The Option Investor Newsletter Wednesday 03-12-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Will History Repeat? Futures Wrap: Oversold Reversal Index Trader Wrap: (See Note) Weekly Fund Family Profile: Metropolitan West Funds Options 101: LEAPS Update Updated on the site tonight: Swing Trader Game Plan: H&S Redux Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 03-12-2003 High Low Volume Advance/Decl DJIA 7552.07 + 28.01 7552.07 7416.64 1839 mln 877/925 NASDAQ 1279.24 + 7.77 1279.59 1253.22 1491 mln 824/601 S&P 100 408.92 + 2.18 408.92 400.24 totals 1701/1526 S&P 500 804.19 + 3.46 804.19 788.90 RUS 2000 345.94 - 1.09 347.03 343.06 DJ TRANS 1950.65 + 8.46 1951.63 1918.12 VIX 38.99 + 0.91 41.16 38.88 VIXN 47.50- 0.03 48.33 46.59 Put/Call Ratio 0.89 ******************************************************************* Will History Repeat? by Steven Price For the last few months, the possibility of war has been blamed for the market's big drop. However, anyone watching only the charts would have pegged a move right to these levels. I'm not suggesting we ignore the environment in which we are trading, but it is interesting just how reliable the technical indicators have been. I'm looking at the head and shoulders patterns that have formed over the past few months in the Dow, OEX and SPX in particular. It may have taken the specter of war to get us there, but the breakdowns over the past few sessions mirrored those that we saw over the summer-fall session. Not only did the Dow fulfill its objective, as it did in October, but so did the SPX and OEX (more on these objectives later). A look at the daily charts completes the picture that I've been drawing over the past couple of months and leaves us wondering if it's time to call a bottom, or jump on short for a further breakdown. Certainly we see no signs that would indicate a possible reversal, with not only the U.S. testing multi-month lows, but also European markets sinking hard. The FTSE dropped 4.8%, the DAX fell 4.4%. When the market plague is spreading across the globe, it is hard to find any reason to step in long. However, we did see a big bounce after fulfilling those objectives in the U.S. markets and bulls will point to history (as far back as October, at least) as a possible indicator that it is time for a rally. Chart of the Dow We continue to hear that the possibility of war is what drove the recent collapse. But we have known the U.S. was planning an Iraqi invasion ever since last summer. How then do we explain the rallies of last fall and early January? The easy explanation is that last fall we got a number of earnings releases that, while seemingly awful, weren't as bad as some had predicted. That led to a reallocation between bonds and stocks that gave the market a boost. Once we got into the retail season and saw signs of further weakness in consumer spending, it was back down again until the end of the year. Then came the fund money. Those investors funding their retirement plans and brokerage accounts at the beginning of each year were apparently the impetus for the beginning of the year rally for the first couple of weeks, as was the President's announcement that his stimulus plan would seek to eliminate the tax on dividends. That would have amounted to a fundamental change in the value of dividend paying stocks and gave the bulls an excuse to step back in. However, the rally failed once again, forming a nice right shoulder to the head and shoulders pattern we saw market wide. The failure came as companies beat fourth quarter expectations with January and February earnings releases, but painted a grim picture for the rest of the year. We saw numerous lowered expectations and heard many cautious statements. That turned attention back on the economy and with war closer and fuel prices higher, there was a snow ball effect. We continue to get daily doses of international developments and although we can spin them as bullish or bearish for the market, the overall trend has remained down. That indicates that even developments that seem to delay the war, such as Britain's new set of conditions for Iraq, can't seem to give the market a boost. Most analysts simply say the market hates uncertainty and once we know whether we will attack and when, we'll finally get a rebound. Another school of thought says that Britain's new proposal suggests a split with the U.S. that indicates the U.S. will be heading in alone. That could be bad for the U.S. markets, as foreign investors pull money out of dollar denominated stocks. While the war fears have remained consistent, the price of oil has continued to climb as the timetable grows closer. While we have yet to approach the spike to $40 per barrel in the crude oil futures that was achieved on February 27, we have maintained much of the recent gains, with the futures still holding over $37. That is a far cry from 2002's top right around $30. As fuel prices remain high, business costs do as well. In spite of OEPC and Saudi Arabia's comments this week that they would make up for any shortfall in the world oil supply in the case of war, anyone who has filled up a car with gas recently is feeling the same pinch as many businesses. We are already in a world of weak business spending and the price of fuel continues to cut further into the bottom line. This can be seen especially in the Dow Transports. Traditional Dow Theory relies on this average to confirm moves in the Dow Industrials and so far we are seeing new multi-year lows in that average. When it bounced from its October low on February 25, it appeared we may have seen a short- term bottom. However, that bounce was short lived and not only have we rolled back over below that October low, but also took out the September 2001 low on an intraday basis this morning. That low followed the 9/11 attacks and cut the price of many airline stocks in half. The Transports seem to be signaling another shot at the October lows in the Industrials, which would give us another 200 points of downside, at least. However, today's bounce back above that September 2001 low and into positive territory by the close may also signal that we finally reached at least a temporary floor, as we bounced from a significant level. At the very least, it signals a confluence of important levels tested across the board today. Another 200 points of downside may be wishful thinking for shorts, but there is little argument that the trend is on their side. There is little horizontal support on the bar charts to indicate any point at which we might bounce now that we have taken out the 7500 level intraday. Not only was that the July low, it was also the head and shoulders objective and the point and figure target on the Dow Diamonds (75.00). The head and shoulders objectives I referred to earlier are just below 400 in the OEX; just under 790 in the SPX and 7500 in the Dow. Those objectives were hit almost to the point in the OEX and SPX, with lows of SPX 788.90 and OEX 400.24. The fact that the Dow fell below its H&S objective this morning can be seen one of two ways when comparing it to the SPX and OEX. Bears will view it as signaling further weakness and as the first domino to fall ahead of the others. Bulls will cite the reversal after the objectives were matched, similar to October's action, as well as the higher number of stocks in the OEX and SPX and the ability to trade futures on the SPX as signs that they are more representative of true sentiment. If the bulls were able to defend those broader averages, then maybe we should be weighing the action there more heavily than the break below 7500 in the Dow. Remember that the Dow did not close below that H&S objective. Also note the fact that the Dow underperformed the others in October, hitting its H&S objective while the others bounced just above theirs. That would be similar to relative levels we see now if we rally from here. Chart of the OEX Chart of the SPX Chart of Crude Oil Futures Those point and figure charts are showing us some signals that actually favor the bulls at this point. Now that we have fulfilled the head and shoulders objectives in the broad market indices, we are also seeing the bullish percents across the board in oversold conditions. 30% is considered oversold and the current readings are Dow 10% SPX 30% and OEX 24%. These bullish percents measure the number of stocks in an index that are currently giving buy signals on the point and figure charts. The Dow saw its bullish percent sink as low as 4% in July and 8% in October. Those extended percents both signaled a coming rebound. The current reading of 10% would indicate a similar extension and when combined with the achievement of the 75.00 target on the Diamonds, which are based on the Dow, we see a shift of risk less in favor of the bears. The OEX is also bounced just 10 points away from its target at 390. The SPX target is 785, which we came just points 3.90 points away from achieving, as well. The SPX, however, derives its count from the current column it is working on to the downside and if it does trade 785 on this drop, the count is extended lower to 775 (and 10 additional points for each five it falls until a rebound of 15 points). Certainly none of these indicators is an absolute target. Each of the indices is made up of numerous stocks. However, there are plenty of technicians and institutions watching these patterns and they tend to become a self-fulfilling prophecy. If you were going to pick a bottom, the completions of a number of head and shoulders patterns, combined with extended, oversold bullish percents might not be a bad place to do it. Therefore, we tend to get some nibbling from the long side when we achieve those targets. The last time we achieved the Dow target, we got a massive reversal the same day. While we did end the day in the green, registering a reversal of 140 points intraday, it still does not measure up to the bounces we got in July or October off the bottoms. However, the fact that they successfully defended the OEX and SPX head and shoulders fulfillments could still be signaling at least a short-term bounce. Certainly if history were to repeat itself, a rally from these levels would fit the pattern. How far that takes us is still anyone's guess and in a weak economic environment, it may be just another shorting opportunity. Another indicator that has been reliable in the recent past has been the Market Volatility Index (VIX). The VIX has been range bound between 34-35% and 40-41% for the past couple of months, with moves to those levels signaling at least short-term reversals in the equity markets. The VIX, which measures option premiums in the OEX, generally increases as the market drops and traders are more leery of selling puts and decreases on the way up as the fear abates. The upper end of that range has been between 40-41% intraday, with each foray over 50% eventually ending in a market bounce and a close below that level. The 40% mark was hit again today for the first time since February 13, and voila! - a market bounce. We traded as high as 41.16% intraday, but finished the day at 38.99%. Traders should have this measure on their screens and exercise caution with current positions think about tightening stops as we approach either end of the range. If traders are looking for a pocket of strength in stocks, they should look no further than the formerly beleaguered Semiconductor Stocks. This sector led the way down in 2002 and again in late January. However, it stayed in the green for most of the day and finished with a 3% gain. While its hard to peg just why these stocks are hanging in there, they have held support at 280 ever since making a failed run at 300 a couple of weeks ago. For those traders taking clues from this sector, it gave a good indication that the early sell-off was doomed. The Nasdaq Composite staged an equally impressive rally. After closing at new relative lows on Tuesday, it continued down past its Feb 13 bounce level at 1261 and looked as though it was on its way to a test of 1200. However, after bottoming at 1253, it followed the Dow, SPX and OEX to a close up 7 points, finishing on its highs of the day. Financials got yet another dose of the ongoing credit problems. It all started last year when J.P. Morgan suffered losses due to growing problems with underperforming debt in the telecom industry. Those problems have extended to almost every area of business, and also to consumers. Morgan Stanley was downgraded today by Wachovia, which lowered its estimates for 2003 and 2004 due to weakening consumer credit trends which could lead to a higher credit card charge-off scenario. Chart of the VIX So what did we see today? We saw some downside objectives filled and a big bounce afterward. It wasn't the same type of major reversal off the lows we saw in July and October, but it was still an impressive defense by the bulls. The trend remains down, and the world markets are still setting new lows. However, with oversold bullish percents, a VIX reading at the top of its range and a recent drop of more than 1300 Dow points from the January highs, the risks certainly seem to be shifting. I'm not going to declare the end of the drop, but if there were ever a time for the bears to start worrying and tightening their stops, this is it. ************ FUTURES WRAP ************ Oversold Reversal By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 7552.07 +28.01 7552.07 7416.64 YM 03H 7531 +41 7535 7392 Nas 100 970.54 +11.72 971.39 946.79 NQ 03H 977.00 +16.50 977.00 948.50 S&P 500 804.19 +3.46 804.19 788.90 ES 03H 804.25 +5.25 804.25 787.25 Daily Pivots Contract S2 S1 Pivot R1 R2 YM 03H 7346 7444 7489 7587 7632 NQ 03H 941.13 962.25 969.63 990.75 998.13 ES 03H 783.06 795.88 800.06 812.88 817.06 o Wild swings in the futures during the overnight session still had us opening the day session with a mild gapdown, which at first attempted to rally, then went to new lows, then moved up again, trying twice to break to the upside. When this failed, a long grind down led to new yearly lows on both the ES and YM. The NQ broke yesterdays lows, but again stayed well above the yearly lows. Once the lows were hit, a weak attempt was made to rally, then we rolled over again to make slightly lower lows. Soon after that pierce of the initial lows, a strong push upwards hit initial resistance, sold off, then rallied hard again. Sellers showed up to blunt the bullishness, and it looked like we had finished moving up for the day, but a third push up took out the highs of the day to close everything above moday’s lows. The question is, how much more upside is there? Closing at the highs of the day normally carries over into the open of the next day, but with all the rumors that pop up and disappear during the night session, nothing is assured. We have heavy overhead resistance and it would require either real news, or another strong rumor’ (which isn’t immediately denied) to push above these areas. Also of note, this push upward is, in e-wave terms, a very nice 5-wave-up move, with the (5) either being complete, or having some more upside at one of near term resistance points. Chart: Looking at the ES 15 minute chart, you can see how the breaking of the 800 area coincides with the MACD and RSI breaking above their centerlines, a long signal. Also note the rounded bottom on the selloff where price hit the bottom trendlines of the regression channels. Above, you can see both horizontal and regression resistance in the 808-810 area. On the 60 minute chart you can see the 809-810 area of horizontal resistance, and the cluster of resistance at 818-820, which will be extremely tough if we manage to get anywhere near there. Also note that the bottoms of the candle tails on the 60 minute chart hold for 3 candles (3 hours) at support. The breaking of the trendlines to the upside were on the close of a 60 minute candle at 796.50. Looking at the candle, with the long upper tail, it looks like the move was going to fail, but the indicators said a reversal had happened: Look at the tail on that daily candle! It could indicate a reversal, and in a normal market we could consider it that way. But, these types of reversals have been the norm rather than the exception. You can see on the following chart that these reversal candles have not always been reversal candles, and in fact were just as often followed by strong down days. The indicators are showing the strong selling we’ve been having and RSI is very low, but not showing anything resembling a change of trend. Here is another view of the daily ES chart. Note the trendlines on the price chart, and where we bounced from today. ADX shows a pick up in the selling, with D- increasing again, and no buying at all with D+ hovering near its lows. On Balance Volume (OBV) also shows no buying. For NQ and YM, you can see in the daily’s how the selling on the DOW has been much stronger than on NQ. On both, you can see how the ADX is showing a complete lack of buyers, and an increase in the selling. NQ daily: The YM daily: ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_031203_1.asp ************************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 ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Metropolitan West Funds Metropolitan West Asset Management ("MWAM"), founded in 1996, is an independent, employee-owned fixed income management firm that offers five mutual funds to institutional and personal investors, including four fixed income portfolios and a unique fixed income- based, enhanced S&P 500 index fund. The firm was founded in 1996 by Tad Rivelle and Laird Landmann, the former co-directors of the Hotchkis & Wiley fixed income group, along with Scott Dubchansky, a former regional manager with the taxable fixed income division of Donaldson, Lufkin & Jenrette. Other members of the Hotchkis & Wiley fixed income team departed along with Rivelle and Landmann, becoming owners in the new firm, MetWest. Rivelle and Landmann co-managed the Hotchkis & Wiley Low Duration Fund until 1996, when Hotchkis & Wiley announced its intention to sell the firm to Merrill Lynch. Before Hotchkis & Wiley, the two were portfolio managers with PIMCO (Pacific Investment Management Company). By the time Merrill Lynch completed its acquisition of Hotchkis & Wiley in November 1996, seven members of the H&W fixed income team had already left the firm and started their own fixed income management shop. By the end of the year, MWAM had already amassed $1.1 billion in assets under management. So, the company got off to a hot start. The Metropolitan West mutual funds were established in March 1997 with the launch of the Low Duration Fund (MWLDX) and Total Return Fund (MWTRX). In September 1997, MWAM received its first mandate for its enhanced equity index strategy and in June 1998, the firm introduced the MWAM AlphaTrak 500 Index Fund (MWATX). This fixed income-based, enhanced equity index fund seeks to beat the return of the S&P 500 index over time, while maintaining similar risk to that of the index. It purchases S&P futures to capture the price return of the 500 index, while actively managing the fund's short duration fixed income assets to add incremental return (above the index). In 2001, the firm hired a mortgage-backed securities (MBS) expert and an asset-backed securities (ABS) specialist and the following year, they hired a high-yield specialist. Those hires led to the launch of an intermediate-term bond fund and a high-yield fund in 2002. In January 2003, Jeff Koch joined MWAM as a co-director of high yield and portfolio manager. Koch is the former co-director of fixed income investments at Strong Funds. Until mid-2002, he managed the Strong High Yield Fund and the Strong Advantage Fund. As of November 2002, MWAM had around $18 billion in assets under management, including the five mutual fund portfolios. The MWAM mutual funds are available in Class I shares (institutional fund investors) and Class M shares for retail investors. The Class M shares impose no front-end or back-end load fees, but require an initial minimum investment of $5,000 ($1,000 for IRAs). MWAM's funds enjoy wide brokerage availability. In some fund networks, such as Schwab's OneSource program, the MWAM funds are available on a no-load, no-transaction fee (NTF) basis. For more info, or to download a fund prospectus, go to the www.mwamllc.com website. Fund Overview Metropolitan West Asset Management currently offers five no-load mutual funds, as follows: Metropolitan West Low Duration Bond Fund (MWLDX) Metropolitan West Total Return Bond Fund (MWTRX) Metropolitan West Intermediate Bond Fund (MWIIX) Metropolitan West High Yield Bond Fund (MWHYX) Metropolitan West AlphaTrak 500 Fund (MWATX) Note that the Intermediate Bond Fund is currently available only to institutional investors in the form of Class I shares. There are no Class M shares at this time for retail investors. All of the MetWest funds strive to consistently outperform their market (index) benchmark, while maintaining below average volatility of returns. In their effort to achieve consistent, strong returns, MWAM employs five "value-enhancing" investment strategies in the management of its fixed income accounts and mutual funds. MWAM seeks to add value over benchmarks by making limited average maturity/duration shifts, managing the yield curve, utilizing all fixed income markets, performing quantitative security selection, and employing sophisticated buy/sell execution strategies per the company website. The firm uses a diversified investment approach to add value by relying on the measured application of "multiple" investment strategies. Each of the MWAM funds has a different performance benchmark that they strive to outperform over time with consistency. The market (index) benchmark for the Low Duration Fund is the Merrill Lynch 1-3 Treasury Index. The Total Return Fund strives to outperform the Lehman Brothers Aggregate Bond Index over time, while MWAM's Intermediate Bond strategy seeks to enhance value over the Lehman Brothers Intermediate Government-Credit Index. MWAM's High Yield Fund seeks to outperform the Lehman Brothers U.S. High Yield Bond Index. The AlphaTrak strategy attempts to beat the return of the S&P index over time. Below is a summary of the Morningstar categories assigned to each of the MWAM mutual funds, based on their average management style over the past three years. Morningstar Categories: Low Duration Bond Fund (MWLDX) Short-Term Bond Total Return Bond Fund (MWTRX) Intermediate-Term Bond Intermediate Bond Fund (MWIIX) N/a High Yield Bond Fund (MWHYX) N/a AlphaTrak 500 Fund (MWATX) Large-Blend Stock Because the Intermediate Bond Fund and High Yield Bond Fund began operations in 2002, there is limited fund information online. In regards to the first three mutual funds, there is sufficient data online to evaluate relative return, risk and expense, and to view key portfolio characteristics to get a better sense of management style/strategy. All three funds (Low Duration, Total Return, and AlphaTrak 500) are co-managed by Stephen Kane, Laird Landmann and Tad Rivelle. The three portfolio managers worked at PIMCO and at Hotchkis & Wiley before co-founding Metropolitan West. According to Morningstar, the Metropolitan West Low Duration Fund (MWLDX) had an average effective maturity of 2.7 years at the end of the third quarter 2002 and an average credit quality of AA (AA is considered "high-grade" quality). Those numbers land the fund in the Morningstar short-term, high-grade fixed income style box. The Total Return Fund (MWTRX) seeks greater total return than its low-duration sibling by extending the fund's average maturity and duration and maintaining a hefty stake in corporate bonds (taking on more credit risk). According to Morningstar, the Total Return Bond Fund (MWTRX) had an average effective maturity of 6.7 years at September 2002 and average credit quality of A (A is "medium- grade" paper). The AlphaTrak 500 Fund, while classified as a large-blend fund by Morningstar, relies on the low duration strategy to enhance value over money market rates - since a money market rate is implied in the pricing of S&P 500 futures. If the fund's three managers can generate incremental return over this implied rate, then the fund makes an incremental return over the S&P 500 index, since the S&P futures held in the portfolio capture the price return of the S&P index. The idea of porting "alpha" to any index that futures and options actively trade is attractive, but fund investment results since inception are disappointing. In the next section, we take a closer look at relative investment results. Fund Performance The Low Duration Bond Fund and the Total Return Bond Fund got off to great starts. In 1998 and 1999, the Low Duration Fund (MWLDX) produced total returns of 6.6% and 6.2%, respectively, ranking in the 2nd percentile of the Morningstar short-term bond category in 1999. The Total Return Bond Fund (MWTRX) produced annual returns of 10.0% (1998) and 1.7% (1999), ranking in the top 3% and top 4% of the Morningstar intermediate-term bond category, respectively. Because the low duration strategy excelled in 1999, the AlphaTrak 500 Fund (MWTAX) returned 22.5% in 1999, its first full year. It ranked in the top one-third of the large-cap blend stock category that year. Kane, Rivelle and Landmann didn't fare quite as well in 2000, and since then relative performance has been hit or miss. The result is relatively weak category rankings for the MetWest Low Duration Bond Fund and the MetWest Total Return Bond Fund for the trailing 3-year and 5-year periods through March 11, 2003 per Morningstar. Below is a performance summary for the three MWAM funds discussed herein (returns are shown on an annualized basis). 3-Year Average Annual Returns & Category Rankings: + 4.7% Low Duration Bond Fund (MWLDX) 93rd Percentile + 6.2% Total Return Bond Fund (MWTRX) 96th Percentile -16.2% AlphaTrak 500 Fund (MWATX) 53rd Percentile 5-Year Average Annual Returns & Category Rankings: + 4.7% Low Duration Bond Fund (MWLDX) 93rd Percentile + 6.2% Total Return Bond Fund (MWTRX) 96th Percentile You can see that on an annualized basis relative to similar funds the Metropolitan West fund have disappointed investors, producing trailing average returns which rank in the bottom decile (10%) of their respective fund peer groups. The bright side of the firm's AlphaTrak 500 strategy is that when active management doesn't add incremental value over the implied money market rate (embedded in the S&P 500 futures), it generates no worse than average relative returns in the Morningstar large-blend stock category. So, there may still be some merit to the income-based, AlphaTrak strategy. Morningstar recently reported that MWAM management makes a strong case for its fixed income investments, having hung on to some low quality, high yield "troublemakers" as they put it that in their opinion still hold much value. Morningstar noted the high yield advantage the MWAM bond funds currently offer, which can generate competitive total returns even if there aren't strong price gains available in the fixed income market. So, now may be a good time from a buyer's perspective to consider the MetWest funds. If you stuck it out, you may want to stay on board for the higher upside potential now. The other thing you have to consider is the long-term performance record of three co-managers. Kane, Rivelle, and Landmann enjoyed success in Metropolitan West's earlier years and had success with Hotchkis & Wiley. They also learned their value-enhancing skills at PIMCO, arguably the premier fixed income shop in America under the direction of bond guru and PIMCO founder, Bill Gross. So, it bodes well for MWAM's long-term prospects. Conclusion If you seek long-term growth of capital, you may want to consider the Metropolitan West AlphaTrak 500 Fund for the core equity part of your investment portfolio. Even though the portfolio managers weren't able to achieve incremental return over the implied money rate in the S&P 500 futures through active management, AlphaTrak Fund's trailing 3-year average returns were no worse than average within the large-blend category, per Morningstar. If you do not believe active managers can pick stocks but want equity exposure, as well as the opportunity to enhance returns over the S&P index with similar risk, this income-based, enhanced equity index fund may be suitable for you. Kane, Rivelle, and Landmann are good portfolio managers but human too. Like many other managers with hefty corporate stakes, these three got tripped up by some of the corporate debacles last year. That hurt their trailing total returns and rankings, but now that the worst seems over, shareholders may benefit from the potential recovery and the high current yields. For more information or to download a fund prospectus, log on to www.mwamllc.com. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** LEAPS Update by Mark Phillips mphillips@OptionInvestor.com Normally, I use this space for educational content or a topic that I think is timely as it pertains to the action in the market. While we're going to certainly touch of timely developments in the market today, there were enough developments related to the plays we're following in the LEAPS column, that I think it warrants a mid-week update. Sure, on any normal day, I could have accomplished this in the Market Monitor. But technology issues kept me sidelined for most of the day, eliminating that opportunity. So what happened that got my attention for a mid-week update? We've got a number of Portfolio plays that have been opened in recent weeks and a number of Watch List plays as well. And they're all bullish. If you think I haven't been sitting on pins and needles about trying to be long-term bullish when the overall market has continued south, you've got another think coming. The play that has caused me the most consternation is the DJX Call play, as I got suckered into moving that one onto the Portfolio back on February 25th on that big intraday reversal. Technically, I still think is was the right play, but the timing of the entry was downright lousy. My fault. So let's look at the big picture. We got a pretty solid midday reversal today, with the all three of the big indices (SPX, OEX and DOW) fulfilling their bearish price targets from the Head & Shoulders formations Steve Price has been talking about. There is still some room to the downside PnF price targets in some of the major indices, but we're getting awfully close. Bullish percent readings are pretty low across the board, although there is still some room to the downside. The early selloff in the market propelled the VIX through the 41 level, but that was it, as the fear index got a nice reversal back down at the end of the day. No panic, just an orderly selloff and a solid bounce. The NASDAQ Composite got its own very solid bounce off the 1260 level, holding above those mid-October lows. Even the Dow Transports managed to close in the green after hitting a new multi-year low earlier in the session. I wouldn't call this a key reversal day or be so bold as to call it "A Bottom", but there are some bullish undercurrents at play that we need to pay attention to. This should be a real warning to the bears, as their risk just went up measurably today, despite the continued uncertainty in the global arena. I have it on good authority that Steve will be addressing the issue of achieved and yet-to-be-achieved targets in the broad market in his Market Wrap tonight. So for further details on that topic, be sure to check out his prose! With a rather bullish backdrop, let's take a look through the current list of plays, as there are some significant developments. Portfolio: QCOM - I think it's clear that we entered this play a bit too early, as the stock has been stuck in the $33-36 area for nearly a month now. But despite missing out on an optimal entry, I think we're in good shape. In sharp contrast to the rest of the market, QCOM has not been losing ground these past couple weeks, solidifying that $33-34 support. I would still favor entries into the play on rebounds from the lower end of its range, as its recent relative strength should translate into outperformance to the upside when the market does turn up. DJX - As mentioned above, it would have been difficult to get much worse of an entry point into the DJX play. And the past few weeks have been frustrating, watching as the market has continued to deteriorate towards the area where we ideally would like to have entered the play. The rebound from just above $74 today looks like a solid bullish entry into this play and I'm going to do something a bit unconventional today. Because I'm still concerned about the likelihood of a full retest of the October lows, I'm going to look for a rebound from the vicinity of $72 to establish a SECOND position in the play. That way, if our $74.50 stop on the current position gets clipped on a closing basis, we'll have an action plan in place to get right back in if the conditions are right. Just to be clear though, I am NOT changing the stop on the current Portfolio position, as that would set a very bad precedent. If filled on the second position, we'll use a stop of $69.50 MSFT - After finally getting a dip down to the ascending trendline (then just above $23) at the end of February, we logged MSFT into the Portfolio. To my chagrin, Mr. Softee proceeded to drift lower with the rest of the market, taking out that trendline and falling as low as $22.55 this morning. But the stock came screaming back this afternoon, ending very near where we initially entered the play. I like today's rebound back over $23 for new positions, although more conservative traders may want to wait for a move back over the long-term ascending trendline and the 3-week descending trendline, which converge in the $23.40-23.50 area. ADBE - If you need any proof that Technical Analysis is as much art as science, you need look no further than our ADBE play. I initially drew the wrong trendline, using it as the support level at which to target new entries. That trendline started at the intraday low on October 16th, catching a number of intraday lows in December and January. Using that as my key, I took the bait on February 28th and entered the play just before the latest downdraft. The break of that trendline sent me back to the drawing board, ending up with the trendline shown on the chart below. See how the stock rebounded from the site of that trendline, just as it crossed through the 200-dma? Looks like a solid entry point to me, and today's rebound back near the $27.50 level (and back above the initial trendline confirms it. If still looking for an entry into the play, today may have been it, and I would recommend using dips into the $26.50-27.00 area to get on board. Watch List: BEAS - Here's an example where excessive patience appears to have gotten in the way of a choice entry. I kept waiting for a test of the $8.50-9.00 support area before logging an entry into the play and it looks like I missed it. On three consecutive days last week, BEAS traded down to $9.15, and it has looked really strong this week, closing back at $10 today. I may be throwing caution to the wind, but with the stock bouncing before the rest of the market and weekly Stochastics turning up, I'm going to initiate a Portfolio position in BEAS as of the close tonight. Initial stops will still be set rather liberally at $7.50, just below the bullish support line on the PnF chart. See the weekend edition for further details. NVDA - This play would test the patience of Job! While I still like it's relative strength, the fact that weekly Stochastics have already traveled into overbought territory is enough to keep me from chasing it higher. It may turn out to be the big one that got away, and if it is, I'm willing to let it go. Traders that don't want to exercise that level of patience can use repeated rebounds from the $12 level to enter the play, but keep in mind that the best level for a technical stop is down at $9.50. For now, our official entry target remains in the $10-11 area. AA - One of only 3 DOW stocks still on a PnF Buy signal, AA is as close to major support as I think it's going to get, without breaking it. I recently revised the entry target down to the $18.00-18.50 area, and I think today's rebound certainly qualifies. Volume was still on the light side, and there's a lot of technical work to be done before AA will be considered truly bullish, but in terms of risk and reward, new entries taken here look favorable. The LEAPS portfolio will take an entry into the play as of tonight's closing price of $18.87. Stops are going to be tight at $17.50, as a trade at that level would put AA on a PnF Sell signal, negating the current bullish target of $44. Our initial target on the play (market permitting) will be the bearish resistance line of $27. EMC - Looking for excitement from our EMC play is a bit like looking for business ethics from the likes of Ken Lay, Dennis Kozlowski and Bernie Ebbers. It might be there somewhere, but it sure is hard to find. But there's no arguing with the bullish trend in shares of EMC, which are still well above the December lows. Our target for entry into the play was a dip into the $6.50-7.00 area, followed by a rebound. I think you'd have to call today's trading action a successful fulfillment of that goal, as EMC dropped as low as $6.54 before rebounding to close at the high of the day. Here again, the Portfolio will log a new position, with full details to come over the weekend. Initial stops will be set at $5.50. NEM - The war hasn't even gotten here yet, and investors are already dumping both gold and gold shares. Easy guys, we're not in a hurry! You can take your time. In all seriousness, I didn't expect the $25 level in NEM to crack until the war started. The long-term ascending trendline for the stock is just below $24, so we're looking to target shoot new entries on a decline AND BOUNCE from this area AFTER the start of hostilities. See the operative words? Entries are only going to be recommended on a rebound from that trendline after the war starts. This is definitely an aggressive play, based on my belief that the stock will continue to benefit from the secular bull market in gold, especially once investors figure out that the recent runup in the price of gold is NOT about Iraq. Be patient on this one, as I think we'll be well rewarded in the end. I know today's discussion doesn't rise to the normal level of interesting commentary I try to save for this column. But hopefully, you found this mid-week update of value. If you'd like to see things like this in the future, drop me an email with "Mid-week Update" in the Subject line. I don't want to leave anyone out of the fun, so if you didn't like the mid-week update, feel free to send me an email as well, putting "Waste of Time" in the subject line. Don't worry, I can take the criticism! GRIN See you in the weekend edition! Mark ************************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 ************************************************************** *********************** SWING TRADER GAME PLANS *********************** H&S Redux Did I just walk through the door of a history 101 class? Actually, walk right into the door is a better way of putting it. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************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 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Wednesday 03-12-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Put - XL Big Cap Covered Calls & Naked Puts: A Great Opportunity For A Review! Updated on the site tonight: Market Posture: Neutralized Market Watch: Ready for Reversal ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* 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 ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* 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) Most Recent Write-Up: Capital has continued the slide since we picked it at $68.50. We got the failed rally at $70 for entries and it has been an ugly couple of days after some sideways movement. While there has not been company specific news behind the recent drop, the insurance industry as a whole has been getting hit hard. The S&P Insurance Index (IUX), which had been slowly sliding lower since bouncing off of the 220 level in early February, gave up that support in grand fashion on Friday with a 10 point drop. The IUX extended those losses today and headed down to yet another 52-week low after giving up 2.2% and taking XL along for the ride. Other major insurers that are also seeing new relative lows are AIG and CB, with AET getting in on the slide as well. Traders looking for more shorts in the sector may want to stick these stocks on the radar as well. A look at the PnF chart shows the last sell signal in XL coming at $69 and the nearest support at $57. That support is now history and the next level that looks apparent is all the way down at $59, which correlates to the July 2002 lows. Momentum traders can look for entry on a break below $65. With a close of $65.17, we may get a bounce off $65 and the best entries may come on a failed bounce below today's intraday resistance at $66.75. Why This Is Our Play of the Day: Most stocks in the market are showing an intraday chart similar to XL. Big drop early, rebound late. Unlike many other stocks, however, XL gave up an important level of support when it dropped through $65. More importantly, while the Dow, Nasdaq and other broad market indices were rallying to highs of the day, XL found sellers at that previous support level, indicating resistance at $65 now in place. We picked this stock originally at $68.50 and suggested entries on a failed bounce at $70. New additions however, were looking for a momentum move through support at $65 and with the failed rebound at that level, those entries look even better. If the stock does rally back through $65 on a broad market continuation higher, then wait for a failed run at resistance in the $66.75 range for a better risk reward. If we instead see the market run out of steam after today's bounce we like short entries under $65. ** March Options Expire Next Week** BUY PUT MAR-70 XL-ON OI=314 at $6.00 SL=3.00 BUY PUT APR-70*XL-PN OI= 95 at $6.70 SL=3.35 BUY PUT APR-65 XL-PM OI=551 at $3.80 SL=1.90 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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* A Great Opportunity For A Review! By Ray Cummins While the major equity averages languish in a sea of uncertainty, it's an excellent time to take a break and discuss the basics of a popular combination strategy that works well with range-bound issues. The derivatives market is unique because it offers a variety of ways to be successful. Although the majority of participants are comfortable with simply buying calls, the difficulties involved in profiting from long positions in directional strategies compels many traders to use a more neutral approach -- one that does not suffer from the effects of time-value erosion. Historically, the option writer enjoys profit potential that is greater than any other segment of options trading. Through the sale of "naked" options, the disciplined player can easily generate returns of 50-75% annually, in all types of market conditions. The strategy of selling premium also offers a higher success ratio than other option-trading techniques because the odds are stacked in your favor. The reason is simple: using this approach is similar to being the "house" in a casino. The house takes bets from players in the casino and they always have a mathematical advantage over the gaming customer. Traders who write options are in a similar position as they take the place of the market-maker, providing additional liquidity for other retail participants. Since option writers are essentially selling time, they have the benefit of a statistical edge because the premium in options erodes with every passing day. This advantage allows the option writer to profit in a high percentage of positions, even when the underlying issue does not move as expected. Traders who sell "out-of-the-money" options have a bigger edge, as only the most adverse activity will result in a losing transaction, and that is the basis for the use of the credit (short) strangle. The credit strangle or "combination" is a neutral-outlook options strategy in which the trader sells a call and a put on the same underlying instrument, with the same expiration date, but with different (out-of-the-money) strike prices. The major advantage to this technique is that the trader has a wide margin for error in predicting how the underlying will move in the future. Some people believe the position is called a "strangle" because it suffers a higher rate of time (premium) decay than an individual short option but in fact, the unique label emerged in 1978 after a number of traders holding short positions in IBM options "lost their shirts" as a result of wide, unexpected price swings in the stock. Indeed, the strategy has unlimited risk and limited profit potential, and is subject to large margin requirements, thus it is best suited to traders with substantial portfolio capital. The credit strangle will profit from limited directional activity but will likely suffer losses if the underlying moves significantly in either direction. A successful outcome occurs when the price of the underlying issue finishes the expiration period between the sold strike prices, but profits can also be achieved through the depreciation of premiums over time. Unlike most option trading strategies, which depend on directional forecasts and accurate market timing, the credit strangle is best suited to range-bound issues where the trends have less bias and extreme movements are rare. The idea is to construct a position that generates acceptable returns and yet has a wide range for success. In choosing the underlying issue, a trader must balance his desire for volatility, which produces excess premium in the options, against the probability of unexpected activity, which may result in significant position losses. Since the primary risk to an option writer (after the short position has been initiated) is unanticipated volatility, the easiest way to avoid this problem is to focus on issues that are not subject to large, gapping moves. One category of financial instruments well suited to this strategy is the equity index. Premium-Selling With Index Options As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at a specific price within some predetermined time. The buyer has the rights and the seller the obligations. With index options, the basic ideas are the same but because an index is composed of many stocks, they allow you to make investment decisions on a specific sector or industry group, or on the market as a whole. In addition, spread and other combination strategies can be implemented with index options similar to those with individual stock options. Professional money managers employ a number of different techniques to profit from the broader market movements and one of the most common hedging strategies is writing "out-of-the-money" options on the major equity indexes. Traders who participate in these techniques often utilize S&P 100 Index or S&P 500 Index derivatives because they contain more premium than options on individual stocks and also provide an instrument less prone to large, unexpected moves. The primary differences between stock and index options are the style, the method of settlement, and the margin (or collateral) requirements. The style of an option refers to when that option is exercisable. An American-style option (such as those on U.S. stocks and the S&P 100 Index) may be exercised any time prior to its expiration while a European-style option (such as the S&P 500 Index) may be exercised only during a specified period before the option expires. Next, there are two basic types of options with regard to payment: physical delivery options and cash-settled options. A physical delivery option gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put), of the underlying interest when the option is exercised. A cash-settled option gives its owner the right to receive a cash payment based on the difference between the price of the underlying instrument at the time the option is exercised and the fixed exercise price of the option. Since index options are cash settled, they require a large amount of portfolio equity, especially when you are short in the option. For example, writers of uncovered S&P 100 options must deposit and maintain 100% of the option proceeds plus at least 10% of the aggregate contract value (current index level x $100) as well as a minimum account balance of $25,000. That's a sizable amount of money for most people, thus the strategy is generally suitable only for those with larger portfolios. There is, however, a more conservative premium-selling technique that can be used by the average retail trader. Selling Index Options: A Limited-Risk Approach A spread is a strategy that involves the buying and selling of simultaneous but opposing positions in different option series. When the premium from the sold option exceeds the cost of the option that was purchased, the resulting position is called a "credit" spread. A credit spread is a popular option position that allows traders to have time (premium) decay work in their favor while maintaining a limited-risk outlook. The objective is for both options to expire worthless so the spreader can keep all of the credit (which is profit) in their account. Normally, a credit-spread trader uses front-month options only, as the time decay evaporates most rapidly in the final few weeks ahead of expiration. This time erosion benefits credit spreads, assuming no change in the other variables that affect option pricing such as the underlying security's price, option volatility, dividends, or interest rates. By combining two "out-of-the-money" credit spreads in one position, you can participate in a conservative, neutral-outlook strategy known as the Credit-Spread Strangle. For those who enjoy more dramatic titles, the technique is also sometimes called a Long Iron Condor. The strategy is generally used with range-bound issues or broad-market indexes and it is a limited-risk, limited-profit position that offers a wide range for success. The benefit to this technique, when compared to writing uncovered options, is that most brokers require far less collateral for the combined position, as only one credit spread can lose money at expiration. And, because of the stability of broad stock indexes, the technique offers a sizeable margin for error, regardless of the overall outlook for the market or its recent volatility. In addition, unforeseen events often produce volatility spikes that can be exploited (in the form of premium selling) with a very high probability of a successful outcome. Guidelines for Selling Index Options: 1) Utilize a broad-based index such as the S&P 100 index (OEX) or another major equity index, and focus primarily on options that are "deep-out-of-the-money," preferably at well-defined support and resistance areas. Remember, the key to consistent success in this strategy is to initiate a position where the sold options are far from the index value, thus reducing the probability that the underlying will ever trade near the break-even points. 2) Perform a volatility analysis of the underlying issue and the target spreads. Most professional traders construct their spread positions based on statistical volatility and the value of this type of assessment cannot be overstated. A thorough study of historic option pricing can also help determine which series offer favorable premiums when compared to relative fair values. 3) Establish a stop-loss (mental or mechanical) that is well inside the break-even points of the position and never allow short options to become "in-the-money." If the underlying moves sharply in one direction early in the life of the position, consider closing the spread that is in jeopardy, even if the stop-loss has not been hit. With this type of conservative, sensible approach, you will rarely incur the maximum loss. 4) Write index options that have no more than one or two months remaining until expiration. Remember, maximum time value erosion occurs in the last month of an option's life, and with less time for unexpected volatility, you have a higher probability of profit. 5) Consider the use of net-debit or net-credit orders to initiate and close combination positions. This is, by far, the safest way to trade spreads. Experienced traders also advocate the use of contingency orders, where you place a limit price for one of your transactions, and either a market or a limit price for your other transaction, to implement simultaneous trades. The technique is useful with multiple positions because the second order will be put into play only after the first transaction is completed. Options: Something For Everyone! The wonderful thing about option trading is its diversity. There are an incredible number of strategies available, one for every type of market trend, character and outlook. Positions involving combinations of calls and puts, with different strike prices and expiration periods, along with index and futures options offer the astute trader a variety of ways to participate in the market. This assortment provides even the most conservative investor the ability to construct positions with an acceptable level of risk and reward in almost any situation. Obviously, there is no such thing as a "perfect" position but successful traders learn to maximize profits and hedge their risk in as many different ways as possible, limiting the effects of short-term volatility and market gyrations. While there is no way to completely eliminate risk but with knowledge and good judgment, you can certainly reduce it much more than that of a inexperienced trader, who does not utilize all of the available strategies. Good Luck! *************** SUMMARY OF CURRENT POSITIONS - AS OF 3/11/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ANF MAR 25 24.40 27.24 $0.60 5.97% 2.46% CLX MAR 40 39.00 42.21 $1.00 5.01% 2.56% OTEX MAR 25 24.50 25.64 $0.50 4.97% 2.04% SYMC MAR 40 39.15 42.30 $0.85 5.10% 2.17% VIP MAR 30 29.40 35.40 $0.60 4.74% 2.04% ANF MAR 25 24.65 27.24 $0.35 4.66% 1.42% AVCT MAR 22 22.20 27.23 $0.30 4.59% 1.35% DISH MAR 22 22.00 28.50 $0.50 7.13% 2.27% IGEN MAR 30 29.50 30.77 $0.50 6.04% 1.69% PTEN MAR 30 29.45 31.35 $0.55 5.17% 1.87% RYL MAR 37 36.95 38.20 $0.55 4.42% 1.49% AVCT MAR 25 24.70 27.23 $0.30 4.78% 1.21% BJS MAR 32 31.95 32.32 $0.37 4.10% 1.72% * DISH MAR 22 22.15 28.50 $0.35 6.56% 1.58% NE MAR 35 34.35 34.55 $0.20 1.99% 1.89% * NBR MAR 35 34.65 38.89 $0.35 4.30% 1.01% PTEN MAR 32 31.95 31.35 ($0.60) 0.00% 1.72% * VLO MAR 35 34.60 40.32 $0.40 4.49% 1.16% LLTC MAR 27 27.15 28.95 $0.35 6.76% 1.29% MXIM MAR 30 29.70 33.60 $0.30 5.88% 1.01% SLAB MAR 22 22.30 26.18 $0.20 5.78% 0.90% XNLX MAR 20 19.75 22.18 $0.25 7.16% 1.27% CELG APR 22 21.25 23.83 $1.25 8.68% 5.88% ERES APR 20 19.20 24.27 $0.80 8.04% 4.17% As noted last week, stocks in the oil sector are in a slump and the trend became more bearish Tuesday. Positions in that group, such as Patterson-UTI (NASDAQ:PTEN), Noble (NYSE:NE) and BJ Services (NYSE:BJ) should be closed to lock-in gains or limit losses. Other issues on the early-exit list include Open Text (NASDAQ:OTEX), Igen International (NASDAQ:IGEN) and Ryland (NYSE:RYL). Naked Calls Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield ESRX MAR 55 55.70 50.36 $0.70 5.07% 1.26% GM MAR 37 38.10 29.92 $0.60 4.60% 1.57% VIA MAR 40 40.95 34.29 $0.95 6.44% 2.32% CCMP MAR 50 50.55 38.34 $0.55 5.47% 1.09% KLAC MAR 40 40.50 32.35 $0.50 5.63% 1.23% QCOM MAR 40 40.45 34.53 $0.45 4.59% 1.11% VZ MAR 40 40.55 32.41 $0.55 4.73% 1.36% OMC MAR 60 60.55 49.02 $0.55 4.52% 0.91% QCOM MAR 37 37.85 34.53 $0.35 4.77% 0.92% QLGC MAR 37 37.90 35.31 $0.40 5.75% 1.06% COF APR 32 33.05 25.38 $0.55 5.56% 1.66% MERQ APR 35 35.80 30.10 $0.80 7.15% 2.23% PHM APR 50 51.10 45.50 $1.10 4.92% 2.15% Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status BHE 34.68 30.20 MAR 25 30 0.60 29.40 $0.60 Open? PRX 33.67 36.60 MAR 25 30 0.40 29.60 $0.40 Open SLM 105.54 104.21 MAR 90 95 0.45 94.55 $0.45 Open EBAY 76.99 78.87 MAR 65 70 0.55 69.45 $0.55 Open CAT 45.95 44.50 MAR 40 42 0.25 42.25 $0.25 Open BRL 77.21 73.39 MAR 65 70 0.50 69.50 $0.50 Open AGN 63.82 64.80 MAR 55 60 0.50 59.50 $0.50 Open CTSH 69.62 67.48 MAR 60 65 0.60 64.40 $0.60 Open EOG 42.14 41.74 MAR 35 47 0.50 39.50 $0.50 Open LXK 62.82 60.83 MAR 55 60 0.70 59.30 $0.70 Open? AMGN 55.33 55.00 APR 47 50 0.30 49.70 $0.30 Open NKE 46.48 47.55 APR 40 42 0.30 42.20 $0.30 Open Benchmark Electronics (NYSE:BHE) is now on the watch-list for an early exit as is Lexmark (NYSE:LXK). Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status CCU 36.70 32.35 MAR 45 40 0.75 40.75 $0.75 Open FDX 50.87 49.67 MAR 60 55 0.55 55.55 $0.55 Open UTX 60.50 54.23 MAR 70 65 0.60 65.60 $0.60 Open BGEN 38.16 32.69 MAR 45 42 0.00 42.50 $0.00 No Play RD 39.56 38.86 MAR 45 42 0.25 42.75 $0.25 Open AZO 64.86 64.21 MAR 75 70 0.50 70.50 $0.50 Open MRK 52.10 50.77 MAR 60 55 0.55 55.55 $0.55 Open CTX 50.03 48.74 APR 60 55 0.60 55.60 $0.60 Open LEN 49.40 48.75 APR 60 55 0.55 55.55 $0.55 Open LEH 53.42 51.80 APR 65 60 0.55 60.55 $0.55 Open Biogen (NASDAQ:BGEN) gapped down at the open during the session after the play was offered, thus a credit near the target price was not available. Calendar Spreads (Reader's Request) Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status APA 60.74 63.16 APR-65C MAR-65C (0.40) 1.10 Closed STJ 43.69 45.50 APR-45C MAR-45C 0.20 0.80 Open Apache Oil (NYSE:APA) has been closed to protect gains. St. Jude Medical (NYSE:STJ) has also offered favorable "early-exit" profits. Credit Strangles No Open Positions Synthetic Positions: No Open Positions Questions & comments on spreads/combos to Contact Support ************** NEW POSITIONS There will be no "New Positions" today as the editor of this section is on a brief (but much-needed) hiatus with his family. ************** SEE DISCLAIMER - SECTION 1 ************** ************** MARKET POSTURE ************** Neutralized To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_031203.asp ************ MARKET WATCH ************ Ready for Reversal To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_031203.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. 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