The Option Investor Newsletter Wednesday 04-02-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: End In Sight Futures Wrap: Back Above The Trendline Index Trader Wrap: (See Note) Weekly Fund Family Profile: Barclays Global Investors Funds Options 101: The Best Defense Updated on the site tonight: Swing Trader Game Plan: Reliable Signals - For A Day Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 04-02-2003 High Low Volume Advance/Decl DJIA 8285.06 + 215.20 8316.64 8070.98 1927 mln 1661/257 NASDAQ 1396.72 + 48.42 1400.86 1374.71 1614 mln 1322/265 S&P 100 447.46 + 12.46 449.53 435.00 totals 2983/522 S&P 500 880.90 + 22.42 884.57 858.48 RUS 2000 376.30 + 7.61 377.11 368.69 DJ TRANS 2212.98 + 62.96 2218.48 2152.04 VIX 31.29 - 0.81 31.43 30.49 VIXN 41.60 - 0.37 42.17 41.06 Put/Call Ratio 0.69 ******************************************************************* End In Sight by Steven Price As U.S. troops neared Baghdad, the markets reflected renewed optimism about a coming end to the war in Iraq. The move was confirmed by action across a number of sectors, including oil, gold and treasuries. For a day, at least, recent disappointing economic reports were forgotten and the technical signals we got Tuesday that a bounce may be in the works proved reliable. Traders will recall the last time the war appeared on the verge of ending we were trading as high as Dow 8500. That was just a couple of days after it started and U.S. troops had seen almost no opposition. Investors were expecting a repeat of the 1991 action that lasted only days and market euphoria was topping out ahead of that first weekend. Some of the rally was likely due to short covering ahead of a possible surrender and we may be seeing some of that same activity now. The (end of) war-rally theory gets support from the gold market, where April Gold Futures (GC03J) dropped $4.60 per ounce and tested relative lows at 326.1, trading down to 327.5 before catching a bounce. Gold was the safety net investment that investors turned to as the build up to war got more serious and it is also one of the hardest hit sectors since the war began. It did hold up over the past week, creeping higher as questions about just how long the war would last persisted. However, this morning's rollover suggested that now that troops have moved within spitting distance of Baghdad, traders are once again setting a timetable. The action in gold is also reflective of the move in the U.S. dollar. The dollar has also fluctuated with the progress in Iraq and today it rallied strongly. The dollar index moved back over 100 for the first time since March 26, showing a flow of investment back into U.S. dollar denominated assets that include stocks. By the end of the day it sat at 100.05. The bond market, although denominated in U.S. dollars, is also seen as a safe haven investment and has given reliable signals on a technical basis, as well. I generally follow the ten-year note, as it splits the difference (actually weighted more heavily toward short-term) between the short-term and long-term treasury and seems to give reliable signals that can be extrapolated to equities. The Ten-Year yield traded down to its early November and late December lows over the past couple of days. That level has led to big bounces on two of the last three tests (the third test in January failed along with the broader markets, but triggered a reversal at the October low). The yield reflects the return on the bond - as bond prices rise, yields drop (mirroring equities) and it is a reflection of asset allocation between the two markets. After finding support yet again at 3.8%, the TNX started its rebound yesterday and exploded higher again this morning, prior to the equity market open, as cash shifted back from bonds into equity futures and stocks. The TNX broke through its 50-dma and also above the 61.8% retracement of its Oct-Dec lo-hi range that drove it back on Tuesday. However, it topped out for much of the afternoon at 3.94% and signaled an end to the equity rally as the asset allocation took a breather. Chart of the Ten-Year Yield Intraday Chart of the Ten-Year Yield Much of the rally was news driven, as the U.S. said that the Baghdad division of the Iraqi Republican Guard - supposedly the cream of the crop of the Iraqi military - had been destroyed. Troops are within 20 miles of Baghdad and it appears the U.S. will lead an assault on the city soon. While the fighting has been more severe than many traders were betting, the latest advances by U.S. troops, including the capture of an important bridge over the Euphrates River, had been easier than it appeared it would be after the delays of the last week, fueling speculation that the end is in sight. The oil market, which has been a good contra-indicator for stocks, also reflected several events that drove the price of oil lower and helped fuel the equity rally. The U.S. advancement was one of the factors in driving down oil futures, which ticked back below $30 per barrel on Tuesday. I have heard it estimated that a drop from $31 to $24 per barrel would lead to a 1% increase in U.S. GDP. One of the other factors that have contributed to the drop in prices is the apparent over-production of oil by Saudi Arabia, which has pledged to make up for any shortfall in world supply that the war might create. That overproduction led to a rise in imports to their highest level on record, averaging nearly 10.4 million barrels a day over the last week. Crude oil inventories rose by 6.8 million barrels, which was higher than the expectation of 4-5 million barrels. The American Petroleum Institute posted an increase of 9 million barrels. The fact that oil supplies have continued to increase, in spite of the war, pushed prices down, with May Light, Sweet, Crude (CL03K) dropping $1.19 per barrel on the day. I've posted the chart of oil futures versus the Dow several times and today's action only underscored the relationship once again. Chart of the Dow versus the May Oil Contract For those traders who follow Dow Theory and looking for confirmation of the rally from the Dow Transports (TRAN), the drop in oil prices also pushed this sector much higher, right up through resistance at 2200. The $3 billion+ airline aid packages added on Tuesday by Congressional and Senate appropriations committees to the war spending request by the White House didn't hurt either, although the White House considers it excessive. That 2200 level has been tough to hold ever since it broke down in late January and has also acted as support in the past. It broke above that level on a closing basis for the first time since March 21. The boost was impressive in light of the new scare from the SARS virus that has begun to affect international travel. The predicted drop in tourism and business travel to Asia has already led analysts to lower their GDP forecasts for Hong Kong, which derives a good portion of its revenue from tourism. Yesterday's quarantine of a U.S. flight landing in California due to several passengers reporting SARS - like symptoms should only heighten the fear of flying, as travelers must now worry about being locked up in a confined space with anyone on a plane with symptoms. It could continue to weigh on airline stocks, as could further bankruptcies and those stocks make up a significant part of the TRAN. Today the index did give bullish signals however, so traders just need to be careful about the mid-term prospects if they jump into these stocks for a short ride. There is also concern that SARS will interrupt exports from Asia and affect tech production. Several companies have already begun asking workers to stay home and since so many tech fabricators are located in that part of the world, we could see production interrupted. While it may be an overreaction to an illness that is something new, as of this time there is not a cure and the hysteria may grow before it fades. It is actually a derivation of the virus that is part of the family of viruses that cause the common cold. However, it is a new strain that humans have not seen and therefore the immune system is not built up for it. Since it is a version of a virus that no one has yet developed a cure for, it may be a while before an effective treatment is created and therefore we may see a continued effect on these industries. While it may have been an afterthought in today's action, we did get some more economic news that continued to paint a glum economic picture after yesterday's disappointing ISM report. Factory orders fell -1.5%, in February, which was more than twice the expected drop of -0.6%. This was a reversal from the 1.7% gain in January and the biggest drop in orders since September. The only area to show any strength was the demand for defense goods, which rose 27.1%. Orders for core capital goods, which exclude defense and aircraft, dropped 3.1% and shipments of all factory goods fell 1.5%. The inventory-to-sales ratio also rose from 1.32 to 1.34. Durable goods orders dropped 1.6% and shipments of durables fell 1.7%. Computer shipments fell 4.2%. These numbers are consistent with the worse than expected ISM report and show little improvement in the economy, calling into question the ability of the recent rally to hold its gains. The indicators that told us we might be seeing a rally yesterday could be found in the point and figure charts. While we had seen some bouncing around last week after the pullback from recent highs, none of those bounces were significant enough to reverse these charts higher from their sinking columns of "O" until the action of the last two days. The bounce from Monday's lows made it high enough to register reversals in the Dow/SPX/OEX on Tuesday afternoon and those reversals were added to today. The other signal from the world of Xs and Os that gave us a sign that bounce was in the cards was the bullish percents in the major indices. These percents, which measure the number of stocks in an index currently giving PnF buy signals, had reversed out of oversold territory below 30% and headed into the low 40s. They don't reach oversold territory until the 70% range, so there is still room to run. More importantly though, is the fact that a 500 point pullback in the Dow (and similar pullbacks in the OEX and SPX) were not enough to reverse enough of those new buy signals to lower the bullish percents. While some did reverse, there were enough others registering new buy signals to make up for it. The last two rebounds have been good for a run in the Dow bullish percent (which sat at 40% throughout the pullback) to 60% and 72% and the reluctance to weaken on the drop signaled at least one more good pop. Point and Figure Chart of the Dow Dow Bullish Percent Does that mean that the pop will last? Certainly the economic picture is anything but rosy. It is hard to imagine a real rally continuing on back to December highs over 9000 as we head into an earnings season that comes on the heels of a sick economy. However, we saw similar action last fall, when disappointing third quarter earnings reports that often missed expectations led to rallies. The only explanation was that things weren't as bad as we thought. We then saw many companies beat expectations that had been dialed down for the fourth quarter, but the market rolled over on disappointing future guidance for 2003 that was mostly blamed on the uncertainty of the geo-political environment. The theory was that companies were holding off on spending until the Iraq situation cleared up. We now have the wild card of a war in progress and its effect on fuel prices and business spending. If businesses begin to see spending pick up after the conclusion of the war, then we may see improved guidance for future quarters. However, one byproduct of the war lasting longer than many investors were hoping for is that any post-war pickup in spending will also be put off. Of course, that may also buy many companies another excuse during the upcoming earnings releases in the next couple of months. After all, if the war had ended in just a few days and there was no effect on spending, then what reason would they have to predict an improvement? The bottom line is that we have a sick, but hopeful economy. We are pinning hopes on companies suddenly increasing hiring and spending after the war. I think this is a tenuous expectation, at best. We may continue to see a short-term rally over the next few days, as the U.S. progresses toward an end to the current conflict. The bullish percents and point and figure charts indicate there is still some life left. However, the mid-term and long-term outlook still appears questionable, so traders jumping on the runaway train should keep their stops tight, as a train off its tracks often crashes. ************ FUTURES WRAP ************ Back Above The Trendline By Vlada Raicevic Daily Settlement Numbers 4:15pm ET > DOW Last: 8285.06 Net: +215.20 High: 8316.64 Low: 8070.98 > YM 03M Last: 8237 Net: +197 High: 8296 Low: 8059 > S&P 500 Last: 880.90 Net: +22.42 High: 884.57 Low: 862.57 > ES 03M Last: 877 Net: +20.25 High: 884.25 Low: 855 > Nas 100 Last: 1063.42 Net: +40.79 High: 1066.90 Low: 1047.39 > NQ 03M Last: 1062 Net: +39 High: 1070 Low: 1023.50 DAILY PIVOTS > YM 03M R2: 8444 R1: 8355 Pivot: 8207 S1: 8118 S2: 7970 > ES 03M R2: 903 R1: 892 Pivot: 873 S1: 863 S2: 844 > NQ 03M R2: 1101 R1: 1086 Pivot: 1055 S1: 1040 S2: 1008 If ten people were to write the Futures Wrap, you would most likely get ten different approaches to the article. However, there is a basic core as to what all the writers would attempt to bring to the article, so let us take a small step back and ponder what the Daily Futures Wrap is for. It is supposed to give you some insight into what the futures did today, how that compares to yesterday and perhaps the last few days, and how the trading has affected both short term charts and long term charts. After looking at these things, we can have a little bit of insight into what it potentially means for trading the following day if the signals are clear. Good enough. Let me digress a little here: when I was younger, I used to play chess. I was fairly good at the game, but not brilliant. Once I found out that the really brilliant players have memorized hundreds, perhaps thousands of well known strategies, and can mix and match these strategies depending on particular situations, I realized that I would never be a great chess player because I simply didn't care enough about the game to cram my head full of so much memorized information. I did continue to play on occasion, but without that vast database of information in my head, I took on a different strategy. When faced with an opponent who knew their chess inside and out, I would play as well as I could at the beginning of the game, which was often good enough to be somewhat of a match to the other player. Then, when a certain strategy became painfully obvious to anyone watching the game, I would do something so irrational and bizarre, that it would completely throw the other player off their game. In the end, I would usually lose, but that sweet moment when I looked at the other player and saw complete and utter confusion in their eyes was good enough for me. I now completely understand how my opponents felt during those insane moments when I pulled out the strategy of "irrational strategy", because the market is now doing the same thing to me. When I looked in the mirror today, I saw wide eyes, confusion, and not a little bit of hostility. Let us recap briefly: The market went up like crazy in anticipation of a quick war. When poor economic data and poor war news came out, the market sold off hard for one day, then just meandered/consolidated for several days, forming a descending triangle which normally breaks to the downside. Finally the consolidation broke on hard selling again. The following day was basically an inside day which tested the now broken support and pulled back. Indicators showed that we had moved into a bearish stance, and we had a classic TA moment: break of support, retest of support that failed....which said that we either continue down or we consolidate again. How then, do we fit today's price action into the TA? Well, frankly, I haven't the faintest idea. Yesterday was chock full of bad econ data, more news on a possible worldwide health epidemic, hand wringing over the stall in the war, and heckling and finger pointing among retired generals and current leaders on the strategies of the war. Yet, the market erases 6 days of selling in one huge gap and run, and plows through resistance like a truck plowing into a shoebox of beanie-babies. How is it that in the face of bad news, and with charts rolling over and breaking, do we get a 7 hour rally (starting during night session) so strong that it cannot pull back more than a couple points? The answer is that in anything resembling a normal market, and even allowing for extremes that stretch the boundaries of TA, the market "should not" be able to do it. Does this mean that 1. Sentiment, based some aspect of reality, is now useless, and 2. Because of number 1, TA is also very suspect, and nearly invalid beyond a 15 minute chart. Consider the break of support on Monday. After such a large run upward, one might think that this break would be good for going short. If one were to be more careful, they would wait for the following day, and upon seeing that we could not break back above the broken support, they would think that this was now resistance and would then short this 'backside bounce'. Both of these methods would be considered sound strategies. If one did go short on either of these elements, they would wake today to find themselves deep underwater. As price continued ever upward with no pullbacks, you have trapped shorts which would capitulate and just cover at any price pushing the buying frenzy into ever higher levels. How then do we trade this? I really don't know. If you can't apply logic using such market sensitive issues as economic numbers, and can't seem to rely on TA because news renders it nearly irrelevant, what are we left with? I suppose we are left with Tarot Cards, rolling dice or chicken bones, reading Runes or just flipping a coin. If you don't know what the news will be overnight, or how that news will be perceived by the market, then do you dare hold any position overnight? Do you even bother to trade anything beyond a short scalp for fear of being whipped out of your position on rumors or quick changes in war news? More so than ever, this market truly makes you ponder just how much risk you are willing to trade under. So, putting cynicism aside, let's take a look at some charts even though they may change completely again by tomorrow morning. The ES daily chart shows what can only be described as a 'save'. Macd has turned up before crossing the centerline, and RSI crosses above its downtrend line and bounces off the centerline. ADX flips again to the positive. CCI, which normally leads other indicators in swift price changes, has turned up but is still below its moving average, indicating that it is not convinced by today's move, and while Macd has turned back up, it still hasn't crossed positive. Price is also against the upper blue regression channel line. So perhaps not a convincing 'save' after all. If we close green tomorrow, then most of the holdouts like Macd and CCI will most likely cross up bullish and finish the reversal of Monday's potential breakdown. ES Daily Chart: The ES 270 minute chart shows how price popped back above that descending line, and also shows how there is still room for price to move up to the upper descending regression channel (black) at 889. This chart is convincingly in a bullish stance, with ADX, Macd, RSI and CCI all breaking above their centerlines, trendlines, or both. ES 270 Minute Chart 1: Here is a close up of the ES 270 minute chart with trendlines and some horizontal support/resistance areas. ES 270 Minute Chart 2: While the NQ's had a better day than the ES, they are still much further below the recent top. The daily chart is not as close as the ES in returning all indicators back to bullish territory, and would require another very strong day to cross Macd and CCI positive again. However, it would be easier for it to do so since it is not against any regression channel resistance like the ES is. Also note that D- may have crossed D+ but it is still above the recent D- downtrend line which indicates that the strong pickup in selling from the last few days has not quite been reversed by today's large candle, even though price itself retraced the last three days range. NQ Daily Chart: The NQ 270 minute chart shows price moving above the recent downtrend line and being stopped by the center of the blue regression channel. Unlike the ES chart, you can see that Macd has crossed but is still below the centerline, and CCI is still being held back by its moving average. RSI, and ADX have had their crossovers, so I would view the chart as more neutral rather than bullish. NQ 270 Minute Chart 1: Here is a close up of the NQ 270 minute chart with trendlines and some horizontal support/resistance areas. NQ 270 Minute Chart 2: Also of note is that the ES fibonacci retrace chart shows we have reversed .786 of the move from the highs of 895.75 on 3/21 to the lows of 840 on 3/31. The NQ chart shows that we reversed .618 of that same move. The red numbers on the far right show these retrace values. ES Fibonacci Retrace Chart: NQ Fibonacci Retrace Chart: ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_040203_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 ************************** Barclays Global Investors Funds This week, we look again at six Barclays Global Investors asset allocation funds that are offered on a no-load NTF basis in the Schwab Retail OneSource network for a low investment minimum of $2,500 ($1,000 for IRAs). Normally, BGI mutual funds require a $1,000,000 minimum to open an account and are distributed to DC (defined contribution) plans and other institutional investors. BGI is currently the six largest DC manager, but they also sell their funds through other distribution channels, such as the no- load NTF fund network at Schwab. Each of these BGI asset allocation funds invest a mix of stocks and bonds and cash in various proportions to achieve the fund's desired risk-reward potential. Five funds are part of a series of funds called the "LifePath" Portfolios that are designed for investors at different stages of life, including retirement. A sixth asset allocation fund combines strategic asset allocation (long-term) and tactical asset allocation (short-term) processes to create and protect wealth over the long term. Accordingly, these Barclays Global Investors funds bring to bear the firm's full capability across all asset and subasset classes. Headquartered in San Francisco, Barclays Global Investors ("BGI") managed $746 billion in assets at December 2002, ranking as one of the industry giants. BGI developed the first index strategy in 1971 and the first quantitative active strategy in 1978. The firm's huge asset base today reflects its strong long-term track record, arguably one of the best in the business. The Barclays Global Investors Funds, through Charles Schwab's NTF network and DC plans, offer investors an opportunity to invest in mutual funds that are institutionally managed and marketed by one of the leading global money managers today. In addition to their low minimum initial purchase requirements in the Schwab OneSource network, these six BGI funds have below-average operating expense ratios of less than 1.00% of assets, adding to their appeal. For more information on Barclays Global Investors, go the BGI website at www.barclaysglobal.com. Fund Overview Note that more information on the six asset allocation strategies featured in this report can be found in the Products and Services Section of the BGI website (www.barclaysglobal.com). There, they ask you what investment type reflects your primary interest. The answer you give is "Defined Contribution Plan" and that will open the window to descriptions of All Strategies and Asset Allocation Strategies. The Asset Allocation Strategies are divided into two sections: Asset Allocation Strategies and the LifePath Portfolios Strategies. Below is a summary of the six funds we are reviewing this week. Barclays Global Investors Funds (Schwab OneSource Funds): BGI Asset Allocation Fund (WFAAX) BGI LifePath 2010 Portfolio (STLBX) BGI LifePath 2020 Portfolio (STLCX) BGI LifePath 2030 Portfolio (STLDX) BGI LifePath 2040 Portfolio (STLEX) BGI LifePath Income Portfolio (STLAX) Barclays Global Investors Asset Allocation Fund (WFAAX) started operations in July 1993 and was the first mutual fund to employ "TAA" or tactical asset allocation. This asset allocation fund, originally called Wells Fargo Asset Allocation Fund, has a long- run target mix of stocks, bonds and cash, known as its strategic asset allocation ("SAA") that is based on long-term assumptions about capital markets. TAA has a short-term focus and is meant to work hand in hand with the SAA process by adjusting the long- term asset mix to reflect current conditions in capital markets. So, assuming the fund has a neutral asset mix of 60% stocks and 40% bonds/cash, it might increase the fund's weight to equities to 70% (reducing bonds/cash to 30%) in the short-term, based on the relative attractiveness of each asset class today, and vica versa. Three tenets distinguish BGI's tactical asset allocation process from other processes: objectivity, value-focus and probabilistic approach. According to the BGI website, objectivity is critical because the opportunities that TAA exploits are typically driven by the subjective, emotional responses of other investors. They also maintain a value focus, believing that in the long run, the capital markets are driven by fundamentals. However, prices can in the short run move above or below what the fundamentals might indicate. Third, BGI's TAA strategy doesn't market time, per se. Rather, BGI takes a probabilistic approach, which identifies and exploits periods when the securities markets may be mispriced in relation to one another. Five mutual funds make up the LifePath Portfolios series. These portfolios are designed for investors at different stages ("life paths") of their life. As you can see, there is one fund geared to people retiring near the year 2010, and three more portfolios aimed at people retiring near the years 2020, 2030, and 2040. A fifth fund in the LifePath series provides retirement income and offers some protection against the negative effects of inflation (through small investment in stocks). BGI's LifePath Portfolios are designed to be complete investment solutions for plan participants and other investors (i.e. Schwab OneSource) who lack the knowledge, interest, and/or time to make sound investment decisions. So, if you are ready to invest, but do not know where to put your money, the BGI LifePath Portfolios may be worth considering. Each portfolio in the LifePath series allocates assets across 17 index-based asset classes based on the expected return and risks of each asset class. Barclays Global Investors believes the key to the success of the LifePath's target objectives is the use of both strategic (long-term) and tactical (short-term) allocation. LifePath's strategic asset allocation represents the optimal mix of the 17 asset classes, based on a person's investment horizon, risk tolerance and investment objectives. As a person ages and his/her investment horizon decreases, the fund's strategic asset allocation migrates from stocks to bonds and cash. So, all that you need to decide is when you will begin to need the money, and then hold the same portfolio for your entire investment horizon. The tactical asset allocation process is designed to complement the strategic asset allocation by incorporating current capital market conditions. As market conditions change, tactical asset allocation gradually shifts the mix toward the asset class that offers higher expected risk-adjusted returns. This flexibility BGI purports allows for a "moderate" range of allocation around the strategic asset mix to account for the dynamic nature of the markets. According to Morningstar, the equity stake of each BGI portfolio reflects a large-cap blend (core) style of management. The BGI Asset Allocation Fund (WFAAX) has a $43.3 billion average market capitalization, per Morningstar, very similar to that of the S&P 500 index. The BGI LifePath Portfolios have average market caps in the $24 billion-$27 billion range, reflecting broader market exposure but still large-cap overall. Average P/E and earnings growth rates are near that of the S&P 500 target. Fixed income investments are generally of high-grade ("AAA") credit quality. The BGI LifePath Retirement Income Portfolio (STLAX) sports the highest trailing yield of 2.6% given its income focus. It makes sense then that the BGI LP 2040 Portfolio (STLEX) has the lowest trailing yield of 1.2% given its emphasis on long-term growth of capital. In the next section, we see how well the six BGI asset allocation funds have performed over various time periods versus their Morningstar category peers (i.e. domestic hybrid funds). Fund Performance Note that two of the BGI asset allocation funds have such heavy concentrations in stocks that they are categorized as large-cap blend funds in Morningstar's star-rating system. But even they include bond/cash investments, so they are truly hybrids rather than pure equity funds. Accordingly, we feel it appropriate to compare all six asset-allocation portfolios versus the domestic hybrid fund average per Morningstar. That way you can see them on an apples-to-apples performance comparison basis. 3-Year Average Annual Return (Apr-01-03): - 8.2% BGI Asset Allocation Fund (WFAAX) - 3.9% BGI LifePath 2010 Port (STLBX) - 8.8% BGI LifePath 2020 Port (STLCX) -11.9% BGI LifePath 2030 Port (STLDX) -15.4% BGI LifePath 2040 Port (STLEX) + 1.0% BGI LifePath Income Port (STLAX) - 5.1% Domestic Hybrid Fund Average -15.8% S&P 500 Index 5-Year Average Annual Return (Apr-01-03): + 0.4% BGI Asset Allocation Fund (WFAAX) + 1.3% BGI LifePath 2010 Port (STLBX) - 0.8% BGI LifePath 2020 Port (STLCX) - 2.2% BGI LifePath 2030 Port (STLDX) - 3.7% BGI LifePath 2040 Port (STLEX) + 3.1% BGI LifePath Income Port (STLAX) - 0.3% Domestic Hybrid Fund Average - 3.6% S&P 500 Index The two tables above show how well the BGI asset allocation funds performed over the trailing 3-year and 5-year periods relative to both the category average and the stock market as measured by the S&P 500 index. You can see that over these periods, total return performance was largely a function of each portfolio's asset mix, with returns becoming more similar to those of the S&P 500 index as you move further out in investment horizon. The LifePath 2040 Portfolio, for example, produced an annualized loss of 15.4% over the past three years compared with an annualized decline of 15.8% by the S&P 500 index. Because bond prices have risen the last three years, while equity prices have fallen, the most conservatively managed BGI funds are the ones with the best relative performance over these periods of measurement. The LifePath 2010 Portfolio and LifePath Retirement Income Portfolio, for instance, outperformed the average domestic hybrid fund over the trailing 3-year and 5-year periods according to Morningstar. Both funds had a greater percentage of assets in bonds and cash investments than the typical hybrid fund's 60%/40% stock/bond mix, so they did a better job of preserving capital in the most recent stock market downturn. To put these funds through one more performance test, we compared them to two venerable Vanguard products: Wellington and Wellesley Income. Wellington Fund (VWELX) is a more growth-oriented hybrid fund that typically invests 60%-70% of assets in stocks while its sibling, Wellesley Income Fund (VWINX) has a more income-oriented approach. While the BGI LifePath Retirement Income Portfolio had the best relative performance among the six BGI funds, and ranked highly within Morningstar domestic hybrid category, it lagged the returns of two Vanguard hybrid products. For the trailing 3-year period, the BGI LifePath Retirement Income Fund had an annualized return of 1.0% (12th percentile) compared to an average return of 8.4% (3rd percentile) for the Vanguard Wellesley Income Fund. On an annualized basis, the Vanguard Wellington Fund produced a 1.9% average return, better than the BGI LifePath Retirement portfolio in spite of its much greater equity allocation. Conclusion There's some evidence to suggest that TAA is difficult to do with precision and consistency. It is also difficult to know how well BGI's asset allocation shifts have worked in the 2010, 2020, 2030 and 2040 LifePath funds since the performance benchmark itself is a moving target. For example, if you see a portfolio with stocks comprising 50% of assets today, and it was 60% yesterday, was the shift lower due to it getting closer to its target date or was it due to the TAA adjustments, reflecting current market conditions? While the concept behind LifePath Portfolios and other life-cycle funds is relatively simple, we're not totally convinced that they are any more effective for individual investors than conventional balanced funds such as Vanguard Wellington and Vanguard Wellesley Income Fund. Still, if you're going to go with one of these fund products ("lifecycle" funds), and you believe that TAA can really add value, these six asset allocation funds from Barclays Global Investors are worth a look considering the firm's excellent long- term track record. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** The Best Defense by Mark Phillips mphillips@OptionInvestor.com In both the sports and military world, the saying is "The best defense is a strong offense". In the trading world, I think it should be changed to "The best defense is a strong business plan". That is sage advice in ANY market environment, but doubly so in the volatile, gap-infested trading waters in which we currently find ourselves. Virtually all of the action in the markets in the past several weeks has been due to the changing picture on the war front. To make it even more confusing, what passes for good news (to the market) on one day is taken to be bearish a few days later and vice versa. Then, adding insult to injury, the market will decide to change directions at a point that doesn't really make sense at the time. Traders trying to make sense of the noise have very little to go on, with normal chart studies and technical levels seemingly ignored by the market. And forget about the fundamentals! One look at the recent reactions to the dismal economic reports makes it perfectly clear that the market is ignoring this data right now. If you're feeling confused, and more than a little beat up over the past few weeks, you aren't alone. I'm receiving several emails per day from traders looking for a viable way to prosper in the current market environment. I shared one of those (along with my advice) in Monday's article. Simply put, we need to avoid chasing every little move in the market unless there is a setup that fits within our own individual business plan. One part of my own business plan mandates that I do not EVER trade on a day with a large gap move. As you all know from the action in the broad market lately, that means that I have been trading very little. I know from years of experience that I can't predict how the market will digest that gap, and by virtue of its existence, that gap makes risk management much more difficult. I'd like to take our time today to focus on another reader email that I think is closely connected to our topic from Monday. The issue raised is central to trading success, both in this difficult environment and in the future when the market returns to trading on pertinent fundamental and technical data. Have you written anything about a strategy for traders where they could keep most of their winnings without giving them back to the market? If you have written anything on that subject, please let me know. I have not yet learned that art. I think I must learn to sell too soon. I've seen too many bear profits collected over 2 months vanish in 1 week, and turn to losses. If you have any wisdom on the subject about harvesting profits (when to sell, how much profit to aim at etc) will you please pass it on to me? Now these are VERY important questions. Those of you that have gone through the work of building a trading plan (and actually trading that plan) know that these are all questions that MUST be answered in the development of that plan. You see, in addition to defining what types of trades you will place, the plan should also specify what is your acceptable risk/reward ratio. I won't take a trade that doesn't offer me at least a 1:2 ratio. The reason why is that it allows me to target a gain of $5 while assuming a risk of no more than $2.50. If I do this over and over and even half my trades are losers, I should still reap a net gain over time. I don't know if this reader has built his own business plan. If not, then it seems these questions are being asked in the process of building that plan. If the plan has already been built, the questions are being asked in an attempt to improve on the results that business plan is providing. That is also a good thing. We must always evaluate the results we achieve in trading and determine first whether we are adhering to that business plan and secondly whether it would be possible to improve the business plan without introducing additional risk to the account. Now this is a very important point! Modifying the business plan and how we are going to trade the account is always something that can be considered. But I would be very careful. We shouldn't change our trading style just to accommodate changing market conditions until we've taken the time to paper trade that new strategy and see how it performs under live fire. You see, if we change our trading style to accommodate new market conditions, then we have to determine how we will know when market conditions have changed once again. More importantly, how would the modified trading approach handle that subsequent change in the market? This gets to the key characteristic of a robust business plan -- it must be able to perform reasonably well across the whole spectrum of market conditions. Certainly it will perform better in some market conditions than others, but it must be capable of preventing large losses in adverse market conditions. That goal may be accomplished by having different strategies that are employed in trending markets than in rangebound markets. Or it may simply dictate abstinence from trading in a choppy news- driven environment, such as we are currently experiencing. As I mentioned on Monday, my business plan has me getting much more cautious in a non-trending market. That means I place far fewer trades, and those trades that I do place are done so with much smaller position size. That quality of my trading plan ensures that it is not possible for me to sustain large losses to the account during non-trending markets. I may get caught a couple times during the transition, but once I can see that a trend is no longer present, my trading plan has a release valve built in to keep me from compounding the error. I am not a momentum trader. My style is to buy support and sell resistance, and that approach does not change, regardless of market conditions. What does change (and this gets to the heart of the reader's question) is how much room I will give a trade to move against me. Since my position size is smaller, I am more comfortable with a stop placed the other side of support or resistance. My initial stops are always based on technical levels. I then modify my position size to keep the risk in the trade at a defined level, based on permissible risk in terms of dollars. That part of my approach remains constant. Where it deviates in a volatile market environment is that I am far more aggressive about tightening the stop when the market allows me to do so. As soon as technically feasible, my first goal is to tighten my stop to the break-even point. And I will aggressively follow the position with trailed stops, almost daring the market to take me out of the play. The other way in which I get aggressive with my trades is by closing out ANY trade that presents me with more than a 75% return. There is no flexibility on this point. The trade may go on to produce a 200% gain without me and I am perfectly happy to let it do so. I got what I was looking for and I don't look back. This is a sharp deviation from how I manage trades in a trending market environment, as in that case I will let a trade run as far as it can without taking out my trailed stops. But very rarely do I let even a great trade run beyond a 200% gain. I like profits and I like them even better when they are booked! So let's review. The first step in difficult market conditions is to cut back on position size. That allows us to still use technically significant stops while at the same time reducing our risk in any given trade. Then we focus our efforts on tightening that stop to break even as soon as possible. And we don't want to waste any time in tightening the stop, as a booked gain can't be taken back by Mr. Market. Most importantly, we need to reduce our expectations from any given trade, being content with taking modest gains more frequently, rather than hold out for the "Big Score". By modifying our business plan in this manner, we reduce our risk in the near-term, while at the same time giving us continued confirmation that the basic theme of our business plan is workable in both good and bad market conditions. Then, when we see our trades being consistently closed out far too early, we can begin to conclude that the market is behaving in a more rational manner and we can start to remove the "choke hold" on our trading plan. Once again, we've stayed away from looking at specific stocks or potential trades because I wanted to focus on the big picture. I think we've covered that in sufficient detail. Next week, I'm going to pick a specific stock (I haven't decided which one yet) and show the different ways in which I would have traded it in a trending environment vs. how I would be trading it now. Hopefully that will help to answer any remaining questions on the issue of how best to defend ourselves from the perils of a treacherous market. Questions are always welcome! 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 *********************** Reliable Signals - For A Day Well, it certainly looks like those reversal signs from yesterday were reliable in the short-term. 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 04-02-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: ROOM Dropped Calls: BRL Dropped Puts: None Play of the Day: Call - WFMI Spreads, Combinations and Premium-Selling Plays: Battlefield Success Spurs Buying Binge! Updated on the site tonight: Market Posture: Reversal - For Now Market Watch: Playing the Bounce ************************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 ***************** Put ROOM Down from $60.00 to $58.58 ************* DROPPED CALLS ************* Barr Labs - BRL close: 57.68 change: -1.10 stop: 55.25 We set up an exit point between $59 and $60 in last night's write-up for BRL, as well as in Tuesday's market monitor, suggesting we'd close the play on that move, giving traders a move of over $5 in their favor since we added it on March 20. The stock opened higher this morning, reaching $59.22 and satisfying our target on the play and we announced the close in this morning's monitor. Traders who followed that strategy got the best price of the day, as the stock eventually fell back and gave back some of its recent gains. The stock has seen several temporary pullbacks following nig runs and continued on higher, but the relative weakness today was a little disturbing. As long as it sticks to that pattern of rebounding after the pullback, traders who want to play it for a run through resistance at $60 can hang on a little longer. However, that resistance looks tough and is the reason we set our exit target in the first place. Picked on March 20th at $53.81 Change since picked: +3.87 Earnings Date 05/08/03 (unconfirmed) ************ 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 - CALL ********************** Whole Foods Mkt - WFMI - close: 56.42 change: +0.78 stop: 53.50 Company Description: Whole Foods Market, Inc. owns and operates a chain of natural and organic foods supermarkets in the United States. As of September 2002, the company operated 135 stores in 25 states plus the District of Columbia and Canada. The company offers a broad product selection with a heavy emphasis on perishable foods designed to appeal to both natural foods and gourmet shoppers. Its product categories include produce, seafood, grocery, meat and poultry, bakery, prepared foods and catering, specialty (beer, wine and cheese), whole body (nutritional supplements, vitamins and body care), pet products and household products. Most Recent Write Up: Just as the broad market was getting started on its strong oversold rebound in mid-March, shares of WFMI got a boost from a downgrade by McDonald Investments. It may seem counter- intuitive, but then what doesn't in this topsy-turvy market. The market completely ignored that downgrade, as investors continued to pile into the stock following its successful rebound from the converged 20-dma and 50-dma near $50.50. That was a couple weeks ago, and not only did the stock continue to climb, but it successfully blasted through long-term resistance near $54 enroute to setting a new all-time high of $58.11 a week ago. That ramp job needed to relax a bit and that appears to be just what has been occurring over the past week, helped along by a Salomon downgrade last Wednesday. Rather than falling apart though, the stock has found support at the $55 level over the past 2 days and looks like it is ready to take another run at those all-time highs. It is no coincidence that the $55 level has been acting as support this week, as that was the site of intraday support on the way up last week. Given the weakness in the rest of the market of late, it is rather curious that WFMI has held up so well, and we can't help but think that it has a lot to do with the company's continued impressive financial performance. The company continues to grow revenues and earnings (beating estimates each of the past 8 quarters) and that is the sort of behavior that investors seem willing to reward with their investment dollars. Another factor that benefits the stock is that it provides products that consumers need, whether the economy stalls or not. Hey, we've all got to eat! It is that economic insensitivity that should keep WFMI working higher along its ascending trend. After the strong rally from the $50 level broke through the bearish resistance line at $52, we were looking for a pullback to provide a lower risk entry, and the recent pullback has done just that, giving us a 3-box reversal into a column of O on the PnF chart. Bulls now want to see a reversal back into a column of X (which will occur with another trade at $58) to confirm the bullishness currently found in the chart. Should broad market weakness pressure WFI down near the $55 level again, a rebound from that level looks to be the perfect entry point into the play. More aggressive traders could even target shoot a dip closer to the $54 level, as this support should be reinforced both by the ascending trendline and the rising 20-dma (currently $54.43). Given the current market environment, and we're not enthusiastic about chasing the stock higher with momentum entries. But for those that prefer that style of trade, we would recommend waiting for a volume-backed move through the $58.25 level (just above last week's intraday highs). Our initial target for the play will be a trade at $60, and conservative traders may want to consider harvesting partial gains if WFMI begins to weaken near that level. Initial stops will be placed at $53.50, as that would be an indication that we are not going to get the bullish 3-box reversal we're looking for. Suggested Options: Shorter Term: The April 55 Call will offer short-term traders the best return on an immediate move, with manageable risk. Due to the relatively slow-moving nature of WFMI, the April 60 Call should only be used by very aggressive traders. Longer Term: Traders looking to capitalize on a move towards the $60 level may want to look to the May 60 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. Why this Is Our Play of the Day: WFMI behaved as planned, pulling back to support and then bouncing higher. Of course, the broader markets had something to do with that rally, but with the convergence of the previous resistance acting as support along with the 21-dma, the bounce looked probably anyway. The stock reversed higher to $58, giving us that bullish PnF reversal we were looking for, however, found resistance just over that level once again. In a sinking market, we were originally targeting $60 and staying away from the momentum play, but if today's rally was a sign of things to come, WFMI could have another run in it after getting its next PnF buy signal at $59. Conservative traders can wait for that signal to get in, while aggressive traders can target the $58.25 entry we highlighted on Tuesday or even a more decisive move over $58.50. Our preference for the play is still entry just above support around $55 on a market pullback, but if we don't get a pullback, then the momentum entry might be our best strategy here. BUY CALL APR-55 FMQ-DF OI= 571 at $3.60 SL=1.80 BUY CALL APR-60 FMQ-DG OI= 204 at $0.75 SL=0.25 BUY CALL MAY-55 FMQ-EF OI=3922 at $4.40 SL=2.00 BUY CALL MAY-60 FMQ-EG OI= 578 at $1.60 SL=0.80 Chart of WFMI http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-02/WFMI040203.gif ************************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 ********************************************* Battlefield Success Spurs Buying Binge! By Ray Cummins Investors returned to the market with a vengeance Wednesday amid favorable reports on the conflict in Iraq. U.S. stocks moved higher for a second consecutive session on hopes of a prompt conclusion to the war, with bullish European markets, a decline in crude prices, and renewed strength in the dollar contributing to upside activity. The Dow Jones Average soared 215 points to 8,285 on new strength in Alcoa (NYSE:AA), American Express (NYSE:AXP), Caterpillar (NYSE:CAT), Home Depot (NYSE:HD), General Motors (NYSE:GM), JP Morgan Chase (NYSE:JPM), International Business Machines (NYSE:IBM), SBC Communications (NYSE:SBC), and Disney (NYSE:DIS). The NASDAQ Composite jumped 48 points to 1,396 with semiconductor shares leading the rally in technology stocks. The S&P 500 Index rose 22 points to 880 with buyers emerging in almost every major market sector except gold and select healthcare issues. Advancers outpaced decliners by roughly 3 to 2 on both the New York Stock Exchange and the NASDAQ. Trading volume was moderate with 1.57 billion shares swapped on the Big Board, and 1.6 billion shares changing hands on the technology exchange. In the U.S. bond market, treasuries slumped as optimism about the war ended the appeal of safe-haven government debt. The 10-year bond fell 30/32, pushing its yield to 3.93%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 4/1/03 *************** 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 CELG APR 22 21.25 26.80 $1.25 8.68% 5.88% ERES APR 20 19.20 27.13 $0.80 8.04% 4.17% EXPE APR 40 39.50 49.77 $0.50 4.15% 1.27% GENZ APR 30 29.60 36.85 $0.40 4.69% 1.35% KLAC APR 32 31.95 36.19 $0.55 5.84% 1.72% MSFT APR 24 23.35 24.35 $0.40 4.85% 1.71% APPX APR 20 19.45 19.48 $0.03 0.61% 2.83% * GENZ APR 30 29.70 36.85 $0.30 4.56% 1.01% KLAC APR 32 32.10 36.19 $0.40 5.35% 1.25% NVLS APR 25 24.65 27.22 $0.35 6.36% 1.42% ROOM APR 50 49.10 55.67 $0.90 8.23% 1.83% YHOO APR 22 21.90 22.79 $0.60 9.63% 2.74% * Conservative traders should closely monitor the position in American Pharmaceutical Partners (NASDAQ:APPX) and those who sold puts to own Yahoo! (NASDAQ:YHOO) near a cost basis of $22 may soon get their wish. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield COF APR 32 33.05 31.37 $0.55 5.56% 1.66% * MERQ APR 35 35.80 29.71 $0.80 7.15% 2.23% PHM APR 50 51.10 50.87 $0.23 1.03% 2.15% * IGEN APR 45 45.55 35.09 $0.55 7.71% 1.21% MCHP APR 25 25.40 20.23 $0.40 7.37% 1.57% BSX APR 45 45.40 41.71 $0.40 3.93% 0.88% IGEN APR 45 45.45 35.09 $0.45 7.93% 0.99% NE APR 35 35.50 32.15 $0.50 6.06% 1.41% VIA.b APR 42 39.00 37.81 $0.30 3.37% 0.77% Capital One Financial (NYSE:COF) remains on the "early exit" watch-list and conservative traders should have closed the position in Pulte Homes (NYSE:PHM) to limit potential losses. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status AMGN 55.33 58.52 APR 47 50 0.30 49.70 $0.30 Open NKE 46.48 50.80 APR 40 42 0.30 42.20 $0.30 Open ADBE 33.02 30.61 APR 25 30 0.50 29.50 $0.50 Open CMCSA 29.91 29.25 APR 25 27 0.30 27.20 $0.30 Open FRX 53.10 55.70 APR 45 50 0.60 49.40 $0.60 Open LXK 65.89 67.09 APR 55 60 0.50 59.50 $0.50 Open SLM 110.21 113.39 APR 95 100 0.45 99.55 $0.45 Open BSTE 38.47 38.98 APR 30 35 0.40 34.60 $0.40 Open CFC 58.00 59.49 APR 50 55 0.40 54.60 $0.40 Open ERTS 59.56 58.91 APR 50 55 0.50 54.50 $0.50 Open Adobe Systems (NASDAQ:ADBE) is on the "early exit" watch-list. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status CTX 50.03 55.08 APR 60 55 0.60 55.60 $0.52 Closed * LEN 49.40 54.76 APR 60 55 0.55 55.55 $0.55 Closed * LEH 53.42 59.62 APR 65 60 0.55 60.55 $0.55 Closed * BHI 30.13 30.73 APR 35 32 0.25 32.75 $0.25 Open INTU 50.44 37.02 APR 60 55 0.55 55.55 $0.55 Open OMC 53.96 54.65 APR 65 60 0.50 60.50 $0.50 Open CCMP 44.61 42.72 APR 55 50 0.50 50.50 $0.50 Open DVN 47.70 48.39 APR 55 50 0.45 50.45 $0.45 Open IP 35.63 34.15 APR 40 37 0.20 37.70 $0.20 Open The recent broad slump in equities provided a "second chance" opportunity to limit potential losses in Centex (NYSE:CTX), Lennar (NYSE:LEN), and Lehman Brothers (NYSE:LEH), thus the positions have been closed. Synthetic Positions ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status GGP 54.02 54.62 APR 55 50 0.00 0.40 Open Calendar Spreads **************** No Open Positions Credit Strangles **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** AVID - Avid Technology $24.38 *** A Big Day! *** Avid Technology (NASDAQ:AVID) develops, markets, and supports a wide range of software, and hardware and software systems, for digital media production, management and distribution. Avid Technology participates in two principal markets transitioning from well-established analog content-creation processes to digital content-creation tools. Both of these markets, video and film editing and effects and professional audio, are using the worldwide web to collaborate and distribute video and audio content. The company's products, which are categorized into the two principal markets in which they are sold, are used worldwide in production and post-production facilities, film studios, network, affiliate, independent and cable television stations, recording studios, advertising agencies, government and also educational institutions, corporate communication departments, and by game developers and Internet professionals. Quarterly earnings are due 4/17/03. AVID - Avid Technology $24.38 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 22.5 AQI PX 162 0.45 22.05 10.3% 2.0% SELL PUT MAY 20 AQI QD 15 0.50 19.50 5.9% 2.6% * SELL PUT MAY 22.5 AQI QX 4 1.25 21.25 9.5% 5.9% ************** BSTE - Biosite $41.39 *** New 52-Week High! *** A leader in the drive to advance diagnosis, Biosite (NASDAQ:BSTE) is a unique research-based company dedicated to the discovery and development of novel protein-based diagnostic tests that improve a doctor's ability to diagnose debilitating and life-threatening diseases. The firm combines integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes. Biosite's "Triage" rapid diagnostic tests are used in approximately 50% of U.S. hospitals and in over 40 international markets. BSTE - Biosite $41.39 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 35 BQS PG 720 0.25 34.75 4.6% 0.7% * SELL PUT APR 40 BQS PH 57 1.15 38.85 13.4% 3.0% SELL PUT MAY 35 BQS QG 52 0.85 34.15 5.3% 2.5% SELL PUT MAY 40 BQS QH 55 2.15 37.85 8.6% 5.7% ************** CAT - Caterpillar $51.71 *** Uptrend Intact! *** Caterpillar (NYSE:CAT) manufactures and markets construction, mining, agricultural and forest machinery; engines for on-highway use and locomotives, as well as for electrical power generation systems and other applications, and provides financing for the purchase and lease of its equipment. The company operates three principal lines of business: machinery, engines and financial products. The company designs, manufactures, markets, finances and provides support for its Caterpillar, Cat, Solar, Perkins, FG Wilson, MaK, and Olympian brands. CAT - Caterpillar $51.71 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 47.5 CAT PW 2,519 0.40 47.10 4.5% 0.8% * SELL PUT APR 50 CAT PJ 1,408 1.00 49.00 9.5% 2.0% SELL PUT MAY 45 CAT QI 2,554 0.65 44.35 3.1% 1.5% TS SELL PUT MAY 47.5 CAT QW 454 1.10 46.40 4.3% 2.4% ************** ERES - eResearch Technology $27.30 *** New All-Time High! *** eResearch Technology (NASDAQ:ERES) is a provider of technology and services that enable the pharmaceutical, biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently. The company offers a range of products and services, including Diagnostics Technology and Services and Clinical Research Technology. Their Diagnostics Technology and Services include centralized diagnostic services and clinical research operations, including clinical trial and data management services. Their Clinical Research Technology and Services include the developing, marketing and support of clinical research technology and services. ERES - eResearch Technology $27.30 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 25 UDB PE 89 0.25 24.75 5.3% 1.0% SELL PUT MAY 22.5 UDB QX 0 0.60 21.90 6.0% 2.7% * SELL PUT MAY 25 UDB QE 10 1.05 23.95 7.4% 4.4% ************** GENZ - Genzyme General $38.33 *** Bullish Biotech! *** Genzyme General Division (NASDAQ:GENZ) is a division of Genzyme Corporation, a biotechnology and human healthcare company that develops products and provides services for unmet medical needs. Genzyme General develops and markets therapeutic products and diagnostic products and services with an emphasis on genetic disorders and other chronic debilitating diseases with defined patient populations. The company is organized into two segments, Therapeutics, which focuses on developing and marketing products for genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, and specialty therapeutics, and Diagnostic Products, which develops, markets and distributes in vitro diagnostic products. The company also operates a wholly owned subsidiary, GelTex Pharmaceuticals. GENZ - Genzyme General $38.33 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 35 GZQ PG 1,019 0.40 34.60 6.1% 1.2% * SELL PUT APR 37.5 GZQ PO 2,576 0.95 36.55 11.6% 2.6% SELL PUT MAY 32.5 GZQ QP 432 0.65 31.85 4.4% 2.0% SELL PUT MAY 35 GZQ QG 3,263 1.10 33.90 5.8% 3.2% ************** GILD - Gilead Sciences $43.67 *** All-Time High! *** 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. GILD - Gilead Sciences $43.67 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 40 GDQ PH 2,571 0.40 39.60 5.4% 1.0% * SELL PUT MAY 35 GDQ QG 3,825 0.50 34.50 3.7% 1.4% SELL PUT MAY 37.5 GDQ QU 560 0.85 36.65 4.8% 2.3% SELL PUT MAY 40 GDQ QH 1,059 1.30 38.70 6.0% 3.4% ************** JCOM - j2 Global Communications $31.91 *** Rally Mode! *** j2 Global Communications (NASDAQ:JCOM) provides outsourced value added messaging and communications services to individuals and businesses throughout the world. The company offers faxing and voicemail solutions, Web initiated conference calling, document management solutions and unified messaging services. j2 Global markets its services principally under the brand names eFax and jConnect. The company delivers its services through its global telephony/Internet protocol network, which spans more than 600 cities in 18 countries across five continents, including four capital cities in Latin America where j2 Global is in the process of launching its unique service. JCOM - j2 Global Communications $31.91 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 30 JQF PF 307 1.00 29.00 16.0% 3.4% SELL PUT MAY 25 JQF QE 107 0.70 24.30 6.8% 2.9% * SELL PUT MAY 30 JQF QF 801 2.20 27.80 11.7% 7.9% ************** KLAC - KLA Tencor $38.34 *** Chip-Equipment Leader! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC - KLA Tencor $38.34 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 32.5 KCQ PZ 5,473 0.25 32.25 4.9% 0.8% * SELL PUT APR 35 KCQ PG 10,761 0.60 34.40 9.1% 1.7% SELL PUT MAY 30 KCQ QF 428 0.50 29.50 4.2% 1.7% SELL PUT MAY 32.5 KCQ QZ 202 0.90 31.60 6.0% 2.8% ************** RYL - The Ryland Group $46.60 *** New 2002 High! *** The Ryland Group (NYSE:RYL) is a homebuilder and mortgage-finance company. The company has built more than 190,000 homes during its 34-year history. Ryland homes are available in more than 260 new communities in 21 markets across the United States. In addition, the Ryland Mortgage company has provided mortgage financing and related services for more than 165,000 homebuyers. The company's operations span all the significant aspects of the home-buying process, from design, construction and sale to mortgage financing, title insurance, settlement, escrow and homeowners insurance. RYL - The Ryland Group $46.60 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 45 RYL PI 358 0.65 44.35 7.0% 1.5% SELL PUT MAY 42.5 RYL QV 36 0.95 41.55 4.2% 2.3% TS SELL PUT MAY 45 RYL QI 26 1.65 43.35 6.1% 3.8% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** BBH - Biotechnology Holders Trust $97.50 *** Break-Out! *** The Biotechnology Holders Trust (AMEX:BBH) is a unique instrument that represents an investor’s ownership in the stock of specified companies in the biotechnology sector. HOLDRS allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid and efficient. Each HOLDR is a fixed basket of 20 stocks (except the Telebras HOLDR, which holds 12 companies). They work operate much like ADRs; American Depositary Receipts, which allow U.S. investors to purchase foreign-owned companies on the U.S. exchanges in dollar denominated amounts. In just the same way, the investor actually owns the shares of each underlying company, receives dividends, proxies, and annual reports from each. The HOLDRs are not managed, and once the companies and amounts have been determined they are fixed, no companies will be substituted. In this way, the HOLDRs differ somewhat from Spiders (SPDRs), or Standard & Poor Depositary Receipts and other exchange traded funds, which will add and delete stocks on a regular basis, usually in conjunction with an index that they are tracking. A complete explanation of this issue, including the companies that make up each HOLDRS' particular industry, sector or group can be found here: http://www.holdrs.com/holdrs/main/index.asp?Action=Definition BBH - Biotechnology Holders Trust $97.50 PLAY (conservative - bullish/credit spread): BUY PUT MAY-85.00 BBH-QQ OI=272 A=$0.70 SELL PUT MAY-90.00 BBH-QR OI=260 B=$1.30 INITIAL NET-CREDIT TARGET=$0.60-$0.75 POTENTIAL PROFIT(max)=14% B/E=$89.40 ************** IBM - International Business Machines $81.46 ** Earnings 4/14! ** International Business Machines (NYSE:IBM) manufactures and sells computer services, hardware and software. The company provides financing services in support of its computer business. The firm's major operations comprise a Global Services segment; three hardware product segments (Enterprise Systems, Personal and Printing Systems, and Technology); a Software segment; a Global Financing segment; and an Enterprise Investments segment. IBM offers its products through its global sales and distribution organizations. The firm operates in more than 150 countries worldwide and derives more than half of its revenues from sales outside the United States. The company's quarterly earnings are due 4/14/03. IBM - International Business Machines $81.46 PLAY (less conservative - bullish/credit spread): BUY PUT APR-70.00 IBM-PN OI=34268 A=$0.25 SELL PUT APR-75.00 IBM-PO OI=47788 B=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$74.50 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** IGEN - IGEN International $35.50 *** Speculation Only! *** IGEN International develops and markets products that incorporate its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of various biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. The product is incorporated into instrument systems and other related consumable reagents, and IGEN also offers assay development and services used to perform analytical testing. Products based on ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. IGEN - IGEN International $35.50 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 42.5 GQ DV 1,421 0.45 42.95 11.2% 1.0% * SELL CALL APR 40 GQ DH 3,219 0.85 40.85 15.3% 2.1% SELL CALL APR 37.5 GQ DU 5,201 1.55 39.05 21.4% 4.0% ************** NE - Noble Corporation $32.24 *** Same Play - Different Week! *** Noble Corporation (NYSE:NE) is a provider of diversified services to the oil and gas industry. The firm performs contract drilling services with a fleet of 49 offshore drilling units located in key markets worldwide. Its fleet of floating deepwater units consists of nine semisubmersibles and three dynamically positioned drillships, seven of which are designed to operate in water depths greater than 5,000 feet. Its premium fleet of 34 independent leg, cantilever jack-up rigs includes 21 units that operate in depths of 300 feet and greater, four of which operate in depths of 360 feet and greater, and 11 units that operate in depths up to 250 feet. Its fleet also includes three submersible drilling units. Over 60% of the fleet is deployed in global markets, principally the North Sea, Brazil, West Africa, the Middle East, India and Mexico. The firm also provides labor contract drilling services, site and project management services, and engineering services. NE - Noble Corporation $32.24 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 35 NE DG 1,369 0.30 35.30 5.4% 0.8% * SELL CALL APR 32.5 NE DZ 175 1.10 33.60 15.1% 3.3% SELL CALL MAY 35 NE EG 89 0.90 35.90 5.6% 2.5% SELL CALL MAY 32.5 NE EZ 10 1.85 34.35 8.7% 5.4% ************** QCOM - Qualcomm $34.18 *** New Competition From Samsung? *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $34.18 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 37.5 AAW DU 13,379 0.40 37.90 7.1% 1.1% * SELL CALL APR 35 AAW DG 17,075 1.15 36.15 15.6% 3.2% SELL CALL MAY 37.5 AAW EU 2,022 1.15 38.65 6.9% 3.0% SELL CALL MAY 40 AAW EH 6,456 0.55 40.55 4.5% 1.4% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** APC - Anadarko Petroleum $46.05 *** Trading Range? *** Anadarko Petroleum (NYSE:APC), through RME Petroleum Company, RME Holding Company, Anadarko Canada Energy, Anadarko Canada Corporation, RME Land and Anadarko Algeria Company, is a global independent oil and gas exploration and production company. The The company's major areas of operations are located in the United States, primarily in Texas, Louisiana, the mid-continent region and the western states, Alaska and in the shallow and deep waters of the Gulf of Mexico, as well as in Canada and Algeria. APC is also active in Venezuela, Qatar, Oman, Egypt, Australia, Tunisia, Congo and Gabon. APC - Anadarko Petroleum $46.05 PLAY (very conservative - bearish/credit spread): BUY CALL MAY-55.00 APC-EK OI=1229 A=$0.15 SELL CALL MAY-50.00 APC-EJ OI=3365 B=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$50.50 ************** ATK - Alliant Techsystems $53.08 *** Defense Sector Slump! *** Alliant Techsystems (NYSE:ATK) is a supplier of aerospace and defense products to the U.S. government, America's allies and major prime contractors. ATK also is a supplier of ammunition to federal and local law enforcement agencies and commercial markets. ATK designs, develops and produces rocket propulsion systems for a wide variety of U.S. Government and commercial applications. The firm is also the sole supplier of the reusable solid rocket motors used on NASA's Civil Manned Space Launch Vehicles. ATK designs, develops and manufactures small, medium and large caliber conventional munitions for the U.S. and allied governments as well as for commercial applications. The company manufactures and develops small-caliber ammunition for the U.S. military and its allies, federal and local law enforcement, and commercial markets. ATK - Alliant Techsystems $53.08 PLAY (very conservative - bearish/credit spread): BUY CALL MAY-65.00 ATK-EM OI=303 A=$0.30 SELL CALL MAY-60.00 ATK-EL OI=691 B=$0.70 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$60.45 ************** TOT - TOTAL Fina Elf $65.30 *** An Old Favorite! *** 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 MAY-75.00 TOT-EO OI=675 A=$0.40 SELL CALL MAY-70.00 TOT-EN OI=907 B=$0.95 INITIAL NET-CREDIT TARGET=$0.60-$0.75 POTENTIAL PROFIT(max)=14% B/E=$70.60 ************** SEE DISCLAIMER - SECTION 1 ************** ************** MARKET POSTURE ************** Reversal - For Now To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_040203.asp ************ MARKET WATCH ************ Playing the Bounce To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_040203.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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