and what feels like the rest of the world is also rising. It is bad enough that we have to play world policeman but there appears to be no one else willing to stand in the gap. Meanwhile take a moment to pray for those men and women in uniform protecting our freedoms. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10353 52-week Low : 7197 Current : 7740 Moving Averages: (Simple) 10-dma: 7808 50-dma: 8179 200-dma: 8539 S&P 500 ($SPX) 52-week High: 1106 52-week Low : 768 Current : 829 Moving Averages: (Simple) 10-dma: 831 50-dma: 866 200-dma: 904 Nasdaq-100 ($NDX) 52-week High: 1350 52-week Low : 795 Current : 987 Moving Averages: (Simple) 10-dma: 991 50-dma: 1008 200-dma: 1003 ----------------------------------------------------------------- VOLATILITY INDICES Considering the volatility in the markets on Friday one might have expected a bit more of a reaction in the fear indices (VIX & VXN). Investors got no such luck. Yes, they both spiked higher at the open, but as the market rallied the volatility failed. Considering what's in front of us next week we'll be looking for these two indicators to head higher. CBOE Market Volatility Index (VIX) = 35.65 -0.69 Nasdaq-100 Volatility Index (VXN) = 46.39 +0.74 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.75 554,276 415,828 Equity Only 0.64 395,183 252,983 OEX 0.99 26,684 26,448 QQQ 1.09 42,085 45,922 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 37.7 - 1 Bull Correction NASDAQ-100 33.0 - 1 Bear Confirmed Dow Indust. 13.3 - 0 Bear Confirmed S&P 500 30.8 - 1 Bull Correction S&P 100 26.0 - 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 1.59 10-Day Arms Index 1.38 21-Day Arms Index 1.29 55-Day Arms Index 1.36 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1561 1261 NASDAQ 1433 1614 New Highs New Lows NYSE 90 143 NASDAQ 58 107 Volume (in millions) NYSE 1,595 NASDAQ 1,401 ----------------------------------------------------------------- Commitments Of Traders Report: 03/04/02 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 We hear about trading volumes falling but now we're seeing it in the institutional futures positions as well. Commercial traders remain net short, expecting the market to go down. Small traders are still net long and actually increased the number of contracts on both sides of the fence. Commercials Long Short Net % Of OI 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%) 03/04/03 426,053 472,492 (46,439) (5.2%) 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 02/11/03 161,126 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% 03/04/03 164,759 98,636 66,123 25.1% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 The professional traders in the NDX futures are just trading water. There is little difference from the week before. Meanwhile the individual trader has bumped up the number of short contracts but remains net long. Commercials Long Short Net % of OI 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%) 03/04/03 39,934 52,978 (13,044) (14.0%) 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 02/11/03 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% 03/04/03 24,240 8,038 16,202 50.2% 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 Looks like interest has been picking up for the DJ futures. Commercials upped both the long and short sides of the contracts but remain net long (expecting the Industrials to go up). The small trader slid a bit more to the bullish camp but remains net short overall. Commercials Long Short Net % of OI 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% 03/04/03 21,326 12,724 8,602 25.3% 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 02/11/03 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%) 03/04/03 5,233 8,075 (2,842) (21.4%) 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 *************** The best book on trading stocks and options I'm just learning how to trade options and would like to know your thoughts on any good books to read on the subject. I've given this great thought, and the book I'm going to recommend cost's just a little over $3,000.00. After you understand the ULTIMATE basics of price fluctuation and understand what truly drives stock and index prices, then I've got a very good technique for learning how to trade, where the price of this education is LIMITED and need not be as expensive as it may have been for some of your friends, when they "learned how to trade." The second-best book I've ever read on trading is Tom Dorsey's "Point and Figure Charting," which give the trader/investor the ULTIMATE understanding that all that really matters when considering price fluctuation is supply and demand and how to understand and measure MARKET/SECTOR/STOCK risk/reward. I'm not here to sell books, but OI does offer the book in our bookstore. The BEST BOOK on learning to trade stocks/options is the one that I've been writing over the years. It's not on paper so to speak. You can read different chapters in the Bailey's Basics and here in the Ask the Analyst section of the site. However, the best book you will ever read on trading is the book that YOU write, or at least learn on your own. You know the saying, "you'll never learn unless you try." This is so true. For many, "learning" to trade with your own money can be scary. I'm not knocking a college education, or spending money on books, seminars, etc. as I've learned a great deal when I went to college, but no matter how "book smart" we become, it does little good unless we learn on our own when applying all that we've learned. I dare say, that I've learned some things over the years from books, college education and seminars, that when I've tried to practice them, just haven't worked out like they were supposed to from the teachings. Guess what? I don't use those "teachings" anymore. I spent a full semester in college going through income statements and balance sheets to try and determine a company's value. What I learned in life, is that the value I might apply to that company may not necessarily be in agreement with what the MARKET places on the company. My value might be too high, or it might be too low. What I did learn is that while I might be able to look at a company's fundamentals and even project how they will look in the future, it was much easier to test that analysis against a stocks price over time, and see if the MARKET thought I was too bullish, too bearish, or was in agreement. Then I began to learn that it doesn't matter what I think about a stock's fundamentals or valuation. All that matters is what the MARKET thinks. And what the market thinks will show up in a supply/demand chart, or other types of charts. So lets suppose you've read Tom Dorsey's book on point and figure charting, and begin to believe that even though company ABCDE has a price/earnings ration of 10, and has been growing the bottom line at 20% the last two years, its the excess of supply (selling) that has the stock down 30% in the last four weeks that begins to hint that something is wrong with the stock. This is a lesson I learned years ago, and it wasn't from a book. It was from personal experience, and being long a stock with "excellent" fundamentals, quality management and superior product that traded at an extreme discount to the broader S&P 500. For many traders, learning how to trade isn't necessarily a profitable experience when you first start. Yuck! That's a scary thought isn't it. But that shouldn't be a deterrent or an excuse to not begin trading. When first stating out, "paper trading" is a good way to begin learning. You know, the imaginary type of trade where you write down on a piece of paper how many shares of stock you bought at the price the stock was trading. Then, if the stock hits your target or stop loss, you'd record the winning/losing transaction and move on to the next trade. However, the one thing paper trading doesn't allow the trader to experience is the human emotions that only come from having REAL capital at risk. Paper trading does not, in my opinion, expose the trader to emotion as you know that you really don't have any capital at risk, and when there's no emotions coming into play, you can easily stop out a paper trade for a loss, don't feel all that bad, and can simply move onto the next trade, try and apply what you just learned to the next trade and try an not make the same mistake again. For traders learning to trade options, here's a technique that I think will help a trader LEARN on their own how to trade options. Find a stock that you like or at least believe has a viable longer-term future that trades between $20 and $25. Open a trading account with $3,000.00, then buy 100 shares of the stock. This would have your cash outlay being between $2,000 and $2,500. I paid for my own college tuition and can't remember now what the cost of tuition was for a semester, but I think it was more than $3,000.00. From this point on (date of purchase) you will never sell this stock. The only way you can keep from losing the $2K to $2.5K is by constantly trying to protect your positions with a PUT option, when it appears the stock is vulnerable to price depreciation. You will NEVER buy a call option, as the underlying 100 shares always has you long the stock. The reason a trader might want to "learn" to trade by buying a stock and not shorting it, and using call options to protect the short positions, is that with a short position in an underlying stock, your risk can be UNLIMITED, especially when/if you didn't have a call position established. By being long the stock, you the trader understand the most you can lose in this trade is between $2K and $2.5K or the $3,000.00 you started your account out with. Believe me. I know a few "investors" that used to be traders that learned they didn't have the discipline or the knowledge of how to trade stocks or options and it cost them MUCH MORE than $3,000.00 to find this out. If you think about it, lets say you lose on all of your put option trades when attempting to "hedge" the $2,500.00 long position in your account. How could a trader lose the remaining $500.00 in his/her account on put options? There are two ways and here is where your first lesson would be learned. You were buying OUT THE MONEY put options and while your underlying stock position may have declined (or stayed unchanged), it didn't decline enough to have the option gaining in value by the options expiration. Lesson learned: Buying out the money options is a lower probability of success trade, especially if near-month expiration is used. The second way you might lose the remaining $500.00 of the account, is that the underlying stock you chose, was simply a strong stock where demand was always sufficient enough to keep the price rising. A good stock picker (stock you bought for $2,500 and now worth $30.00 or $3,000) may learn ($500.00 loss in put options) that they've got some further learning on how to properly select options. But hey! If I could have only learned to trade options for $500.00 with REAL money, I could have saved myself from stress when first starting out. Another lesson you will learn is that it is BEST to BUY TIME in a put option. Traders that buy too little time find that their options trading becomes DICTATED to by expiration, in that they are making decisions as it relates to expiration, on not based on the underlying stock's price action. There's nothing worse that holding a put option on a stock that looks to be on the brink of a potential major decline, only to have to close that put option out because the risk of a slight rebound in the stock's price ahead of expiration could have current profits in the option being eroded rather quickly. When you buy time on an option, it allows the trader to make a decision on closing out the option ONLY as it relates to the stock itself. If the stock looks to have stabilized at a price you had hedged it to, then the option can be close out, but the decision was based on the stock's price and not the options expirations. At the end of 6-months, you're going to have an idea if you've "passed the course" or not. If at the end of 6-months, the bottom line of your $3,000.00 account is anywhere close to break- even, and the stock you bought at $25.00 is $25.00 or lower, then you've got a passing grade and have probably LEARNED how to trade options profitably. If your account value is ABOVE $3,000.00, the you've graduated at the top of the class! However, if you're account is down more than $500.00 at the end of 6-months, then keep educating yourself and keep learning! Don't give up! NEVER give up! But make the decision yourself if its worth adding another $500.00 to the account to keep learning. Here's a novel idea for even more experienced options traders. When you look at a stock's chart and begin to contemplate a call or put option on a stock, try putting yourself in the shoes of a trader that owns 100 shares of that stock (for put option buyer) or is short 100 shares of stock (for call option buyers, either at the level it is trading at right now, or a level just before the put option SHOULD have been bought to have provided the ULTIMATE protection from the hedge. Let's face it, if a stock looks like its already made a substantial move from an IDEAL action point, then this observation could influence just how much money you expose to the trade at a given point. If you look at a chart and think.... "Ugh! This stock has fallen too far in recent sessions to really have me looking to hedge it at this point," then it may just be that you should either wait for the stock to rally back to the "hedge level", initiate just a partial position in an IN THE MONEY put option (that you could add further to should the stock recover from an oversold level), or just move on to another opportunity. I'm a strong believer in also knowing or understanding how to trade STOCKS from the short or bearish side. A good way to LEARN how to trade a stock from the short side is to use a CALL option as insurance while you're learning to trade a stock short. Remember, OPTIONS were "invented" as a tool to HEDGE risk. They were not "invented" as a tool for SPECULATION! I strongly believe in education through books, subscriptions and seminars as there is going to be something that "hits home" with your belief system and can be successfully incorporated into your trading discipline, but the BEST BOOK you'll ever read on stock/options trading is the one YOU end up writing yourself. And to write this book, you're going to need to RISK real capital. Hopefully the technique of buying 100 shares of a stock that is priced between $20 and $25, and using a put options contract to hedge that positions when deemed necessary will be of use. As outlined above, the MOST you could lose is a little over $3,000.00, but it the BEST book you'll ever read and learn from on how to trade options. Again, I'm not here to sell books, but here's a link to our bookstore where you can find Tom Dorsey's Point and Figure Charting book. http://www.OptionInvestor.com/bookstore/index.asp Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of March 10th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- BMY Bristol-Myers Squibb Mon, Mar 10 Before the Bell 0.27 DT Deutsche Telekom Mon, Mar 10 Before the Bell N/A SASOY Sasol Ltd ADR Mon, Mar 10 -----N/A----- 0.78 ------------------------- TUESDAY ------------------------------ DLM Del Monte Foods Tue, Mar 11 Before the Bell 0.32 HNZ H.J. Heinz Company Tue, Mar 11 Before the Bell 0.52 KR The Kroger Co. Tue, Mar 11 Before the Bell 0.49 ----------------------- WEDNESDAY ----------------------------- CMVT Comverse Technology Wed, Mar 12 After the Bell -0.11 Z Foot Locker, Inc. Wed, Mar 12 Before the Bell 0.34 FCEa Forest City Enter Inc Wed, Mar 12 -----N/A----- N/A MIK Michaels Stores Wed, Mar 12 After the Bell 1.01 TLB Talbots Wed, Mar 12 -----N/A----- 0.47 ------------------------- THURSDAY ----------------------------- BGP Borders Group Inc. Thu, Mar 13 After the Bell 1.38 CLE Claire's Stores Thu, Mar 13 During the Market 0.81 DEG Delhaize Group Thu, Mar 13 -----N/A----- N/A PSA Public Storage Thu, Mar 13 -----N/A----- 0.70 TKC Trkcl Iltsm Hzmtlri Thu, Mar 13 -----N/A----- N/A HLTH WebMD Thu, Mar 13 After the Bell 0.09 ------------------------- FRIDAY ------------------------------- BAY Bayer Fri, Mar 14 Before the Bell N/A KBH KB Home Fri, Mar 14 Before the Bell 1.16 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable 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 BRL Barr Labs 3:2 Mar. 17th Mar. 18th NARA Nara Bancorp 2:1 Mar. 17th Mar. 18th XTO XTO Energy 4:3 Mar. 18th Mar. 19th -------------------------- Economic Reports This Week -------------------------- This week is back loaded with plenty of economic data as the Retail Sales, Import/Export, PPI, Industrial production reports and more all come out Thursday & Friday. Unfortunately, this will all pale beneath the media blitz covering the final ten days before the U.S. goes to war with Iraq. ============================================================== -For- Monday, 03/10/02 ---------------- None Tuesday, 03/11/02 ----------------- Wholesale Invntories(DM)Jan Forecast: 0.3% Previous: 0.8% Wednesday, 03/12/02 ------------------- Trade Balance (BB) Jan Forecast:-$44.5B Previous: -$44.2B Thursday, 03/13/02 ------------------ Initial Claims (BB) 03/08 Forecast: N/A Previous: 430K Retail Sales (BB) Feb Forecast: -0.2% Previous: -0.9% Retail Sales ex-auto(BB)Feb Forecast: 0.0% Previous: 1.3% Export Prices ex-ag.(BB)Feb Forecast: N/A Previous: 0.4% Import Prices ex-oil(BB)Feb Forecast: N/A Previous: 0.2% Friday, 03/14/02 ---------------- PPI (BB) Feb Forecast: 0.7% Previous: 1.6% Core PPI (BB) Feb Forecast: 0.1% Previous: 0.9% Business Inventories(BB)Jan Forecast: 0.2% Previous: 0.6% Current Account (BB) Q4 Forecast:-$136.5B Previous: -$127.0B Industrial Prduction(DM)Feb Forecast: 0.2% Previous: 0.7% Capacity Utilization(DM)Feb Forecast: 75.7% Previous: 75.7% Mich Sentiment-Prel.(DM)Mar Forecast: N/A Previous: 79.9 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 ********************* Focusing on the Charts Bush addressed the nation. Blix reported to the U.N. Security Council. The U.S., U.K., and Spain proposed a March 17 deadline for Iraqi compliance. Opposition to the U.S. position hardened. The entire world knows what will happen after that deadline, and the discovery of U.S. Marines cutting electric fences in the demilitarized zone between Kuwait and Iraq only confirms that prediction. These developments mean some of the market uncertainty lies behind us now, and the markets will focus on the war's probable impact on the U.S. economy. 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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 03-09-2003 Sunday 2 of 5 In Section Two: Daily Results Call Play of the Day: ZMH Put Play of the Day: XL Dropped Calls: None Dropped Puts: None ************************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 55.70 -0.90 0.27 1.42 0.07 0.95 Holding Highs BDX 33.96 -0.23 -0.64 0.27 0.10 -0.39 Looking for $34 DGX 52.45 -0.73 -0.97 0.64 0.17 -0.80 Support Holding EXPE 70.39 -0.68 -0.82 0.87 0.83 0.41 New, Stock Split MME 37.35 -0.15 -0.10 0.82 1.73 1.70 Big Week SLAB 27.54 -0.85 0.02 0.46 0.72 -0.85 Great Strength ZMH 45.21 -0.96 -0.05 0.53 0.56 0.57 Closing High! PUTS BBOX 39.58 -1.00 -0.11 -0.29 -0.72 -1.32 Still Under $40 MHK 46.27 -0.82 -1.18 -0.71 -0.98 -3.11 Big Week PII 46.73 -0.69 -1.36 0.33 -0.28 -1.67 Trend Remains TIN 39.74 -0.52 -1.43 0.01 -0.81 -0.52 Under $40 UTX 57.12 -0.79 -0.57 0.13 -0.70 -1.47 Bouncing VZ 34.06 0.22 -0.40 0.13 -1.23 -0.53 Trend Intact XL 69.00 -0.80 -0.45 1.23 -0.63 -0.75 Tense Week? ************************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: ********************* ZMH - Zimmer Holdings - $45.21 +0.42 (+0.82 for the week) See details in play list Put Play of the Day: ******************** XL - XL Capital - $69.00 +0.38 (-1.94 for the 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 ^^^^ None *********** 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 03-09-2003 Sunday 3 of 5 In Section Three: New Calls: EXPE Current Calls: AMGN, BDX, DGX, MME, SLAB, ZMH New Puts: None ************************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 ************** EXPE – Expedia, Inc. $70.39 (+0.60 last week) Company Summary: Expedia is a provider of online travel services for leisure and small business travelers, offering one-stop shopping and reservation services with real-time access to schedules, pricing and availability. The company's global travel marketplace includes direct-to-consumer Websites offering travel-planning services at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.nl and Expedia.it. In addition, the company provides travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is a division of Travelscape, Inc., one of EXPE's wholly owned subsidiaries. Why We Like It: Travel-related stocks got pummeled throughout the months of December and January as economic uncertainty had bulls in this sector moving to the sidlelines ahead of earnings. But the earnings weren't as bad as expected and we've seen a fair amount of improvement in these stocks in recent weeks. Announcing earnings that handily beat analyst forecasts on February 5th, shares of EXPE initially sold off, trapping the bears below $60 and then promptly shooting skyward. After one more dip in the middle of February, EXPE has really been on a tear. First clearing the 200-dma, the next surge took the stock through the 50-dma (currently $64.98) and then through the $68 level this past week. What initially looked like short-covering, now appears to be genuine buying in anticipation of the stock's upcoming split. That's right, EXPE is due to split 2-for-1 on Monday, and that is likely part of the catalyst for the bullish action in the stock. What happens after the split is where the rubber meets the road. We don't want to enter before the split, and that means waiting until it is trading split adjusted on Tuesday. Over the past several days, EXPE has been finding support just above the $68 ($34 post-split) level, and we need that level to continue supporting the stock after the split. The 10-dma (currently $68.30) should reinforce that support level. Look for a dip and bounce from that level on Tuesday to provide the best entries. Should buyers continue to bid the stock after the split, momentum traders can consider new entries on a breakout over $71 ($35.50 post-split), so long as buying volume remains strong. Place stops initially at $67.50 ($33.75 post-split). Note that the push through the $70 level over the past two days has taken the stock through the PnF chart's bearish resistance line and the current column of X indicates substantial upside still to come. Our target for the play will be $77.50, where the stock found resistance in late November. We've listed pre-split option strikes for the play this weekend and will update them with post-split strikes on Tuesday. *** March contracts expire in two weeks *** BUY CALL MAR-70 UED-CN OI=4629 at $2.75 SL=1.25 BUY CALL APR-70*UED-DN OI=3047 at $5.00 SL=3.00 BUY CALL APR-75 UED-DO OI=2036 at $2.60 SL=1.25 Average Daily Volume = 2.05 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** CURRENT CALL PLAYS ****************** AMGN – Amgen, Inc. $55.70 (+1.06 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: Consistency is the key, and our AMGN play certainly has it. Support at the ascending trendline has been as consistent as the rising sun for months now, and most recently afforded an attractive entry into the play on February 25th when the company reaffirmed its growth rate in terms of both revenue and earnings out until 2005. That gave the stock a strong rebound from the $52 level and since then AMGN has been banging on resistance, first at the $54 level, then $55 and now $56. This play has been a slow mover, but steady as they come. Trying to chase price action higher is a losing proposition, as each move to new highs is invariably followed by a retracement back to confirm support at a higher level. After breaking through the $55 resistance earlier this week, the stock has been testing that level as support and it looks like it is going to hold. While we may see a brief dip back to the $54 area, it is likely to be bought with enthusiasm, making such a dip a gift of an entry point at this stage of the play. The stock appears intent on continuing its upward move, with $60 an obvious upside target for the bulls. Buying volume is strong and this is borne out by the strong bullish trend in the On Balance Volume indicator. Buy the dips to support and maintain stops just below trendline support ($53.10). Our stop rises to $53 this weekend. *** March contracts expire in two weeks *** BUY CALL MAR-55 YAA-CK OI=33633 at $1.90 SL=0.75 BUY CALL APR-55*YAA-DK OI=34707 at $2.95 SL=1.50 BUY CALL APR-60 YAA-DL OI=31603 at $0.90 SL=0.50 BUY CALL JUL-60 YAA-GL OI=32874 at $2.75 SL=1.25 Average Daily Volume = 11.8 mln --- BDX - Becton Dickinson - $33.96 +0.16 (-0.44 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: Position trading can be a game of patience and that is exactly what bullish traders in BDX need right this moment. Considering the world events these days patience can be tough to come by if you're long stock. We remain encouraged by the relative strength displayed in the daily chart of BDX and if the market cooperates at all on Monday we should see shares break through the $34 level again. Unfortunately, the position on the point-and-figure chart is still challenging and shares have yet to break through the overhead resistance near $35.00. As we mentioned in the Thursday update, conservative traders can reduce their risk by placing a stop near $33.20, which has been recent support. Officially, the OI play stop loss remains at $31.98. Enter cautiously as the markets seem headed for another troubling week. ** Only Two Weeks Left for March Options ** BUY CALL MAR-30*BDX-CF OI= 101 at $4.00 SL=2.00 BUY CALL MAR-35 BDX-CG OI=1268 at $0.35 SL=0.00 BUY CALL APR-30 BDX-DF OI= 0 at $4.20 SL=2.00 BUY CALL APR-35*BDX-DG OI= 57 at $0.75 SL=0.00 Average Daily Volume = 1.16 mil --- DGX – Quest Diagnostics $52.45 (-0.31 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: Right on the edge, shares of DGX just can't seem to gain any traction. But at the same time, the stock also seems to be finding support just above the $51 level. It is interesting that each of the past 3 days has seen the bears press the stock under the 20-dma ($51.67) and each time the bulls have been able to battle back above that moving average. In fact, the closing highs have been moving fractionally higher. The real problem is the volume, as the term anemic would be an understatement. Friday's lackluster showing was barely half the ADV, so clearly we are going to need to get some more volume in play if the stock is going to have any hope of getting over that $55 level. But with support so consistent just above $51, it certainly makes it easy to grab an attractive entry into the play each time the stock rebounds from that level. Recalling the picture on the PnF chart, we got a new Buy signal with the trade above $54, but then the latest pullback took over. Traders not willing to buy the dip near support will need to see upside conviction with a move through 10-dma ($52.64) and then $53 before playing. We're raising our stop to $51.25, just below the recent intraday lows. *** March contracts expire in two weeks *** BUY CALL MAR-50 DGX-CJ OI= 664 at $3.40 SL=1.75 BUY CALL MAR-55 DGX-CK OI=2142 at $0.70 SL=0.25 BUY CALL APR-50*DGX-DJ OI= 152 at $4.40 SL=2.75 BUY CALL APR-55 DGX-DK OI= 979 at $1.70 SL=0.75 Average Daily Volume = 1.28 mln --- MME – Mid Atlantic Medical Services $37.35 (+1.60 last week) Company Summary: Mid Atlantic Medical Services is a holding company for subsidiaries active in managed healthcare and other life and health insurance related activities. MME and its subsidiaries offer a broad range of managed healthcare coverage and related ancillary insurance and other products and deliver these services through health maintenance organizations, a preferred provider organization, and a life and health insurance company. MME owns a home healthcare company, a pharmaceutical services company and a hospice company. The company also owns a collections company and maintains a partnership interest in an outpatient surgery center. Why We Like It: Whatever the cause of MME's strong upward move on Thursday, it doesn't seem to be news related, as there still isn't anything of substance on the news wires. And it doesn't seem to be related to either the economy or the geopolitical situation, as there wasn't much movement in the stock on Friday despite the wild gyrations in the broad market brought on by the jobs data and developments on the international scene. MME traded in a very narrow range on Friday, completing a nice little inside day at the upper end of Thursday's large-range candle. That gives us a couple of ways to play the action next week. A breakout over $38 can be used by momentum traders as an entry, as it would represent a bullish resolution to the inside day. More conservative traders are still looking to enter the play on another pullback to support, which resides down in the $35.50-36.00 area. A more aggressive approach to buying the dip would be to enter on a rebound from the $37 level, which provided support on two separate occasions on Friday. Maintain stops at $35 until we see how next week gets started. *** March contracts expire in two weeks *** BUY CALL MAR-35 MME-CG OI=339 at $3.10 SL=1.50 BUY CALL APR-35*MME-DG OI= 20 at $3.90 SL=2.50 BUY CALL APR-40 MME-DH OI=150 at $1.25 SL=0.60 Average Daily Volume = 428 K --- SLAB - Silicon Laboratories - $27.54 -0.04 (+0.42 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: Sometimes it's all about relative strength. Bulls are probably looking for anything they can park their money in these days and SLAB has certainly been holding up its part of the bargain. Intel's news really hit the stock (INTC) hard and shares lost 4% by the close. More importantly, the semiconductor sector gapped lower, much like the rest of the markets today. The dip below 280 was probably a tense once for both bulls and bears a like. When the markets began to rebound, so did the $SOX. Meanwhile, shares of SLAB remained very strong. Both the morning dip and the afternoon dip in SLAB saw good rebounds. The upward trend remains and shares look ready for a breakout above $28.00. We still caution any traders strongly about going long stocks in this market. Many analysts believe that next week could be very tough (translate: down) as we wait for the shooting to start. However, if you're going to buy a stock, how about one that's out performing its peers and the market (like SLAB). Remember, if SLAB hits $29.50 or higher we're closing the play. ** Only Two Weeks Left for March Options ** BUY CALL MAR-25 QFJ-CE OI=1005 at $3.10 SL=1.50 BUY CALL MAR-30 QFJ-CF OI= 658 at $0.45 SL= 0 BUY CALL APR-25*QFJ-DE OI=1439 at $4.10 SL=2.00 BUY CALL APR-30 QFJ-DF OI=2550 at $1.25 SL= 0 Average Daily Volume = 1.22 mil --- ZMH - Zimmer Holdings - $45.21 +0.42 (+0.82 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: Fresh news on ZMH remains hard to come by. Thankfully, that has not stopped shares from climbing higher despite all the market volatility and apparent weakness. This could be another case of bulls looking for a place to put their money and keying in on ZMH's impressive relative strength. The stock is really out performing. Despite the great performance we remain cautious and traders should pay extra attention to their stops and be sure to have an exit plan in mind. As previously noted, looking at ZMH's weekly chart is showing the stock very close to its upward trendline (of resistance). You can see the same trendline on the stock's point-and-figure chart, which happens to be showing a bullish double-top breakout. Don't misunderstand us. ZMH has been performing well and Friday's close over $45 is very encouraging. We still feel the upside target should be in the $47.50 range as shares don't move that fast. Another word of caution for the bulls is the volume on ZMH. Volume has been dropping since the breakout above resistance near $42.50. This is not normally a good sign but we also have to consider that volume has been dropping in the markets overall during the same time frame. Thursday's update offered a new stop loss for ZMH at $42.95. We're going to leave it there for now. BUY CALL APR-40 ZMH-DH OI= 6 at $5.80 SL=2.60 BUY CALL APR-45*ZMH-DI OI=808 at $1.95 SL=0.80 Average Daily Volume = 1.08 mln ************* NEW PUT PLAYS ************* None ************************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 03-09-2003 Sunday 4 of 5 In Section Four: Current Put Plays: BBOX, MHK, PII, TIN, UTX, VZ, XL Leaps: War, War and More War Traders Corner: Position Adjustments For The (Semi-Rational) Trader Traders Corner: For the Bears Traders Corner: Daisy Two-Breath Futures Corner: Execution ************************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 ***************** BBOX – Black Box Corporation $39.58 (-1.08 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: Friday's trading session was volatile to say the least and our BBOX play went along with that trend. After falling below recent support, the bulls stepped in to support the stock at the $38 level (at the bottom of the 10/17 gap), and then propelled the price sharply higher throughout the morning until reaching the $40 level. That level proved too strong of resistance and BBOX pulled back slightly into the close. So the question we have to answer this weekend is whether Friday's action provided an entry point, or whether it was a reversal session. It is too hard to call tonight, as volume wasn't sufficiently strong to call it a real reversal, but it was strong in terms of price, with the day's candle completely engulfing Thursday's candle. Daily Stochastics are just starting to attempt a bullish reversal, so we need to exercise caution. Should the bulls be unable to crest the $40 level (reinforced by the 10-dma at $39.82), then a continued rollover can be used for new entries. However a continued upward move and close above $40 would be confirmation that Friday's session marked an important reversal. More conservative traders will want to wait for a drop back under $39.25 (afternoon support on Friday) before initiating new positions. Our official stop remains at $41. *** March contracts expire in two weeks *** BUY PUT MAR-40*QBX-OH OI=264 at $1.65 SL=0.75 BUY PUT APR-40 QBX-PH OI= 35 at $2.55 SL=1.25 Average Daily Volume = 286 K --- MHK – Mohawk Industries, Inc. $49.38 (-3.11 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: Short-covering was the name of the game on Friday, which was actually quite surprising, given the depth and breadth of the job losses reported before the opening bell. But geopolitical concerns once again took center stage, giving the victory to the bulls. After dropping at the open with the rest of the market, our MHK play found solid support just above the $45 level before rebounding throughout the rest of the morning. The bulls clearly lacked conviction though, with the $46.70 level (prior support) acting as resistance into the close. We expected support to materialize in the $44-45 area, and had suggested harvesting gains on a drop into that area. Under normal market conditions, we might have even dropped MHK from the playlist this weekend, but as we all know, this market is anything but normal. The dominant issue still at play for MHK is the developing weakness in the Housing sector, and it will take more than a one-day short-covering bounce to dissuade us from the fundamentals driving this play. The Home Construction index ($DJUSHB) faces stiff resistance at the $300-307 area, and unless it can move above that zone, MHK should remain mired in its downward trend. The descending trendline from the beginning of the year is now at $48, and MHK will face stiff resistance there. The best case for new entries will be on a failed rally below that level, although we'd prefer a rollover below $47. Given the rebound from the $45 level on Friday, we're still advising not to enter on breakdowns, but to use dips to that support level to harvest gains in the play. Maintain stops at $48. *** March contracts expire in two weeks *** BUY PUT MAR-50*MHK-OJ OI= 47 at $4.20 SL=2.50 BUY PUT MAR-45 MHK-OI OI= 86 at $1.05 SL=0.50 BUY PUT APR-45 MHK-PI OI=565 at $2.15 SL=1.00 Average Daily Volume = 476 K --- PII - Polaris Industries, Inc. $46.73 (-1.67 this week) Company Summary: Polaris Industries designs, engineers and manufactures all terrain vehicles (ATVs), snowmobiles, motorcycles and personal watercraft(PWC). The company markets them together with related replacement parts, garments and accessories through dealers and distributors, principally located in the United States, Canada and Europe. ATVs are four-wheeled vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland. Snowmobiles have been manufactured under the Polaris name since 1954. Why We Like It: Broad market action was still dominated by geopolitical events on Friday, as evidenced by the sharp rebound form the morning lows. Our PII play went along with the crowd, dipping to new lows near $45 at the open and then getting hit with a sharp round of buying that took the stock right up to the descending trendline (just over $47) that began in early January. There wasn't enough buying interest to hold over that trendline and the stock then weakened slightly into the close, ending the day just below $47. This is an important level, as it provided support both on 2/13 and 2/25, so we have old support now behaving as new resistance. Provided the bulls can't extend Friday's gains early next week, a rollover from this trendline will give eager bears their next likely entry into the play. We've been avoiding entries on breakdowns below recent support and the sharp bounce on Friday reinforces our resolve about that strategy. Should the bulls be able to continue Friday's bounce on Monday though, it is likely we will have to concede that the 2-month downtrend has run its course. Traders looking for a new entry into the play can either use a rollover near $47 next week, or for those with a more aggressive approach a bounce and failure below $47.75. We're maintaining our stop at $48. *** March contracts expire in two weeks *** BUY PUT MAR-45 PII-OI OI=106 at $1.15 SL=0.50 BUY PUT APR-45*PII-PI OI=149 at $2.65 SL=1.25 Average Daily Volume = 460 K --- TIN – Temple-Inland Inc. $39.74 (-2.16 last week) Company Summary: Temple-Inland is a holding company that conducts all of its operations through its subsidiaries. Its principal subsidiaries include Inland Paperboard and Packaging, Inc., Temple-Inland Forest Products Corporation, Temple-Inland Financial Services Inc., Guaranty Bank and Guaranty Residential Lending Inc. TIN's business is divided among three groups: the Paper Group, which manufactures corrugated packaging products, the Building Products Group, which manufactures a wide range of building products and manages the company's forest resources of 2.1 million acres of timberland, and the Financial Services Group, which consists of savings bank, mortgage banking, real estate and insurance brokerage activities. Why We Like It: It is uncanny how the PnF bullish support line consistently provides support on the first test. It is that reality that kept us from recommending new entries into our TIN play on a breakdown below Thursday's low. That breakdown occurred first thing on Friday morning, with the broad market heading sharply lower in response to the dismal employment numbers. TIN plunged to $38.65 before climbing right to $40, dipping back to just above $39 and then moving back towards the highs at the close. Despite that relatively bullish action, it does nothing to change the trend, which is clearly down. Short-covering ahead of the weekend seemed to be the dominant theme, and the bounce in TIN just sets us up for a potential entry early next week. While the best case for a new entry point would be a rollover from just above $41 (the site of the 8-week descending trendline and broken support, not to mention the 10-dma at $41.17), we may have to settle for a rollover in the vicinity of $40.00-40.50, where the stock found support on the way down on Wednesday. While this play does have the technicals in its favor, traders need to be aware of the attendant risks that go with a stock that has thinly traded options. That factor will mean the bid/ask spread is wider and purchases will have to be done at the ask, while sales will likely have to be done at the bid. But that should become an insignificant factor, if the play performs to our expectations, as we're looking for a decline to at least $37 (filling the first gap) and eventually to $35.50 (filling the second gap). In order to give the play time to perform, we're recommending using the April or even May option, rather than March, which only has two weeks to expiration. *** March contracts expire in two weeks *** BUY PUT MAR-40 TIN-OH OI= 16 at $1.25 SL=0.60 BUY PUT APR-40*TIN-PH OI= 0 at $2.05 SL=1.00 BUY PUT MAY-40 TIN-QH OI= 86 at $2.50 SL=1.25 Average Daily Volume = 364 K --- UTX - United Technologies $57.12 (-1.46 last 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: The question we've been asking over the past several days was "how long will UTX fall before giving us a bounce we can use for new entries?" We got our answer on Friday, as an early drop was met with fierce short-covering, making for a very wild session. The initial drop was motivated by the pathetic employment report, which quickly drove the broad market lower. UTX fell to just above $55 at the open and then quickly soared higher as the shorts covered. Within the first 90 minutes, the stock was back up at the $56.50 resistance level and after a bit of indecision, it pushed higher, ending the day just above $57 and very near the high of the day. Volume was heavy on Friday too, but we're not quite ready to cut bait and run on this one, as the downward trend is still very much intact. The 10-dma (currently $57.93) provided strong resistance as UTX rolled over from the $62 level last month and given the fact that it lines up nicely with strong historical resistance (broken support) at $58, that's where we want to focus our efforts for initiating new positions. Recall that the PnF chart is still very bearish, with the bullish support line soundly broken and the vertical count forecasting a decline down to the $51 level. That's just above the October lows and an ideal level to harvest gains if we get there. As news driven as this market is, it still makes more sense to enter on failed rallies than breakdowns (as seen on Friday), so we're going to stick with that strategy. Keep stops set at $58.75. BUY PUT MAR-60 UTX-OL OI=1976 at $3.60 SL=1.75 BUY PUT APR-60 UTX-PL OI= 201 at $4.70 SL=2.75 BUY PUT APR-55*UTX-PK OI= 361 at $2.20 SL=1.00 Average Daily Volume = 2.13 mln --- VZ – Verizon Communications $34.06 (-0.52 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: How can you tell you've just watched a short-covering rebound? When a group of stocks that have been weak lately all see a strong rebound just after tracing a new low. That's exactly what happened to our VZ play on Friday. Dropping sharply with the rest of the market and the North American Telecoms index (XTC.X), VZ hit a morning low of $32.90 before rebounding sharply, right back to the $34 level at the close. The thing that is encouraging is that there wasn't enough buying interest to push the stock back over the $34.25 level, which after providing such consistent support for 2 weeks should now present formidable resistance. Remember the descending trendline that has been defining the series of lower highs for the past couple weeks? Well, it has now fallen to $34.70 and if this trend is to continue, the bulls should not be able to effect a rally through that trendline. For that reason, we can now get even more aggressive with our stop, lowering it to $34.75 this weekend. Traders looking for a new entry into the play will want to focus on a rollover from the $34.25-34.50 area as the best approach. Despite the rebound on Friday, VZ looks weak and so does the XTC index. VZ isn't going to move quickly, but it still looks vulnerable to the $29-30 level, which ought to provide a great exit point at strong support. In order to get there though, the XTC is going to need to remain weak, with the next level of support $380-390 falling to the bears. Traders can use the action in this index to confirm strength/weakness in VZ. *** March contracts expire in two weeks *** BUY PUT MAR-35 VZ-OG OI=11506 at $1.65 SL=0.75 BUY PUT APR-35*VZ-PZ OI= 3737 at $2.80 SL=1.50 BUY PUT APR-32 VZ-PZ OI= 4336 at $1.50 SL=0.75 Average Daily Volume = 7.12 mln --- XL - XL Capital - $69.00 +0.38 (-1.94 for the week) Company Summary: XL Capital Ltd, through its operating subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products to industrial, commercial, and professional service firms, insurance companies, and other enterprises on a worldwide basis. As of December 31, 2002, XL Capital Ltd had consolidated assets of approximately $35.6 billion and consolidated shareholders' equity of approximately $6.6 billion. (source: company release) Why We Like It: The next few weeks could be intense ones for insurance companies. Many have dramatically increased rates and reserves over the last 18 months in preparation for any future homeland terrorist incident. As the deadline between the U.S. and Iraq approaches (March 17) the expectation for a terrorist attack will probably rise (both before and after the deadline. As reported in the news, the high-profile capture of one of Al-Queda's leading organizers could either put Al-Queda into hiding or accelerate any plans they have. Looking at the Insurance sector index ($IUX.X) one can see that the IUX tested support at 220 on Friday. This is the third time 220 has held as support since last July. While technical bulls may see this as a low-risk entry (using a very tight stop) we have looked at some of the bigger insurance stocks in the group and many appear ready to drop with several under key support levels. The exception in the property and casualty group is Progressive Corp (PGR) and shares of PGR have turned vertical. We all know that can't hold up forever. Unfortunately, we could not uncover what is driving the price higher for PGR. If you have an insight into the stock's sudden rise, let us know (comments@OptionInvestor.com). Meanwhile, shares of XL don't look much different from Thursday's update. The stock dipped lower on Friday morning with the markets and rebounded with the markets. Bears can happily say that the rebound was rather muted and the stock remains under resistance at $70. The point-and-figure chart also looks bearish with a double-bottom breakdown and no real support until $60. We will leave our stop at $72.06 for the moment. ** Only Two Weeks Left for March Options ** BUY PUT MAR-70 XL-ON OI=314 at $2.90 SL=1.45 BUY PUT APR-70*XL-PN OI= 95 at $4.10 SL=2.00 BUY PUT APR-65 XL-PM OI=551 at $2.20 SL=1.00 Average Daily Volume = 734 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** War, War and More War By Mark Phillips mphillips@OptionInvestor.com Doesn't anyone care about the economy anymore? That certainly seemed to be the case on Friday, as the early plunge due to the abysmal (actually, I think that's an understatement) employment report was over almost as quickly as it began. Shorts began covering almost immediately ahead of the Hans Blix testimony in front of the U.N. as attention reverted almost immediately back to the geopolitical stage. Aside from the employment report an hour before the open, I really didn't hear anything else throughout the day that could be termed "economic news". It was all geopolitical, from the back and forth rhetoric at the U.N. to the on again, off again rumors of the capture of one or more of Bin Laden's sons. I hate to be the bearer of bad news, but don't expect any of this to change until Bombs Over Baghdad: The Sequel opens at a theatre near you. There's no way President Bush is going to back down now (save for Saddam meeting with an unfortunate accident), and we ARE going to war. Most likely within the next 2 weeks. The market knows this and appears to have found a point of equilibrium, where major participants are content to wait until the show starts. Please don't misunderstand my comments. I view war as a very serious event and one only to be undertaken when all other diplomatic means have been exhausted. I believe the administrations in the U.S. and U.K. (along with others) have come to the conclusion that we're there. Why do I start off with the geopolitical situation? Because it defines where the market is and what it is likely to do over the near term. the market has found a point of equilibrium, while it awaits some sort of confirmation that the war will go either better or worse than is generally expected. Once that unknown becomes known, then the press and traders can get back to the business of valuing stocks based on expectations about business growth (or lack thereof) and the overall economy. Trust me, we'll get there. And quite possibly by the end of the month. Just in time for earnings season again! Capitulation Time Not the market, but me. I've got to tip my hat to Linda Piazza, as she's finally convinced me of the validity of technical analysis on the VIX. It works. That doesn't mean I have the slightest idea where it is headed over the next 6 weeks (although I expect much higher and then lower), I can no longer avoid the conclusion that the technical analysis metrics we've been talking about are quite valid. Take a look below. Daily Chart of the VIX That descending trendline from the July highs is still defining a ceiling for the VIX and if you draw the trendline on the tops of the candle bodies, rather than the wicks (as I've shown), you'll see that Friday's action represented another rejection at that trendline. Look at the moving averages too. The 200-dma has now risen over 35, and I think it is significant the regularity with which either the 200-dma or the 50-dma is providing support for the VIX. With the Stochastics and MACD both looking early bullish, we could be in for some real excitement next week. We'll know for sure with either a VIX close below the 50-dma or a close above the descending trendline. I still view the current action as showing extreme complacency, despite a VIX of 35. Take another look at the OEX and you'll see what I mean. This week saw the VIX go out just over 35, with the OEX barely able to hold onto the 420 level. What we continue to see is a pattern of the VIX moving ever lower, while at the same time, the market is moving lower. This is a clear divergence from past behavior as I pointed out in my February 26th Options 101 article, Best of Intentions. Investors are showing their expectation that the beginning of the war will be the time to buy as the market will rally just like it did in 1991. Let's just say I'm not convinced. My money is on another sharp increase in the VIX, through the trendline, and through the 40 level, although I could be wrong. So if that's my expectation, then why is everything in both the Portfolio and Watch List bullish? Great question! Because by way of the bullish percent charts and the current oversold condition throughout the market, the odds don't favor long-term bearish positions right now. Bears are carrying the lion's share of the risk in this market, and what we're trying to do here is pick attractive entry points into bullish plays that should hold up well on that expected decline and then outperform to the upside. Of course, it never hurts to hedge your bets, and that's what we're doing by bringing NEM back onto the Watch List this weekend. I'm looking for a sharp decline in the stock (and the price of gold) in the next few weeks and that will be when we want to strike. I'm sure you've noticed that I really haven't said anything about technical levels in the market, or the specifics of the Bullish percent or where support/resistance lie. The reason why is that it really hasn't changed that much in the past 3 weeks, as we remain mired in the range, and I see no benefit to telling you in excruciating detail that which you already know. So we'll keep it brief this weekend and go right to the plays. Portfolio: QCOM - "I think I can, I think I can" say the bulls as they struggle and strain to push QCOM higher. For all the grunting and straining over the past few weeks, they certainly haven't accomplished much, now have they. For myself, I'm actually pretty pleased with the stock's relative performance, as it has held in the $33-35 area while the rest of the market has been deteriorating. It looks to me like we got a pretty solid entry and now we just wait for a bullish move that lasts more than a day to propel the stock through the $36 resistance level. Dips and rebounds from above the 200-dma still look attractive for those of you still looking for an entry into the play. So long as we remain mired in this range, I'll keep a wide stop set at $30. DJX - This is just what I was worried about when I succumbed to taking an entry on the DJX play a couple weeks ago. This volatile news-driven market environment is certainly not conducive to measured and well-considered entry plans. My intent had been to log an entry from a rebound near $77.50, but that bounce took the DJX over the $79 level by the close, leaving the Portfolio with a less than desirable entry to be sure. But that's water under the bridge, and I trust many of you got into the play closer to the $78 level, as mentioned in the Market Monitor. Coming back to my original target of $77.50, did you notice that we're right back there again this weekend, with the DJX going out at $77.40? For traders not yet in the play, I would look for dips into the $75-76 area as a solid entry point. Just keep in mind that with war looming in the next couple weeks, conservative traders will be best served by waiting on the sidelines until seeing how the market reacts to international developments. MSFT - Much ado about nothing! We took our entry into the MSFT play last weekend, and in the past week the stock has been down to test the $23 level and it right back where it was when we initiated the position. The stock "feels" like it is trying to put in a bottom, but like the rest of the market, the key remains with the geopolitical situation. Rebounds from the $23 level continue to look good for new entries, but I just can't shake the feeling that there is one more strong downdraft in store before MSFT really bottoms. For that reason, I'm keeping a rather wide stop at $21. ADBE - While I clearly jumped into the ADBE play just a tad early, I do like the way the stock rebounded from the 200-dma late last week. That $25.00-25.50 level has been solid support for several months now and should continue in that role until the stock can really gain some traction to the upside. The first obstacle will be getting back over $28 and then the very strong $29 resistance level. We may seem some more weakness in the stock ahead of the war effort in Iraq, but unless our $24 stop is violated, I view those dips as buying opportunities. Watch List: BEAS - There's not question BEAS' dip down to $9.15 last week looked tempting for an entry point, but I'm trying to be more patient. Too many times in recent weeks, I've taken an entry into one of our Watch List plays prematurely, only to see a better entry opportunity arise soon thereafter. With the trend in BEAS still down and the uncertain market environment, I want to see the stock actually fall into our $8.50-9.00 target zone before pulling the trigger. The 200-dma is sitting right in the middle of that zone, and I'm betting it is going to be tested before a sustained rally arrives. Even after that entry, I wouldn't be surprised to see a dip as low as the $8 level (the site of the PnF bullish support line) before BEAS really turns around. Patience is the key. NVDA - In the area of resilience, our NVDA play has been truly amazing, as it continues to find support at the $12 level. Is our target zone of $10-11 too aggressive? While I'm not entirely sure, I don't think so. In the wake of the company's stellar earnings report, investors just seem unwilling to let the stock fall very far before snapping up the perceived bargain. The problem with buying at this level is the fact that the weekly Stochastics are now topping out in overbought territory and with price unable to advance, it looks like they will soon begin their trek back down towards oversold. That certainly isn't the setup I want for aggressively trying to go long. Call me a skeptic, but I think we're best served by waiting for the market to deliver the entry point we've requested. A bounce from the $10-11 area is what we want, and I for one am prepared to wait for it. AA - Last weekend I raised the question of whether I had perhaps missed a good entry into our AA play. Based on the price action of the week just concluded, I would have to say "No". In fact, with the sharp slide on Thursday, and a pretty meager rebound on Friday, I'm certainly in no hurry to open a position. I think the thing that may be bothering me the most is the position of the weekly Stochastics, which are just starting to tip bearish midway up towards overbought. That's a warning of potential weakness that I don't want to ignore. With the February lows now broken, a retest of the October lows seems certain, so that's what we're going to look for. Lower the entry target to $18.00-18.50. If we do get an entry into the play, we'll have a tight stop at $17.50, as a trade at that level would be a new PnF Sell signal and would negate the current bullish vertical count. EMC - Can you say boring? While I expected EMC to be a slow mover, I was a bit surprised to see the quiet trade last week. Alright, to be fair, for a $7 stock, that $0.60 range throughout the week wasn't too bad, as it equates to an 8.5% range. I guess I'm just irritated that the wild gyrations in the stock couldn't get it closer to our entry zone. While EMC did trade an intraweek low of $7.03, I'm holding out for a dip down closer to $6.50 before getting my feet wet. Up until late February, EMC had been holding above an ascending trendline that began with the February lows. The break below that line and the fact that EMC couldn't get back through it last week hints that there is some more weakness in store. A trade down to the $6.40 level (followed by a rebound, of course) would fill the stock's last remaining gap and pave the way for the next bullish move. So let's keep our target where it is and hope for one more surge down over the next couple of weeks. My opening comments really say it all. This market is all about the coming war with Iraq and little else. That means a 5-10% ramp up OR down can occur just as easily, based entirely on the latest piece of breaking news. That is not an environment for long-term investors to be aggressively establishing new positions. That's a sure-fire way to lose money, in my opinion. It may not be exciting or what we want to do, but this is an excellent time to be sitting still and tracking our quarry, but not letting our presence be known. Like many others before me have said with great regularity, "Cash Is King!" 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 $ 4.40 - 4.35% $30 '05 $ 40 ZLU-AH $ 7.90 $ 7.60 - 3.80% $30 DJX 02/25/03 '03 $ 80 DJX-LB $ 6.40 $ 5.60 -12.50% $74.50 '04 $ 80 YDJ-LB $ 9.30 $ 8.40 - 9.68% $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 $ 4.40 - 6.38% $24 '05 $ 30 ZAE-AF $ 7.50 $ 7.30 - 2.67% $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 NEM 03/09/03 $23.50-24.00 JAN-2004 $ 25 LIE-AE CC JAN-2004 $ 20 LIE-AD JAN-2005 $ 25 ZIE-AE CC JAN-2005 $ 20 ZIE-AD PUTS: None New Portfolio Plays None New Watchlist Plays NEM - Newmont Mining Corp. $25.96 **Call Play** Ever the contrarian, I'm looking to take advantage of the reactive plunge in the price of gold and by association, the price of gold stocks once the shooting starts in Iraq. You see, analysts and the media have conditioned the public to believe that the primary cause of the rise in the price of gold over the past several months is due to the heightened geopolitical uncertainty. While I don't doubt that this factor has played a part, I don't for a minute delude myself into thinking that Iraq and North Korea are the central cause. The bull market in gold began before Iraq started heating up and even before 9/11 as market forces recognized that gold was undervalued and most everything else in the market was overvalued. The price of gold began posting higher highs and higher lows in the middle of 2001 and hasn't deviated from that trend yet. The real cause of the strength in gold is derived from the fact that gold is real money, as apposed to the multitude of fiat currencies, none of which are based on anything other than the say so of their respective central banks. And with debt concerns, looming recessions and trade imbalance concerns, there are very few currencies (none that I know of) that are looking strong relative to the price of gold. Central to this theme is the action of the US Dollar index (DX00Y), which tracks the value of the dollar against a trade-weighted basket of international currencies, hit a new 3-year low last week and looks like it is headed lower. That can only be good for the price of gold. Alright, enough background. What do I like about NEM? In the world of mining stocks, NEM is the blue chip company, with mining interests throughout the world. The stock is well into a solid long-term bullish trend and is one of the few mining stocks that has LEAPS available. We played this one successfully not too long ago, although I think I was a bit tardy in pulling the plug. The long-term ascending trendline for the stock currently rests just below $24, and I expect to see a sharp pullback in both the price of gold and NEM in the wake of positive developments soon after the shooting in Iraq starts. The reason for this sharp selloff is the reaction of the uninformed "sheeple" that will sell based on the belief that the price of gold (and gold shares) is linked to the geopolitical situation. We know better, and we'll be in a position to take advantage of their ignorance. Make no mistake, there is a significant amount of risk in trying to game the bottom in an emotional selloff, but I'm looking for the smart money to step forward and support the price of gold and NEM at major support levels. For gold, that is in the $325-330 area, with support reinforced by the 200-dma at $329.76 (basis the April futures contract, GC03J). For NEM, the support we want to target is the ascending trendline at $23.75, so our entry target will be $23.50-24.00. That drop to support over the next couple weeks should coincide nicely with the weekly Stochastics bottoming in oversold (they're almost there now). Keep in mind, this isn't a play that we want to enter until AFTER the beginning of hostilities in Iraq. BUY LEAP JAN-2004 $25 LIE-AE BUY LEAP JAN-2004 $20 LIE-AD **Covered Call** BUY LEAP JAN-2005 $25 ZIE-AE BUY LEAP JAN-2006 $20 ZIE-AD **Covered Call** Drops None ************** TRADERS CORNER ************** Position Adjustments For The (Semi-Rational) Trader By Mike Parnos, Investing With Attitude Normally, when position adjustments become necessary for CPTI students, it’s the result of a leg cramp, answering nature’s call, or the timer going off on the microwave. On occasion, when our trades are being naughty, they will require a little position adjustment as well. That’s OK because we have a plan. Sitting Bull had a plan. General Custer did not. He might have made it into the history books (see “stupid”), but he never made it out of the Little Big Horn. Two weeks ago, in the CPTI Portfolio, we put on an Iron Condor for the March expiration cycle using XAU (Gold/Silver Index). We established a range of $65 to $80. It seemed like a good idea at the time. There was some support around $69-70 and some pretty good resistance to the upside near $80. An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread placed around a projected trading range. The collected premium comes into your account the very next business day. The objective is for the underlying, at expiration, to finish anywhere within the range. Gold’s Recent Downtrend Since the end of January, gold has been steadily trending down. It recently broke through some support at $70 and traded as low as $67.33 Friday -- finishing at $67.44. There are two weeks remaining until expiration. We have a $2.44 cushion and little, if any, support. If you feel comfortable holding onto the position, go for it. I’m going to err on the side of caution and recommend you close the put side of the XAU Iron Condor. We closed ours just prior to market close on Friday. Why? Personally, I simply don’t like the chart. Today, the put side could be closed for a debit of $1.00. Originally, we took in $1,400 when we established the position. Looking at the big picture, we actually realized a profit of $400 and are no longer exposed on the downside. Think about it – $400 profit for two weeks isn’t bad at all. By closing the put side of the trade we have also freed up $5,000 in maintenance that can be used elsewhere in our account. Plus, let’s not forget that our $80/85 bear call spread is still intact. As of the end of trading on Friday, you could unwind that spread for about $.10-.15. There’s no big rush, though. Over the weekend, two more days of premium value will erode from the calls. You may soon be able to buy back the $80 put for a nickel, thereby freeing up $5,000 more in maintenance for other use. Note: I just refreshed the XAU option chain and they readjusted the prices back to their traditionally wide bid/ask spreads. On the surface, it seems that, if you go by the posted numbers, it would cost you $1.35 to close the put portion of the Iron Condor. Keep in mind that XAU is only traded on the PHLX and that, during the trading day, bid/ask spreads fluctuate dramatically. If you place the order as a spread order, there’s a good chance you’ll be able to shave money off the spreads and hopefully come reasonably close to the $1.00 it cost us on Friday. Another Exit Option Earlier this week, on Monday, the day XAU first broke below $70 and bounced back up a bit, a CPTI student chose to play the downside instead of hoping for support to hold. He bought back the XAU $65 put for $1.35. That removed any downside exposure or obligation to perform. He still owned the $60 put and now he’s rooting for gold to go down to $50. As XAU declines in value, his $60 put will increase in value. By purchasing back the XAU $65 put for $1.35, (remember, we originally took in $1.40), he now has a free downside play. He has nothing to lose. This type of adjustment certainly isn’t classic CPTI “hands off” trading. I just wanted to show you how, if you’re aware, there are many kinds of methods of position adjustments. As the big picture changes, so may you re-evaluate and adjust your positions. When General Custer was killed, why did they strip him and lay him face down? So Sitting Bull would have a place to park his bike. ______________________________________________________________ CPTI PORTFOLIO UPDATE: Position #1 – OEX Bull Put Spread – Trading at $420.12. 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. Now the projection is that the war won’t happen for two weeks. It would be nice if G.W. would be considerate enough to wait until after option expiration. ____________________________________________________________ Position #2 – XAU Iron Condor – Trading at $67.44. (See Main Article Above) ______________________________________________________________ Position #3 -- OIH -- Diagonal Calendar Spread – Trading at $57.22 It seems that there’s about $8-10 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 $24.54. 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. ______________________________________________________________ Position #5 – MMM Iron Condor – Currently trading at $124.50. 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. We created an Iron Condor with a 15-point range $115 to $130 for April. We were able to take in a credit of $1,550 for our 10- contract position. If you entered the trade on Friday, you could have taken in as much as $1.65 at various times during the trading day. ______________________________________________________________ Heard On The Street: "The Lord gave us two ends - one to sit on and the other to think with... Success depends on which one you use the most...” "Don't get excited about a tax cut. It's like a mugger giving you back fare for a taxi." ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************** TRADERS CORNER ************** For the Bears Jonathan Levinson The past month has been particularly nerve-wracking for position and swing bears, forthe simple reason that the "waterfall" decline that most have been expecting has refused to make an appearance. The most rapid and violent moves have been to the upside, vaporizing hours and days of decline within minutes. As we’ve seen in the Market Monitor, these rallies look like flagpoles on the intraday charts, with a few long vertical candles as price rockets north (the pole), followed by a narrow, horizontal trading range at the top (the flag). Nothing feels natural about these moves when they occur, except the losses for those who do not use pre-programmed stops. I have been receiving emails from subscribers who are frustrated, dismayed, and defiantly holding their bearish positions, waiting for a plunge. I agree, and wish to consolidate some of the things I’ve been seeing to assist our resident bears in organizing their thoughts and maybe even getting some sleep for a change. I will mention news-related and non-technical only in passing, not because I don’t believe them significant, but because they’re difficult to trade and time with options. See my article on Technical and Fundamental Analysis at http://www.OptionInvestor.com/traderscorner/tc_121502_2.asp for my thoughts on news and externalities- briefly, fundamental analysis is relevant to the broad or secular trend, within which technical analysis rules the day. That said, we are witnessing the early stages of the Kondratieff Winter, in which debt becomes The issue. Consumer debt is at all time highs, and the fed funds rate is at multidecade lows. The issue is worldwide- here’s a recent statement relevant to Japan: TOKYO — Financial Services Minister Heizo Takenaka said Friday Japan is in danger of falling into the pits of "loan shark hell" in which it is forced to borrow only to pay more debts. "If we have to borrow to pay interest on government bonds, the debt outstanding will grow infinitely and go out of control," Takenaka, who is also economic and fiscal policy minister, told the House of Councillors Budget Committee. Unemployment and deflation are issues that are becoming less shocking to "Joe Sixpack", those around us and with whom we deal every day. Yesterday’s nemployment report was certainly negative, but more disconcerting is the degree to which individuals are becoming aware of these issues. Most people I know are tighter with their money now than they were last year, and most are complaining that their businesses, from retail to professional, are slower. Most value their money and their jobs more than they did a year ago, and much more than they did two years ago. The government statistics purport to tell the story to the decimal, but they somehow miss the basic fact that people are growing increasingly concerned about their money and their jobs, and are increasingly willing to admit it. This tells a deflationary story, another hallmark of the Kondratieff Winter. As debt is cleansed, money and the ability to earn it become increasingly critical throughout the economy. These issues, being seen on a worldwide basis, won’t go away with the capture of 2 of Bin Laden’s children, the capture of Osama himself, or the successful invasion of Iraq. There has been a lot of noise about a "war rally", and many bulls have been positioning themselves for it. War is not bullish, except for arms manufacturers. The very fact that "everyone", or at least the mainstream financial media, expects a "war rally" implies that it’s already happened. If market participants are unanimous on anything, the opposite is almost guaranteed to occur. In this case, those who expect a war rally have been positioning for it during the past weeks, as on many occasions war has seemed imminent, and at all times nearly unavoidable. Who will be left to buy into the anticipated rally? On to the charts: Despite the relentless flagpole rallies that have miraculously saved the COMPX from a waterfall decline, the perspective of even the daily chart shows a pattern of lower highs. I’d say lower lows, but Friday’s intraday reversal, if the COMPX never looks back from here, would be a higher low. The oscillators, however, are currently kissing, the MacD from below the 0 line, and a cross from here would be very bearish. My own "oscillator" of the 5 and 13 day SMAs gave a sell signal on March 1st and haven’t shown any sign of reversal. Simply "eyeballing" the daily chart, I see a topping formation more than a bottoming formation in the post Feb- 18th prints. A quick look at the weekly candles shows no further signs of a bottom on the oscillators or moving averages I follow- more of a top, than of a bottom: The bullish percent chart, the BPCOMPQ, tells the same story, and I see no buy signal since it issued its sell off the January highs: The put to call ratio is in a rising range, and while the absolute weekly readings are less instructive, the direction of the trend confirms a gradually increasing level of bearish speculation in the market. This week’s close is nearer to the bottom of the range, heading back up, and the oscillators are in a bottoming zone. In other words, bullish speculation appears to be in the process of maxxing out during the past two weeks, which is bearish for the COMPX. Lastly, the COMPX volatility index, the VIX for the Nasdaq or VXN, which rises as implied volatility for the top traded Nasdaq stock options increases. We see that the VXN has been declining in a descending wedge, well off its highs above 70. A break above VXN 48 on a closing basis will bring significantly higher VXN readings, projecting to 70+, which would imply a revisit to the 2002 COMPX lows: Here’s a closeup on the daily candles, showing that the VXN appears to want to go higher rather than lower, and appears to be in the process of putting in a higher low both in its absolute level, as well as on both the stochastic and MacD oscillators: There are endless charts examine, but as we know, technical analysis doesn’t tell the future. Instead, it gives us an accurate snapshot of the present and the past. More important is what our fellow traders are thinking, how they are positioning themselves, and where their exposure lies. The Commitment of Traders reports show that small traders are at a 3 year high to the long side (net long 16,202 contracts), while large traders and commercial hedgers are near their 3 year highs to the short side (net short 16,202). Perhaps this will be the rare occasion on which small traders beat out the big money, but I know which side of the trade I prefer. The degree to which small traders are longer than larger traders and commercial hedgers exceeds that of any other period since January 2000. There are currently 3 long contracts to each short contract amongst small traders. While my primary reasons for being bearish on equities are fundamental and not technical, the technicals support my trading bias. I am not a "permabear", in that I will trade and invest to the long side of equities when they appear to be a good bet. Currently they do not, and neither does the global economy. Commodities and, yes, gold is included, look like good buys for all but the shortest term. In the short term, central bank dumping and leasing of gold makes directional leveraged trades tricky, but in the longer term, the global economy and the US campaign of currency inflation continue to make gold and other commodities look good to me. What I’m trying to say is that we can have the best reasons for being bearish, and currently I’m feeling quite comfortable in my long put positions, but we have to trade what we see in the short term. If we get a no-holds barred Osama/Rumsfeld love-in Iraq-is- disarmed flagpole rally, it is my sincere hope that you will have covered on the first break of upside resistance, wherever that may be at that given time. My conclusions based on the above analysis are my own, and don't need to be correct in the short term or at all. Set and respect your stops, take your profits when you have them, and don’t give them back. ************** TRADERS CORNER ************** Daisy Two-Breath By Vlada Raicevic This week, trading boards all over the internet were chock full of traders whining, and it all revolved around the same concept: “how the heck are we supposed to make any money in this kind of market”. Mind you, I was one of them, with much wailing and gnashing of virtual teeth. However, while many of my long term puts mostly just sat there, looking wistful, I had little to complain about. The reason is that this kind of market is good for the way I trade: through a variety of indicators on several different time frames. If I were trading using support/resistance lines, I would have been chopped up like cheap lunchmeat, since price often flopped back and forth across these areas with nary a blink or stutter. Trading off indicators has it’s downside, with strong, high-momentum moves being the worst as they tend to goose these indicators into rollovers which are nothing more than false signals destined to take my money. It took me a long time to learn how to read through these high momentum overshoots. Let me clarify something here: I’m a charting nut. I love to look through them, tweaking the settings, trying to puzzle out what they’re attempting to tell me. I will also step on the confessional and say that I was one of those annoying kids in school who actually liked to do the math problems handed out as homework because they were, in essence, puzzles. So, of all the things I like to look at on charts, I ‘ve been trying to puzzle out what specific topic I want to discuss. Well, it’s Friday, and I’m a little dizzy from all the whipsawing this week, so I thought the best topic would be this: how charts talk to me. >>>>> My parents had a friend, we’ll call her Daisy. She had that rare ability, shared only by a few Australian aborigines and Tibetan monks....to speak while both inhaling and exhaling. Blessed with this gift, she strode through life intent on sharing it as much as possible with everyone she knew: She never stopped talking. I was young at the time, and I often stood there gaping at the waterfall of words pouring forth. After a time, the sound became a soothing hum, like the wind blowing past your car as you speed down the highway. Daisy was very much like a technical chart. All this information, pouring forth from the screen, poking your eyeballs, demanding you make some sense of it all. If you stare too long, it turns into a low level buzz, hypnotizing you into a stupor. Approach charting as you would a conversation with someone who is very talkative: filter out the noise and concentrate on the message. Trading the ES 3-07-2003 When trading, I constantly switch the time frames on my charts. Watching the SPX on a 60 minute chart gives me certain information that a 5 minute chart does not. But the 60 minute chart won’t show me all the small gaps on a 5 minute SPX chart (which by the way, are often filled on an intraday level). After the Spike A big, news driven spike. Looking at the 5 minute chart, I see price moving from very oversold - well below the outer tines of all regression channels, to over bought.....outside of the upper tines. Dare I short? All my indicators have rolled upward into bullish positions. I check the 45 minute chart, and see that price has spanned a beautiful stick from the low, where two lower regression channels came together to support price, to the high end of the red channel, with heavier resistance at 830, the middle of the long term channel. I short at 828, with a stop over 830. My intent is to just scalp a few points riding the tails of profit takers and early shorts. A huge candle like this usually has profit takers at/near resistance. I switch to a three minute bar and wait for an exit signal. Pure luck here, as price really starts dropping. Look at the next chart, selling seems severe, but the 5,5,2 stochastic is actually a fairly gentle slope, unlike most for this fast indicator. RSI, another fast indicator, broke the uptrend line. RSI trendlines will often break before price channels, and are a good heads up for weakening of trends. MACD crosses over as well, but again the slope is gentle on the rollover. Approaching two regression channel centerlines...should be decent support. Price initially bounces off the yellow uptrend line, but then breaks through it in a high momentum stick (long and closing near the low). Next stick however, stops the decline and bouncs off the centerline of the orange regression channel. RSI breaks centerline, a secondary confirming bearish move, but, I’m wary of the flat slower stochastic....it’s undecided and going sideways. Still looks bearish, but I look over to the the 60 minute chart, and I see it’s saying, and I see MACD has crossed over bullish, and RSI has broken above the downtrend line. Looks like market sentiment may be changing. A few more bars on the 3 minute and I’m out of the short at 820. A bullish 60 minute chart and indicators rolling back up are enough for me to take profits and wait for another signal. I go short again at 827.75. Look at the 5 minute chart below: move up stalled at upper tine of channel, MACD crossed broke below trendline and crossed over, RSI broke trendline, and Stochastics stayed flat while price moved up, a bearish divergence. Out of short at 823.50. I end up leaving a lot on the table, though, as price continues down after I cover. MACD had gotten pretty oversold, but if you look at stochastic lines, they continue to pull apart further from each other, showing that momentum to the selloff has not yet slowed down, nothing shows that it was time to cover. A week of market whipsaws has me very jittery indeed. The following chart shows all the reasons to stay in the trade, even though I did not. Here is one reason I covered, 15 minute chart shows price bouncing off three different levels of regression support. MACD and RSI though, are both very bearish still. Now that I’ve put all that together, it seems to me that both the huge gapdown and mind-numbing rise really played havoc on indicators as they struggled to keep up with the violent price swings. I leave you with an annotated chart of two nice setups. ************** FUTURES CORNER ************** Execution By John Seckinger jseckinger@OptionInvestor.com One of the hardest things to do as a trader is simply pulling the trigger on a buy or sell order. There are a few simple rules that can help master this important piece of the trading puzzle. 830.25, bid; 830.50, offer; 830.25, trade, 830.50, trade; 830.50, bid, 830.75 offer. Did you buy the ES at 830.50? Hours of preparation the night before, and all indicators told you that a move above 830.25 is a breakout. When it comes time to buy, do you? Let us assume that you do, and, since managing a winning trade is relatively easy, let us assume the market fails. Your stop? 828.00. Not in the system, but only in your head. So, what happens? 828.00, bid; 828.25 offer; 828.00 trades, 828.00 trades, 827.75 offer, 827.50 offer, 827.25 offer. Did you get out? Probably not. There are a few different approaches to executing trades. One is the "range rejection method". This is when a "support zone" (found in the futures wrap) simply fails to hold the selling pressure; thus "rejecting" the possibility of the market bouncing back into the recent range. Example: A "support zone" is found in the ES from 820 to 823. Before the market opens, a trader can put in an order to sell the ES at the 819.50 level (under the "support zone" and the IDEAL entry). This will either represent a new short, or be a stop if a trader decides to buy near the 823 level and the top of this defined zone. If it is a new sell order, a stop should be placed just above 823. Of course, this method can be used on the upside as well. If resistance is seen from 839.50 to 840.75, a trader can use this "zone" to define entry and exit levels. Look to buy at the 841.25 area (the IDEAL level) and on a breakout; either being a new long or a stop based on a short placed either just below or inside this range. If a resistance zone is from 839.50 to 840.75 AND either a pivot, R1, or R2 is near or inside this area, I would use the calculated level based on pivot analysis. Ideally, it is R2 and falls INSIDE this area. If R2 is not inside this range, then we will have do some more analysis. If any of the pivot analysis levels is more than a point below the 839.50 area, I would use the "zone" instead. With that said, it then comes down to what level should a trader use; 839.00, 839.25, 839.50, 839.75, 840.00, 840.25, 840.50, or 840.75? I think it makes sense to use a stop around 2.50-points in the ES contract; therefore, it really doesn't matter if we use 839.00 or higher. Note: It is very hard to recommend using a stop more than 5-points. With that said, a trader could look to sell slightly lower than 839. I would not, however, use the 2.50-point cushion and place the STOP much above 841.25. Why? If the top of the range is cleared, there is a good chance that stops are being filled and a new wave will likely commence (read: resistance becoming support). Panic will most likely set in, and there is a good chance that a trader will get a bad fill to the upside. Let us assume that the "resistance zone" is five-points wide; say from 835 to 840. Now it becomes more challenging. Because this is a wide zone, a trader could assume that resistance is weaker. It really does depend how many resistance lines are within this zone. For this situation, I would ask myself a variety of questions. If the ES is currently at 834, where is MACD and stochastics on a five-minute chart? Does the ES contract have any daily, weekly, or monthly pivots, R1 or R2s in this range? Is the ES currently in an "open drive" pattern; therefore, there is a good chance a trader will be able to sell the ES closer to 840. Has levels from 835 to 840 been important pivot, R1, or R2 levels for PAST weeks or months? If yes, where? Another variable I really like to talk about is the bullish percent indicator. If the ES contract is falling towards a support zone, and it looks like the bullish percent is falling from levels above 70%, odds are that selling the contract will work better than buying. Therefore, a trader can actually sell the contract before the bottom of the support zone is cleared. This is not recommended now because the bullish percent for the SPX is currently just above the 30% level and nearing oversold conditions. Speaking of current conditions, bulls could wait until the SPX reverses back into a column of X's and then might have a case to buy the contract on pullbacks BEFORE the top of a support zone is reached. If a trader is buying the ES contract before the top of a support zone is reached, I would recommend only a quarter position. Why? Number one, it does go against my normal methodology of executing orders; moreover, a trader does not have confirmation that it makes sense to buy the contract. Of course, only buy if the bottom of the support zone is less than 5-points from the executable level. There is no question that execution is extremely critical. Institutional traders love to play games with retail traders, mostly by taking out a defined low or high by 0.25 before bringing the contract back into the daily range. Another practice by traders is to paint an extremely bullish wedge and then make it seem like there is a breakout to the upside. Retail traders jump on board, and then the failure commences. Example: Institutional traders know that the apex of a wedge is at 840. They actually buy the contract up to 842 and give the impression of a breakout. Then the see volume jump up, giving them the necessary liquidity to SELL both the position they just bought and new shorts. They then take the contract back under the pivot and now force the retail bulls to exit. This is a very effective strategy. There are a few things to keep in the back of your mind, just in case either an apex or a 'one-tick new high/low' falls inside either a support or resistance level. Getting to the mental part of executing trades; Never second- guess your execution. The trade is on, so just manage it properly. In fact, most of the time a BAD fill works out better for a trader. Example: Buy at market when ES is offered at 830.25, and you get filled at 830.50. Secondly, do NOT worry about buying low and selling high. If you have 1,000 support levels at 836 and the market trades at 836; buy. Sure, support can turn into resistance; however, if the bullish percent indicator tells you that the market is oversold, do not start second-guessing your homework. What if the trade is a losing trade? Well, we do know that not all business ventures are winners, so chalk it up to experience. If these trades continue to be losers, then you will need to go back and re-define how you calculate your support levels. There could be a fundamental problem. As of right now, believe in yourself and simply trade levels. My personal opinion on market conditions now can be found in my futures wrap article. Bullish percent is still in intermediate bearish mode; therefore, I am not very quick to buy either the pivot or S1. S2 is a different story, since bullish percent is near 30% for the ES and things are relatively oversold. With that said, I would not hesitate to buy a pullback that includes testing a "support zone" and daily S2. What if it is a losing trade? I will come back to fight another day, even more hungrier. Ask Away, John Seckinger ************************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 03-09-2003 Sunday 5 of 5 In Section Five: Covered Calls: Another Use For Covered-Calls Naked Puts: Success With Naked Puts Spreads/Straddles/Combos: Lots Of Activity But No Conviction! Updated In The Site Tonight: Market Watch: New Bull and New Bear Market Posture: New Breaks and Bounces ************************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: Another Use For Covered-Calls By Mark Wnetrzak Editor's Note: As I struggle to recover from my harrowing trip to a beach in Hawaii (no computer, sun, water, sun, Mai Tai's, sun...rough!), an offer from the Naked-Puts editor to provide a narrative for this week was something I just couldn't pass up. Most people believe that investing in the stock market is one of the best ways to increase personal wealth over the long run. Unfortunately, the potential downside risk of owning stock keeps many people from investing in the market, even where long-term growth such as planning for retirement is the objective. While there are few investments that offer the potential for favorable returns without the possibility of loss, investment bankers have come up with some unconventional solutions for anxious investors who are afraid to venture into stocks after the recent declines. This burgeoning class of hybrid securities includes issues with names such as TIERS, SUNS and MITTS and the proponents of these "protected growth" instruments promise stock-like gains with the security of bonds and in many cases, a money-back guarantee. In short, these financial instruments allow you to profit from the growth of the stock market while insuring that your principal is preserved in the event of a severe, prolonged downtrend in the economy. The downside, much like the covered-call strategy that many of these vehicles use, is the substantially limited gains that will occur, even if the stock market soars to new highs. In the past, there were two primary categories of "guaranteed" investments: Index Annuities, which are offered by insurance companies, and Index CDs, which are offered by institutions such as Banker's Trust. More recently, larger brokerages such as Merrill Lynch have offered investments known as Protected Growth Trusts. Indeed, Merrill is a pioneer in this category and they offer a number of unique products that combine participation in the appreciation potential of stocks and other opportunities, with protection of principal. Protected growth generally means the assets are financial instruments with the features of both stocks and bonds. The benefits of these complex issues include diversification, reduced minimum investment and liquidity. The most common products provide for a market-based return linked to a range of potential growth opportunities such as major indexes, individual stocks or other popular financial indicators. In most cases, the issues are tied to index funds that are (initially) offered at $10 a share and usually mature in seven years or less. If you retain the issue to maturity, you profit from the growth of the index. In the event of substantial price declines, the instruments guarantee repayment of principal at maturity. The "bear market" that began a few years ago has generated yet another wave of innovative structured products including an array of diverse funds that are both exchange-traded and equity-based. Many of these new issues combine equities with covered options written against some or all of the securities held by the fund. Those of you who are long-term investors know that the purchase of equities by a fund can provide tax-advantaged dividend income while the sale of options can yield capital gains and, at the same time, reduce the volatility of the underlying stocks. There are also a number of tailored products, based either on a single equity, a basket of stocks, an index, commodity or debt issuance, that are designed to meet specific risk-reward characteristics. The purpose of these unique instruments is simple: to allow the pursuit of growth with less risk. The low initial cost of these assets provide investors an affordable means of participating in the long-term performance of a number of financial instruments and industry groups. The diversification possibilities available through these investments is often greater, and at a lower price than that which could be achieved by purchasing individual issues. The majority of these instruments are "listed" on the major stock exchanges. This feature allows you to trade the assets publicly, as well as monitor their progress through daily price quotations on the Internet or in the financial pages of major newspapers. There are many advantages to investing with structured products such as Protected Growth trusts, but they are complicated assets requiring careful examination and specific strategies to maximize potential profits. One of the most critical factors associated with many of the newer instruments is the “annual adjustment factor.” Typically, a structured product allows an investor to capture the percent increase of an index over the offering price, any time up to the maturity date of the issue. If there is no increase, the principal investment is returned. However, in the case of recent products, an annual adjustment factor is used to reduce the index value before the final cash settlement amount is determined. The adjustment factor will vary but even when the amount is only 2% or 3%, the reduction in overall return can be substantial. When aversion to risk stands in the way of achieving long-term personal goals, alternate solutions must be explored to remedy the situation. If your financial outlook dictates the need for capital growth, but you are concerned about the volatility or potential downside associated with stocks, you might consider including structured products as part of your portfolio. This type of investing allows you to participate in numerous growth opportunities that may otherwise be too extreme for your risk tolerance. Regardless of your personal financial outlook, a sound investing strategy includes diversification and low-risk capital appreciation, and these relatively unknown issues can be an excellent and profitable way to achieve that objective. 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. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield IMCL 13.33 15.70 MAR 12.50 1.50 0.67* 8.2% MSTR 21.28 22.60 MAR 20.00 2.60 1.32* 7.7% IMCL 13.72 15.70 MAR 12.50 2.00 0.78* 7.2% FEIC 15.70 15.00 MAR 15.00 1.40 0.70 7.1% JDSU 2.68 2.85 MAR 2.50 0.40 0.22* 7.0% GLW 5.18 5.79 MAR 5.00 0.55 0.37* 6.9% SEPR 11.17 11.90 MAR 10.00 1.90 0.73* 6.8% RSAS 5.90 7.00 MAR 5.00 1.25 0.35* 6.5% ASKJ 5.86 5.97 MAR 5.00 1.25 0.39* 6.1% CBST 7.57 7.19 MAR 7.50 0.75 0.37 5.9% MCDT 8.42 8.80 MAR 7.50 1.30 0.38* 5.8% OVTI 19.00 18.04 MAR 17.50 2.15 0.65* 5.6% OVTI 16.83 18.04 MAR 15.00 2.55 0.72* 5.5% ADLR 13.07 11.83 MAR 12.50 1.80 0.56 5.4% RMBS 14.76 13.44 MAR 12.50 2.85 0.59* 5.4% ARRS 5.14 4.78 MAR 5.00 0.60 0.24 4.6% NFLX 14.24 16.09 MAR 12.50 2.30 0.56* 4.1% SBL 10.58 10.55 MAR 10.00 0.85 0.27* 4.0% MRVL 20.60 19.37 MAR 20.00 1.35 0.12 0.9% ALA 7.58 6.96 MAR 7.50 0.65 0.03 0.4% HHL 12.57 11.35 MAR 12.50 0.75 -0.47 0.0% EMIS 5.66 2.47 MAR 5.00 1.10 -2.09 0.0%** EMIS 5.48 2.47 MAR 5.00 0.90 -2.11 0.0%** * Stock price is above the sold striking price. ** Summary data does not reflect a timely exit trade. Comments: The major averages continue to go nowhere real fast as they bounce around in a geopolitical trading range. One of our listed candidates for this week, Tivo (NASDAQ:TIVO) was unattainable with the bullish gap-open on Monday - and after Friday, maybe that was a good thing. Microstrategy (NASDAQ: MSTR) now appears out of danger as it has rallied above the early FEB high on increasing volume. Alacatel (NYSE:ALA) however, still remains in a tenuous position - time to go? We show two positions closed, DNDN and CRY, though investors with a long-term outlook could consider rolling them forward and/or down as noted below. Emisphere Technologies (NASDAQ: EMIS) was an unavoidable casualty as its CEO failed to win a development deal with two large pharmaceutical firms. The action on Tuesday (in hindsight) looks like "someone" knew what was coming on Wednesday. The position will be shown closed. Some other stocks on a technical early-exit watch list are: Ask Jeeves (AKSJ), Cubist Pharmaceuticals (NASDAQ:CBST), Adolor (NASDAQ:ADLR), Rambus (NASDAQ:RMBS), Arris Group (NASDAQ:ARRS), and Hurricane Hydrocarbons (NYSE:HHL). Of course, if the present trend continues, nothing will happen until something really happens - then we all can go back to concentrating on the economy, no wait a minute... Positions Closed: Dendreon (NASDAQ:DNDN) - the AUG-$5 call offers a new cost basis around $4.25); Cryolife (NYSE:CRY) - the OCT-$5 call offers a break-even roll-down. 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 MANU 2.56 APR 2.50 ZUQ DZ 0.35 755 2.21 42 9.5% CD 12.51 MAR 12.50 CD CV 0.40 12029 12.11 14 7.0% CMCSA 28.14 MAR 27.50 CCQ CY 1.40 3120 26.74 14 6.2% ANPI 40.20 MAR 40.00 AUJ CH 1.20 1455 39.00 14 5.6% MVL 12.70 MAR 12.50 MVL CV 0.50 892 12.20 14 5.3% OAKT 3.23 APR 2.50 KAU DZ 0.90 211 2.33 42 5.3% DISH 28.75 MAR 27.50 UAB CY 1.75 3571 27.00 14 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). ***** MANU - Manugistics $2.56 *** Bottom Fishing: Part I *** Manugistics Group (NASDAQ:MANU) is a global provider of enterprise profit optimization solutions. The company provides solutions for supply chain management, supplier relationship management, pricing and revenue optimization and service and parts management. The Manugistics NetWORKS family of products is designed to coordinate, optimize, measure and analyze across each of the key business processes: design, source, buy, make, store, move, price, market, sell and service. The company also provides strategic consulting, implementation and customer support services. Manugistics has been forging a Stage I base for about 9 months and appears to have a fairly strong support area around $2. The current technical outlook is recovering and our position offers excellent reward potential at the risk of owning MANU near technical support. APR 2.50 ZUQ DZ LB=0.35 OI=755 CB=2.21 DE=42 TY=9.5% ***** CD - Cendant $12.51 *** Bottom Fishing: Part II *** Cendant (NYSE:CD) is a provider of travel and real estate services as well as a wide range of consumer and business services. The Real Estate Services segment franchises the real estate brokerage businesses of the Century 21, Coldwell Banker, Coldwell Banker Commercial and ERA brands. The Hospitality segment operates the Days Inn, Ramada, Super 8 Motel, Howard Johnson, Wingate Inn, Knights Inn, Travelodge, Villager Lodge, Village Premier, Hearthside by Villager and AmeriHost Inn. The Vehicle Services segment operates and franchises Avis, the Company's car rental business. The Travel Distribution segment provides global distribution and computer reservation services to airlines, hotels, car rental companies and other travel suppliers. The Financial Services segment provides enhancement packages to financial institutions. Cendant is trading near a historical support area (since 1998) and this position offers speculators excellent short-term reward potential at the risk of owning an industry-leading issue at a favorable cost basis. MAR 12.50 CD CV LB=0.40 OI=12029 CB=12.11 DE=14 TY=7.0% ***** CMCSA - Comcast $28.14 *** Own This One! *** Comcast (NASDAQ:CMCSA) 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 the majority of its cable communications systems. Comcast recently announced that the they see a strong financial performance in the year 2003 as it believes its growth rate will now be well above a previously stated 20%. We favor the strong support area around $26 and this short-term positions offer a favorable entry point for investors who retain a bullish long-term outlook in the company. MAR 27.50 CCQ CY LB=1.40 OI=3120 CB=26.74 DE=14 TY=6.2% ***** ANPI - Angiotech $40.20 *** Stock-Split Rally? *** Angiotech Pharmaceuticals (NASDAQ:ANPI) is engaged in the fusion of medical device technologies and pharmaceutical therapies. The company's first product was a drug-coated stent. Angiotech's goal is to develop other products to enhance the performance of medical devices and biomaterials through the use of pharmatherapeutics. In September 2002, the company and Cohesion Technologies, Inc. agreed to a merger in which Cohesion will merge with a wholly owned subsidiary of Angiotech, with Cohesion continuing as a wholly owned subsidiary of the company. The transaction is set to close during or before the first quarter of the fiscal year that will end on September 30, 2003. Angiotech rallied at the end of February after announcing a strategic alliance with Baxter and a submission by its partner Boston Scientific, of the first module of Boston's PMA application for its TAXUS(TM) paclitaxel-eluting coronary stent system. We simply like the bullish move above its 150-dma and the heavy volume on Friday, which suggests further upside potential. Share holders recently approved a 2-for-1 stock split that should be effective March 17. MAR 40.00 AUJ CH LB=1.20 OI=1455 CB=39.00 DE=14 TY=5.6% ***** MVL - Marvel $12.70 *** Earnings Feed Rally Fire *** Marvel Enterprises (NYSE:MVL) incorporated in 1993, is a character- based entertainment company with a proprietary library of over 4,700 characters. The company operates in the licensing, comic book publishing and toy businesses in both domestic and world markets. The company's library of characters includes Spider-Man, X-Men, Captain America, Fantastic Four and The Incredible Hulk. The company's characters have been developed through a long history of comic book plots and storylines, which give each of them their own personality, context and depth. On Monday, Marvel pleased investors with a 74% increase in revenues even though the company posted a loss due to charges. The company, whose comic strip "DareDevil" was made into a movie and is currently in studios, also raised its earnings and revenue targets for the 1st-quarter and the full year. Shares of Marvel continue to surge higher and investors can use this short-term position to speculate on the future movement of the issue in a conservative manner. MAR 12.50 MVL CV LB=0.50 OI=892 CB=12.20 DE=14 TY=5.3% ***** OAKT - Oak Technology $3.23 *** Bottom Fishing: Part III *** Oak Technology (NASDAQ:OAKT) designs, develops and markets high- performance integrated semiconductors, software and platform solutions to OEMs worldwide that serve the optical storage and digital imaging equipment markets. Its digital imaging products consist of semiconductor hardware and software that enables users to print, scan, process and transmit documents to computer peripherals that perform printing functions. Its Optical Storage products consist primarily of ICs and supporting software and firmware, all designed to store and distribute digital content, thereby enabling its customers to deliver systems to the end user for the home and enterprise. The Imaging Group is comprised of the combination of its Xionics Document Technologies, Inc. and Pixel Magic subsidiaries, serving the digital imaging equipment market. Oak Tech has been forming a Stage I base since the drop in June 2002 and appears to have formed a trading range around $3. This position offers a reasonable way to establish a low risk cost basis in the issue. APR 2.50 KAU DZ LB=0.90 OI=211 CB=2.33 DE=42 TY=5.3% ***** DISH - EchoStar Communications $28.75 *** Rally Mode! *** EchoStar Communications (NASDAQ:DISH) operates through two major business units, the DISH Network and EchoStar Technologies. The DISH Network offers a direct broadcast satellite subscription TV service in the United States with almost 7 million DISH Network subscribers. EchoStar Technologies Corporation is engaged in the design, development, distribution and sale of DBS set-top boxes, antennae and other digital equipment for the DISH Network and the design, development and distribution of similar equipment for a range of international satellite service providers. EchoStar recently reported earnings which included a fairly large loss due to the cancelled Hughes Electronics (NYSE:GMH) buy-out. However, investors appeared pleased with a 15% increase in revenues and 400,000 new subscribers which was well above estimates and bodes well for the future. We simply favor the bullish technical indications and our position offers a method to participate in the future movement of the issue with relatively low risk. MAR 27.50 UAB CY LB=1.75 OI=3571 CB=27.00 DE=14 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 FTUS 2.73 MAR 2.50 FEQ CZ 0.35 2 2.38 14 11.0% OVTI 18.04 MAR 17.50 UCM CW 1.20 737 16.84 14 8.5% RSH 20.11 MAR 20.00 RSH CD 0.75 198 19.36 14 7.2% CGNX 22.72 MAR 22.50 QCG CX 0.90 53 21.82 14 6.8% ENTU 2.97 APR 2.50 EXH DZ 0.65 577 2.32 42 5.6% NOVN 12.80 MAR 12.50 NPQ CV 0.60 123 12.20 14 5.3% ADIC 7.81 APR 7.50 QXG DU 0.75 100 7.06 42 4.5% FAF 22.50 MAR 22.50 FAF CX 0.40 5 22.10 14 3.9% SBL 10.55 APR 10.00 SBL DB 1.05 2376 9.50 42 3.8% SLAB 27.54 APR 25.00 QFJ DE 3.70 1439 23.84 42 3.5% ***************** NAKED PUT SECTION ***************** Options 101: Success With Naked Puts By Ray Cummins This week's narrative concerns positions adjustment strategies and techniques for limiting losses with uncovered options. Attn: Naked-Puts Editor Subject: Limiting Risk With Naked Puts Ray, I think your column is tops and one of the reasons I subscribed to the service. I've been trading naked puts for 6 or so months and find closing a losing position prior to expiration to be problematic. I tried a contingency order based on a stock price the amount in the money as the premium I had received, and got socked with a triple the premium loss due to increased volatility as the losing stock dropped and residual time value (I suppose), about a week prior to expiration. I also tried buying the loser back and rolling out and down for several months but essentially got nowhere as the loser stagnated. Also sometimes the put will go into the money for a short time and then rally back, so it seems difficult to buy back immediately upon the stock's becoming a small amount in-the-money. If you have any suggestions, I'd appreciate them as selling puts is challenging and appears to be rewarding from my rookie perspective. If I'm just bellyaching and my questions are just "part of it" I can accept that too, if it comes from a pro like yourself. Thanks for your time. RC Hello RC, First, I would never consider a request for strategy suggestions as "bellyaching," however I do know (from personal experience) that losses in the stock market can make a person feel "sick to their the stomach." As far as closing a losing position prior to expiration, that is definitely the key to success with high probability/low profit strategies such as writing out-of-the-money "naked" puts. There are no big winners to offset the big losers, so there simply can not be any big losers. Obviously, a gapping issue may wipe-out a portion of previous gains and there is nothing you can do about it but at the same time, you must manage the remaining positions effectively or there will be no portfolio profits to offset the (rare) catastrophic losers. The techniques you mentioned are all viable methods for limiting losses with short (uncovered) option positions, provided they are implemented correctly, in a timely manner. An option writer has many different alternatives when the underlying issue moves beyond the sold strike however in most cases, the appropriate action must be taken prior to that event, when the stock undergoes a technical change in character, such as breaking-out of a trading range or closing below a moving average. Most methods for taking profits and preventing losses, as well as making position adjustments or rolling down and out to new options, fit into two categories: a pre-arranged target profit or loss limit; or a technical exit based on the chart indications of the issue. The first technique, using a mechanical or mental closing STOP to terminate a play or initiate a roll-out trade, is simple as long as you adhere to the initially established limits. The alternate method, a technicals-based exit, is more difficult. However, there are many different indicators that can help establish an acceptable exit point; moving averages, trend-lines, previous highs/lows, oscillators, etc., and with this type of loss-limiting system, you simply exit the position after a violation of a pre-determined level. In addition, the closing or adjustment transaction should be based on the existing market and sector conditions as well as the current outlook for the underlying issue and the ratio of potential gain to additional risk. Writing "naked" options is one of my favorite strategies and there are a few ways to limit potential losses or even capitalize on a reversal (or transition) to a bearish trend with uncovered puts. The three most common methods to exit or cover a losing position include: a "buy-to-close" stop order, based on either the option or stock price; a "roll-out" to a longer-term option, possibly to a lower strike price as well; and "shorting" the underlying issue to cover the sold option. The first method is relatively simple, however it requires knowledge of option pricing and an effective floor-broker or trading platform to limit slippage. The second technique is popular among long-term investors who sell options only on stocks they wouldn't mind owning (a cardinal rule!), but the strategy requires the commitment of collateral for extended periods and the downside risk may increase if the primary market trend changes for the worse (consider the 2000-2003 timeframe). The last method: covering (by shorting the stock) the sold option as the underlying issues moves below the short strike, is probably the most popular technique among experienced traders. In fact, it may be the best method for bailing out on an issue in which the trend or technical character has changed significantly due to unexpected news or events. To initiate this strategy, place place an order to short the underlying stock, in an equivalent number of shares, any time the issue trades (preferably closes) below technical support or a well-established trend-line, support area, or moving average on substantial volume. Of course, there are more precise signals available but this technique is based on the assumption that once a reversal has occurred, the stock will continue to move in that direction until a new catalyst emerges. "Shorting to cover" can be a difficult technique to perform when emotion enters the formula but the strategy works well after you become experienced at it. The key to success is initiating the trade at known support levels or after obvious reversal signals, otherwise you are simply speculating about the stock's next move. The outstanding principle that many traders fail to adhere to is the need to outline a basic exit strategy, before initiating any position, to eliminate emotional decisions. This plan should be simple enough to implement while monitoring a portfolio of plays in a volatile market. In addition, these exit-adjustment rules should apply across a wide range of situations and be designed to compensate for one's weaknesses and inadequacies. To be effective in the long run, they must be designed to help maintain discipline on a general basis and at the same time, offer a timely memory aid for difficult situations. Utilizing this type of system addresses a number of problems, but the biggest obstacle it removes is the need for "judgment under fire." In short, a sound exit strategy will help you avoid exposing your portfolio to excessive losses and that's important because the science of successful trading is far less dependent on making profits, but rather on avoiding undue outflows. 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 22.60 MAR 17.50 0.80 0.80* 12.0% 4.2% RMBS 15.18 13.44 MAR 12.50 0.25 0.25* 9.9% 3.0% CGNX 22.62 22.72 MAR 17.50 0.55 0.55* 9.4% 2.8% MSTR 20.69 22.60 MAR 17.50 0.75 0.75* 9.3% 3.2% SRNA 15.07 14.59 MAR 12.50 0.30 0.30* 8.7% 2.7% RMBS 13.69 13.44 MAR 10.00 0.30 0.30* 8.6% 2.7% OVTI 16.55 18.04 MAR 12.50 0.35 0.35* 8.3% 2.5% IART 19.39 19.90 MAR 17.50 0.35 0.35* 8.2% 3.0% XLNX 23.04 22.73 MAR 20.00 0.50 0.50* 8.1% 2.8% MDCO 16.92 18.51 MAR 15.00 0.60 0.60* 8.0% 3.0% LRCX 12.56 12.08 MAR 10.00 0.25 0.25* 7.9% 2.2% ANSS 22.20 23.32 MAR 20.00 0.80 0.80* 7.7% 3.0% XLNX 22.90 22.73 MAR 20.00 0.35 0.35* 7.7% 2.6% IRF 20.39 20.41 MAR 17.50 0.50 0.50* 7.5% 2.6% MACR 15.22 14.79 MAR 12.50 0.25 0.25* 7.5% 2.2% OVTI 16.83 18.04 MAR 12.50 0.25 0.25* 7.5% 2.2% DIGE 15.54 16.79 MAR 12.50 0.30 0.30* 7.5% 2.1% CGNX 21.84 22.72 MAR 20.00 0.75 0.75* 7.1% 2.8% ERES 22.46 23.41 MAR 17.50 0.30 0.30* 6.8% 1.9% MDCO 18.94 18.51 MAR 17.50 0.30 0.30* 6.7% 2.5% HHL 11.56 11.35 MAR 10.00 0.20 0.20* 6.7% 2.2% SLAB 27.12 27.54 MAR 22.50 0.30 0.30* 6.7% 2.0% CKFR 20.66 20.00 MAR 17.50 0.30 0.30* 6.0% 1.9% AVCT 27.82 27.25 MAR 25.00 0.35 0.35* 5.9% 2.1% EPIQ 19.10 18.35 MAR 17.50 0.25 0.25* 5.8% 2.1% OTEX 27.14 26.71 MAR 25.00 0.75 0.75* 5.7% 2.2% ADBE 27.43 27.02 MAR 22.50 0.40 0.40* 5.4% 1.6% FAF 23.10 22.50 MAR 22.50 0.30 0.30 4.9% 2.0% * Stock price is above the sold striking price. Comments: As if the flagging U.S. economy wasn't enough to be concerned about, investors were forced to assimilate a number of reports Friday including dour data from the Labor Department, weapons inspector's statements from Iraq, and a rumor that Bin Laden's eldest son was captured. President Bush also commented on the current state of affairs in a speech to America Thursday night and analysts say there is now a strong possibility of a change in interest rates at the next FOMC meeting, due to a possible "double-dip" recession. Fortunately, most of the positions in the naked-puts portfolio are weathering the storm fairly well. Among the stocks on the "early exit" watch-list are; Open Text (NASDAQ:OTEX), Rambus (NASDAQ:RMBS), Epiq Systems (NASDAQ:EPIQ), and First American (NYSE:FAF). Previously Closed Positions: Possis Medical (NASDAQ:POSS) and American Pharmaceutical Partners (NASDAQ:APPX). 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 IMCL 15.70 APR 12.50 QCI PV 0.50 120 12.00 42 9.9% 3.0% MSTR 22.60 MAR 20.00 EOU OD 0.30 81 19.70 14 9.7% 3.3% MOGN 10.96 APR 10.00 QOG PB 0.50 89 9.50 42 9.2% 3.8% CELG 24.00 MAR 22.50 LQH OX 0.35 938 22.15 14 9.0% 3.4% AFFX 26.92 MAR 25.00 FIQ OE 0.35 2692 24.65 14 8.3% 3.1% GILD 36.80 MAR 35.00 GDQ OG 0.45 219 34.55 14 7.3% 2.8% MEDI 30.68 APR 27.50 MEQ PY 0.65 238 26.85 42 4.8% 1.8% 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). ***** IMCL - ImClone $15.70 *** Entry Point? *** 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 in early March amid optimism that new data about the firm's experimental cancer drug Erbitux will be released shortly and prove positive. The rally continued Thursday after the biotech firm said it received a $60 million cash payment from Bristol-Myers Squibb under the companies' amended March 2002 agreement to develop Erbitux. Investors who wouldn't mind owning IMCL at a cost basis near $12 should consider this position. APR 12.50 PUT QCI-PV LB=0.50 OI=120 CB=12.00 DE=42 TY=9.9% SY=3.0% ***** MSTR - MicroStrategy $22.60 *** New 10-Month High! *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via Web, wireless, and voice. Shares of MSTR soared in January after the business software maker reported better than expected profit and rising software sales. A number of analysts also raised their 2003 outlooks for the company and Friday's close at a 10-month high suggests further upside potential. MAR 20.00 PUT EOU-OD LB=0.30 OI=81 CB=19.70 DE=14 TY=9.7% SY=3.3% ***** MOGN - MGI Pharma $10.96 *** Rally Mode! *** MGI Pharma (NASDAQ:MOGN) is an oncology-focused pharmaceutical firm that buys, develops and commercializes proprietary pharmaceutical products that meet patient needs. MGI's current product candidates are at various stages of development with an emphasis on advanced stages of development, and are intended to have diverse roles in treating cancer patients. Of the company's product candidates, two are in Phase III, one in Phase II and two in preclinical development programs. Of these programs, one is with a supportive care product candidate, two are with cytotoxic product candidates, and two are with cytostatic product candidates. Not much news on this issue in recent weeks but the price chart speaks volumes. Investors who are willing to perform some "due diligence" may favor a cost basis near $9.50 in this speculative drug stock. APR 10.00 PUT QOG-PB LB=0.50 OI=89 CB=9.50 DE=42 TY=9.2% SY=3.8% ***** CELG - Celgene $24.00 *** 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. Celgene said on Friday that it expects to meet or exceed 2003 financial targets first made in January, as its cancer drug Thalomid should push the company to profitability in 2003. Celgene also said it has discovered a new class of anti-cancer compounds and is in the early stages of developing them in the lab. Investors who agree with the firm's bullish outlook can establish a reasonable cost basis in the issue with this position. MAR 22.50 PUT LQH-OX LB=0.35 OI=938 CB=22.15 DE=14 TY=9.0% SY=3.4% ***** AFFX - Affymetrix $26.92 *** Genomic Research Giant! *** Affymetrix (NASDAQ:AFFX) is a pioneer in creating breakthrough tools that are driving the genomic revolution. By applying the principles of semiconductor technology to the life sciences, Affymetrix develops and commercializes systems that enable scientists to improve the quality of life. The firm's customers include pharmaceutical, biotechnology, agrochemical, diagnostics and consumer products companies as well as academic, government and other non-profit research institutes. Affymetrix offers an expanding portfolio of integrated products and services, as well as its integrated GeneChip platform, to address growing markets focused on understanding the relationship between genes and human health. AFFX recently announced it is offering three new GeneChip brand CustomExpress array formats, giving researchers the flexibility to create affordable, customized arrays offering the same quality and reliability that have made Affymetrix the platform of choice for gene expression research. The news was apparently well received and the issue vaulted higher on Friday. Investors who want to own a popular issue in the genomic group should consider this position. MAR 25.00 PUT FIQ-OE LB=0.35 OI=2692 CB=24.65 DE=14 TY=8.3% SY=3.1% ***** GILD - Gilead Sciences $36.80 *** Upgrade = Rally! *** Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases. The company has five products that are marketed in the United States and in other countries worldwide. These are Viread, a drug for treating HIV infection; AmBisome, a drug for treating and preventing life-threatening fungal infections; Tamiflu, a drug for treating and preventing influenza; Vistide, a drug for treating cytomegalovirus (or CMV) retinitis in AIDS patients, and DaunoXome, a drug for treating AIDS-related Kaposi's sarcoma. J.P. Morgan raised its 2003 and 2004 earnings estimates for Gilead on Friday, saying it expects sales of the company's HIV drug, Viread, to be higher than expected. J.P. Morgan analyst David Molowa also said that sales of other Gilead drugs could beat expectations, and that the firm will likely reduce its expenses, research and development costs and taxes. The news generated a sharp rally and traders who believe the upside activity will continue can speculate on that outcome with this position. MAR 35.00 PUT GDQ-OG LB=0.45 OI=219 CB=34.55 DE=14 TY=7.3% SY=2.8% ***** MEDI - MedImmune $30.68 *** Drug Stock Speculation! *** MedImmune (NASDAQ:MEDI) is a biotechnology company with 5 products on the market and a diverse product pipeline. MedImmune is focused on using advances in immunology and other biological sciences to develop new products that address significantly unmet medical needs in areas of infectious disease and immune regulation. The company also focuses on oncology through its wholly owned subsidiary, MedImmune Oncology, Inc. In addition, the company owns Aviron, a biotech company. In January 2002, MedImmune acquired Aviron, a firm focused on the prevention of disease through vaccine technology. Medimmune shares have been in "recovery mode" since late last year, when the biotech firm's partner Wyeth announced it intended to focus on new flu immunization technologies. Wyeth is working with MEDI to win approval for the nasal spray flu vaccine FluMist. There is also speculation that the firm could be a take-over candidate, especially if its lead drug, Actimmune, becomes the first and only effective treatment for patients with idiopathic pulmonary fibrosis, a fatal disorder marked by scarring of the lungs. Despite the recent market slump, the issue is testing 9-month highs and the bullish trend will likely continue in the near-term. APR 27.50 PUT MEQ-PY LB=0.65 OI=238 CB=26.85 DE=42 TY=4.8% SY=1.8% ***** ***************** 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 ERES 23.41 MAR 22.50 UDB OX 0.55 48 21.95 14 13.3% 5.4% HAS 12.52 MAR 12.50 HAS OV 0.30 2205 12.20 14 12.3% 5.3% MCDT 8.80 APR 7.50 DXZ PU 0.35 172 7.15 42 9.9% 3.5% MDCO 18.51 MAR 17.50 MQL OW 0.30 80 17.20 14 9.7% 3.8% NSCN 19.18 APR 17.50 QKN PW 0.75 68 16.75 42 8.1% 3.2% NVDA 12.49 APR 10.00 UVA PB 0.30 675 9.70 42 7.7% 2.2% TRMS 43.10 MAR 35.00 RQM OG 0.30 1718 34.70 14 6.9% 1.9% ENDP 10.50 APR 10.00 IUK PB 0.30 20 9.70 42 5.4% 2.2% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Lots Of Activity But No Conviction! By Ray Cummins The major equity averages drifted in and out of positive territory Friday as investors were barraged with news of terrorist captures, war deadlines, weak economic data, and gloomy earnings forecasts. The Dow Jones Industrial Average rose 66 points to close at 7,740 on a late-session rally led by Caterpillar (NYSE:CAT) and Johnson & Johnson (NYSE:JNJ). The NASDAQ composite eased 2 points higher to 1,305 despite downward pressure from Intel (NASDAQ:INTC), which was also the biggest decliner among the Dow's 30 components. In the broader market groups, financials, healthcare and industrial shares enjoyed limited bullish activity while oil and gold stocks generally moved lower. The S&P 500-stock index climbed 6 points to 828. Trading volume was moderate on the NYSE, with about 1.37 billion shares changing hands. Advancers outnumbered decliners by a ratio of 9 to 7. On the NASDAQ, where overall volume ended above 1.4 billion, decliners outnumbered advancers 8 to 7. Trim Tabs estimated that U.S. equity funds had outflows of almost $4 billion over the past week ending March 5, compared with outflows of roughly $6 billion during the prior week. Equity funds that invest primarily in U.S. stocks had outflows of $1.8 billion, far less than outflows of $5.6 billion the prior week. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status SYMC 46.09 43.54 MAR 35 40 0.50 39.50 $0.50 Open COP 48.72 51.60 MAR 42 45 0.25 44.75 $0.25 Open NKE 45.14 49.10 MAR 40 42 0.20 42.30 $0.20 Open CAM 53.03 51.82 MAR 45 50 0.65 49.35 $0.65 Open SII 35.34 34.20 MAR 30 32 0.25 32.25 $0.25 Open CMCSA 29.22 28.14 MAR 25 27 0.30 27.20 $0.30 Open FIC 48.84 46.83 MAR 40 45 0.50 44.50 $0.50 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss Oil stocks Cooper Cameron (NYSE:COO) and Smith International (NYSE:SII) are on the watch-list, as are the new positions in Comcast (NASDAQ:CMCSA) and Fair & Isaac (NYSE:FIC). CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status BSC 59.90 61.57 MAR 70 65 0.50 65.50 $0.50 Open BUD 47.70 46.93 MAR 55 50 0.45 50.45 $0.45 Open MDT 44.15 44.10 MAR 50 47 0.25 47.75 $0.25 Open PEP 39.86 38.50 MAR 45 42 0.25 42.75 $0.25 Open BSC 61.69 61.57 MAR 70 65 0.55 65.55 $0.55 Open NEM 27.51 25.96 MAR 32 30 0.25 30.25 $0.25 Open PG 81.86 80.96 MAR 90 85 0.45 85.45 $0.45 Open TRMS 40.02 43.10 MAR 50 45 0.50 45.50 $0.50 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss The position in H&R Block (NYSE:HRB), although positive, has been previously closed to limit losses. Bear Stearns (NYSE:BSC) is on the "watch-list" as the issue may test its current trading-range top (near $65) in the coming week. A similar situation exists in Trimeris (NASDAQ:TRMS). CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status AMGN 52.09 55.70 MAR 45 47 2.20 47.20 0.30 Open EXPE 66.57 70.39 MAR 55 60 4.35 59.35 0.65 Open NBR 40.13 40.86 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 28.69 MAY 35 22 (0.10) 0.65 Open? UPL 10.11 8.89 MAR 10 10 0.10 0.00 Closed AFFX 27.14 26.92 MAR 30 25 0.15 0.00 Open UOPX 37.38 38.19 MAR 40 35 (0.10) 0.10 Open Watson Pharmaceuticals (NYSE:WPI) was a big mover earlier in the month after the won U.S. FDA approval for Oxytrol, a patch to treat urinary incontinence. Our bullish synthetic position has reached favorable exit points twice since it was initiated in January. The position in Ultra Petroleum (NYSE:UPL) has slumped in conjunction with the oil service sector and the play will be closed to limit losses. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status AXP 33.70 33.07 APR-30P FEB-30P 0.75 1.20 Open? CI 43.02 42.05 APR-45C MAR-45C 0.85 1.00 Open BMET 28.52 29.85 JUL-30C MAR-30C 1.50 1.50 Open WFT 40.55 39.39 MAY-45C MAR-45C 1.25 1.40 Open OTEX 29.29 26.71 MAY-25C MAR-30C 4.50 4.20 Open CMVT 10.20 9.63 APR-7.5C MAR-10C 2.20 2.00 Open ICST 23.86 23.19 APR-22C MAR-25C 2.10 1.90 Open The bearish position in American Express (NYSE:AXP) has yielded favorable short-term profits and Biomet (NASDAQ:BMET) remains within $0.20 of the maximum profit point. Open Text (NASDAQ:OTEX) is the only major disappointment, however the issue has support near the current price and market permitting, will likely rebound in the coming sessions. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status ROOM 40.14 47.30 MAR 40 40 6.50 7.90 Open? The Hotels.com (NASDAQ:ROOM) straddle has reached the target exit profit, however Friday's close at a near-term high suggests some additional upside potential in the next few sessions. 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. ***** AMGN - Amgen $55.70 *** New 10-Month High! *** 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 $55.70 PLAY (conservative - bullish/credit spread): BUY PUT APR-47.50 AMQ-PW OI=3415 A=$0.50 SELL PUT APR-50.00 AMQ-PJ OI=15576 B=$0.75 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$49.75 ***** EXPE - Expedia $70.39 *** 2-For-1 Split Coming! *** Expedia (NASDAQ:EXPE) is a provider of travel-planning services. The company's travel marketplace includes direct-to-consumer Websites offering travel-planning services located at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl and Expedia.it. Expedia also provides travel-planning services through Voyages sncf.com, as part of a joint venture with the state-owned railway group in France. In addition, the company offers travel-planning services through its telephone call centers and through private label travel Websites through its WWTE business. WWTE is now a division of Travelscape, one of Expedia's primary subsidiaries. In February 2002, a controlling stake in the Expedia was acquired by USA Networks. EXPE - Expedia $70.39 PLAY (conservative - bullish/credit spread): BUY PUT APR-55.00 UED-PK OI=2556 A=$0.80 SELL PUT APR-60.00 UED-PL OI=6124 B=$1.35 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$59.45 ***** XAU - PHLX Gold & Silver Index $67.44 *** Market Bulls Only! *** The PHLX Gold&Silver Sector (XAU) is a capitalization-weighted index composed of the common stocks of 9 companies involved in the gold and silver mining industry. XAU was set to an initial value of 100 in January 1979; options commenced trading on December 19, 1983. For a list of individual stocks in the XAU, click here: http://www.phlx.com/products/xaucomp.htm XAU - PHLX Gold & Silver Index $67.44 PLAY (conservative - bearish/credit spread): BUY CALL APR-80.00 XAU-DP OI=1713 A=$0.95 SELL CALL APR-75.00 XAU-DO OI=1064 B=$1.40 INITIAL NET-CREDIT TARGET=$0.50-$0.55 POTENTIAL PROFIT(max)=11% B/E=$75.50 ***** CHIR - Chiron Corporation $35.80 *** Trading Range? *** Chiron Corporation (NASDAQ:CHIR) is a global pharmaceutical firm that is focused on developing products for cancer and infectious disease. Chiron continues to build upon its cancer franchise, which has three dimensions, including immune system modulators, monoclonal antibodies and novel anti-cancer agents. In the area of infectious diseases, the company has a range of products. The company commercializes its products through three business units, which include biopharmaceuticals, vaccines and blood testing. Chiron Biopharmaceuticals discovers, develops, manufactures and markets a range of therapeutic products. Chiron Vaccines offers more than 30 vaccines for adults and children. Chiron Blood Testing provides products used by the blood banking industry. CHIR - Chiron Corporation $35.80 PLAY (conservative - bearish/credit spread): BUY CALL APR-42.50 CIQ-DV OI=1012 A=$0.20 SELL CALL APR-40.00 CIQ-DH OI=1083 B=$0.45 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$40.25 ***** IP - International Paper $34.30 *** Next Leg Down? *** International Paper Company (NYSE:IP) is a global forest products, paper and packaging company that is complemented by an extensive distribution system, with markets and manufacturing operations in the United States, Canada, Europe, Pacific Rim and South America. The company's businesses are separated into six segments: Printing Papers; Industrial and Consumer Packaging; Distribution; Forest Products; Carter Holt Harvey; and Other Businesses. In the United States, the firm operates over 30 pulp, paper and packaging mills, 90 converting and packaging plants, 35 wood products facilities, seven specialty panels and laminated products plants, and eight specialty chemicals plants. Production facilities in Europe, Asia, South America and Canada include pulp, paper and packaging mills, converting and packaging plants, wood products facilities, a number of specialty panels and laminated products plants, as well as some specialty chemicals plants. IP - International Paper $34.30 PLAY (conservative - bearish/credit spread): BUY CALL APR-40.00 IP-DH OI=6807 A=$0.15 SELL CALL APR-37.50 IP-DU OI=6581 B=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$37.75 ***** TOT - TOTAL Fina Elf $65.30 *** Oil Sector Slump! *** TOTAL Fina Elf (NYSE:TOT) operates with its subsidiaries and affiliates as an integrated oil and gas company, with operations in more than 120 countries. The firm's worldwide operations are conducted through three business segments: Upstream, Downstream and Chemicals. The Upstream segment includes TOT's exploration, development and production activities, as well as their coal and gas and power operations. The Downstream segment sells most of the crude oil produced by the company, purchases most of the oil required to supply its refineries, operates the refineries and markets petroleum products worldwide through both retail and non retail activities, and conducts TOT's bulk trading. The Chemicals segment includes Petrochemicals and plastics, which are linked to the company's refining activities, Intermediates and performance polymers, as well as Specialties, which include rubber processing, resins, paints, adhesives and electroplating. TOT - TOTAL Fina Elf $65.30 PLAY (less conservative - bearish/credit spread): BUY CALL APR-75.00 TOT-DO OI=0 A=$0.50 SELL CALL APR-70.00 TOT-DN OI=53 B=$1.25 INITIAL NET-CREDIT TARGET=$0.75-$0.85 POTENTIAL PROFIT(max)=16% B/E=$70.75 ************* DEBIT SPREADS ************* These candidates offer a risk/reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** FDX - FedEx Corporation $50.84 *** Earnings Play! *** FedEx Corporation (NYSE:FDX) is a provider of transportation, e-commerce and supply chain management services. The services offered by the company include worldwide express delivery, ground small-package delivery, less-than-truckload (LTL) freight delivery, global logistics, supply chain management and customs brokerage, as well as trade facilitation and electronic commerce solutions. FedEx offers integrated business solutions through a network of subsidiaries operating independently, including FedEx Express, an express transportation company; FedEx Ground, a provider of small package ground delivery services, and FedEx Freight, a provider of regional LTL freight services. Other operating companies include FedEx Custom Critical, a critical-shipment carrier; FedEx Trade Networks, a global trade services company, and FedEx Services, a provider of sales, marketing, supply chain management services and information technology support for the company's global brands. The company's quarterly earnings are due 3/19/03. FDX - FedEx Corporation $50.84 PLAY (conservative - bearish/debit spread): BUY PUT APR-60.00 FDX-PL OI=745 A=$9.40 SELL PUT APR-55.00 FDX-PK OI=4724 B=$4.90 INITIAL NET-DEBIT TARGET=$4.45-$4.50 POTENTIAL PROFIT(max)=11% B/E=$55.50 ***** STN - Station Casinos $19.40 *** Reader's Request! *** Station Casinos (NYSE:STN) is the leading provider of gaming and entertainment to the residents of Las Vegas, Nevada. Station's properties are regional entertainment destinations and include various amenities, including numerous restaurants, entertainment venues, movie theaters, bowling, and convention/banquet space, as well as traditional casino gaming offerings such as video poker, slot machines, table games, bingo and race and sports wagering. Station owns and operates Palace Station Hotel & Casino, Boulder Station Hotel & Casino, Santa Fe Station Hotel & Casino and Wild Wild West Gambling Hall & Hotel, Texas Station Gambling Hall & Hotel and Fiesta Rancho Casino Hotel in Las Vegas, Nevada, and Sunset Station Hotel & Casino and Fiesta Henderson Casino Hotel in Henderson, Nevada. Station also owns a 50% interest in both Barley's Casino & Brewing Company and Green Valley Ranch Station Casino in Henderson, Nevada. STN - Station Casinos $19.40 PLAY (aggressive - bullish/debit spread): BUY CALL APR-17.50 STN-DW OI=80 A=$2.45 SELL CALL APR-20.00 STN-DD OI=259 B=$0.70 INITIAL NET-DEBIT TARGET=$1.65-$1.70 POTENTIAL PROFIT(max)=45% B/E=$19.20 ***** ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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