The Option Investor Newsletter Wednesday 04-09-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Markets Topple Like a Statue Futures Wrap: Rollover, No Break Index Trader Wrap: (See Note) Weekly Fund Family Profile: Hennessy Funds Options 101: An Oldie, But Goodie Updated on the site tonight: Swing Trader Game Plan: Sell the News! Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 04-09-2003 High Low Volume Advance/Decl DJIA 8197.94 - 100.98 8388.33 8195.14 1502 mln 411/1066 NASDAQ 1356.74 - 26.20 1393.37 1356.60 1289 mln 179/1093 S&P 100 440.53 - 6.62 451.92 440.29 totals 590/2159 S&P 500 865.99 - 12.30 887.35 865.72 RUS 2000 372.28 - 2.38 378.66 371.34 DJ TRANS 2186.35 - 14.64 2227.67 2185.36 VIX 30.91 + 1.32 30.91 29.30 VIXN 41.45 + 0.53 42.12 40.36 Put/Call Ratio 0.74 ******************************************************************* Markets Topple Like a Statue by Steven Price It was all about Iraq again this morning. With U.S. troops in the center of Baghdad, television cameras were pinned on jubilant Iraqis attempting to topple a statue of Saddam Hussein as an overnight sell-off in the equity market reversed back into the green. For a few hours, no one seemed to care that economic worries had sent a strong overnight signal that looked anything but bullish. The statue eventually came down, and so did the rally. It certainly looks as though the war speculation will be short lived, with a U.S. victory imminent. Let the haggling over how to split up the oil dollars begin. With no significant economic releases this morning, today's activity gave us the best snapshot of just how the markets would react to a victory in Iraq, even though it has been assumed for some time that the U.S. victory would eventually come. The question had been, "At what cost?" While it was assumed the U.S. would eventually topple Hussein, we weren't really sure if there would be chemical and biological weapons waiting as we got closer to Baghdad. Apparently those concerns were answered as troops have suffered no attacks of that nature. the question of whether Saddam was dead or not has yet to be answered, although a mid- morning rumor that he had sought asylum at the Russian embassy turned out to be false. The "end of the war rally" actually looked pretty weak. While the U.S. brass has said the war is not yet over, it appears that Baghdad has fallen and there are only small pockets of resistance left throughout the country. We are also about to start receiving first quarter earnings en masse in the next few weeks. Those numbers have already started coming in and so far they haven't been pretty. The fact that the war lasted longer than expected and extended right into earnings season can be seen a couple of different ways. First, it buys companies extra time for the excuse that spending is going to pick up after the war. Certainly investors can't expect those results to start showing up until next quarter and therefore we still have plenty of hope. After all, if the war had lasted three days and there was no improvement in spending trends, what excuse would companies have? This way they can release poor numbers but still accompany that data with hopeful guidance. The second way to view this is that a recovery won't come now until at least the third quarter, since hiring and spending have been pushed back by another few weeks. While the price of oil may eventually head lower, we cannot undo the damage that has been done by higher prices and the more companies had to spend on fuel, the fewer dollars they will now have to spend on new employees and technology. Did I say two ways to look at it? Maybe I meant two ways to spin the same negative outlook. Let's not ignore the bullish possibilities, though. Maybe the theory that we will see spending pick up is valid. Certainly lower oil prices would help, but it appears that OPEC, which scheduled a meeting April 24, isn't going to let prices fall too far. OPEC had a hand in today's pullback, as well. The secretary general of the organization commented that there was plenty of supply on the market, further increasing speculation that the group would curtail production at that April 24 meeting. Saudi Arabia and others have been overproducing to make up for any possible shortfall that would result from the war and most likely also attempting to take advantage of elevated prices that might come down soon. OPEC would like to prevent prices from falling too far, since a robust supply and the lack of war premium might lead to a quick drop in oil prices. We also got news that the country's oil reserves had dropped unexpectedly last week. Right now the supply chain has been reduced by output reductions in Iraq, Nigeria and Venezuela and until the Iraqi oil fields are settled, OPEC still remains in control. Equities have traded consistently inverse to oil prices and those comments form OPEC and news about the reserves coincided with both a rise in oil futures and a drop in stock prices. Of course, with the U.S. in control of Iraqi oil fields, it can always help drive prices lower through increased production. It is unlikely that the U.S. would move to disrupt the supply/demand structure and interfere too much with OPEC price controls, but we have proven that we are only so concerned with what the rest of the world thinks and if it takes increased oil supply from Iraqi oil fields to boost the economy before the 2004 elections, then I can certainly imagine a scenario where that occurs. However, for the time being, May Crude Oil futures bounced strongly from the rising 200-dma that has provided recent support. It will take some time to set up an Iraqi government and determine how the oil profits are distributed. We may see some big price fluctuations during that process. However, in the end, expect the supply to help, instead of hurt, the U.S. economy, even if the profits go back into Iraq. Chart of May Crude Oil Futures There are some sectors that should see immediate benefits from increased consumer spending. Airlines and hotels are a couple of the obvious travel-related industries. Many people have postponed planning vacations that involve flying either domestically or overseas and that should improve with the obvious celebration by Iraqis at the Saddam ouster. If the citizens of Iraq are glad to see the Americans, then the current level of global anti-American sentiment should at least not increase. Of course, the SARS virus still looms to disrupt travel to and from Asia, so until that situation is cleared up we may not see a return to pre-war levels. Wal-Mart, one of the world's largest companies, has banned corporate travel to Asia and the Government of Malaysia has banned tourist travel to China. Asian hotels are currently suffering single-digit occupancy rates, so we can't discount the effect of this virus on the industry. The market internals derived from the point and figure charts continue to show an improving picture. The bullish percents continue to increase and we now have the Dow, SPX, NDX, COMP, OEX and NYSE bullish percents in rising columns of "X." However, with Monday's big intraday rally failing and looking like a blow- off reversal top, and the news all but done with the war, we will be left to digest those upcoming earnings and economic data. So far the data has shown a steady decline since the beginning of the year, with some of the data indicating a contracting economy. The ISM reports showed contraction in both the manufacturing and non-manufacturing sectors and the most recent jobs report showed the four-week moving average well above the 400,000 level that indicates a worsening labor market. However, if we look at the daily charts, we also see support at Dow 8200 finally cracking, as it did before the last dip. That was our previous line in the sand and had been again until today. Daily Chart of the Dow The initial rally on the Baghdad pictures this morning ran out of steam at a lower high than it did on Monday, and eventually faded back into the red as night fell in Baghdad. We took out the lows of Tuesday afternoon, after earlier taking out the highs. The Nasdaq Composite continued to underperform, as recent warnings from the sector have investors dumping some of these stocks ahead of earnings. The COMP not only dropped 26 points, but took out levels of support that were in place before the big gap up on the April 2 broad market rally. It began filling the gap early in the session and continued below that support, apparently headed for the next significant pivotal level at 1350. An upside earnings surprise from Yahoo (YHOO) after the bell could help halt the skid. The company beat estimates by 0.02 and also raised its guidance for the second quarter. Chart of the COMP One of the weaker sectors was the semiconductor stocks. The Semiconductor Index (SOX), which often leads the COMP, re-tested the pivotal 300 level, where it eventually failed. It has now set a series of lower highs and is once again testing support, instead of resistance. The RFMD warning apparently reminded investors that the pricing pressures and weakness in the sector could rear their heads in the earnings of the next couple of weeks. The SARS virus also continues to present complications for industry, as workers are quarantined and engineers stay away from Southeast Asia. The 50-dma sits at 294 and should be the next downside test. The Dow saw its second major intraday bearish reversal in the last three. On Monday we reversed down 220 points from the high, while today we reversed down 191. While that's not decisive evidence that the recent rally is done, it is certainly not a bullish indication. WE now appear to be rolling over in a possible double-top formation in the major indices. The second top should actually be lower than the first, which it was in the Dow, but it was actually a little higher in the SPX and OEX. Still, it appears we have seen a "buy the rumor... sell the news" scenario. We also sit at a pivotal support level in the OEX at 440 and traders can keep their eyes on that average, which closed at 440.53 for signs of a bounce or continued weakness. The Congress took an unconventional approach to budget approval today, essentially passing a plan with two different tax-cut plans. The plan will contain a $550 billion plan to be submitted to the House and a $300 billion dollar cut to be submitted to the Senate. It was essentially a away to pass a budget with a bottom line spending amount, but also allow for more debate between republicans and democrats on how much of the President's plan to implement. That doesn't sound like good news for investors looking for the elimination of the dividend tax. After all, if Bush couldn't get his plan through a Congress where both houses are controlled by Republicans, it can't exactly be considered an administration victory. The IMF also gave us some data to digest and it wasn't good. The organization cut its global growth forecast for 2003 from 3.7% to 3.2%. It blamed a host of factors, including an average price for oil of $31 per barrel (which is higher than current levels). It also cited stagnant economies in Germany and Japan, a possible stock market bubble, a possible housing bubble, the spread of the SARS virus and a drag on European economies by social welfare programs. It lowered its growth estimate for the U.S. for 2003 from 2.6% to 2.2%. If our end of war rally turned into a loss, it is hard to imagine what news will drive us higher. Positive earnings would be one catalyst; however, the pre-announcement phase doesn't look promising. Of the 1025 companies that have pre-announced, 202 have surprised to the upside, 225 have been on target and 598 have warned. The bullish percents are certainly in the bulls' favor, but what we saw today is not terribly bullish and appears as though we may have finally run out of steam. Common sense seems to indicate that if we didn't rally strongly today, there's not much out there that can still get us rolling in the short- term. Of course, a few well placed words about the U.S. opening the oil wells to the point of keeping energy prices down would help. While the war may be ending, the game has not. ************ FUTURES WRAP ************ Rollover, No Break By Vlada Raicevic Daily Settlement Numbers 4:15pm ET > DOW Last: 8197.94 Net: -100.98 High: 8388.33 Low: 8195.14 > YM 03M Last: 8185 Net: -97 High: 8389 Low: 8164 > S&P 500 Last: 865.99 Net: -12.30 High: 887.35 Low: 865.72 > ES 03M Last: 867 Net: -11.25 High: 887.25 Low: 864.25 > Nas 100 Last: 1023.52 Net: -22.78 High: 1055.89 Low: 1023.48 > NQ 03M Last: 1026.50 Net: -24 High: 1061 Low: 1024.50 DAILY PIVOTS > YM 03M R2: 8456 R1: 8297 Pivot: 8231 S1: 8072 S2: 8006 > ES 03M R2: 894 R1: 878 Pivot: 871 S1: 855 S2: 848 > NQ 03M R2: 1071 R1: 1045 Pivot: 1035 S1: 1009 S2: 998 Futures sold rather hard during the overnight session, but recovered before the open to a slight gap up. This gap was sold but stopped sliding above yesterday's lows. From there euphoria took the futures up to break the highs from yesterday, and topped out first at 887, then again at 887.25 for a double top. The sellers then took over and stair stepped down for hours, first stopping at 867.25, then at 866.75, and finally, after an attempt to rise off these lows, but failing at 874.50, one last push down to reach a low of 864.25 before closing at 867. We have now broken the 4/2 gap support, and have moved deeply enough into that gap that it requires filling at 856.50, just over 10 points below today's close. This is also the area of strong support that held price for 9 trading days, before it broke. That break below the 856-857 area held only for two days, and spending so little time there means that more than likely 856 should hold initially when we reach it.....assuming that we do. This is still a news driven market, and gap fill may have to wait if something very positive pops up on the news wires tonight. However, sentiment seems to have changed, for the moment, and perhaps even good news could be met with a shrug, and continued selling. I zoomed in a bit on the posted Daily chart so that several things can become more clear. Note that price has broken below the uptrend line. Macd has crossed to the downside, but is still above the centerline. Both stochastics are also pointing down, but they too are above the centerline. Remember, that centerline acts as support and resistance, and there is still plenty of time for these indicators to bounce from that area. However, also note that fast stochastic is below the slow, meaning that short term trading is outpacing the longer term trading to the downside. RSI has broken below both its uptrend line and the 21 period moving average (pink line). ADX is converging, but is not close to crossing over yet, and D+ is still well away from its uptrend line. So I would mark this chart as having rolled over, but not yet at a point where I would say it is broken. There are still enough positive elements to say that the bullish case can be saved, and it looks like that test will come, yet again, at 856- 857. ES Daily Chart: The 270 minute chart also shows that Macd has not yet broken down, and the longer stochastic is also holding the trendline (blue) and centerline. The fast stochastic is actually getting into the oversold level, which when coupled with the uptrend lines on the RSI and Macd, could potentially indicate that another half day of selling may lead to a bounce or reversal. This seems to work well with the idea that a gap fill could happen in the morning, and the oversold levels could then be bought along with the filling of the gap. ES 270 Minute Chart: Looking at the 60 minute chart, we see the carnage that the selling from Monday's highs has done. But again, note the stochastic and CCI are both getting to oversold levels, which could get more oversold since RSI still has room to the downside. ADX bearish cross continues to hold, but doesn't point to a high degree of sellers, with D+/- diverging, but not by much. I don't really know what to make of this, and it bears watching, since the continued selling should be more obvious on the ADX panel. Note that regression channels show first support at around 860-861 and then again at 853, which can be considered a target if the selling gets severe and overshoots the gap fill, however that is unlikely as the chart is already getting somewhat oversold. ES 60 Minute Chart: Quick peek at the new fibonacci numbers, since we now take our top as 805 rather than the previous top. Here we see that .382 reversal is also at the 860 level, which lines up with the regression channel on the above chart, and would allow for a 3 point overthrow to the gap fill. Also note that the 50ema (daily) is also right there, giving additional support that level (arrow). ES Daily Fibonacci Chart: The NQ Daily chart is again more bearish than the ES, with heavier selling, and less dip buying. Macd is below the trendline and about to break the centerline, both stochastic are breaking the centerline, and ADX has crossed bearish. Surprisingly, while RSI is below the moving average, it still has a bit of support from the trendline, although that doesn't look like much comfort for bulls with everything else giving breakdown signals. However, it is not uncommon to get a bounce just when things break, and here we see that NQ is at the centerline support of the blue regression channel, as well as horizontal support. If selling continues, it may break to the recent lows of 1015-1019 before the selling stalls. NQ Daily Chart: NQ 270 minute shows that Macd, RSI and ADX are just beginning to break. Fast stochastic is getting oversold, again making it look like a short term bounce may be expected at some point tomorrow or Friday. NQ 270 Minute Chart: The NQ 60 minute chart is also getting fairly oversold. Since the NQs have been selling harder than the ES, it looks like they will reach support sooner. Will they then bounce and diverge with the ES, or will they meander sideways while the ES catches up. Hard to say, but even this chart shows that there is good support at the 1017-1018 level, where BOTH regression channels converge with their lower tines. NQ 60 Minute Chart: The NQ Fibonacci chart shows that the .500 level of the recent run has been reached twice. As this is a good horizontal support area, it is no wonder that price has bounced from there. But we have also moved below the 50ema (thick purple line) for the second time, and there is a chance that it may become resistance on any attempts to move back up. That moving average now sits at around 1030. NQ Daily Fibonacci Chart: Some of the charts are showing signs of being oversold, and while a bounce is most likely to be expected from the support levels that we are approaching, those oversold levels can also be relieved by sideways trading. Remember how the overbought levels of the recent month didn't always lead to a selloff, but rather to a sideways consolidation before another push up. This can happen on the way down as well. As I've been saying for awhile now, the real test of this rally is coming up, and how we react to another test of support will tell us a great deal. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_040903_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 ************************** Hennessy Funds The Hennessy Funds is a no-load fund family based in California that takes a conservative approach to investing and offers five mutual funds designed to meet a variety of investment objectives and risk tolerance levels. There are four equity-based funds to choose from and one money market fund. All of Hennessy's equity strategies use money management techniques that seek to combine strong stock selection formulas with discipline and consistency. Neil Hennessy is a director and president of Hennessy Management Company, his employer since 1989. Hennessy attended the Wharton School of Upper Management and began his investment career about 25 years ago as a broker with Paine Webber, his biography states. In 1989, Hennessy established his own broker/dealer business and in 1996, he launched the Hennessy Funds. Hennessy Balanced Fund (HBFBX) commenced operations on March 8, 1996 with Neil Hennessy at the portfolio management reins. The firm's most successful mutual fund based on assets, the $458 million Hennessy Cornerstone Growth Fund (HFCGX) has been around since November 26, 1996. The fund was actually founded by James O'Shaughnessy (author of What Works on Wall Street), a book that espouses "mechanical" investing. Neil Hennessy has run the fund since his company bought it from O'Shaughnessy in September 2000. The same is true for the Hennessy Cornerstone Value Fund (HFCVX). According to Morningstar, Hennessy brought trading capability to the funds that O'Shaughnessy lacked. In 1998, Hennessy Total Return Fund (HDOGX) was started. It was the first mutual fund to utilize the strategy known as the "Dogs of the Dow." The fund follows a value-oriented strategy that is designed to produce high total return consistent with a low risk strategy. In this fund, Hennessy seeks to beat the total return of the Dow Jones Industrial Average in the long run by investing 75% of assets "equally weighted" in the top 10 dividend-yielding stocks of the Dow Jones Industrial Average (i.e. Dogs of the Dow) and 25% in short-term Treasury securities. A money market fund offering is also available for investors who seek income and preservation of principal. First American Prime Obligations Fund Class A (FIVXX) currently offers a 7-day simple yield of only 0.60%. If you need a money market fund, there are better investment options elsewhere. At 0.60%, the fund's yield is below average within the "taxable" money market fund universe (0.76% is average per iMoneyNet.com's most recent weekly report). The Hennessy Balanced Fund and Hennessy Total Return Fund have a minimum initial investment of $1,000, while Hennessy Cornerstone Growth Fund and Hennessy Cornerstone Value Fund require a $2,500 initial investment ($250 for IRAs). Annual expense ratios range from a low of 1.11% on the Hennessy Cornerstone Growth Fund to a high of 2.33% on the Hennessy Total Return Fund. The high 2.33% expense ratio is a function of the fund's low assets ($5 million per Morningstar). For more information on Neil Hennessy and his family of no-load funds, go to the www.hennessyfunds.com website. Performance Below is a performance summary for the four equity-oriented funds offered by the Hennessy Funds. Returns in excess of one year are annualized. 1-Year Total Return/Category Ranking: - 9.0% Hennessy Balanced (HBFBX) 1st Percentile -13.5% Hennessy Cornerstone Growth (HFCGX) 2nd Percentile -19.3% Hennessy Cornerstone Value (HFCVX) 27th Percentile -14.5% Hennessy Total Return (HDOGX) 3rd Percentile -20.6% S&P 500 Index 3-Year Average Total Return/Category Ranking: - 0.0% Hennessy Balanced (HBFBX) 7th Percentile + 0.0% Hennessy Cornerstone Growth (HFCGX) 3rd Percentile + 0.2% Hennessy Cornerstone Value (HFCVX) 6th Percentile - 0.5% Hennessy Total Return (HDOGX) 9th Percentile -15.4% S&P 500 Index 5-Year Average Total Return/Category Ranking: + 0.6% Hennessy Balanced (HBFBX) 9th Percentile + 7.3% Hennessy Cornerstone Growth (HFCGX) 6th Percentile - 1.1% Hennessy Cornerstone Value (HFCVX) 24th Percentile N/a Hennessy Total Return (HDOGX) N/a - 3.2% S&P 500 Index Note that three Hennessy funds - Balanced, Cornerstone Value and Total Return - are currently ranked in the Morningstar large-cap value category (based on their average investment style over the past three years). However, keep in mind that Hennessy Balanced Fund does allocate assets between stocks and bonds, so you might also want to compare the fund versus other domestic hybrid funds. The same is true for the Hennessy Total Return Fund, which has a normal mix of 75% stocks and 25% bonds. The equity stake of the three funds may vary, but they all have a "large-cap value" bias according to Morningstar. Hennessy Cornerstone Growth Fund's at the opposite corner of the style box, landing in the Morningstar small-cap growth category. It utilizes computer-aided models to select stocks of companies with attractive "value" and "earnings momentum" characteristics, which also certain "price momentum" criterion. Relative to its small-cap growth category peers, the Cornerstone Growth Fund has generated top-decile returns with a below average level of risk. Its trailing 5-year average annual return of +7.3% outperformed the broad S&P 500 index by more than ten full percentage points on average per year. Three of Hennessy's equity funds - Balanced, Cornerstone Growth and Total Return - currently receive Morningstar's highest star rating (5 stars) for overall risk-adjusted performance relative to category peers. Hennessy Balanced Fund's top rating results from having produced high returns with low risk relative to the average large-cap value fund. Hennessy Total Return Fund also has produced high returns relative to its large-value peers but Morningstar rates its risk level as average within the category, still good enough on a risk-adjusted basis to warrant a "5-star" overall rating. Hennessy Cornerstone Growth Fund has produced high returns with below average risk relative to its category peer group of small- cap growth funds, according to Morningstar. The Hennessy website says they believe in taking a conservative approach to investing and Morningstar's "risk-adjusted" ratings would appear to show the benefits of following such an approach. All four Hennessy funds are rated as "Lipper Leaders" for total return by Lipper Analytical Services, their highest "1" ranking for relative total return performance over the past three years relative to similar funds. Below is a summary of how the funds are rated in the Lipper system (1-best, 3-average, and 5-worst). Lipper 3-Year "Total Return" Rating: 1 Hennessy Balanced (HBFBX) Lipper Leader 1 Hennessy Cornerstone Growth (HFCGX) Lipper Leader 1 Hennessy Cornerstone Value (HFCVX) Lipper Leader 1 Hennessy Total Return (HDOGX) Lipper Leader Lipper 3-Year "Consistent Return" Rating: 1 Hennessy Balanced (HBFBX) Lipper Leader 3 Hennessy Cornerstone Growth (HFCGX) 1 Hennessy Cornerstone Value (HFCVX) Lipper Leader 1 Hennessy Total Return (HDOGX) Lipper Leader Lipper 3-Year "Preservation" Rating: 2 Hennessy Balanced (HBFBX) 2 Hennessy Cornerstone Growth (HFCGX) 1 Hennessy Cornerstone Value (HFCVX) Lipper Leader 1 Hennessy Total Return (HDOGX) Lipper Leader According to Lipper, all four of Hennessy's equity mutual funds have excelled at generating consistent, strong returns relative to similar funds, while also doing better at preserving capital. The result, strong risk grades from both Morningstar and Lipper. Note that Lipper also ranks funds on the basis of expense and tax efficiency. None of the Hennessy funds are Lipper Leaders based on relative expense or tax efficiency; instead, receiving average ratings in general. Conclusion Conservative equity investors with long-term investment horizons may want to take a closer look at the Hennessy Funds. Two funds, Hennessy Balanced and Hennessy Total Return, invest primarily in stocks, but also invest in bonds, giving them greater income and stability than the average pure equity fund. That means the two mixed equity funds could lag pure stock funds in a rising market, but they will generally hold up better in a declining market, as they have over the past three years. Three of the Hennessy funds have "large-cap value" equity styles, which are generally less volatile than other equity mutual funds. Because of their value bias, they could lag other funds during a rising market, such as growth-oriented funds. If you believe in the value approach to investing then Hennessy offers three funds worth considering, Hennessy Balanced, Hennessy Cornerstone Value and Hennessy Total Return. If you seek greater potential return over the long term and are willing to assume greater volatility, then you may want to set your sights on the Hennessy Cornerstone Growth Fund, which has a small-cap growth style and has produced solid risk-adjusted returns for more-aggressive equity investors. For more information, or to download a fund prospectus, go to the Hennessy Funds website at www.hennessyfunds.com. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** An Oldie, But Goodie By Mark Phillips mphillips@OptionInvestor.com As regular as clockwork, every few months, I get a new wave of emails asking about the selection of options - which expiration, ITM, ATM or OTM, effect of time decay, volatility, etc. - to which I am only too happy to respond. The frequency of those questions has picked up recently and it occurred to me that the majority of the questions are coming from new subscribers that haven't yet worked their way through all the great information in the OIN archives. You see, a little over a year ago, I started a series on option basics that took a couple months to complete on a one article per week basis. Usually when these questions come up, I just refer readers to the articles I've written in the past. But with the frequency of the questions picking up again, I thought it would be useful to issue the initial article again, with links to all the follow-on articles at the bottom. So with apologies to my long- time readers who were looking for something new tonight, we're going to spend our time together here in review mode. Next week, we'll delve back into new topics, just as we usually do in this space. So without further ado, here goes. When trading options, there are a lot more factors to pay attention to, when compared to just trading stocks. Due to the plethora of additional factors that influence option pricing, most notably "the Greeks", it is possible to enter an option trade that produces a loss, even when a corresponding trade in the underlying equity or index would have produced a profit. Understanding these factors and their influence on option pricing is essential to profitable option trading, especially in the volatile market we currently have at our disposal. So what are the Greeks? In order to answer that question, we need to say a few words about how option prices are calculated. Option prices are determined by applying the standard Black-Scholes pricing model, which uses 5 inputs to create the theoretical price of the option. They are as follows: 1. Time to expiration 2. Strike price 3. Value of the underlying equity or index 4. Implied volatility of the underlying equity or index 5. The risk-free interest rate Discussion of the inner workings of the Black-Scholes model is far beyond the scope of a single article, and there have been numerous books written on the subject for the inquisitive student. Rather than delving into theory, I thought it would be far more productive to deal with the practical measures of option pricing and strike selection that can aid us in our pursuit of profits. These measures are commonly referred to as the Greeks and the four most important Greeks, in my opinion, are Delta, Gamma, Theta and Vega. Delta measures the amount that a given option will move with respect to the underlying security and is stated in terms of percentage from 0 to 100. If a stock moves $1 and the option in question increases in value by $0.40, we know that the option had a Delta of 40. At-the-money (ATM) options typically have a delta of 50, while out-of-the-money (OTM) options have a Delta less than 50 and in-the-money (ITM) have a Delta greater than 50. As we move further out-of-the-money, Delta approaches zero, while it approaches 100 as we move deeper in-the-money. Neither of these extremes are met in practical application, but the basic relationship should give us a useful working understanding. Gamma is used to describe the rate-of-change of an option's Delta, and those that understand the relationship can use their knowledge to give their trading profits an extra boost. Putting the relationship in physics terms, Delta is the equivalent of velocity, while Gamma can be equated to acceleration. If you recall your high school physics, you'll remember that acceleration can really boost velocity over time. The same is true of the Delta-Gamma relationship. I'll leave you to ponder that concept and we'll revisit it in exacting detail on our next visit. The one constant in the universe (aside from taxes) is the passage of time, and Theta is the Greek that measures the impact of Father Time on option prices. Options are, by definition, a wasting asset, meaning that the portion of the option premium that is attributable to time, declines day after day. Adding insult to injury, the rate of decay of the time-related portion of an option's value increases as expiration Friday draws near. The majority of an option's time value disappears in the final 30 days of its life and most of that evaporates in the final 2 weeks. During expiration week, an equity must move in your favor substantially, just to offset the loss in value due to Theta-decay in an OTM or ATM option. Volatility is perhaps the most apparent determinant of option pricing; at least it has seemed that way during recent months as we have watched the VIX race from 35 to 57 and then back down to the low 20's. While normal trending markets don't have nearly that kind of volatility movement, when it does occur, it can yield outsized returns for appropriately positioned traders, and exact staggering losses from those unaware of its potential effects. Last week, I highlighted the perils of trading in a high- volatility environment. Traders that sell options in such an environment can reap substantial rewards, but need to be cognizant of the inherent risks that come with the territory. One interesting point about time-value in options is that on a percentage basis, ATM options are the most expensive in terms of time value. So when we buy ATM options, we need to understand that we are buying the most time-value possible for that expiration month, and every last shred of that time-value will melt away by expiration Friday. By expiration, either all the time value will have melted away leaving a worthless option (great for option sellers, but unpleasant for option buyers), or the stock will have appreciated so that the option is ITM, now possessing intrinsic value equivalent to how far in the money the option is. As a simple example, let's take a $50 OCT Call on stock XYZ which is trading for $3.00 one month before expiration. If on expiration Friday, the price of the stock is $48 (even if that is above the price of the stock one month earlier), the option will expire worthless, with no time value and no intrinsic value. On the other hand, if XYZ appreciates to $54 by expiration Friday, the option will be worth $4.00 ($4 intrinsic value, and no time value). In both cases, the time value of the option fades away to nothing by expiration, but if the stock moves sufficiently so that our option is in the money, we have real, as opposed to anticipated value. Delta and Vega are fairly easy to quantify, and there are a number of websites that provide this data for those interested in learning the inter-relationships and how they influence the potential success of option trading. One of my favorite sites is iVolatility (www.ivolatility.com), which provides detailed analysis of option Greeks, as well as historical volatility charts. While this site also provides an option calculator to determine Theta and Gamma for specific options, I think these two Greeks are more important to understand from a qualitative sense, so I tend to focus less on the actual numbers and more on their general influence on option prices. One interesting trend I have noticed in recent months is that online brokers are doing a better job of catering to option traders. All 3 of the brokers that I currently use, have recently added options analysis tools to their trading sites. This provides me with the ability to research the various Greeks on a prospective option trade without ever leaving the trading screen. In addition to basic option calculators that provide the ability to check Delta, Gamma, Vega and Theta for any option, these sites now provide charts of both historical and implied volatility. Using this latter tool, I can see where a stock's volatility is in relation to its historical range, helping me to make sure I am buying low volatility and selling high volatility. We'll devote a future article to just talking about volatility and how to use it to our advantage. When properly understood, the inter-relationship of the Greeks on option pricing can be very useful to option traders (both buyers and sellers) who understand how to capitalize on the opportunities provided. Now that we've covered the basics, we're ready to dig into all the details you can stand. Fortunately, I don't have to write the whole series of articles again, as they are archived in the Options 101 section on the website. If this article whetted your appetite for more details, then feel free to peruse the list of articles below. The Greeks, Part 1 - Delta and Gamma http://members.OptionInvestor.com/options101/012302_1.asp Application of Gamma and Delta to Strike Selection http://members.OptionInvestor.com/options101/013002_1.asp Back to the Olympians of Old http://members.OptionInvestor.com/options101/021302_1.asp Oh, That Vexing Volatility http://members.OptionInvestor.com/options101/022002_1.asp Volatility - Part Deux http://members.OptionInvestor.com/options101/022702_1.asp The Greeks - Putting It All Together http://members.OptionInvestor.com/options101/030602_1.asp A Greek Encore http://members.OptionInvestor.com/options101/031302_1.asp Varying Views on Volatility http://members.OptionInvestor.com/options101/032002_1.asp A Primer on Online Volatility Tools - Part I http://members.OptionInvestor.com/options101/040302_1.asp Hope this helps! 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 *********************** Sell the News! Well, it looks like we got our end of the war rally. Too bad it ended up with a triple-digit Dow loss. 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 04-09-2003 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 - ROOM Spreads, Combinations & Premium-Selling Plays: A Post-War Slump? Updated on the site tonight: Market Posture: Bulls Out of Breath Market Watch: Getting Our Breakdowns ************************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 ********************* Hotels.com - ROOM - close 54.35 change: -0.52 stop: 58.00 Company Description: Hotels.com is a provider of discount hotel rooms and other lodging accommodations, allowing customers to select and book hotel rooms in major cities through the company's websites and its toll-free call centers. ROOM contracts with hotels in advance for volume purchases and guaranteed availability of hotel rooms and vacation rentals at wholesale prices and sells these rooms to consumers, often at discounts to published rates. In addition, its hotel supply relationships often allow the company to offer its customers hotel accommodation alternatives for otherwise unavailable dates. At the end of 2001, ROOM had room supply agreements with over 4500 lodging properties in 178 major markets in North America, the Caribbean, Western Europe and Asia. Most Recent Write-Up: It's hard to draw any conclusions from Tuesday's session, with ROOM's exceedingly light volume. The mild morning bounce faded into the close for a 25-cent loss, but with volume only 25% of the ADV, it is clear that it wouldn't have taken much to push the pile around. We're left with price action that still looks weak, barely holding above the $54 support level and any elevation in the level of concern about the SARS virus could produce a quick downdraft. Failed rallies in the $55-56 area still look good for new entries, although more conservative traders will still want to wait for the break below $54 on increasing volume before taking the plunge. With the 10-dma falling to $55.67 today and yesterday's intraday surge capped at $57.20, it seems both prudent and safe to lower our stop to $57.25. Why This Is Our Play of the Day: We finally got the breakdown below $54 in ROOM. With the apparent imminent end to the war with the U.S. capture of Baghdad, we would have expected less bearishness from ROOM, as the danger of travel seems likely to drop a notch. However, no such luck for this put play, as SARS continues to interrupt worldwide travel. Asian hotels are suffering single digit occupancy rates and Wal-Mart, one of the world's largest companies, has now banned corporate travel to Asia. On top of that, the Malaysian Government has banned tourism travel to China. It appears that it could be a while before this problem is brought under control and ROOM is reflecting those concerns. The stock dropped to within $0.05 of a new double-bottom sell signal on the point and figure chart at $53 and momentum traders can use a break below that level for entry. While the 200- dma/200-ema level sits just over $50, the PnF also shows a spread triple bottom at $53, with a vacuum down to $45. A failed rebound at $54, the previous support level, would be an alternate entry point for more aggressive traders looking to capitalize on a better reward/risk ratio. BUY PUT APR-55 URD-PK OI=2957 at $3.00 SL=1.50 BUY PUT MAY-55 URD-QK OI= 224 at $5.60 SL=3.25 BUY PUT MAY-50 URD-QJ OI= 101 at $3.30 SL=1.75 Chart of ROOM http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-09/ROOM040903.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 ********************************************* A Post-War Slump? By Ray Cummins Stocks retreated Wednesday, despite indications of an end to the war in Iraq, as investors focused on the fragile outlook for the U.S. economy. The Dow Jones Industrials slumped 100 points to 8,197 as declines in McDonald's (NYSE:MCD), AT&T (NYSE:T), Home Depot (NYSE:HD), Hewlett-Packard (NYSE:HPQ), American Express (NYSE:AXP), and General Electric (NYSE:GE) led the blue-chip average lower. The NASDAQ Composite Index fell 26 points to 1,356 as software and Internet stocks pulled back in conjunction with selling pressure in Microsoft (NASDAQ:MSFT) and Yahoo! (NASDAQ:YHOO). The S&P 500 Index slipped 12 points to 865 as retailers, banks, chemicals and paper products drifted lower. Gold, natural gas, and oil services issues were among the few upside movers. Decliners led advancers 6 to 5 on the New York Stock Exchange and 3 to 2 on the NASDAQ. Trading volume was moderate, coming in at 1.27 billion shares on the Big Board and just over 1.31 billion shares on the technology exchange. In the bond market, traders focused on the progress in Iraq and the U.S. economic outlook with the 10-year treasury note climbing 9/32 to yield 3.90 percent. *************** SUMMARY OF CURRENT POSITIONS - AS OF 4/8/03 *************** 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 26.30 $1.25 8.68% 5.88% ERES APR 20 19.20 27.76 $0.80 8.04% 4.17% EXPE APR 40 39.50 49.92 $0.50 4.15% 1.27% GENZ APR 30 29.60 36.58 $0.40 4.69% 1.35% KLAC APR 32 31.95 37.46 $0.55 5.84% 1.72% MSFT APR 24 23.35 25.58 $0.40 4.85% 1.71% APPX APR 20 19.45 19.39 ($0.06) 0.00% 2.83% * GENZ APR 30 29.70 36.58 $0.30 4.56% 1.01% KLAC APR 32 32.10 37.46 $0.40 5.35% 1.25% NVLS APR 25 24.65 27.50 $0.35 6.36% 1.42% ROOM APR 50 49.10 54.46 $0.90 8.23% 1.83% YHOO APR 22 21.90 23.81 $0.60 9.63% 2.74% * BSTE APR 35 34.75 39.54 $0.25 4.56% 0.72% CAT APR 47 47.10 52.10 $0.40 4.51% 0.85% GENZ APR 35 34.60 36.58 $0.40 6.10% 1.16% GILD APR 40 39.60 42.97 $0.40 5.36% 1.01% * KLAC APR 32 32.25 37.46 $0.25 4.87% 0.78% AVID MAY 20 19.50 25.21 $0.50 5.89% 2.56% ERES MAY 22 21.90 27.76 $0.60 6.03% 2.74% JCOM MAY 25 24.70 31.01 $0.70 6.83% 2.83% RYL MAY 42 41.50 47.38 $1.00 4.45% 2.41% Conservative traders should closely monitor the positions in American Pharmaceutical Partners (NASDAQ:APPX), Yahoo! (NASDAQ:YHOO) and Gilead (NASDAQ:GILD). Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield COF APR 32 33.05 33.31 ($0.26) 0.00% 1.66% * MERQ APR 35 35.80 31.78 $0.80 7.15% 2.23% IGEN APR 45 45.55 34.57 $0.55 7.71% 1.21% MCHP APR 25 25.40 18.66 $0.40 7.37% 1.57% BSX APR 45 45.40 42.66 $0.40 3.93% 0.88% IGEN APR 45 45.45 34.57 $0.45 7.93% 0.99% NE APR 35 35.50 31.08 $0.50 6.06% 1.41% VIA.b APR 42 39.00 39.40 $0.30 3.37% 0.77% IGEN APR 42 42.95 34.57 $0.45 11.18% 1.05% NE APR 35 35.30 31.08 $0.30 5.39% 0.85% QCOM APR 37 37.90 32.40 $0.40 7.07% 1.06% Capital One Financial (NYSE:COF) remains on the "early exit" watch-list. As noted last week, the position in Pulte Homes (NYSE:PHM) has previously been closed to limit losses. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status AMGN 55.33 58.65 APR 47 50 0.30 49.70 $0.30 Open NKE 46.48 51.87 APR 40 42 0.30 42.20 $0.30 Open ADBE 33.02 32.38 APR 25 30 0.50 29.50 $0.50 Open CMCSA 29.91 29.65 APR 25 27 0.30 27.20 $0.30 Open FRX 53.10 54.49 APR 45 50 0.60 49.40 $0.60 Open LXK 65.89 67.91 APR 55 60 0.50 59.50 $0.50 Open SLM 110.21 114.50 APR 95 100 0.45 99.55 $0.45 Open BSTE 38.47 39.54 APR 30 35 0.40 34.60 $0.40 Open CFC 58.00 59.40 APR 50 55 0.40 54.60 $0.40 Open ERTS 59.56 57.97 APR 50 55 0.50 54.50 $0.50 Open * IBM 81.46 80.07 APR 70 75 0.50 74.50 $0.50 Open BBH 97.50 95.95 MAY 85 90 0.60 89.40 $0.60 Open Electronic Arts (NASDAQ:ERTS) is on the "early exit" watch-list. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status BHI 30.13 29.64 APR 35 32 0.25 32.75 $0.25 Open INTU 50.44 38.55 APR 60 55 0.55 55.55 $0.55 Open OMC 53.96 57.54 APR 65 60 0.50 60.50 $0.50 Open CCMP 44.61 44.05 APR 55 50 0.50 50.50 $0.50 Open DVN 47.70 45.33 APR 55 50 0.45 50.45 $0.45 Open IP 35.63 34.72 APR 40 37 0.20 37.70 $0.20 Open APC 46.05 44.21 MAY 55 50 0.50 50.50 $0.50 Open ATK 53.08 50.35 MAY 65 60 0.45 60.45 $0.45 Open TOT 65.30 67.35 MAY 75 70 0.65 70.65 $0.65 Open As noted last week, positions in Centex (NYSE:CTX), Lennar (NYSE:LEN), and Lehman Brothers (NYSE:LEH), have previously been closed to limit potential losses. 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 $25.73 *** New "All-Time" High! *** 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 $25.73 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 AQI PE 86 0.55 24.45 18.4% 2.2% SELL PUT MAY 22.5 AQI QX 4 0.80 21.70 8.4% 3.7% SELL PUT MAY 20 AQI QD 33 0.30 19.70 4.5% 1.5% * ************** CMCSA - Comcast $29.08 *** Bullish Sector! *** Comcast (NASDAQ:CMCSK) is a cable operator involved in three principal lines of business: cable, through the development, management and operation of broadband communications networks; commerce, through QVC, its electronic retailing subsidiary; and content, through its consolidated subsidiaries Comcast Spectacor, Comcast SportsNet, Comcast SportsNet Mid-Atlantic, Comcast Sports Southeast, E! Entertainment Television, The Golf Channel, Outdoor Life Network, G4 Media, and through other programming investments. The company has deployed digital cable applications and high-speed Internet service to most of its cable communications systems. CMCSA - Comcast $29.08 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT APR 27.5 CCQ PY 4,914 0.25 27.25 8.2% 0.9% * SELL PUT MAY 27.5 CCQ QY 283 1.00 26.50 7.4% 3.8% ************** CTSH - Cognizant Tech. $22.10 *** Post-Split Entry Point? *** Cognizant Technology Solutions (NASDAQ:CTSH) delivers full life cycle solutions to complex software development and maintenance problems that companies face as they transition to e-business. These information technology (IT) services are delivered through the use of a seamless on-site and offshore consulting project team. The company's solutions include application development and integration, application management and re-engineering services. The company's customers include ACNielsen Corporation, ADP, Incorporated, Brinker International, Incorporated, Computer Sciences Corporation, The Dun & Bradstreet Corporation, First Data Corporation, IMS Health Incorporated, Metropolitan Life Insurance Company, Nielsen Media Research, Incorporated, PNC Bank and Royal & SunAlliance USA. CTSH - Cognizant Technology $22.10 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 UPU PX 2,410 0.60 21.90 20.6% 2.7% SELL PUT MAY 20 UPU QD 49 0.75 19.25 8.2% 3.9% SELL PUT MAY 18.3 UPU QW 386 0.35 18.03 5.3% 1.9% * ************** DCX - DaimlerChrysler AG $32.74 *** Bottom Fishing! *** DaimlerChrysler AG (NYSE:DCX) develops, manufactures, distributes and sells a wide range of automotive products, mainly passenger cars, light trucks and commercial vehicles. The company also provides financial and other services relating to its automotive business. It has five business segments: the Mercedes Car Group, Chrysler Group, Commercial Vehicles, Services and Other Activities. DaimlerChrysler offers its automotive products and related financial services primarily in Europe and in the North American Free Trade Agreement (NAFTA) region, which consists of the United States, Canada and Mexico. In 2002, the company's automotive business, including related financial services, contributed 98% of its revenues. Additionally 52% is derived from sales in the United States, 15% from sales in Germany and 16% from sales in other countries of the European Union (EU). The company's quarterly earnings report is due 4/24/03. DCX - DaimlerChrysler AG $32.74 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 DCX PF 7,470 0.45 29.55 14.1% 1.5% * SELL PUT MAY 27.5 DCX QY 118 0.45 27.05 4.5% 1.7% SELL PUT MAY 30 DCX QF 64 1.20 28.80 8.5% 4.2% ************** JCOM - j2 Global Communications $31.05 *** Premium Selling! *** 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 $31.05 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 535 1.15 28.85 31.0% 4.0% SELL PUT MAY 30 JQF QF 1,151 2.95 27.05 16.9% 10.9% SELL PUT MAY 25 JQF QE 162 1.25 23.75 13.5% 5.3% SELL PUT MAY 22.5 JQF QX 30 0.70 21.80 8.3% 3.2% * ************** 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. *************** 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 (conservative - bullish/credit spread): BUY PUT MAY-45.00 CAT-QI OI=2559 A=$0.65 SELL PUT MAY-47.50 CAT-QW OI=553 B=$0.90 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$47.20 ************** RYL - The Ryland Group $47.52 *** 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 $47.52 PLAY (very conservative - bullish/credit spread): BUY PUT APR-40.00 RYL-QH OI=86 A=$0.50 SELL PUT APR-42.50 RYL-QV OI=70 B=$0.70 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$42.25 ************** VIP - Vimpel Communications $37.73 *** Bullish Telecom! *** Vimpel Communications (NYSE:VIP) is an established provider of telecommunications services in Russia, operating under the Bee Line family of brand names. VimpelCom's license portfolio covers approximately 70% of Russia's population (100 million people), including the City of Moscow and the Moscow Region. VimpelCom introduced two digital cellular communications standards to Russia and built a dual band GSM-900/1800 cellular network. The company also led the development and emergence of the mass consumer market for wireless communications in Russia by introducing a prepaid product solution. In 2000, VimpelCom introduced new technologies, such as wireless application protocol and BeeOnline, a multi-access Internet portal that offers a multitude of wireless information and entertainment services, including location-based features. VIP - Vimpel-Communications $37.73 PLAY (less conservative - bullish/credit spread): BUY PUT MAY-30.00 VIP-QF OI=105 A=$0.25 SELL PUT MAY-35.00 VIP-QG OI=113 B=$0.80 INITIAL NET-CREDIT TARGET=$0.60-$0.75 POTENTIAL PROFIT(max)=14% B/E=$34.40 ************** 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. *************** CCMP - Cabot Microelectronics $42.78 *** Downtrend Resumes? *** Cabot Microelectronics (NASDAQ:CCMP) is a global supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is a polishing process that levels, smoothes, and removes the excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $42.78 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 45 UKR DI 1,611 0.65 45.65 14.1% 1.4% SELL CALL MAY 45 UKR EI 271 2.10 47.10 10.2% 4.5% SELL CALL MAY 50 UKR EJ 806 0.70 50.70 5.4% 1.4% * ************** MERQ - Mercury Interactive $30.85 *** Sector Slump! *** Mercury Interactive (NASDAQ:MERQ) is a provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Its software products and hosted services help Global 2000 companies enhance the user experience by improving the performance, availability, reliability and scalability of their Web-based applications. Its many hosted services provide its customers with a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. Its integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. The company also provides outsourced load testing and Web performance monitoring services that complement its software products. MERQ - Mercury Interactive $30.85 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 32.5 RQB DZ 1,676 0.65 33.15 19.4% 2.0% SELL CALL MAY 32.5 RQB EZ 903 1.80 34.30 11.8% 5.2% SELL CALL MAY 35 RQB EG 421 0.95 35.95 8.5% 2.6% SELL CALL MAY 37.5 RQB ET 253 0.45 37.95 5.6% 1.2% * ************** QLGC - QLogic $37.53 *** Premium Selling! *** QLogic Corporation (NASDAQ:QLGC) designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers. The company's products are based on SCSI, iSCSI, Fibre Channel and Infiniband standards. The company is the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the SAN. Their products include its SANblade HBAs, SANbox Fibre Channel Switches and SANsurfer Tool Kit management software. QLogic is the only HBA vendor that supports SCSI, Internet Protocol, Virtual Interface and FICON protocols with the same Fibre Channel HBA. In addition, the company designs and supplies controller chips used in a variety of hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure. QLGC - QLogic $37.53 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL APR 40 QLC DH 9,499 0.40 40.40 10.4% 1.0% SELL CALL MAY 40 QLC EH 811 1.65 41.65 9.6% 4.0% SELL CALL MAY 42.5 QLC EV 1,019 0.90 43.40 6.8% 2.1% * SELL CALL MAY 45 QLC EI 441 0.40 45.40 4.1% 0.9% TS ************** 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. ************** CAH - Cardinal Health $56.55 *** Accounting Issues? *** Cardinal Health (NYSE:CAH) is a provider of products and services to healthcare providers and manufacturers, helping them improve the efficiency and quality of healthcare. The company has four segments: Pharmaceutical Distribution and Provider Services, which offers pharmaceutical and other healthcare products, as well as pharmacy management services; Medical-Surgical Products and Services, which includes medical products and services; Pharmaceutical Technologies and Services, which provides a broad range of technologies and services, and Automation and Information Services, which focuses on meeting the needs of customers through proprietary automation and information products and services. CAH - Cardinal Health $56.55 PLAY (moderately aggressive - bearish/credit spread): BUY CALL MAY-65.00 CAH-EM OI=386 A=$0.25 SELL CALL MAY-60.00 CAH-EL OI=935 B=$1.10 INITIAL NET-CREDIT TARGET=$0.85-$1.00 POTENTIAL PROFIT(max)=20% B/E=$60.85 ************** GM - General Motors $34.48 *** Another Downgrade! *** General Motors (NYSE:GM) is a diversified automotive business with interests in communications services, locomotives, finance and insurance. GM's automotive business designs, manufactures, and/or markets vehicles primarily in North America under the Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn and Hummer nameplates, and outside North America under the Vauxhall, Opel, Holden, Isuzu, Saab, Buick, Chevrolet, GMC, and Cadillac nameplates. GM's communications services relate to its Hughes Electronics Corporation subsidiary, which includes its digital entertainment, information and communications services, and satellite-based private business networks. GM also is engaged in the design, manufacturing and marketing of locomotives and heavy-duty transmissions. The firm's financing and insurance operations are conducted through the General Motors Acceptance Corporation, which provides a broad range of financial services. GM - General Motors $34.48 PLAY (conservative - bearish/credit spread): BUY CALL MAY-40.00 GM-EH OI=23887 A=$0.20 SELL CALL MAY-37.50 GM-EU OI=2781 B=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$37.80 ************** MXIM - Maxim Integrated $35.51 *** Chip Stock Retreat! *** Maxim Integrated Products is a worldwide leader in design, development, and manufacture of linear and mixed-signal integrated circuits. Maxim circuits provide an interface between the real world and the digital world by detecting, measuring, amplifying, and converting real-world signals, such as temperature, pressure, or sound, into the digital signals necessary for computer processing. Maxim's products are used in a wide range of microprocessor-based electronics equipment, including personal computers and peripherals, test equipment, hand-held devices, wireless communicators, and video displays. MXIM - Maxim Integrated $35.51 PLAY (moderately aggressive - bearish/credit spread): BUY CALL MAY-45.00 XIQ-EI OI=3873 A=$0.30 SELL CALL MAY-40.00 XIQ-EH OI=5595 B=$1.05 INITIAL NET-CREDIT TARGET=$0.75-$0.80 POTENTIAL PROFIT(max)=17% B/E=$40.75 ************** MHP - McGraw-Hill $56.65 *** A Big "Down" Day! *** McGraw-Hill (NYSE:MHP) is a global information products and services provider serving the financial services, education and business information markets. The company also serves other markets including energy, construction, aerospace and defense, as well as medical and health. McGraw-Hill serves its customers through its distribution channels, including books, magazines and newsletters, online via web-sites and digital platforms, through wireless and traditional on-air broadcasting and with a variety of conferences and trade shows. The company's quarterly earnings report is due 4/29/03. MHP - McGraw-Hill $56.65 PLAY (less conservative - bearish/credit spread): BUY CALL MAY-65.00 MHP-EM OI=96 A=$0.20 SELL CALL MAY-60.00 MHP-EL OI=3397 B=$0.80 INITIAL NET-CREDIT TARGET=$0.65-$0.80 POTENTIAL PROFIT(max)=15% B/E=$60.65 ************** SEE DISCLAIMER - SECTION 1 ************** ************** MARKET POSTURE ************** Bulls Out of Breath To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_040903.asp ************ MARKET WATCH ************ Getting Our Breakdowns To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_040903.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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