The Option Investor Newsletter Sunday 04-13-2003 Copyright 2003, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. Entire newsletter best viewed in COURIER 10 font for alignment In Section One: Wrap: Great Expectations? Futures Market: Funny Hats with Feathers Index Trader Wrap: Mother of all Battle Plans Editor’s Plays: No Brainer Market Sentiment: Relationships Tested Ask the Analyst: Calculating a % probability of Fed rate cut Coming Events: Earnings, Splits, Economic Events Updated on the site tonight: Swing Trade Game Plan: (See Note) Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 4-11 WE 4-04 WE 3-28 WE 3-21 DOW 8203.41 - 73.74 8277.15 +131.38 8145.77 -375.85 +661.91 Nasdaq 1358.85 - 24.66 1383.51 + 13.99 1369.52 - 51.65 + 80.84 S&P-100 440.97 - 5.72 446.69 + 8.75 437.94 - 18.43 + 32.30 S&P-500 868.30 - 10.55 878.85 + 15.37 863.48 - 32.41 + 62.62 W5000 8227.54 - 92.43 8319.97 +134.60 8185.39 -277.93 +566.83 RUT 371.30 - 1.98 373.28 + 4.58 368.70 - 7.53 + 21.84 TRAN 2194.56 + 6.28 2188.67 + 25.47 2163.20 -100.29 +236.40 VIX 28.27 - 4.53 32.80 + 0.62 32.18 - 1.44 - 2.71 VXN 39.62 - 2.83 42.85 - 0.24 43.09 - 2.69 - 0.02 TRIN 0.88 1.00 1.43 0.59 Put/Call 0.79 0.76 1.31 0.63 ****************************************************************** Great Expectations? by Jim Brown What a difference a week makes. I was rereading my commentary from last Sunday and realized we were just approaching Baghdad when I wrote it. This week the war is almost over. What were your expectations a week ago? War over? Positive economic reports? Market rally? Iraqi invasion of Washington? I doubt very few investors expected what we got and there are likely a few bulls scratching their heads this weekend. Dow Chart - 120 Min Nasdaq Chart - 120 min The week ended with an economic surprise, actually a couple of surprises. The PPI report rose by +1.5%, much more than the consensus of only +0.4%. This was due almost entirely to higher energy prices which are already beginning to fall. This report will be discounted completely and inflation will be deemed to still be nonexistent. Excluding energy, prices rose only +0.7% and most of that increase can be attributed to autos (+3.3%) and trucks (+5.2%). You did not think those massive incentives were free did you? Mark prices up so you can cover your free interest loans. There is no free lunch. Even more surprising was the jump in Retail Sales by +2.1%. I mentioned on Thursday that there was likely to be a big discrepancy in the Chain Store sales on Thursday and the government Retail Sales report on Friday. First this report is based on store sales open over one year. This takes out volatility of new stores and closed stores. Also this report compares March to February and is adjusted for the late Easter week. February was very bad for retailers with sales falling -1.3% due to terrible winter weather. Adjusting for Easter falling in mid April and comparing against blizzard conditions it is not surprising for sales to rise in this report. It is all in how you manage the numbers. Remember most major retailers warned that sales were below plan and lowered estimates in the last couple weeks. Look for these numbers to average out in the April report. The last economic surprise was a jump in Consumer Sentiment to 83.2 from 77.6 in March. In reality this is not much of a surprise to anybody who thinks it through. In March we were still in the uncertainty of the initial war and consumers were concerned about the change in the terrorist alert to orange and the potential challenges in the weeks ahead. Now two weeks into April with the war almost over according to most reports it appears consumers are breathing a sigh of relief. The March levels were a nine-year low and a relief bounce on good war news is only reasonable. With the potential for lingering problems in Iraq and potential earnings problems in equities this indicator is not going to rocket upward. The markets gapped up on the economic news but quickly faded despite some good news from some reported earnings. GE reported earnings for the first quarter of 30 cents a share on lighter than expected revenue and affirmed the outlook for all of 2003. However, they also said the 2Q could drop -15%. With 30 cents for the 1Q and estimates of 38 cents for the 2Q they will need a huge bounce in the second half to make the consensus of $1.63 for the full year. Immelt said on the conference call they are expecting a favorable comparison in the 4Q due to charges in the same quarter of 2002 but I fail to see how that will raise 4Q earnings. GE is a proxy for the economy with 13 diverse businesses from manufacturing a wide variety of products to insurance to airline maintenance and leasing. How GE sees the business environment is a good read on the rest of the economy. GE may be insulated to some extent from economic forces due to its monster scale. GE said the cost for raw materials was down due to economic factors and their buying power gave them added leverage. With the worst over in the airline sector and lower oil prices helping with their future plastics costs, GE may be in the best position to profit from any recovery. Still Immelt said things were tough and cost cutting would still be a priority. They made the numbers but the outlook, while positive, was definitely not rosy. On the brighter side Foundry raised guidance for the quarter on strong equipment sales to the government. Juniper also reported a net profit for the quarter and said revenues would be flat to up slightly for the 2Q. Is this a glimmer of hope? Even networker ETS rose despite a warning earlier in the week. Analysts said sales of communication gear remained flat to down and telecommunication spending remained the worst area for capex. Enterprise customers, large corporations and government agencies, are upgrading networks but only in small increments. The positive comments from JNPR and FDRY are welcomed and it may be the light at the end of the tunnel but it is still a long tunnel. Earnings this week were scarce but the same cannot be said for the week ahead. IBM will be the cloud on the horizon on Monday as traders wait for the company to announce earnings after the close. INTC and MSFT both announce on Tuesday and once those three companies report the rest of the tech sectors fate should be known. Next week should be hectic. It is a short week with the holiday on Friday and it is an options expiration week. It is also the biggest earnings week for the quarter in terms of the number of blue chips reporting. The economic calendar is full with Business Inventories on Monday, Industrial Production on Tuesday, Housing and Permits and CPI on Wednesday. Thursday closes with the Jobless Claims and the Philly Fed Survey. It is going to be a very busy week. Working against us next week is the melt down in Asia. The Nikkei closed at 7816 on Friday and there appears to be no end in sight. There was another 161 SARS cases on Friday bringing the total to more than 2700. The region is in serious economic trouble. With the focus off the war the potential for a more inward focus is good and that focus will not find anything to cheer about. Our U.S. economy will continue to be impacted by events in Asia. The war is over. Or is it? According to everyone the Saddam regime is gone and there is a growing feeling that so has Saddam. The day after the last decapitation attempt the government disappeared. Despite conflicting intelligence about several Saddam sightings in various parts of Iraq the scuttlebutt is growing that he bought the farm last week. With only two towns still fighting as I write this on Friday night the large scale battles are almost over and they could be over by Monday. That means the positive news from Iraq is almost over as well. The only news we will be getting will be negative. Suicide bombings, car bombs, failure to exercise population control and the eventual infighting between factions for control of the new government. In short the positive impact on the market should be over. Traders should start looking at earnings again and those earnings will be flying fast. Most analysts think the earnings for this quarter are a non-event. Everyone thinks they will be bad, very bad but they are a result of the pre-war freeze in the economy. Actually since nearly 60% of the S&P warned for the quarter the expectations are so low a child's sidewalk Kool-Aid stand could beat them. The potential for some earnings surprises is good. However, it is not the current earnings that will govern our future. As we all know it is the guidance. Yes we know the last quarter was bad but what are you going to do now that the war is over. Unfortunately nobody is going to be able to tell. It is the third week of the quarter and the war has been over for a day or two. Nothing has changed. Companies will probably be hopeful but they will have nothing concrete to point to for guidance. They are probably not going to be glowing with optimism. Traders are so confused they don't know whether to buy or sell. The result is they are doing nothing. The NYSE only traded 1.3 billion shares on Friday with 1.2 billion on the Nasdaq. Remember this was a Friday before a short options expiration week, with a huge number of earnings in the wings and on positive economic data. Except for the opening irrational exuberance spike on Friday the Dow has traded in an 80 point range for the last two days. After the spike it traded in a 50 point range from 10:45 to the close on Friday. Does this strike you are strange? There are so many factors pulling the market in different directions that it is going nowhere. Remember the post war rally everyone expected? Where is it? The Dow hit 8388 as the statue was about to fall. That was three days ago. We closed at 8200 on Friday with no real threat to holding stocks over the weekend. The lack of interest in the markets appears to be growing now that investors have nothing to look forward to. While everyone has been begging for a return to a normal market the prospect of actually getting their wish has made them nervous. The post statue performance was not that dismal. It was just that most traders had such great expectations. Therein lies our problem. Expectations have been so bloated for weeks that professional traders were ready for a sell the news event. If -200 Dow points were all they could manage to sell then things might not be as bad as the bears think. I won't bore you with all the market technicals because Leigh Stevens does a much better job in the Index Trader Wrap elsewhere in the newsletter. Suffice to say we are still in the trading range between 8150-8350 that I have been pointing to all week. The Nasdaq is fighting to hold the lower end of its trading range at 1350 and with IBM/INTC/MSFT earnings in the next two days it is doing well under the pressure. The one thought I will leave you with today is the VIX. I know everyone gets tired of hearing about the VIX analysis. Anyone wanting a full understanding of this indicator need only look in the Traders Corner archives for Mark Phillips great series of VIX articles. The bottom line remains it closed at 28.27 on Friday. It set a new three-month low at 27.77 intraday and it is only two points away from a low not seen since June 2002 at 26. The low for 2002 was 18.87 on March 28th. Just before earnings began. There is a pattern here. The VIX tends to hit lows just before key earnings weeks only to rocket a week or two later when those earnings disappoint. Note the following charts. The first one compares the DOW/VIX for March or 2002. The second is the current chart. Compare the similarities. Also, note the market relationship in December and January. What would your conclusion be? Vix/Dow Chart - daily (March 2002) Vix/Dow Chart - daily (current) On the last chart we still have the downtrend line from November and the 200 EMA. I am not predicting a rally or a dramatic crash. I am only pointing out that traders had great expectations and many still do. Those expectations may have been filled by that giant spike in March and a lack of positive guidance over the next two weeks could deflate those expectations. This does not mean we are going to retest March lows. It may just mean we may not rocket back above 8500 anytime soon. Traders next week should be on the lookout for weakness and be prepared to protect long positions. Should we get some positive earnings surprises I would look for a critical resistance test at Dow 8520. This has been the high for March and April and a critical level any rally must conquer. Load up on the caffeine on Monday. You will need it to keep up with the frantic pace in the holiday shortened expiration week. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Funny Hats with Feathers Friday, April 11, 2003 By Vlada Raicevic Daily Settlement Numbers 4:15pm ET > DOW Last: 8203.41 Net: -17.92 High: 8337.65 Low: 8179.74 > YM 03M Last: 8165 Net: -39 High: 8317 Low: 8153 > S&P 500 Last: 868.30 Net: -3.28 High: 883.34 Low: 865.92 > ES 03M Last: 868.25 Net: -3.50 High: 883.50 Low: 864.75 > Nas 100 Last: 1026.15 Net: -6.99 High: 1051.88 Low: 1020.56 > NQ 03M Last: 1028.50 Net: -9.50 High: 1054 Low: 1022 DAILY PIVOTS > YM 03M R2: 8364 R1: 8248 Pivot: 8200 S1: 8084 S2: 8036 > ES 03M R2: 890 R1: 878 Pivot: 871 S1: 859 S2: 852 > NQ 03M R2: 1065 R1: 1044 Pivot: 1033 S1: 1012 S2: 1001 Have you ever noticed how often the dress uniform for a given military unit is often very silly looking? You have these extremely useful, practical military outfits for going out and doing battle, but those dress uniforms are something straight out of the Land of Absurd. The more poor and destitute a country is, the more odd their military uniforms become. Now, I'm not going to name names, but some of my favorite uniforms involve the excessive use of Silly Hats, and the silliest are the short stubby hats with the single, tall feathers sticking straight up. I bring this up because if you look at the daily charts of the futures, you will note they contain a veritable parade of candles with tails pointing to the sky, like a parade of soldiers, hats and feathers in the air. Perhaps I'm seeing things, or the war news has finally gotten to me. This hypnotic market has been putting me into a trance daily, with the sameness of a loud metronome, ticking back and forth. And it even has me mixing metaphors. I shudder to think what's next. This is a market that can't go anywhere. There are many prettier, and wordier ways to put it, but they all come to the same point. Why? That too is very simple: there is a lot of bullishness, but the bulls can't push it higher, and they won't let the bears take it lower. The alternate is that after being trounced for long, the bears are too scared to try. Again, say it any way you wish, but the gist is the same. Just when I think (and hope) that I've written my last wrap that in essence says, "well, nothing's changed, but tomorrow it may," I find that yet again, I'm faced with the same daily chart, which, I'm not ashamed to say, is really starting to irritate me. So here goes: The ES Daily chart has not changed. It is split with conflicting signals, some bullish and some bearish. Macd has crossed down and continues to make its way slowly toward centerline support. RSI is below the moving average, but today's strong gap up pulled it upward. ADX still is showing buying overcoming selling, but this is most likely skewed by the strong gap as well. The 55 period regression channel is pointing up purple), the 200 period is pointing down (black), and the 78 period is nearly flat but is slightly down (blue). All stochastics are pointing down. Note: my article this week in the Futures Corner will focus on how to read this particular stochastic study. ES Daily Chart: The 270 minute chart shows how price gapped up over two trendlines of resistance, and then sold off to below both of them. This is extremely bearish. Yet. Look what happens next: oh my, price rises and closes above the downtrend line that was resistance yesterday, we gapped above this morning, sold through to create that very bearish moment, and then we move back above it, which one might think is bullish, but at this point I'm just rolling my eyes. The indicators are all still bearish with the exception of the ADX which just seems a little confused, and almost like it doesn't care what's going on. ES 270 Minute Chart: ES weekly chart is little better than the daily. A mighty attempt was made this week to move above the downtrend line drawn from the past two peaks, but it failed, and moved below last weeks close, but above the close of the week before, and lower than the week before that. I know it's obvious, but stating it just shows how indecisive we are even on a weekly basis. Macd looks tired and starting to bend over a bit, RSI is nearly flat, and ADX is doing little, except erasing a little bit more bearishness from the slope. The only thing still obviously positive are the stochastics which are still in an uptrend. ES Weekly Chart: NQ daily chart actually looks a little better to me. I think it's mostly due to how the candles look. Here you have a lower top and a selloff, but the selloff stops short of the recent lows and bounces hard. Today, we attempt to move much higher to continue with the bounce, but we fail, still closing over the recent downtrend line. That line, however was too steep to hold, so a break is no surprise. So there are two ways to read this. Either we it's bullish, because we made a higher low and still closed above recent horizontal support; or it's bearish, because we closed in the lower 25% of the candle leaving a big tail above, and closing below yesterday's closing price. Stochastics are still in a solid downtrend, Macd has broken below centerline, but the slope is very tame. RSI has stopped moving down and is above the recent low, and ADX is confused, a theme among all these charts, it seems. NQ Daily Chart: The NQ 270 minute chart shows how the broken downtrend line held as support on the selloff from the gap. There is now a slight rising support trendline from the two most recent lows, and price closed well above that. Both regression channels are tilted up showing a bullish bias over 78 and 200 periods. Most of the indicators are still in solidly bearish territory but the fast stochastic has bottomed and looks like it is moving up. Again, this chart is saying that the selling has been strong, and that price has not done enough to change the indicators, but that it is holding support well. NQ 270 Minute Chart: The NQ weekly chart tried to move above the most recent downtrend line off the recent highs, but failed and moved down sharply to close near the lows of the week. This close is the lowest of the past month, although it has not broken the lows set last week. There is a falling trendline of support that was broken four weeks ago, and that is a logical place for a bounce the first time it is tested. Just below that is an uptrend line off the October lows that should provide a lot of support. Indicators have turned more bearish this week, with stochastic about to cross down, and fast stochastic already crossed over, although not aggressively. RSI still holding above the moving average and the centerline at 50, and ADX shows selling has dropped off. NQ Weekly Chart: Like I said when I started. A lot of indecision and mixed signals. All the candle tails tell us we can't seem to go up, but the market cannot seem to go down. A classic standoff that should get very interesting next week with options expiry and big names reporting their quarterly results. ******************** INDEX TRADER SUMMARY ******************** Mother of all Battle Plans By Leigh Stevens lstevens@OptionInvestor.com This past week brought success to General Tommy Franks' battle plan (following the guidelines of Secretary Rumsfield no doubt) as the Iraqi regime collapsed faster than most dared hope. And, as Vice President Chaney said, it was done contrary to the advice of the retired military folks "embedded" in TV studios - who were second-guessing our relatively small number of troops in country. For battle, the numbers involved led to a brilliant execution - for keeping order it was uncertain by week's end if the generals had the right forces ready to roll. Well, if this is the worst thing to worry about currently, not so bad. For the markets, a big uncertainty is over, which could be bullish if only now the economy and earnings revive. General Electric (GE) executed pretty brilliantly as the company recorded a 20% increase in earnings (to $3 billion, versus $2.5B a year ago) last week to 30 cents per share, versus 25 cents last year. However, consensus estimates were for 32 cents. Nevertheless, I thought it remarkable that 8 of 13 GE business groups recorded double-digit earnings growth. Well, the house that Jack built is probably an exception to what corporate America in general is doing or will be reporting in coming weeks/months - especially out in techland. Hey, I now live near the heart of techland - Silicon Valley that is. I know traffic is well under what it was a year, or two, ago. I'll let you know when the traffic jams get as intense as they were - hopefully NOT for the sake of my sanity on the way to San Fran. THE BOTTOM LINE – The market remains stuck in trading range on a near to intermediate-term basis, with the major trend still down. It's still a bear market unless prior rally highs are exceeded. The sideways move going on for some weeks now could be basing action of a bottom. However, so far there's no telling if the indexes are consolidating prior to an eventual breakout above the key 200-day moving average in the S&P and Dow or to a further sustained uptrend in the Nasdaq that would take out its double top. For index traders, there will likely be some price swings large enough to exploit profitably - however, absent the war news and before a significant economic upswing, there may be less of the bigger moves. I'll be waiting for the larger overbought/oversold extremes according to the daily charts or on the hourly charts over a 2-3 day period. FRIDAY'S TRADING ACTIVITY – The big news - we consumers aren't as "dead" as the pundits were thinking. I know I still like spending those pieces of paper with pictures of dead presidents on them. (I have to confess, that this is what my old PaineWebber colleague Art Cashin used to say all the time about spending money.) There was sharp first hour run up on the news from the Commerce Dept. that said that U.S. retail sales rose 2.1% in March. The rally looked like it was driven by short-covering, because the gains quickly faded when more buyers with deeper pockets failed to step in. It was all on light volume too. Tech stocks lost more than the Dow (off by only 2 tenths of a percent) as the Composite fell to 1358.8 - the widely followed SOX index (Semiconductors) fell the most, at off 1.5%. March retail sales was significantly stronger than economists' estimates. A big worrisome overhang in the market was something like what if the CONSUMER stops spending because he or she is worried about something like losing their job or WAR in the oil patch. Never underestimate the propensity of Americans to spend spend spend. (Well, we do have a lot of nifty things to buy here and their all from China.) The jump in March retail sales was the largest increase since October 2001 when people went back to spending after laying very low in Sept. 2001 - 0% financing on cars helped a lot too! U. of M.'s consumer sentiment index which was released later in the session showed some growing confidence - the index jumped to 83.2 in April, up from 77.6 in March, versus expectations of a rise to 78. Oh, those gloomy economists. Some floor talk was that a sentiment number closer to 90 would have gotten the market more in gear to the upside. Oh, those gloomy traders. The Labor Dept. came out with its PPI report and this report indicated that prices for finished goods rose 1.5% last month, which was up from 1% in Feb. More than the half of the increase was due to higher energy prices and any trips to the pump lately will tell you that the oil price spike is coming back down. Also, the winter from Siberia is over! Hooray!!! On a weekly basis, the S&P 500 lost less than 1/2 of 1 percent, the Dow was off 0.89% and the Nasdaq dropped 1.8%. EARNINGS concerns - remember those? Back on traders and investors' minds they are. Hey, we're back in earnings (reporting) season next week. I mentioned GE already and that was a biggie. Boeing fell over 2% after the company said Thursday (after the close) that is will record a big write off on the value of its assets - well, at $1.2 billion pretax it seems like a big number to me. Microsoft, the company I love to hate - not really, I just sort of hate their software sometimes - fell 1.6% to 24.20 after being downgraded by First Albany. They went from a "strong buy" to a "buy" on concerns that the company may have more trouble renewing maintenance contracts than originally thought - all this a drag on the profit growth in their 2004 fiscal year. Wal-Mart also drew a downgrade - to "hold" from "buy" - from some yahoo analyst. Opps, I used to be one of those analysts. Well, the stock is only trading - as he put it - at "whooping" 27 times 20003 earnings estimates. Wow, that (kind of multiple) used to be cheap! MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Daily & Hourly charts: SPX continues to find resistance at the key 200-day moving average, as it's an area where traders naturally both take profits and do some shorting - and, it is a technical (one of the few) indicator that institutional money managers do watch. They have to be on a roll with stocks and possess a bullish outlook to buy up stocks enough to push the index through this area - NOT! - at least not yet and with key bellwether stocks like GE and Microsoft faltering, not tomorrow either. Key resistance continues to be in the 880-885 area on a closing basis. While the Dow - and that average can get pushed around more - did close above its 200-day average on 2 consecutive days (my usual "acid" test), not so the S&P 500. The 50-day moving average, now at 848 (daily chart, left-above), may provide a next level of support. SPX needs to work higher in the very near-term, like Monday, to continue to trend higher on the hourly chart (right-above) - this trendline intersects in the 867-868 area currently. Stay tuned. The longer hourly stochastic (length: 21) is oversold enough that it could continue to climb higher at or above this line - however, I'm not banking on it and would rather wait for a next trade when the DAILY stochastic (middle chart, left-above) gets to an oversold extreme again and is digging into some prior support such as in the 860-850 area - the daily stochastic is in midrange now and showing overall downward momentum. The 10-day TRIN is at a more or less neutral reading. We have not seen sustained selling or buying lately in any kind of extreme way. I made a note in my past week's Trader's Corner article - see http://www.OptionInvestor.com/traderscorner/tc_041003_2.asp about how neatly the bull flag pattern seen on the hourly chart above did exactly what the TA (technical analysis) textbooks (my own included) say is a minimum upside objective when prices break out above the "flag" pattern - namely, the next move will cover a distance equal to the "flagpole" or the first spurt up. So, in the way I have marked it above, that's where a-b equals c-d. Rather neat and provided all you OIN sharp eyed traders with a good trading opportunity. You even sharper eyed practitioners of TA will have also seen the pronounced bearish price/oscillator (in my example above, the 21- hour stochastic indicator) divergence that shaped up at the top of that upswing, as the stochastic registered a significantly LOWER low and thereby did NOT "confirm" the higher high - a sort of screaming sell. S&P 100 Index (OEX) – Daily & Hourly charts: 450 is the key near resistance - no change there from last week. There was a minor Head & Shoulder's Top that formed on the hourly chart, and the downside objective implied by that formation has not quite been realized yet. This thinking leads me to believe that the hourly up trendline is not going to hold as support. Both hourly stochastic models are nearly oversold readings, so it could happen that we get a bounce from the 440 area, but I would rather buy puts at 450 than calls at 440. There is the matter also of the downward momentum we still see on the Daily stochastic (not shown with OEX, but on the SPX chart above and the Dow chart below) and the absence of any extreme in my chief "sentiment" indicator (see lower left on chart) leads me to take a wait and see attitude. Note how the last extreme (heavy PUT buying) forecasted the bottom that came 1-day later. Neat, when it works and it usually works as an indicator, but the lead time does vary from 1-5 trading days. An ideal successful test is if buying developed again on any move back to the area of the prior 427 low when, at the same time, the daily oscillators like the 14-day RSI and Stochastic model was back at an oversold extreme. That would be a place to take put profits and purchase some of the index calls. I favor the 427- 430 area as a possible buy zone, but will want to see how it all looks if the OEX gets back into this area. A decisive upside penetration of 450 would cause me to protectively cover (exit) long puts. It's not what I'm looking for but all long-lasting traders with any flecks of grey hair (or not) should always be prepared to be wrong. If it were easy - to profitably trade the indexes - we would all be rich or richer than we are. Dow Industrial (Dow 30) Average Daily & Hourly: The Dow is simple - hey, its only 30 stocks - nothing is proved on the bullish side without a breakout above 8350-8400 and there is support in the 8000-8100 price zone. Absent a close under 8000, I can't get real bearish either. Of course, I think we're in trading range basically while the market waits to see if we're going to see a pickup in business activity and earnings by spring/summer. Stay tuned. There is also some technical support that may come in again in the 81 area in DJX. However, all this is, is the lower end of the hourly downtrend channel currently - not a lot to hang your hat on. If long puts, stay with em. Nasdaq Composite Index (COMPX) – Daily & Hourly: The Nasdaq presents a more bullish possibility if its 50 and 200- day moving averages provides support in the 1337 area. Of course, we're looking a double top that is bearish, so I wouldn't want to forget this either. If there is close under the 1340 area I would look for a further move lower. Its a real mixed picture with stocks no matter whether you look at them fundamentally or technically or with a mix of both. The hourly COMPX chart above is showing that there may be some technical support and buying interest shaping up in the 1350 area, after the upside gap got "filled in" and after the "island bottom" which I spoke about in a previous Index Trader commentary. With the Composite the basically sideways trend is causing the stochastic to head lower and it may move back down that way to register an oversold reading. Corrections, as I've often said, are of two types - price and "time". A price correction is where there is a move, then a retracement of half or more for example. A "time" correction is where the market goes sideways after a move, up or down, then goes sideways, which also causes the stochastic or RSI or whatever indicator of this type (also, MACD) to get back to a neutral to overbought/oversold level again. Let me not forget to mention that the broader picture is still a bear market in Nasdaq - as if you needed any reminding! We have yet to see ONE instance of a higher rally high of any significance. However, on a trading basis I have interest in the long side (buying calls) of the Nasdaq indices plus QQQ, if COMPX appears to again find support in the 1340 area. In which case I'd exit puts. Not so if there was a break of 1340-1337, especially on a closing basis, as possible next support isn't apparent until the low-1300 area. QQQ charts - Daily & Hourly: Near support looks to be 24.6-25.3. A break of 24.6, especially on a closing basis, would suggest staying short and/or long puts if you got em. On the upside, without a breakout above 27.4-27.8 there is no cause to buy back any short position. This is the are to short - there have been 3 tries to get through this area - 3 strikes and you're OUT! What keeps me mildly bullish or willing to trade the long side in the 24.7-25 area in the Q's is the fast approaching oversold condition. One more sideways to lower move may set up a bullish trade. Maybe we can just buy at 25, sell at 27.5 for the next month - or, am I dreaming. Trading range markets are ok - not as great as straight-up or straight-down, but I'll take em. In fact, on the historical average the market is only in a definite and strong directional trend about 30% of the time. The rest of the time it is this back and forth stuff. ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** Editor's Plays ************** No Brainer Choosing a play this week was a no brainer. The various options and the various market expectations for next week made the choice very simple. At least simple for me. The market appears weak but appearances can be deceiving. However, with IBM, INTC and MSFT all announcing earnings the first two days of the week the direction for tech should be decided by 4:30 on Tuesday if not by 4:30 on Monday when IBM announces. This is also expiration week. This affords us some very cheap options to gamble with. I say gamble since any speculative play with April options in expiration week is pure gambling. The third time is the charm. The last two times I tried to play the QQQ we had a market event at the open on Monday and the plays should never have been entered. That could happen this week as well but I am going to try it again. I am going to use a QQQ strangle. The QQQ closed Friday at $25.51 and dead center between two strikes. The $26 April call closed at 25 cents on Friday. The $25 April put closed at 30 cents. These prices should be cheaper at the open on Monday. You should be able to buy the strangle for 50 cents or less unless we have another gap open on Monday. The risk here is that the QQQ does not move more than $1 in either direction. Since it is exactly between the strikes it needs a 50 cent move to get TO THE MONEY and another 50 cent move to get to breakeven on either side. Granted you can probably play the spikes but don't count on it. Personally I think somebody is going to stink up the place and the QQQ could hit $24 by Thursday's close. THIS IS PURE SPECULATION AND HIGH RISK. A drop to $24 would make the put option worth $1.00 at expiration. There are three ways to play this. First, you could take the strangle mentioned above and spend 50 cents to potentially make 50 cents. The odds are good but not guaranteed and high risk. This would not be my choice. Second, you could just take the put side of the strangle at 30 cents or less and hope for an earnings disaster. The QQQ would have to move -80 cents for you to break even by Thursday. Third, and my preferred option, is to cheat. Buy the May $25 put which closed at 90 cents on Friday. This gives you an entire month for the drop to occur. Read my market wrap for Sunday and decide which direction you think we are going. Then buy the April $26 call for 25 cents or less for insurance. Your total cost is probably going to be around a dollar after the premium decay occurs over the weekend. (assuming no market gap open on Monday) If IBM/INTC/MSFT blows the doors off the QQQ will likely spike and you cash your insurance call before Thursday's close. You hold the May put for the eventual drop into the summer doldrums. Using option number three you are protected against the upside potential and have a longer timeframe to profit from any downside from negative earnings guidance. April $25 put = QAV-PY $.30 April $26 call = QAV-DZ $.25 May $25 put = QAV-AY $.90 May $26 call = QAV-EZ $.90 ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. ORCL - Put - $11.29 4/6/03 ($11.37 when recommended) Thank you, thank you, thank you. The huge gap open on Monday rocketed ORCL to $12.00 and lower the cost of the recommended May $12.50 put from $1.50 to $1.10 at the open. This was as close to a perfect entry as possible. ORCL sold off to $11.29 by Friday's close and appears ready to drop further. The $11 area is holding as we wait for the MSFT earnings on Tuesday. I doubt even good earnings will help ORCL but should MSFT lower guidance again it could be a real problem. Looking good! QLGC - Qlogic Put - $38.00 3/23/03 ($39.98 when recommended) We are just not getting any cooperation from QLGC, which appears stuck at $38. I am closing this one today with only one week left on the April option. The option closed Friday at .55 x.75 after trading as high as $1.60 this week. The price when recommended on 3/23 was $1.65 and it traded as high as $2.05. Sometimes things just don't go your way. http://members.OptionInvestor.com/editorplays/edply_032303_1.asp CY - Cypress Semi Call - $7.56 3/2/03 ($6.41 when recommended) http://members.OptionInvestor.com/editorplays/edply_030203_1.asp Microsoft Call - Feb-16th $24.21 (MSFT $24.15 when recommended) I am closing the MSFT call play due to the poor performance by the stock as we get closer to its earnings on Tuesday. It appears somebody thinks we may get some bad news as it is well off the $26.88 high from a couple weeks ago. The recommend July-$25 call was $2.25 when recommended and traded as high as $3.20 since. It closed at $1.60 on Friday. The performance of Microsoft could be a leading indicator of our earnings week ahead. http://members.OptionInvestor.com/editorplays/edply_021603_1.asp EMC Call from Feb-2nd $7.73 ($7.70 when recommended) http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball - From 12/29/02 The warning by RFMD did not help this portfolio play over the week and that single option represents 30% of the loss year to date. It would have taken $1,255 to buy one contract of each on January-2nd. Any bets on what this will be worth on 12/31/03 http://members.OptionInvestor.com/editorplays/edply_122902_1.asp ******************** Remember, these are high risk plays and should only be made with risk capital. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Relationships Tested by Steven Price The war is winding down and it appears the war trade is fading. We have been left to decipher economics once again and this morning gave us a clue as to just what will be needed to get a rally in the equities. The short answer is "a lot." We got better than expected data from the retail sector, with retail sales coming in significantly above expectations for March. The Commerce Department adjusted the numbers for a late Easter and it appears to have made an awfully big difference from the sales reports we saw on Thursday. There were a slew of disappointing individual results on Thursday, with below expected results from Wal-Mart leading the pack, but the government's formula showed an increase of 2.1% after a February decline. That increase was the highest since the post - 9/11 October increase of 6.2%. The increase does seem curious; however, as we saw warnings and a drop in same store sales at large department stores such as J.C. Penney, Federated (Macys and Bloomingdale's) and a gain of only 0.7% at Wal-Mart. Much of the number was due to a larger than expected increase in auto sales, but even without those sales, there was an increase of 1.1%. The data was also enough to get the markets on an early roll ahead of the Consumer Sentiment release 15 minutes after the bell. The Consumer Sentiment index rose to 83.2 in early April from an end of March reading of 77.6. While still historically low, it was a big improvement over the previous month and well above expectations for a reading of 79.5. It was also the highest reading since December. The main ingredients in the improvement were falling oil prices and the progress in the war. After the first Gulf War, consumer sentiment rose 17 points. We still need to keep this in perspective, however, and realize that we are just coming off of 10-year lows and remain very low historically. Half of the consumers surveyed still expect a difficult economy in the next year and don't expect more hiring in the coming months. That would seem to fit with Thursday's CEO survey that indicated 45% expect to cut jobs in the next 6 months. The data was enough to push the Dow to a triple digit gain to start the day. But as the Dow, OEX and SPX all ran into their descending 200-dmas and the coinciding 38.2% retracement of the Oct-Dec lo-hi range, they were hammered hard. The intraday reversal looked much like the ones we saw on Monday and Wednesday, with traders selling into the rallies. The triple- digit gain turned into a reversal of 150 points at one time. The intraday action also led to some divergences that we haven't seen in a while. The bond yields stayed positive, indicating selling in the treasury market, which is usually bullish for stocks. In fact, after a morning sell-off, they crawled higher all day, even as stocks were taking out support and testing intraday lows. That was probably a good indication that we wouldn't see a major equity sell-off, as asset allocation was favoring the move out of bonds and into stocks at that point. Oil futures traded lower for most of the day, also diverging from their recent relationship to equities. However, a late day rise in that market kept the inverse relationship with stocks in tact at the close. Still, we are seeing less of a correlation as the war comes to a close. The dollar stayed positive, in spite of stocks falling, which was yet another divergence from the norm. While we are seeing a number of relationships stretched and in some cases broken, it simply underscores the lack of conviction the past few days have brought. It is as if now that the war is coming to a close, traders are confused about just where to hang their hats. They will likely turn back to the economy and unfortunately it doesn't look so good right now. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8203 Moving Averages: (Simple) 10-dma: 8209 50-dma: 8002 200-dma: 8345 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 868 Moving Averages: (Simple) 10-dma: 871 50-dma: 848 200-dma: 882 Nasdaq-100 ($NDX) 52-week High: 1573 52-week Low : 795 Current : 1026 Moving Averages: (Simple) 10-dma: 1040 50-dma: 1013 200-dma: 989 ----------------------------------------------------------------- The Semiconductor Index (SOX): The SOX rolled over and headed back below support at the 300 level on Friday. The low of 296 amounted to the third successful test of the 50-dma (currently 295) in as many sessions. However, the action of the past two days has violated an upward sloping trend line connecting the February, March and early April lows, so a break below that 50- dma could also be seen as confirmation of a bearish pennant breakdown. 52-week High: 618 52-week Low : 209 Current : 298 Moving Averages: (Simple) 21-dma: 314 50-dma: 295 200-dma: 306 ----------------------------------------------------------------- Market Volatility The VIX continued its slide from support in the 29-30% range. This indicates a possible slide to the next support level at 26% and that would equate to a rally in equities. As mentioned above, many intermarket relationships were stretched today, so traders should view the break with skepticism. However, it still gives us bullish implications. CBOE Market Volatility Index (VIX) = 28.27 -0.69 Nasdaq-100 Volatility Index (VXN) = 39.62 -0.71 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.79 495,087 393,321 Equity Only 0.66 333,937 219,556 OEX 0.74 39,688 29,240 QQQ 0.97 42,308 41,132 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 43.9 + 0 Bull Confirmed NASDAQ-100 56.0 - 1 Bull Alert Dow Indust. 43.3 + 0 Bull Alert S&P 500 47.0 + 0 Bull Confirmed S&P 100 45.0 + 0 Bull Alert Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.28 10-Day Arms Index 1.26 21-Day Arms Index 1.26 55-Day Arms Index 1.37 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1341 1437 NASDAQ 1395 1572 New Highs New Lows NYSE 50 31 NASDAQ 70 42 Volume (in millions) NYSE 1,313 NASDAQ 1,198 ----------------------------------------------------------------- Commitments Of Traders Report: 04/08/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added to the long side and reduced short positions for a net long gain of 4,000 contracts. Small traders reduced both sides for a net reduction of 3,000 contracts from the long side. Commercials Long Short Net % Of OI 03/18/03 483,224 490,582 ( 7,358) (0.1%) 03/25/03 424,781 415,258 9,523 1.1% 04/01/03 417,637 409,332 8,305 1.0% 04/08/03 420,084 407,452 12,632 1.5% Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: 12,632 - 4/8/03 Small Traders Long Short Net % of OI 03/18/03 184,907 153,400 31,507 9.3% 03/25/03 143,402 123,178 20,224 7.6% 04/01/03 143,580 126,594 16,986 6.3% 04/08/03 136,173 122,006 14,167 5.5% Most bearish reading of the year: 14,167 - 4/08/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 The small trader change in data seems rather extreme from the last report to this one and as a new addition to the newsletter, we will wait to draw conclusions until we have a more reliable data stream. Commercials Long Short Net % Of OI 04/01/03 98,460 321,335 222,875 (53.1%) 04/08/03 114,210 344,961 230,751 (50.3%) Most bearish reading of the year: 230,751 - 04/08/03 Most bullish reading of the year: 222,875 - 04/01/03 Small Traders Long Short Net % of OI 04/01/03 2,296 1,146 1,150 33.4% 04/08/03 319,460 35,629 283,831 79.9% Most bearish reading of the year: 1,150 - 04/01/03 Most bullish reading of the year: 283,831 - 04/01/03 NASDAQ-100 Commercials added 10% to the long contract position while leaving shorts unchanged. Small traders added slightly more contracts to the short position. Commercials Long Short Net % of OI 03/18/03 58,877 64,302 ( 5,425) ( 4.4%) 03/25/03 44,403 36,436 7,967 9.9% 04/01/03 40,493 36,893 3,600 4.7% 04/08/03 44,257 36,711 7,546 9.3% Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 03/18/03 37,097 26,951 10,146 15.8% 03/25/03 10,313 20,080 ( 9,767) (32.1%) 04/01/03 9,771 13,306 ( 3,535) (15.3%) 04/08/03 11,365 17,790 ( 6,425) (22.0%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials left positions relatively unchanged, while small traders did the same. Commercials Long Short Net % of OI 03/18/03 26,880 18,853 8,027 17.6% 03/25/03 19,752 10,212 9,540 31.8% 04/01/03 19,068 12,672 6,396 20.2% 04/08/03 18,566 12,616 5,950 19.1% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 03/18/03 6,589 8,343 (1,754) (11.7%) 03/25/03 5,076 7,721 (2,645) (20.7%) 04/03/01 5,142 7,459 (2,317) (18.4%) 04/08/03 5,886 7,964 (2,078) (15.0%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *************** ASK THE ANALYST *************** Calculating a % probability of Fed rate cut When there is talk about the Fed cutting rates, how is that percentage probability computed? What's the formula? Is there a public site where anyone can see the raw figures and do the math themselves? Is there a site where the computed percentage can be found? We often hear reports where a probability of a Fed rate cut is forecasted for a particular FOMC meeting. You've heard it mentioned on TV or radio, or read it in a newspaper or magazine. Just how the heck is a probability assigned to such an event as a rate cut or rate hike at one of Fed meetings where important decisions are made as it relates to interest rates? And why should any trader or investor care about this futures contract to begin with? Believe it or not.... YOU or at least other traders in the debt/interest rate markets, which is a BIG PART of the MARKET, helps determine this "probability" of Fed action at one of their meetings. Traders will PAY ATTENTION to this futures contract as it gives some INSIGHT into the MARKET's mindset. The Fed raises or loweres interest rates for two reasons. One reason is to cool down (raise rates) an economy as inflation often times results from a surge in demand for products and goods if demand outpaces supply goods and services, or try and stimulate (lower rates) an economy by lowering the borrowing cost of capital that might have businesses making purchases they might not otherwise make with the cost of capital being deemed "too high." The MAIN reason the Fed will adjust its Fed Funds rate is to protect against inflation, which in the end is simply a result of DEMAND exceeding SUPPLY of a particular good or service. How can you the trade/investor have impact on this probability? By placing bets (bullish or bearish) in the Fed funds futures and OPTIONS markets! That right! OPTIONS! Did you know that the Chicago Board of Trade just launched a new derivative that allows traders to make bets on Fed action on interest rates and profit from a correct prediction? It's true! The CBOT just launched this new options product on March 14. http://www.cbot.com/cbot/www/cont_detail/0,1493,10+24+109+11402,00.html How is the probability calculated? Once you get the hang of it, it's really pretty easy. All you have to know is two things. The first item you must know is the CURRENT Fed Funds Rate. A neat site I found is Money-rates.com http://www.money-rates.com/keyrates.htm where the Fed Funds Rate is posted along with other key interest rates. This rate will be your "constant" from which you can begin figuring out just what the probability of a rate cut will be. The second item you will need is the current (today's) Fed Funds FUTURES contract trade. This is a VARIABLE that can change second-by-second, minute-by-minute or day-by-day. This is the VARIABLE where market participants will VOTE with their money on just what they think the FOMC is going to do at the next Fed meeting. Here's a very interesting comment from the Fed dating back to January 4, 2001 regarding the use and potential "misuse" of the Fed funds futures. http://www.clevelandfed.org/Research/Com2001/1001pr.htm If you were a CFO of a large corporation and contemplating a large purchase of equipment that you were going to finance with borrowing, you might be keeping and eye on Fed Funds futures to try and "time" or at use the potential change in interest rate policy to influence the timing of your purchasing decision. Now... here we are on Sunday, April 13, 2003. I know, as do you, that the current Fed Funds Rate is 1.25% (this is our CONTSTANT) until the next FOMC meeting. Yes... sometimes the Fed will give us a "surprise" inter-meeting rate move, but this is where the Fed Funds Futures comes in. The Fed usually moves on interest rates in 0.25-point moves or does nothing at all and keeps rates flat. I use my q-charts symbol (CBOT:ff03k) to get the May futures contract trade, however, for the most part, it is sufficient to simply get an end of day quote from the CBOT site http://www.cbot.com/cbot/quotes/fin_futures/0,1860,FF+1,00.html and their symbol for 30 Day Federal Funds is (ff). Once we have our CONSTANT (current) and our VARIABLE (futures) Fed Funds Rates, we can begin working on how to assign a probability and prediction of what the Fed will do. Let's look at a chart of the May Fed Funds Futures contract (ff03k) and it can be very interesting for traders to see what the MARKET was thinking, perhaps why it was thinking the way it was, and it may have actually had or have influence on what STOCK traders are doing with their money based on Fed policy. In the chart below, I'm also going to show the equation for calculating the actual Fed funds futures "interest rate." You'll need to do this in order to interpret the current trade of 98.795 in Fed interest rate terms. It's real easy. May Fed Funds Futures Contract (ff03k) - Daily Intervals From a base value of 100, we see that the MARKET is currently predicting a Fed Funds Rate of 1.205% at the May 6th meeting. Since the Fed usually moves its key rate of interest in 0.25 increments, one would either expect rates to remain unchanged (current rate is 1.25%), with a slight probability of a rate increase. I'll discuss how we can assign a probability to this in a minute. I've made a couple of notes on the Fed Funds futures contract, which really shoots a hole in some trader's theory that Fed rate cuts are a "positive sign" for the stock market. While Fed rate cuts can create capital liquidity for a stagnate or slowing economy by lowering interest rates, the fact that the Fed is cutting rates gives the impression of future slowing where stimulus is actually needed. A market technician can perhaps see how a level of RESISTANCE was broken to the upside on December 17th on a closing basis when the May Fed Funds Futures contract (ff03m) broke above 98.75 on the chart began moving higher. Now... on November 6, 2002, the Fed lowered rates by 50 basis points to 1.25%. Was it a good sign for the May Fed funds futures and MARKET to begin thinking the economy needed ANOTHER rate cut in May? From December 17 to March 10, the MARKET was now fully pricing in another 25 basis point rate cut wasn't it? See how the SPX benchmarks from those dates had the SPX falling nearly 100 points? Wow! So much for rate cuts being a good sign for the stock market. Lets look at how we can perhaps assign and then follow a "probabilities" forecast of Fed action as it relates to the upcoming Fed meeting. As each day passes, the MARKET gathers more information from economic reports and global events to make a decision on what the Fed will do and why the Fed might do what is does, or doesn't do. On the above chart, I market the "range" of 98.75 to 99.00 to mark a 25 basis point or 0.25% range. Did you find the tool in your toolbox that can help assign a % probability to Fed action? Retracement! An excellent tool for trading levels and breaking things up into ranges. Check it out! May Fed Funds Futures Contract (ff03k) - Daily Intervals Using a retracement bracket from 98.75 to 99.00 and dividing this RANGE into increments of 10%, all of a sudden, we can sound like an overly astute TV commentator or "Fed Watcher" and say "the market currently sees a less-than 20% chance of a Fed rate cut at the May 6th meeting." Heee, heee, heee. I bet you thought somebody won a Nobel Prize for mathematical computation and forecasting for this didn't you? It can be "interesting" to look for "spikes" in the Fed Funds futures contracts and look for DIVERGENCE to news events that may give "clue" to stock market action. For instance... on March 31 the Chicago PMI fell below the 50.00 level for the first time since October. This "should have" perhaps been viewed as a negative as it showed CONTRACTION at the industrial level. If the MARKET felt the economy was really beginning to WEAKEN (bad for stocks?) then we might have expected the May Fed Fund futures to rise back toward 99.00 and see an increasing probability for a Fed rate cut to 1.00%. Right? But it didn't and over the next couple of days, started trending back lower. What happened? Stocks rallied strong the following sessions! Gosh darned it! I will admit I did not make this observation at the time in my Index Trader Wrap. I would have looked like a "genius" if I had. However, I did go back and look at my March 31st Index Trader Wrap and by golly, we were indeed looking to take partial BULLISH positions in the indexes the next day in some "zones of support!" Anyway... I don't want this to get into a "market analysis" type of article, but you now have some idea of how Fed Funds Futures can be used to try and get inside the mind of the MARKET. How a "probability" of a rate cut is determined for a particular month, and how that probability can change from day to day as the MARKET gathers information from global events and domestic economic reports that may impact Fed policy on interest rates. If you decide to trade option on Fed Funds futures... think about this. Imagine from the above chart that you had made a bet a couple of months ago that the Fed would cut rates by 25 basis points at its May 6th meeting, which would have put the Fed Funds Rate at 1.00%. When the Fed Funds Futures contract got within 10% of YOU being correct, what was your further UPSIDE as it relates to your DOWNSIDE? If you held a BULLISH position in the futures contract, or an options contract, are you holding out for 99.00? He-double-toothpicks probably not, unless of course you then thought the Fed might "surprise" and cut 50 basis points. Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of April 14th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ACN Accenture Mon, Apr 14 Before the Bell 0.24 BAC Bank of America Corp Mon, Apr 14 Before the Bell 1.48 BBT BB&T Corporation Mon, Apr 14 Before the Bell 0.71 CSL Carlisle Companies Mon, Apr 14 After the Bell 0.49 C Citigroup Inc. Mon, Apr 14 -----N/A----- 0.77 ETN Eaton Mon, Apr 14 Before the Bell 0.96 FNM Fannie Mae Mon, Apr 14 Before the Bell 1.73 FTN First Tennessee Natl Mon, Apr 14 Before the Bell 0.81 FBF FleetBoston Finl Corp Mon, Apr 14 Before the Bell 0.55 HU Hudson United Bancorp Mon, Apr 14 Before the Bell 0.63 GMH Hughes Electronics Mon, Apr 14 Before the Bell -0.07 IBM Intl Business Mach Mon, Apr 14 After the Bell 0.80 NVLS Novellus Systems, Inc Mon, Apr 14 -----N/A----- 0.07 RMBS Rambus Inc. Mon, Apr 14 After the Bell 0.05 RPM RPM, Inc. Mon, Apr 14 Before the Bell 0.04 NYT The NY Times Company Mon, Apr 14 Before the Bell 0.42 UIS Unisys Mon, Apr 14 Before the Bell 0.12 ------------------------- TUESDAY ------------------------------ ADO Adecco SA Tue, Apr 15 Before the Bell N/A ADTN ADTRAN, Inc. Tue, Apr 15 Before the Bell 0.24 ADS All Data Sys Corp Tue, Apr 15 -----N/A----- 0.15 DOX Amdocs Limited Tue, Apr 15 After the Bell 0.19 ASO AmSouth Bancorp Tue, Apr 15 Before the Bell 0.43 ONE Bank One Tue, Apr 15 Before the Bell 0.72 BLK BlackRock, Inc. Tue, Apr 15 Before the Bell 0.54 BRE BRE PROPERTIES INC Tue, Apr 15 After the Bell 0.60 BCR C.R. Bard, Inc. Tue, Apr 15 Before the Bell 0.88 CDN Cadence Design Sys Tue, Apr 15 After the Bell 0.03 CDWC CDW Comp Centers, Inc Tue, Apr 15 After the Bell 0.48 CLS Celestica Tue, Apr 15 After the Bell 0.07 CHKP CheckPoint Sftwr Tech Tue, Apr 15 Before the Bell 0.24 CYN City National Corp Tue, Apr 15 After the Bell 0.89 CNB Colonial BancGroup Tue, Apr 15 -----N/A----- 0.28 CBSH Commerce Bancshares Tue, Apr 15 Before the Bell 0.73 DCLK DoubleClick Tue, Apr 15 After the Bell 0.01 ET E*TRADE Group, Inc. Tue, Apr 15 -----N/A----- 0.10 FBAN F.N.B. Corporation Tue, Apr 15 After the Bell 0.53 FITB Fifth Third Bancorp Tue, Apr 15 Before the Bell 0.72 FULT Fulton Financial Tue, Apr 15 -----N/A----- 0.34 GCI Gannett Tue, Apr 15 Before the Bell 0.92 GM General Motors Corp. Tue, Apr 15 Before the Bell 1.55 GPT GreenPoint Financial Tue, Apr 15 Before the Bell 1.46 RX IMS Health Tue, Apr 15 After the Bell 0.20 INTC Intel Corporation Tue, Apr 15 After the Bell 0.12 JEF Jefferies Group Tue, Apr 15 Before the Bell 0.50 JNJ Johnson & Johnson Tue, Apr 15 Before the Bell 0.68 JCI Johnson Controls Tue, Apr 15 After the Bell 1.38 KRI Knight Ridder Tue, Apr 15 Before the Bell 0.62 KFT Kraft Foods Tue, Apr 15 After the Bell 0.48 LAB LaBranche & Co Inc. Tue, Apr 15 Before the Bell 0.07 LLTC Linear Technology Tue, Apr 15 -----N/A----- 0.19 MAN Manpower Tue, Apr 15 Before the Bell 0.19 MEL Mellon Financial Corp Tue, Apr 15 Before the Bell 0.37 MTG MGIC Investment Corp. Tue, Apr 15 Before the Bell 1.35 MSFT Microsoft Tue, Apr 15 After the Bell 0.24 MLNM Millennium Pharm Tue, Apr 15 After the Bell -0.30 MIL Millipore Corp. Tue, Apr 15 After the Bell 0.41 MOT Motorola Inc. Tue, Apr 15 After the Bell 0.01 NTRS Northern Trust Tue, Apr 15 Before the Bell 0.44 NVS Novartis Corporation Tue, Apr 15 Before the Bell 0.46 JNC Nuveen Investments Tue, Apr 15 Before the Bell 0.34 PH Parker Hannifin Corp. Tue, Apr 15 -----N/A----- 0.47 PII Polaris Industries Tue, Apr 15 Before the Bell 0.54 PP Prentiss Properties Tue, Apr 15 After the Bell 0.80 PEG PSEG Tue, Apr 15 After the Bell 1.20 RJF Raymond James Tue, Apr 15 After the Bell 0.34 RHI Robert Half Intl Tue, Apr 15 After the Bell -0.02 PHG Royal Philips Elect Tue, Apr 15 Before the Bell N/A STX Seagate Technology Tue, Apr 15 After the Bell 0.27 SKFR SKF AB Tue, Apr 15 -----N/A----- N/A SOV Sovereign Bancorp Tue, Apr 15 After the Bell 0.32 STT State Street Corp Tue, Apr 15 Before the Bell 0.46 TER Teradyne Inc. Tue, Apr 15 After the Bell -0.28 TXN Texas Instruments Tue, Apr 15 After the Bell 0.06 ALL The Allstate Corp Tue, Apr 15 After the Bell 0.78 MNI The McClatchy Company Tue, Apr 15 Before the Bell 0.56 TSFG The South Finl Group Tue, Apr 15 Before the Bell 0.38 TBL The Timberland Co Tue, Apr 15 Before the Bell 0.31 TRMK Trustmark Corporation Tue, Apr 15 -----N/A----- 0.48 TSS TSYS Tue, Apr 15 -----N/A----- 0.16 USB U.S. Bancorp Tue, Apr 15 -----N/A----- 0.47 WM Washington Mutual Tue, Apr 15 After the Bell 1.04 WBS Webster Financial Tue, Apr 15 Before the Bell 0.86 WFC Wells Fargo Tue, Apr 15 Before the Bell 0.87 WABC Westamerica Bancorp Tue, Apr 15 -----N/A----- 0.69 ----------------------- WEDNESDAY ----------------------------- AMD Advanced Micro Dev Wed, Apr 16 After the Bell -0.49 AKZOY Akzo Nobel N.V. Wed, Apr 16 -----N/A----- N/A AL Alcan Inc. Wed, Apr 16 -----N/A----- 0.36 MO Altria Group, Inc. Wed, Apr 16 Before the Bell 1.06 ASD American Standard Wed, Apr 16 -----N/A----- 0.87 APH Amphenol Wed, Apr 16 Before the Bell 0.53 AAPL Apple Computer, Inc. Wed, Apr 16 -----N/A----- 0.02 ATR AptarGroup Wed, Apr 16 After the Bell 0.49 ASML ASML Holdings NV Wed, Apr 16 -----N/A----- -0.03 AVCT Avocent Corporation Wed, Apr 16 -----N/A----- 0.26 BXS BancorpSouth, Inc. Wed, Apr 16 After the Bell 0.37 BAX BAXTER INTL INC Wed, Apr 16 Before the Bell 0.37 BOKF BOK Financial Wed, Apr 16 -----N/A----- 0.61 BRCM Broadcom Wed, Apr 16 After the Bell 0.02 CAT Caterpillar Inc. Wed, Apr 16 Before the Bell 0.25 CNT CENTERPOINT PPTYS TR Wed, Apr 16 After the Bell 1.02 CF Charter One Financial Wed, Apr 16 -----N/A----- 0.64 CMH CLAYTON HOMES INC Wed, Apr 16 Before the Bell 0.19 CMA Comerica Incorporated Wed, Apr 16 Before the Bell 0.99 CBSS Compass Bancshares Wed, Apr 16 -----N/A----- 0.63 COT Cott Corporation Wed, Apr 16 Before the Bell 0.14 CR Crane Wed, Apr 16 After the Bell 0.27 CREE Cree Inc. Wed, Apr 16 After the Bell 0.14 DPH Delphi Wed, Apr 16 Before the Bell 0.22 D Dominion Resources Wed, Apr 16 Before the Bell 1.25 DOV Dover Corporation Wed, Apr 16 After the Bell 0.24 DSL Downey Financial Corp Wed, Apr 16 Before the Bell 1.14 EMC EMC Corporation Wed, Apr 16 Before the Bell 0.01 ESV ENSCO International Wed, Apr 16 Before the Bell 0.16 F Ford Motor Company Wed, Apr 16 -----N/A----- 0.22 GD General Dynamics Wed, Apr 16 Before the Bell 1.02 GNTX Gentex Wed, Apr 16 -----N/A----- 0.31 GENZ Genzyme Wed, Apr 16 Before the Bell 0.31 GDT Guidant Wed, Apr 16 -----N/A----- 0.57 HDI Harley-Davidson Wed, Apr 16 Before the Bell 0.50 HRS Harris Wed, Apr 16 After the Bell 0.33 HRH Hilb, Rogal Hamilton Wed, Apr 16 During the Market 0.52 HCBK Hudson City Bancorp Wed, Apr 16 Before the Bell 0.27 HBAN Huntington Bancshares Wed, Apr 16 Before the Bell 0.36 IDPH IDEC Pharmaceuticals Wed, Apr 16 -----N/A----- 0.24 ITW Illinois Tool Works Wed, Apr 16 Before the Bell 0.65 N Inco Wed, Apr 16 -----N/A----- 0.19 JPM J.P. Morgan Chase Co Wed, Apr 16 Before the Bell 0.51 KMP Kinder Morgan Wed, Apr 16 After the Bell 0.50 LRCX Lam Research Wed, Apr 16 After the Bell 0.00 LEA Lear Corp. Wed, Apr 16 Before the Bell 0.98 LEG Leggett & Platt Wed, Apr 16 After the Bell 0.25 LYG Lloyds TSB Group Wed, Apr 16 -----N/A----- N/A MYG Maytag Wed, Apr 16 Before the Bell 0.57 MEG Media General Wed, Apr 16 Before the Bell 0.10 MERQ Mercury Interactive Wed, Apr 16 After the Bell 0.20 MER Merrill Lynch Wed, Apr 16 Before the Bell 0.61 MGG MGM MIRAGE Wed, Apr 16 -----N/A----- 0.39 MHK Mohawk Industries Wed, Apr 16 After the Bell 0.61 MOLX Molex Inc. Wed, Apr 16 After the Bell 0.15 NCC National City Wed, Apr 16 Before the Bell 0.64 NYB New York Com Bancorp Wed, Apr 16 Before the Bell 0.61 NFB North Fork Bancorp Wed, Apr 16 -----N/A----- 0.67 BTU Peabody Energy Corp. Wed, Apr 16 Before the Bell 0.12 PBCT People's Bank Wed, Apr 16 -----N/A----- 0.27 PPDI Pharm Prod Devel Wed, Apr 16 After the Bell 0.38 PFGI Provident Finl Group Wed, Apr 16 -----N/A----- 0.54 RDN Radian Group Wed, Apr 16 After the Bell 1.13 RTRSY Reuters Group Wed, Apr 16 Before the Bell N/A COL Rockwell Collins, Inc Wed, Apr 16 Before the Bell 0.31 RDC Rowan Companies, Inc. Wed, Apr 16 Before the Bell -0.12 SNDK SanDisk Corp. Wed, Apr 16 After the Bell 0.18 SKYF Sky Financial Group Wed, Apr 16 Before the Bell 0.42 SON Sonoco Products Wed, Apr 16 -----N/A----- 0.31 SOTR SouthTrust Wed, Apr 16 -----N/A----- 0.49 STJ St. Jude Medical, Inc Wed, Apr 16 Before the Bell 0.40 SYK Stryker Wed, Apr 16 After the Bell 0.48 SNV Synovus Financial Wed, Apr 16 -----N/A----- 0.32 TCB TCF Financial Corp Wed, Apr 16 Before the Bell 0.83 TFX Teleflex, Incorp Wed, Apr 16 After the Bell 0.71 TLAB Tellabs Wed, Apr 16 Before the Bell -0.06 TXT Textron Inc. Wed, Apr 16 Before the Bell 0.51 BK The Bank of New York Wed, Apr 16 Before the Bell 0.41 KO The Coca-Cola Company Wed, Apr 16 Before the Bell 0.37 PGR The Progressive Group Wed, Apr 16 After the Bell 1.09 TRB Tribune Wed, Apr 16 Before the Bell 0.39 UB UnionBanCal Wed, Apr 16 -----N/A----- 0.89 UNH UnitedHealth Group Wed, Apr 16 Before the Bell 1.23 UHS Universal Health Serv Wed, Apr 16 After the Bell 0.83 UTSI UTStarcom Wed, Apr 16 After the Bell 0.28 GWW W.W. Grainger Wed, Apr 16 Before the Bell 0.57 WB Wachovia Wed, Apr 16 Before the Bell 0.77 ------------------------- THURSDAY ----------------------------- ABK AMBAC FINL GROUP INC Thu, Apr 17 Before the Bell 1.24 ASBC Associated Banc-Corp Thu, Apr 17 -----N/A----- 0.73 AF Astoria Financial Thu, Apr 17 Before the Bell 0.68 ADP Automatic Data Proc Thu, Apr 17 -----N/A----- 0.52 BNK Banknorth Group Inc. Thu, Apr 17 -----N/A----- 0.53 BGEN Biogen, Inc. Thu, Apr 17 Before the Bell 0.48 POS Catalina Marketing Thu, Apr 17 -----N/A----- 0.40 CEN Ceridian Thu, Apr 17 Before the Bell 0.18 CL Colgate-Palmolive Thu, Apr 17 -----N/A----- 0.55 CFBX Com First Bankshares Thu, Apr 17 Before the Bell 0.50 ED Consolidated Edison Thu, Apr 17 -----N/A----- 0.74 CUM Cummins Inc. Thu, Apr 17 Before the Bell -0.57 CYT Cytec Industries Inc. Thu, Apr 17 After the Bell 0.46 DHI D.R. Horton Thu, Apr 17 -----N/A----- 0.76 DHR Danaher Thu, Apr 17 Before the Bell 0.64 DAL Delta Air Lines Thu, Apr 17 -----N/A----- -3.49 DLX Deluxe Corporation Thu, Apr 17 Before the Bell 0.84 DO Diam Offshr Drilling Thu, Apr 17 Before the Bell -0.06 FCS Fairchild Semi Intl Thu, Apr 17 After the Bell 0.03 FHR Fairmont Htls & Rsrts Thu, Apr 17 -----N/A----- 0.12 FVB First Virginia Banks Thu, Apr 17 Before the Bell 0.65 FMER FirstMerit Thu, Apr 17 Before the Bell 0.44 FO Fortune Brands Thu, Apr 17 Before the Bell 0.67 FCX Frprt-McMoRan Cop Gld Thu, Apr 17 Before the Bell 0.33 GPC Genuine Parts Thu, Apr 17 -----N/A----- 0.52 GP Georgia-Pacific Thu, Apr 17 Before the Bell -0.01 GDW Golden West Financial Thu, Apr 17 -----N/A----- 1.62 GGG Graco Thu, Apr 17 Before the Bell 0.36 HSY Hershey Foods Corp Thu, Apr 17 Before the Bell 0.73 HIB Hibernia Corp. Thu, Apr 17 Before the Bell 0.42 HON Honeywell Thu, Apr 17 Before the Bell 0.33 IR Ingersoll-Rand Co. Thu, Apr 17 Before the Bell 0.61 IVC Invacare Thu, Apr 17 -----N/A----- 0.39 ESI ITT Educational Serv Thu, Apr 17 Before the Bell 0.18 JEC Jacobs Engineering Gr Thu, Apr 17 Before the Bell 0.55 KEY Keycorp Thu, Apr 17 Before the Bell 0.53 MAT Mattel Thu, Apr 17 Before the Bell 0.03 NCF Natl Comm Finl Corp Thu, Apr 17 During the Market 0.38 NATI National Instruments Thu, Apr 17 -----N/A----- 0.12 NOK Nokia Thu, Apr 17 -----N/A----- 0.17 ODP Office Depot Inc. Thu, Apr 17 Before the Bell 0.32 PCBC Pacific Capital Banc Thu, Apr 17 Before the Bell 1.00 PNR Pentair, Inc. Thu, Apr 17 Before the Bell 0.54 PEP Pepsico Thu, Apr 17 Before the Bell 0.42 PBI Pitney Bowes Inc. Thu, Apr 17 After the Bell 0.54 PMCS PMC-Sierra, Inc. Thu, Apr 17 After the Bell -0.06 PNC PNC Finl Services Grp Thu, Apr 17 -----N/A----- 0.93 PHCC PRIORITY HLTHCARE Thu, Apr 17 -----N/A----- 0.30 PUK Prudential PLC Thu, Apr 17 -----N/A----- N/A RG Rogers Comm Inc. Thu, Apr 17 Before the Bell N/A RCN Rogers Wireless Comm Thu, Apr 17 -----N/A----- N/A TSG Sabre Holdings Corp. Thu, Apr 17 Before the Bell 0.36 SAP SAP AG Thu, Apr 17 -----N/A----- 0.13 SFA Scientific-Atlanta Thu, Apr 17 After the Bell 0.16 S Sears, Roebuck and Co Thu, Apr 17 Before the Bell 0.56 SEIC SEI Investments Thu, Apr 17 Before the Bell 0.32 SLM SLM Corporation Thu, Apr 17 Before the Bell 1.27 SII Smith International Thu, Apr 17 Before the Bell 0.22 STU Student Loan Thu, Apr 17 -----N/A----- N/A SY Sybase Thu, Apr 17 -----N/A----- 0.18 UPC Union Planters Corp Thu, Apr 17 Before the Bell 0.66 UBSI United Bankshares Thu, Apr 17 -----N/A----- 0.53 UTX United Technologies Thu, Apr 17 Before the Bell 0.98 VLY Valley Natl Bancorp Thu, Apr 17 -----N/A----- 0.40 WFSL Washington Federal Thu, Apr 17 Before the Bell 0.53 WTNY Whitney Holding Corp Thu, Apr 17 -----N/A----- 0.60 WL Wilmington Trust Thu, Apr 17 -----N/A----- 0.50 WIT Wipro Limited Thu, Apr 17 -----N/A----- 0.25 WIT Wipro Limited Thu, Apr 17 -----N/A----- 0.25 XLNX Xilinx, Inc. Thu, Apr 17 After the Bell 0.13 ZBRA Zebra Technologies Thu, Apr 17 Before the Bell 0.64 ZION Zions Bancorp Thu, Apr 17 After the Bell 0.93 ------------------------- FRIDAY ------------------------------- None ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable AVD American Vanguard Corp. 3:2 Apr. 11th Apr. 14th TTC Toro Company 2:1 Apr. 14th Apr. 15th WSB Washington Savings 3:2 Apr. 23rd Apr. 24th -------------------------- Economic Reports This Week -------------------------- Welcome to the 2003 Q1 earnings season. If the conflict in Iraq can simmer for a few days, Wall Street will be faced with a heavy onslaught of first quarter numbers. Expectations are not high. Click inside for this week's economic reports. ============================================================== -For- Monday, 04/14/02 ---------------- Business Inventories(BB)Feb Forecast: 0.2% Previous: 0.2% Tuesday, 04/15/02 ----------------- Industrial Prduction(DM)Mar Forecast: -0.2% Previous: 0.1% Capacity Utilization(DM)Mar Forecast: 75.4% Previous: 75.6% Wednesday, 04/16/02 ------------------- Housing Starts (BB) Mar Forecast: 1.685M Previous: 1.622M Building Permits (BB) Mar Forecast: 1.725M Previous: 1.811M CPI (BB) Mar Forecast: 0.4% Previous: 0.5% Core CPI (BB) Mar Forecast: 0.2% Previous: 0.2% Thursday, 04/17/02 ------------------ Initial Claims (BB) 04/12 Forecast: N/A Previous: 405K Philadelphia Fed (DM) Apr Forecast: -6.5 Previous: -8.0 Friday, 04/18/02 ---------------- Treasury Budget (DM) Mar Forecast:-$55.0B Previous: -$64.2B Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************* SWING TRADE GAME PLAN ********************* The Swing Trade Game Plan's nightly update is currently offline and will return shortly. To read previous Swing Trader Game Plans click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. 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The Option Investor Newsletter Sunday 04-13-2003 Sunday 2 of 5 In Section Two: Watch List: 1 Bearish, 3 Bullish Daily Results Call Play of the Day: UNH Put Play of the Day: NOC Dropped Calls: None Dropped Puts: WHR ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** WATCH LIST ********** Lockheed Martin - LMT - close: $44.11 change: -0.64 If you read the Market Posture then you'll know that the DFI defense sector has produced a fresh triple-bottom breakdown on its PnF chart. Not surprisingly, shares of LMT have broken under recent support as well. The stock's MACD has rolled over and re- crossed the zero line heading lower. If you look at the weekly chart, this stock looks like it's on a collision course with $40. Be aware that earnings are expected on April 22nd. FYI: Shares of RTN, another defense stock, appear to be in the same boat. Chart= --- Trimble Navigation Limited - TRMB - close: $20.67 change: +0.64 TRMB makes the list as one of our bullish candidates. The stock has shown an incredible amount of relative strength. Here's why...Trimble makes GPS systems. If you've been following the war coverage then you know the military uses GPS for almost everything. However, what you may not know is that civilian sales of GPS equipment are expected to more than double by 2008 to more than $10 billion. Today's close above $20 for TRMB puts the stock above multi-year resistance. One thing to keep in mind is options on TRMB are very lighted traded. Use caution. Wall Street expects the company to announce earnings at the end of April. Chart= --- Gap Inc - GPS - close: 16.20 change: +0.41 Surprise, GPS may be making a comeback and today it shows up on the watch list as one of our bullish candidates. One of our own analysts turned bullish on GPS eight sessions ago when it broke out of the four-month consolidation pattern but we just didn't believe it. That's what you get for not trading what you see! Do you think it's possible that someone knew that GPS would turn in outstanding same store sales numbers of +9 percent this week, when most of the major outlet results were much poorer? The close over $16 is positive but more importantly, the $17 level is multi-month resistance going back to the middle of 2001. Trade carefully, but if you choose to go long, we might suggest a longer-term option like the June or Septembers. Chart= --- Quest Diagnostic - DGX - close: $59.87 change: +0.83 Rounding out this week's watch list candidates is DGX. The stock produced an incredible run from mid-March to early April. Five of the last six sessions has produced a classic pull back. The low on Thursday was a perfect bounce at the 38.2% retracement level and Friday's positive close looked encouraging. Here's what has us hesitant to go long. The stock could not maintain a close above $60 on Friday. Furthermore the MACD has produced a bearish crossover (on the daily chart) and the weekly oscillators are looking overbought and could roll as well. The PnF chart has rolled over into a column of O's but this is to be expected with such a sharp round of profit taking. Earnings are expected on April 22nd. We're going to keep our eye on this one to see if it rebounds back above $60. Should this occur then aggressive traders using tight intraday stops could potentially target a move back to the recent highs and beyond (maybe $65). Chart= *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AZO 75.24 -0.50 -0.79 -0.81 0.84 -1.87 New, Bouncing BBBY 37.46 -0.55 0.73 -0.71 0.77 0.46 $38 trigger BLL 57.21 -1.04 -0.02 -0.64 0.22 -0.99 21-dma bounce LXK 68.45 -2.13 -0.78 0.49 1.39 -2.20 Held $68 MEDI 32.41 -1.17 0.31 -0.57 0.01 -1.63 Long-term MMM 132.91 -2.39 0.92 -1.87 1.17 -2.04 $130 support UNH 92.93 -0.60 1.27 -1.28 -0.78 -0.10 $94 next? WFMI 56.49 -1.30 0.39 -0.25 0.59 -1.01 Higher low PUTS CDWC 39.80 -1.04 -0.59 -0.50 0.40 -2.79 sub-40 close LLL 36.24 -0.71 -0.45 -0.37 -0.85 -2.76 trend lower NOC 80.22 0.99 -0.30 0.20 -2.27 -2.79 relative low WHR 51.74 -0.63 0.08 -0.57 0.60 -0.63 Drop, 200-dma ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* United Health - UNH - close: 92.93 change: +1.29 stop: 89.48 See details in play list Put Play of the Day: ******************** Northrop Grumman - NOC - close: 80.22 change: -1.16 stop: 88.02 See details in play list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ None PUTS ^^^^ WHR - Whirlpool - close: 51.95 change: +0.21 stop: 53.25 WHR finally traded back above the 200-dma we were using as a gauge for its rollover. With that move and the indecisive market action, we are going to let this one go. While we have a hard time seeing a reason for buyers in WHR, there has been enough indecision to convince us not to waste any more time decay. There is still significant overhead resistance in the $52-$53 range, so traders who would like to give it more time can use this level to decide when the sentiment has turned bullish enough to reverse the tide. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 04-13-2003 Sunday 3 of 5 In Section Three: New Calls: AZO Current Calls: BBBY, BLL, LXK, MMM, UNH, WFMI New Puts: DOW (Where is the Dow Going?) ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** NEW CALL PLAYS ************** AutoZone, Inc. - AZO - close: 75.24 change: +0.34 stop: 72.00 Company Description: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why we like it: After a couple years of truly stellar performance, AZO finally got their comeuppance last fall, plunging from the high $80's to below $60. The majority of this selling pressure seemed to have been prompted by some comments in the company's December earnings report about rising inventory levels. Well those comments were like shouting fire in a crowded theatre and the downdraft was swift. Fast forward to today, and things are looking much healthier. After rebounding from its lows in late January, the stock spent more than 6 weeks consolidating near the $65 level and then exploded higher through the 50-dma on March 13th. That initial surge higher was capped by the $73 level (an important level of support from last fall's slide), which was also just below the 200-dma. After pulling back to find higher support near the 20-dma (then at $68.50), AZO took another run at the 200-dma in early April and absolutely smashed it, vaulting as high as $79 before running out of fuel. The pattern of higher lows continues though, with last week's pullback coming to a halt just above $73.50. Interestingly, that is just above the 10-dma ($73.86), which is just crossing up through the 200-dma (now at $73.10). Taken together with the rising 20-dma (currently $72.63), AZO should find strong support in the $72.50-73.50 area. The real key to AZO's recent strength is seen in the PnF chart, which really changed in favor of the bulls with the strong breakout in mid-March. That column of X extended from $63 to $73 before pulling back, generating a vertical count of $96. While that may not be achievable in the near term, it certainly seems possible for the stock to challenge the $80 level and quite possibly move into the November consolidation zone between $80-85. Because of the way AZO pulled back so sharply after its latest breakout attempt, we want to avoid entering this play on a breakout. Rather, intelligently buying the dips seems to be the strategy of choice. A return to the $73.00-73.50 area seems to be the best possibility for a solid entry, although an intraday dip as low as the $72.50 level can still be considered a viable entry. Given the strength of support in the $72-73 area, it seems like $72 is a good place to set our stop. A close below that level would be a clear indication that the bullish trend has come to a premature end. Suggested Options: Shorter Term: The May 75 Call will offer short-term traders the best return on an immediate move, with manageable risk. With April expiration looming next week though, this option should only be used by aggressive traders. Longer Term: Traders looking to capitalize on a sustained breakout move over the next few weeks will want to look to the May 80 Call or even the July 80 Call. These options are 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. BUY CALL APR-75 AZO-DO OI=899 at $1.60 SL=0.75 BUY CALL MAY-37 BHQ-EU OI=288 at $3.40 SL=1.75 BUY CALL MAY-40 BHQ-EH OI=796 at $1.20 SL=0.50 BUY CALL AUG-40 BHQ-HH OI=427 at $2.35 SL=1.25 Annotated Chart of AZO: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/AZO041303.gif Picked on April 8th at $75.24 Change since picked: +0.00 Earnings Date 06/03/03 (unconfirmed) Average Daily Volume = 1.36 mln ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ****************** CURRENT CALL PLAYS ****************** Bed Bath & Beyond - BBBY close: 37.46 change: +0.33 stop: 35.00 Company Description: Bed Bath & Beyond is an operator of stores selling predominantly better quality domestics merchandise and home furnishings typically found in better department stores. As of May, 2002, the company had stores in 44 states. Domestics merchandise includes bed linens and related items, bath items and kitchen textiles. Home Furnishings include kitchen and tabletop items, fine tabletop and giftware, basic housewares and general home furnishings. Why we like it: Even with the strong Retail numbers last week, the Retail index (RLX.X) just can't break out of its funk. Oh it is certainly giving it a good college try, but that $290 resistance level stopped the bulls cold again on Friday. This lack of bullish conviction is reflected clearly in our BBBY play. Despite the fact that the stock is trading near its all-time highs and showing excellent strength relative to the RLX, it is perhaps telling that the stock was unable to breach our $38 trigger on Friday, topping out intraday at $37.97. That isn't to say that it won't get the job done (we think it will), but it continues to keep us cautious on the play, especially with the potential for bearish divergence on the Stochastics oscillator (see chart below). On the more positive side, we can take note of the way the converged 10-dma ($36.15) and 20-dma ($36.00) are rapidly rising towards what looks like strong support in the $36.25-36.50 area. Despite the bearish tone on Friday, that had the RLX closing in the red, BBBY managed to hold onto positive territory after hitting a new all-time intraday high. We want to continue to exercise patience on BBBY because of that potential bearish divergence mentioned above, and that means not making the play active until it can show us the strength needed to trade $38. Aggressive traders will want to enter on the initial breakout, while those with a more conservative style will want to wait for a subsequent pullback to confirm support in the $37-38 area after the initial breakout. Suggested Options: Shorter Term: The May 37 Call will offer short-term traders the best return on an immediate move, with manageable risk. With April expiration looming next week, only the most aggressive traders should consider using the listed April option. Longer Term: Traders looking to capitalize on a sustained breakout move over the next few weeks will want to look to the May 40 Call or even the July 40 Call. These options are 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. BUY CALL APR-37 BHQ-DU OI=1755 at $0.85 SL=0.40 BUY CALL MAY-37 BHQ-EU OI=5455 at $1.85 SL=1.00 BUY CALL MAY-40 BHQ-EH OI=2357 at $0.80 SL=0.40 BUY CALL AUG-40 BHQ-HH OI=3322 at $2.20 SL=1.00 Annotated Chart of BBBY: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/BBBY041303.gif Picked on April 8th at $37.18 Change since picked: +0.28 Earnings Date 07/02/03 (unconfirmed) Average Daily Volume = 3.24 mln --- Ball Corporation - BLL - close: 57.21 change: +0.49 stop: 55.50 Company Summary: Ball Corp. is a manufacturer of metal and plastic packaging, primarily for beverages and foods, and a supplier of aerospace and other technologies and services to commercial and governmental customers. Ball's principal business is the manufacture and sale of rigid packaging products, primarily for beverages and foods. Polyethylene terephthalate packaging is the company's newest product line. The aerospace and technologies segment includes civil space systems, defense operations and commercial space operations. The defense operations business unit includes defense systems, systems engineering services and advanced antenna and video systems, as well as electro-optics and cryogenic systems and components. Why We Like It: Things were looking pretty tenuous for our BLL play by the middle of last week, as the stock had pulled back significantly from Monday's intraday high of $59.22. But the bulls managed to save the day by showing up with buy orders near the $56 level, which also happened to be right near the rising 20-dma (currently $56.19). The pullback over the past week has allowed that moving average to catch up and add to support near the $56 level, and with daily Stochastics just starting to turn up, it looks like the next upward leg is upon us. Adding to that perception on Friday, BLL gapped up over the 10-dma and managed to hold above that level into the close. Despite that encouraging sign, bulls can't be too happy about Friday's candle pattern, where the stock surged as high as $57.83, only to pull back to its opening level by the close, leaving behind a gravestone doji, which is normally a bearish pattern. That leaves us with the impression that Friday's gap is likely to fill early next week. Dips to support above $56 are still buyable for those still looking to take a position, but bear in mind that our BLL play is running out of time to make more significant upward progress. The company is due to report earnings on April 24th, giving us just over a week before we'll be forced to drop the play one way or the other. Due to the way BLL pulled back from last Monday's breakout move, we're not interested in chasing momentum entries in BLL. We'll have to settle for buying the dips. Maintain stops at $55.50. Suggested Options: Shorter Term: The May 55 Call will offer short-term traders the best return on an immediate move, with manageable risk. With April expiration looming next week, only the most aggressive traders should consider using the listed April option. Longer Term: Traders looking to capitalize on a sustained breakout move over the next two weeks will want to look to the May 60 Call or even the July 60 Call. These options are 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. BUY CALL APR-55 BLL-DK OI= 473 at $2.90 SL=1.50 BUY CALL MAY-55 BLL-EK OI=5190 at $4.00 SL=2.50 BUY CALL MAY-60 BLL-EL OI= 518 at $1.30 SL=0.75 BUY CALL AUG-60 BLL-HL OI= 519 at $2.90 SL=1.50 Annotated Chart of BLL: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/BLL041303.gif Picked on March 21st at $55.87 Change since picked: +1.34 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 446 K --- Lexmark Intl. - LXK - close: 68.45 change: -0.57 stop: 66.00 Company Description: Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. Why we like it: When we initiated coverage of LXK on Thursday, we were hoping to get a pullback to support in the $67-68 area to give us a better entry. Friday's session certainly got things going in the right direction with a pullback to $68.02 before a very slight lift into the close. Recall that the $67-68 area held up as strong support through the middle of last week and we're looking for it to continue to do so next week, with the added support being provided by the ascending trendline from the February lows now at $66.65 and the 20-dma ($66.98). LXK has blazed a trail of impressive revenue and earnings growth over the past year and that is a big part of why the stock is once again testing multi-year highs. Anticipation of another strong quarterly report on April 21st is likely to keep the stock's uptrend intact over the next week. Buying dips near support is our preferred entry strategy in anticipation of a renewed assault on the $71 resistance level. Traders that are set on taking a momentum entry will want to wait for a volume-backed move above $71.50 (last Monday's intraday high) before taking a position. LXK's PnF chart is still quite bullish, with a current price target of $79. So a breakout above Monday's highs could really gain some momentum heading into earnings. We're maintaining our stop at $66, just below major support. Suggested Options: Shorter Term: The May 70 Call will offer short-term traders the best return on an immediate move, with manageable risk. With April expiration looming next week, only the most aggressive traders should consider using the listed April options. Longer Term: Traders looking to capitalize on a sustained breakout move through expiration Friday without being subjected to the spectre of time decay will want to look to the May 70 Call or even the July 70 Call. BUY CALL APR-65 LXK-DM OI=2908 at $3.90 SL=2.50 BUY CALL MAY-65 LXK-EM OI= 618 at $5.60 SL=3.50 BUY CALL MAY-70 LXK-EN OI= 372 at $2.55 SL=1.25 BUY CALL JUL-70 LXK-GN OI=1909 at $4.60 SL=2.75 Annotated Chart of LXK: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/LXK041303.gif Picked on April 10th at $69.02 Change since picked: -0.57 Earnings Date 04/21/03 (confirmed) Average Daily Volume = 1.58 mln --- 3M Company - MMM - close: 132.91 change: +0.13 stop: 129.75 Company Description: Commonly known as the maker of the ubiquitous, adhesive-backed Post-It Notes, MMM is also a leading manufacturer of a variety of industrial, consumer, and medical products. Reflective sheeting on highway signs, respirators, spill-control sorbents, and Thinsulate brand insulations are just some of the company's industrial products. MMM also makes microbiology products, making it easier for food processors to test for the microbiological quality of food. Why we like it: While MMM hasn't demonstrated the sustained buying interest that we anticipated when we added the stock to our Call list, it has held its ground quite well considering it is the highest priced stock in the DOW. While the opening euphoria last Monday propelled the stock first through the $135 level and then to an intraday high of $136.75, the broad market rally didn't last and neither did MMM's. The pullback saw the stock dropping into the $131-132 area before finding support at the 20-dma (currently $131.83). One point of concern is the fact that daily Stochastics are showing the possibility of bearish divergence, and this potential weakness is confirmed by the MACD, which is just starting to roll over, although still well into positive territory. Contrasting this weakness is the On Balance Volume, which moved to its highest level since late November on Friday, showing there is still strong buying interest in the stock. For now, we'll continue to focus on buying support in the $131-132 area, leaving our stop at $129.75. For those traders that would prefer to buy strength, another break above $135 (which provided intraday resistance all last week) before entry. Note that the fuse is getting rather short on this play, as the company is set to release earnings on April 21st, giving MMM just one more week to prove itself. Suggested Options: Shorter Term: The May 130 Call will offer short-term traders the best return on an immediate move, with manageable risk. With April expiration looming next week, only the most aggressive traders should consider using the listed April option. Longer Term: Traders looking to capitalize on a move towards the PnF target of $172 may want to look to the May 135 Call or even the July 135 Call. This provides more time for the stock to move higher without time decay becoming a dominant factor over the short run. BUY CALL APR-130 MMM-DF OI=8534 at $3.70 SL=2.00 BUY CALL MAY-130 MMM-EF OI= 675 at $6.20 SL=4.25 BUY CALL MAY-135 MMM-EG OI=1233 at $3.30 SL=1.75 BUY CALL JUL-135 MMM-GG OI=2794 at $5.60 SL=3.50 Annotated Chart of MMM: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/MMM041303.gif Picked on March 27th at $131.66 Change since picked: +1.25 Earnings Date 04/21/03 (confirmed) Average Daily Volume = 2.37 mln --- United Health - UNH - close: 92.93 change: +1.29 stop: 89.48 Company Description: UnitedHealth Group is a diversified health and well-being enterprise that provides a full spectrum of resources and services to help people achieve improved health and well-being through all stages of life. UnitedHealth Group is organized into five businesses: UnitedHealthcare, Uniprise, Ovations, Specialized Care Services, and Ingenix (source: company press release) Why we like it: In Thursday's write-up, we discussed the possibility of entry on dips above $90. that strategy appears to have been sound, with UNH's bounce once again this morning. the stock added $1.29 and made another run toward the $94-$96 resistance area that we have highlighted as its next test. A broad market reversal kept an anchor tied to the stock. However, it performed admirably and made an argument that the outlier payments that hurt THC's earnings and and have been a problem for that company for the past year, don't seem to be an issue for UNH, or at least they are not so far. Those issues dragged down the HMO.X on Thursday, but the sector index rebounded from its 21-dma and made a run at the 200-dma. The HMO finished just $0.02 below that 200-dma, which sits at 530.13 and appears to have set a lower high on the bounce, rebounding from previous resistance at 520. With earnings due out in UNH on 4/16, we will be dropping the play for that reason and will not be recommending new entries just ahead of earnings. However, those traders who are willing to assume the earnings risk can continue to target new entries above $90, knowing that the stock has yet to break through the $94-96 resistance. if it does, the $100 level looks like a reasonable target and conservative traders can wait for a break above $96 to play that move. BUY CALL APR-85 UHB-DQ OI=3998 at $8.30 SL=4.10 BUY CALL APR-90 *UHB-DR OI=3414 at $3.80 SL=2.00 BUY CALL JUN-90 UHB-FR OI=4642 at $6.70 SL=3.30 BUY CALL JUN-95 UHB-FS OI=1465 at $3.80 SL=1.90 Annotated Chart of UNH: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/UNH041303.gif Picked on March 25th at $90.66 Change since picked: +2.27 Earnings Date 04/16/03 (unconfirmed) Average Daily Volume = 2.12 mln --- Whole Foods - WFMI - close: 56.49 change: -0.31 stop: 55.00*new* 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. Why we like it: What's it going to be? While WFMI is holding at its ascending trendline on the dips, the intraday highs have been dropping over the past 8 sessions, building a short-term neutral wedge that should break early next week. In favor of our bullish play, the intraday highs have been rising over the past 3 days, each time bouncing at the ascending trendline (currently at $56.10), and each time managing a close over the 20-dma (currently $56.47). Oscillators are hard to read as they are in the middle of their range, trying to turn up, but that hasn't occurred just yet. So WFMI remains alive, with the preferred entry strategy being to target entering new positions on intraday rebounds from the ascending trendline. Just in case the current wedge breaks to the downside, we're snugging up our stop to $55, right at critical support from late March. Should WFMI catch fire, a breakout over the $58.25 level (representing a new all-time high) can be used for entries by the momentum types. Suggested Options: Shorter Term: The May 55 Call will offer short-term traders the best return on an immediate move, with manageable risk. With April expiration looming next week, only the most aggressive traders should consider using the listed April option. Longer Term: Traders looking to capitalize on a move towards the $60 level may want to use the May 60 Call or even the AUG 60 Call. These options are 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. BUY CALL APR-55 FMQ-DK OI= 525 at $2.05 SL=1.00 BUY CALL MAY-55 FMQ-EK OI=3911 at $3.20 SL=1.50 BUY CALL MAY-60 FMQ-EL OI= 621 at $0.95 SL=0.50 BUY CALL AUG-60 FMQ-HL OI=1169 at $2.65 SL=1.25 Annotated Chart of WFMI: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/WFMI041303.gif Picked on April 1st at $56.42 Change since picked: +0.07 Earnings Date 05/08/03 (unconfirmed) Average Daily Volume = 905 K ************* NEW PUT PLAYS ************* Where Is The Dow Going? By Steve Gould On March 23, 2003, I wrote that the Dow was going to take one of two paths. Here is an excerpt of what I said. ********** Let's take a step back, look at the bigger picture and discuss two possible scenarios. Chart: Scenario 1: Dow 3-21-03 http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/DOW041303a.gif The move down from March until October is still a 5 wave basic pattern, but now let's considered it the 1 wave of a larger wave. The move from October until 3/21/2003 has been relabeled a 2 wave going through an A-B-C correction. If this is the case, then the move we are in right now is the completion of the C wave and could go as high as 9500. Then the 2 wave will be complete and the Dow will continue to head down as it starts the 3 wave. Chart: Scenario 2: Dow 3-21-03 http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/DOW041303b.gif Again, the move down from March through October is a wave 1. In this scenario, just the move from October through December is a wave 2. At this point, the Dow began a wave 3. Since each 1, 3 and 5 wave will subdivide into a 5 wave basic pattern, the Dow just completed the 1 wave (green) of the overall 3 wave (red). The Dow will finish its wave 2 up (green) by completing the A-B-C correction (blue) and then start the wave 3 down (green and blue). I believe this is the more likely scenario. So what will happen next? Well, until proven otherwise, it looks like the Dow is going to retrace the last gains we had, perhaps around 380-620 points (wave B) and rally again to complete the wave C. After that rally, the Dow will head back down. ********** As the baboon said to Simba in The Lion King, "It is time." Looking at the current picture of the Dow, it is clear that the Dow has traced out scenario 2. http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/DOW041303c.gif Trade Setup The larger wave, in green, is tracing out a 5 wave basic pattern and is currently in the midst of a 3 wave. Just as the larger 1 wave traced out a 5 wave basic pattern, now the 3 wave is tracing out its 5 wave basic pattern. Notice on the 1 wave, the (3) wave was the longest wave. This is a basic rule of Elliott Wave Theory. The 3 wave is always the longest wave. This rule gives us a clue that the (3) wave just now unfolding within the 3 wave is going to be at least 1627 points (9043 – 7416). This takes the Dow down to at least 6893 (8520 – 1627), possible more. In fact, I would say definitely more. Since the three wave could be 1.6X the one wave, it would not be unreasonable to expect 5885 (8520 – 2635). At that point, we would expect a wave 4 countertrend rally. This is a longer term trade and the options should reflect this. Option DJX Dec 03 Options Sym Strike Type Bid Ask Delta Vol OI DJXXX 76 Put 4.00 4.20 -26.86 1483 85787 What If We Are Right If the Dow falls to 6893 by the August expiration date, then the option will be worth about 8.40 for a profit of 4.20 or 100% not including commissions. (Note: The toolbox did not have a 76 strike, so the numbers may be a little off.) Chart: DOW Position Analysis http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/DOW041303d.gif What If We Are Wrong If the Dow breaches the high of the current C wave, it is going to trace out a slightly higher A-B-C pattern. Close the trade if the Dow pierces 8521. We can reenter it once we know where the Dow is going to top. If the Dow rises above 9043, then our count is wrong and we need to reevaluate it. This is highly unlikely. Chart: Dow Wrong Scenario http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/DOW041303e.gif On a grander scale, I have this unpleasant thought. The larger 1 wave traveled 3476 points (10,673 – 7197). This means that the larger 3 wave will be at least 3476. This puts the end of the 3 wave at 5567 (9043 – 3476) or if the 3 wave is 1.6X the 1 wave down to 3481 (9043 – 5561). ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. 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The Option Investor Newsletter Sunday 04-13-2003 Sunday 4 of 5 In Section Four: Current Put Plays: CDWC, JCP, LLL, NOC Leaps: Back To Reality? Traders Corner: How About A Quickie? I've Got The Time, If You Have The Inclination Traders Corner: It's Gotta Make Sense Futures Corner: Stack Your Stochastic ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** CURRENT PUT PLAYS ***************** CDW Computer Centers - close: 39.80 change: -0.97 stop: 43.25 Company Description: CDW ranked No. 414 on the Fortune 500, is a leading provider of technology solutions for businesses, government agencies and educational institutions nationwide. CDW is a principal source of technology products and services including top name brands such as Cisco, Compaq, Computer Associates, Hewlett-Packard, IBM, Intel, Microsoft, and Toshiba. CDW distributes contracts to end users for customized and standardized on-site services supplied directly by providers such as H-P Services and Unisys and for training programs provided by firms such as KnowledgeNet and Productivity Point International. (source: company release) Why we like it: CDWC continued its rollover from the recent lower high, and also traded down through the $40 level that has provided closing support the past few sessions. The tech sector was once again the weak link, but this time this tech retailer had the added weight of the retailers heading lower. In spite of a positive retail sales report, much of the retail sector headed down following disappointing sales results on Thursday. The positive data was largely the result of auto sales, so there was nothing in the report that really favored the business model of CDWC. The overall ex-auto increase was 1.1%, but the electronics & appliance store sector posted a gain of only 0.6% from the previous month. CDWC was pushed to a sub-$40 close for the first time since the middle of March. We like the fact that the stock was finally pushed below that level, but with earnings on Tuesday, we will be dropping the play Monday night. Traders willing to take on that earnings risk can think about entering on the breakdown, but they'll be on their own after that. BUY PUT APR-45 DWQ-PI OI=3807 at $5.30 SL=2.60 BUY PUT MAY-40 DWQ-QH OI=329 at $2.80 SL=1.40 Annotated Chart of CDWC: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/CDWC041303.gif Picked on April 1st at $40.00 Change since picked: -0.20 Earnings Date 04/15/03 (unconfirmed) Average Daily Volume = 2.18 mil --- Elliott Wave Play Updates By Steve Gould JCP Chart: JCP 4-11-2003 http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/JCP041303a.gif JCP gapped down Thursday on news that comparable store sales decreased 5.5%. That brought the price of the stock down to 17.70, just .20 above the target. If you did not exit then, then this week should see a small continued downward movement as wave 3 of the 5 wave completes. I would expect the stock to retrace slightly to fill the gap and then complete the wave 5 leg down. Chart: JCP projection http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/JCP041303b.gif --- L-3 Communications - LLL - close 36.24 change: -0.24 stop: 38.50 Company Description: As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Why we like it: Positive developments on the war front haven't been translated into positive action in the Defense sector, with the DFI index continuing to deteriorate throughout last week. While the DFI index managed to bounce from its intraday lows to eke out a close over $440 on Friday, the trend is definitely down. However, daily Stochastics are starting to flatten out in oversold territory, so the next bounce may not be far off. Our LLL play has performed like a champ over the past week, continuing to take out one support level after another. Our initial downside target of $37 was breached on Thursday and the stock inched a bit lower on Friday, hitting an intraday low of $36.10. Our final price target for the play is $35.50, which provided rock solid support in late February and early March, so now isn't the time to be contemplating new entries. It's all about managing open positions. Conservative traders should have their stops lowered to $37 or perhaps just a bit higher, as this is the site of both the aggressive descending trendline, as well as newfound resistance (broken support). Those traders willing to hold on for one more dip will want to plan on exiting the play near $35.50. Our official stop remains at $38.50, just above last week's intraday resistance and the 10-dma ($38.43). Suggested Options: With this play already nearing its conclusion, only aggressive traders should consider new entries. If opening new positions on failed rallies, the May 40 put will offer the best return on a small move to our target at $35.50. The May 35 put will offer a greater percentage gain on a move to that target but carries greater risk due to the fact it is still out of the money. BUY PUT MAY-40 LLL-QH OI= 441 at $4.50 SL=2.75 BUY PUT MAY-35 LLL-QG OI=1062 at $1.55 SL=0.75 Annotated Chart of LLL: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/LLL041303.gif Picked on April 3rd at $38.84 Change since picked: -2.60 Earnings Date 04/23/03 (unconfirmed) Average Daily Volume = 1.59 mln --- Northrop Grumman - NOC - close: 80.22 change: -1.16 stop: 88.02 Company Description: Northrop Grumman Corporation is a $25 billion global defense company, headquartered in Los Angeles, Calif. Northrop Grumman provides technologically advanced, innovative products, services and solutions in systems integration, defense electronics, information technology, advanced aircraft, shipbuilding and space technology. With approximately 120,000 employees and operations in all 50 states and 25 countries, Northrop Grumman serves U.S. and international military, government and commercial customers. (source: company release) Why we like it: NOC continued the end of week rollover, following Thursday's $2.27 drop with another loss of $1.16. As the war effort finds little remaining resistance and the U.S. government has declared the Iraqi regime dead, investors continue to file out of these defense stocks. NOC dropped back through the $80 support level that held on its last pullback, giving a fresh point and figure double-bottom sell signal. It has extended the loss on a slight volume increase since it consolidated in the $82.50-$84.50 trading range at the beginning of the week. The DFI also rolled over and took out the 21-dma that had provided support on the past few drops. It set a new relative low, but bounced near the end of the day. The next lower low in NOC does not come until the stock breaks $78, but we have gotten another in a long series of lower highs, this time using the 50-dma as the latest ceiling on the stock. We like the intraday break below $80 and the new PnF double bottom to initiate short entries, however, more conservative traders may want to wait for a test of the relative low at $78. BUY PUT APR-85 NOC-PQ OI=2885 at $4.80 SL=2.40 BUY PUT MAY-90 NOC-QR OI=771 at $10.30 SL=5.20 Annotated Chart of NOC: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-13/NOC041303.gif Picked on April 6 at $83.26 Change since picked: 3.04 Earnings Date 04/29/03 (unconfirmed) Average Daily Volume = 1.57 mil ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***** LEAPS ***** Back To Reality? By Mark Phillips mphillips@OptionInvestor.com "The war's over, let the rally begin!" Well, wait just a minute. Correct me if I'm wrong, but I think we already had the rally. It started on March 12th, and in a very short space of time, the DOW vaulted higher to the tune of 14.9%. Since then, the DOW has been consolidating above the 50-dma, but below its 3/21 highs. While the numbers and levels are different on the other indices, the story line is much the same. Investors expended a tremendous amount of energy trying to front-run the expected post-war rally. This buying surge propelled the market off its mid-March lows and now investors are sitting there asking themselves, where's the rally, not yet quite aware that it is for all intents and purposes over. Now it is back to the reality of earnings and the economy, and more than a few investors are hoping that 2003 isn't another repeat of 2002. Remember what happened last year around this time? The end of March turned out to be the end of the latest bear market rally, followed by a fairly sedate decline into the beginning of May, a slight pop and then carnage into the end of July? Could it happen again just like it did last year? Actually, I'll give a qualified "Yes". You see, the market isn't termed "The Great Humiliator" without reason. While the cycle may be predictable, the points of reversal and the timing are what really makes picking the tops and bottoms so difficult. Or put another way, the devil is in the details. Turning to the view provided by the bullish percents, it is clear that the bulls still have the ball, with all of the major indices either in Bull Confirmed or Bull Alert. But they've only managed to push the ball to midfield (near 50%) in most cases, and now the economy and earnings are coming into full view, just ahead of the "bad 6 months" for the market, from May-October. I've written about the VIX quite a bit in recent months, trying to determine how it is likely to resolve its year-long consolidation pattern, and whether or not it is truly moving into a new and permanently higher range. Personally, I'm leaning towards that being the case, based a lot on some extended analysis that I've written about in past articles. The VIX has been confined to a broad triangle consolidation pattern over the past several months, and we've noted that in here in the past. Additionally, we have the 200-dma hovering just below the 36 level, which is significant insomuch as prior to last fall, the 200-dma for the VIX had never so much as crept over 30! In some recent articles, I referred to a calculation I had done off the historical VIX data, where I had noted that at no point in the past several years had the VIX ever fallen more than 17% below the 200-dma. It turns out, I made an error in my calculation and fortunately one of my vigilant readers (Thanks NASO!) pointed out the error for me. When doing the calculation properly, I found the correct calculated "floor" for the VIX should be 30-32% below the 200-dma. Running the numbers off of the current value of the 200-dma gives an expected floor of 24.40-25.20, which is just below major support from last November and this January near 26. Judging by the way fear seems to be draining out of the market, with the VIX cracking below its ascending trendline on Friday, it looks like that 26 level will likely be in play heading into earnings season. Call me a pessimist, but I think that complacency is very misplaced considering the likely lack of good news about to be released from Corporate America. I know there are a lot of numbers in that paragraph above, and given that some of them are corrections to some of my writing on the VIX in the past, I've put together a chart that shows those critical levels, which we can monitor together in the weeks ahead. Daily Chart of the VIX While I won't predict where the VIX is headed next (that violation of the lower trendline could be promptly reversed on Monday), I will say this. The best case scenario for a bearish position trade on the DOW, SPX or OEX would be to have the VIX falling into the 24-25 area, while at the same time, bullish percents for those indices rise closer to overbought territory, and at the same time price on the SPX challenges the upper boundary of that descending channel we've been talking about both here and in some of my other weekly articles. For the record, that upper channel line is currently at 930 -- pull up a 6-month chart of the SPX, and I think you'll see the significance of the 925-935 level. I'm betting there will be a lot of rejuvenated bears lurking near there, looking for another feast as we head into the summer months. It may not set up just like that, but if it does, I'll personally be leaning pretty heavily to the short side with LEAP puts on the DJX. I've mentioned in recent weeks that I'm targeting the middle to the end of May as "decision time", where I think the current consolidation patterns in both the VIX and the OEX will be resolved. That timeframe still looks like a viable timeframe for the beginning of the next big move. But until we see how things play out during the upcoming earnings season and more things fall into place, we'll have to settle for playing cautiously. To see how things are shaping up, let's move forward now, looking at our severely shortened list of current plays. Portfolio: ADBE - despite the rather poor performance of the Software index (GSO.X), which is just barely hanging onto support at the 200-dma ($100.81), our ADBE play is doing a good job of holding its ground. Over the past two weeks, the stock has been consolidating its bullish move above the $30 level, finding support at the 20- dma (now at $32.13). However, I'm becoming concerned that the odds of another powerful upward move are diminishing, with the weekly Stochastics starting to look toppy and ADBE unable to challenge its 3/21 high of $34.27. Daily Stochastics are nearing oversold, so we ought to get another upward push, but I want to err on the side of caution, raising our stop to $31.50. That is just below the intraday lows of the past week and if violated on a closing basis, should still ensure we exit with a decent gain. Conservative traders that want to take a targeted gain should use a rally into the $34-35 area to close the position, as I doubt there is enough buying interest to sustain a move over the $35 level. EMC - There was cause to get a bit excited about our EMC play last Tuesday, as the company's bullish guidance (essentially just a reaffirmation of prior guidance) had the bulls once again pushing the stock over the $8 threshold. Unfortunately, with the rest of the Technology sector having a hard time holding altitude, EMC fell back into its $7.50-8.00 range, where it sits this weekend, awaiting the next bullish catalyst. With earnings season kicking off in earnest next week, there will certainly be plenty of catalysts. The big unknown is whether they'll be positive or negative. EMC will make its own appearance in the earnings parade on April 16th before the opening bell, and the market's response, not so much to the actual numbers but the forward guidance, should give us a good feel as to the future of the play. Conservative traders might want to harvest gains ahead of the report, but the LEAPS Portfolio is going to stand fast with our stop at $5.50. The upward trend is still intact and it appears a breakout over $8.50 could really get the stock moving. The PnF chart is still bullish, with a price target of $15.50, so the potential reward definitely looks favorable compared to the potential risk. Watch List: NEM - It certainly looks like the gold market is trying to put in a bottom with gold futures dancing between the $320-330 area, signaling that the war premium has effectively been taken out of this sector. With earnings and economic reports once again taking center stage, continued currency weakness should play into our hands quite nicely in the months ahead. That is if we can get an entry into our NEM play. The stock has really been resilient over the past couple weeks after the company's upside surprise when it announced earnings on March 28th. Judging by the recent price action, I'm increasingly convinced that we won't see a dip down to the $24 level, so I'm raising our target for entry to the $24.50- 25.00 area. Weekly Stochastics have started turning up and the rising trendline is now over the $24 level. Hmmm...I guess we should have taken that entry a few weeks back when the stock tagged an intraday low of $24.08! Sigh...Any dip into to $25 or below will be our trigger for entry, so long as the June Gold Futures (GC03M) hold above the $320 level. Our initial stop will be set at $22.50, so as to give the play plenty of room to move before the gold bulls really get frisky again. Our initial target will be a return to the $30 level, but I expect on the next move that high, NEM will break out and at least test the $32 level, possibly moving to new 5-year highs in the $35 area. QQQ - Recent price action in the NASDAQ certainly isn't encouraging for Technology bulls, as warnings and downgrades have the QQQ sitting right on the $25.50 level this weekend and looking vulnerable to more downside next week as earnings season kicks into high gear. Weekly Stochastics have clearly rolled over and I'm thinking we could most definitely see a test of the 200-dma ($24.61) before any sustainable bullish action. Note that the recent highs in the QQQ (near $27.25) really don't give much upside from current levels, and this is a big part of why I'm willing to be patient and stingy about what I want for an entry into the play. Remember that gap up move on 4/02, and my aversion to entering new plays on a gap? Now you can see why, as QQQ is now back to the bottom of that gap. Note the lowered entry target of $24.50-25.00. I still like the potential for the QQQ given the still strong appearance of the NASDAQ-100 Bullish Percent, but there's no justification to get into a chase mode here. After entry, we'll set a fairly wide stop at $23, just below the February lows. GD - Close, but no cigar! Pressured by the continued weakness in the Defense Index (DFI.X) last week, shares of GD actually fell as low as $52.20 on Friday before rebounding to close just below $54. Could that have been the entry we are looking for? Perhaps, but I'm not yet convinced. I think we'll likely see the DFI index trading in the $425-430 area before things stabilize, and that sector weakness should bleed into trading of GD and having trading into the meat of our chosen $50-52 entry zone. That low will likely correspond with confirmation that the last major battle (in Tikrit) of the Iraq campaign is over. Then as the consummate contrarians, we ought to be able to nab a solid entry into the GD play, looking for a return to at least the $60 level and quite possibly $65 in the months ahead. "Be careful what you wish for", is certainly an apt saying for investors right now. I, along with many others have been saying how we just wanted to get past this Iraq war, so we can refocus on the underlying economic issues influencing our market. Guess what? That picture hasn't gotten any clearer over the past 6 weeks, with a dismal employment picture, but the vaguest hints that perhaps we're seeing some marginal improvement in areas like Retail sales and Consumer Confidence. The real litmus test is coming in the weeks ahead though, with earnings season kicking off next week and we'll each get to determine for ourselves whether we think the mantra of "2nd half recovery" will finally stick or if it will once again be proven that the emperor has no clothes. I think you know where I stand on that debate, even without seeing any of the earnings results we're going to get over the next several weeks. Simply put, it's a bear market and there isn't anywhere near the level of strength in any area of the economy to justify a continued rally. The bulls have driven the market higher in the past month, not so much through sheer buying power, but through a relaxation of selling pressure. That's been just enough to get us back to where we started the year. The war fear has been taken out of the market, but what now? It's the economy and I can't say I'm thrilled about the bullish prospects of this market, seeing as how the good war news is quite clearly already factored into the market, and we're still below the 200-dma on the DOW and SPX. Watch those 3/21 highs and then the top of the descending channel on the SPX. If that level is reached (especially with the VIX down in the mid-20s, I'll consider that a high-odds short and hold signal. But for now, we remain in the middle of the recent range and volatility is likely to remain with us a while longer. As promised, we've got a new Watch List play this weekend and finally something for the bears to nibble on. I had intended to list two plays this weekend, but as you can see from the length of the AMZN writeup, I simply ran out of time and space. We'll have more new candidates next weekend too! In the meantime, manage your open positions aggressively! Mark LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: ADBE 02/28/03 '04 $ 30 LAE-AF $ 4.70 $ 7.40 +57.45% $31.50 '05 $ 30 ZAE-AF $ 7.50 $10.40 +38.66% $31.50 EMC 03/12/03 '04 $ 7 LUE-AU $ 1.40 $ 1.75 +25.00% $5.50 '05 $ 7 ZUE-AU $ 2.15 $ 2.65 +23.25% $5.50 Puts: None LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 03/09/03 $24.00-25.00 JAN-2004 $ 25 LIE-AE CC JAN-2004 $ 20 LIE-AD JAN-2005 $ 25 ZIE-AE CC JAN-2005 $ 20 ZIE-AD QQQ 03/16/03 $24.50-25.00 JAN-2004 $ 26 KLF-AZ CC JAN-2004 $ 22 LKF-AU JAN-2005 $ 26 ZWQ-AZ CC JAN-2005 $ 22 ZWQ-AU GD 03/23/03 $50-52 JAN-2004 $ 60 KJD-AL CC JAN-2004 $ 50 KJD-AJ JAN-2005 $ 60 ZZJ-AL CC JAN-2005 $ 50 ZZJ-AJ PUTS: AMZN 04/13/03 $27.50-28.00 JAN-2004 $ 25 LOH-ME JAN-2005 $ 25 ZWE-ME New Portfolio Plays None New Watchlist Plays AMZN - Amazon.com $25.75 **Put Play** It may seem a bit crazy to consider a new long-term bearish play on a stock with such cult status as AMZN. Afterall, look at what has happened recently with the other surviving Internet stocks YHOO and EBAY. EBAY has defied the odds and continued to shine, tagging a new multi-year high above $91 last week. While its rise has been more sedate, YHOO is setting new multi-year highs as well. Likewise, our targeted play, AMZN, recently hit the $28 level, its best level since late 2000. So what is there about AMZN that makes me think it is due for a stumble? Quite simply, it is the primary difference between the financials of AMZN and the other two Internet darlings that most clearly demonstrates what is wrong with AMZN. EBAY may still have a triple-digit P/E ratio, but given the fact that it is still growing revenues at a breakneck pace and last quarter saw the company post its best quarter ever, both in terms of revenue and earnings. Likewise, YHOO has really gotten its house in order, with revenues growing and actual earnings growing as well. On the other hand, management at AMZN has made much of being profitable on an operating basis, or when it is going to be cash-flow positive. It strikes me as more of the obfuscation we became familiar with over the last few years. AMZN is the hands down leader in the online sales of stuff -- from books to clothes to electronics and miscellaneous household supplies and has been growing its product offerings and market presence for years now. But guess what? No matter how you Jeff Bezos wants to spin reality, his company moved just under $4 billion worth of merchandise over the last 12 months, all in the process of losing $150 million. That's right, I'm looking at the actual cashflow earnings, not EBITDA (Earnings Before I Trick Dumb Accountants). Go back and look at YHOO and EBAY. Do I think they're worth 100 times their respective earnings streams? No way! But at least they have an earnings stream on which the companies can be valued. AMZN doesn't. The company has beaten all comers in the name of gaining market share and they've won. They sell more stuff over the Internet than anyone, and they manage to lose money doing it. Even if you give AMZN the benefit of the doubt and calculate a P/E ratio off of their EBITDA earnings, you get 142! Sorry, I just can't see the current price trend as being sustainable with that kind of lunacy in the accounting office. Now that we've laid the fundamental groundwork for why the current pricing doesn't make sense, let's quickly look at the price action and try to come up with a workable action plan. AMZN has been consistently working higher in an ascending channel for 18 months, with the top of that channel just above $28 and the bottom of that channel just below $21. I don't expect AMZN to fall out of this channel during the extent of our play, but a retracement to the bottom of that channel certainly seems likely and given the relatively cheap LEAP premiums a move from $28 to $21 should produce a nice 100%+ return (at least based on the '04 strike prices). So we'll target an entry as close to $28 as we can get it (preferably after the company announces earnings on April 24th) and then look to ride the stock down to the bottom of the channel near $21. We could really get a gift of a breakdown to touch the 200-dma (currently $19.66), but we'll cross that bridge when/if we get there. Technically, there are a couple of other factors working in our favor as well. The weekly Stochastics (10,5,3) are just starting to turn bearish and showing the slightest hint of bearish divergence with higher price highs and lower Stochastics highs. Also, while the PnF chart hasn't yet given a Sell signal, I'll point out that the column of X that launched this 18-month bull run originally gave a bullish price target of $27 and the stock just recently printed $28. So that bullish target has been achieved and slightly exceeded. We know that PnF price targets may not be achieved, or may be exceeded, but along with the bearish fundamentals and technicals, the PnF chart gives us a good idea of where to draw our line in the sand. After entry, we'll set our stop at $30.50. BUY LEAP JAN-2004 $25 LOH-ME BUY LEAP JAN-2005 $25 ZWE-ME Drops None ************** TRADERS CORNER ************** How About A Quickie? I've Got The Time, If You Have The Inclination By Mike Parnos, Investing With Attitude A quickie for a daytrader might be a two-minute trade. However, a quickie for a CPTI trader, can be four trading days. Four days allows for some foreplay, a little suspense, the risk of exposure, and the ever-increasing heart pounding as the trade's climax gets closer and closer. It also allows more experienced practitioners to apply a variety of techniques. Whew!! Let's get on with it. I'm beginning to perspire. I'm feeling a stirring in my brokerage account that I may not be able to control much longer. ____________________________________________________________ It's That Time Of The Month With only four trading days left, let's see if we can come up with a way or two to squeeze a few bucks out of what's left of the April option cycle. The last few days prior to expiration, option premiums disappear faster than a half-gallon of chocolate ice cream from my freezer. How can we take advantage of that scenario? We're in a trading range – with low volume to boot! Buyers and sellers are sparring. The DOW is up 50 points one day on war new and down 100 the next on accounting irregularities. The NASDAQ is up 15 points on positive earnings announcements one day and down 25 points the next, just for the hell-of-it. Here are some ideas of the type of trades one might look at near the end of an option cycle. The numbers are current, but keep in mind that these are hypothetical trades for educational purposes. Also, if you're considering a trade, make sure the stock will not be announcing earnings during these four days. _______________________________________________________________ 1. RMBS Short Straddle RMBS is trading at $15.44. In this lackluster market, there's a good bet that it will bounce around and end up pretty close to where it is. Lets: Sell 10 contracts of RMBS April $15 calls for $.85 Sell 10 contracts of RMBS April $15 puts for $.45 Total credit is $1.35. Profit range is $13.65 to $16.35 It might be a bit risky, but it's only for four days. The one thing we know for sure is that the $1.35 will be going into someone's pocket. Might as well be yours. ______________________________________________________________ 2. ADRX Put or Short ADRX spiked up on news. It traded as high as $14.95 and finished Friday at $14.71. It was up $1.91 for the day. There's a good chance profit takers will come in and ADRX might retrace about a buck. How can we take advantage of that scenario? a) We can short ADRX stock and participate penny for penny in the stock's action. This is one you have to pay close attention to. Your stop should be put at about $15 – a nickel above Friday's high. Your risk would be about $.25 or $250 for a 1,000-share position. Watch the pre-market activity. Often, before the retracement begins, a stock will show a little follow through from the big day. You may then be able to short it at a higher price. b) We can buy an in-the-money $17.50 put for about $2.85. Being so close to expiration, there's very little time premium left and you'd be able to participate close to penny-for-penny. You still have to have your mental stop and keep an eye on it. Call it your "stop-watch." Your risk would be about the same for a 10-contract position. c) The cheap-o way to play it would be to buy the April $12.50 put for $.15. Twenty contracts would cost $300 (possibly only $200 on Monday). The ADRX $12.50 put has a delta of about 10%. That means that ADRX would have to move a full dollar (and quickly) to generate a $.10 move on the option. It's like a lottery ticket, but the return on investment can be huge if you get the move – and your risk is limited. ______________________________________________________________ 3. MO Baby Short Strangle Altria (Phillip Morris) finished at $30.10. It's in an ascending triangle and is likely to continue its slow move back up. There is resistance just above $32. Sell 10 contracts of the MO April $30 puts at $.85 Sell 10 contracts of the MO April $32.50 calls at $.35 Total credit of $1.20. We have a maximum profit range of $30 to $32.50. Our safety range is $28.20 to $33.70. If you don't have trading clearance to do a short strangle, you can buy the $32.50 call and the $22.50 put for a total of $.20. That still leaves a credit of $1.00. I Hope It Was Good For You There you have it – some relatively low risk quickie trades to study for the more impulsive CPTI students. It can be very satisfying, but, if things don't go well, you have to know when to pull out. ______________________________________________________________ Reminder The markets will not be open on Friday (it's "Good" Friday). How "good" it is will depend greatly on how our plays work out on Thursday (option expiration). Either way, the markets will still be closed on Friday. _____________________________________________________________ CPTI Portfolio Update Position #1 – OEX Iron Condor – closed Friday at $440.97. We created an Iron Condor with a 70-point range of 420 to 490 for April. The objective is for the OEX, at April expiration, to finish anywhere within the spread. The total credit for the Iron Condor position is $2.35. With five trading days left, we're looking real good! Position #2 – BRCM Short Straddle – Trading at $13.08. About three points ago we sold 10 contracts of BRCM April $15 calls and sold 10 contracts of BRCM April $15 puts for a total credit of $2.60. Our safety range is from $12.40 to $17.60. On Monday, we were presented with an opportunity. The market spiked up. BRCM traded as high as $13.90. To buy back the $15 put would have cost $1.60. There is heavy resistance at about $14. We decided that, if BRCM reversed, we would close out our position. When BRCM moved down to $13.80, we bought back the $15 put for $1.65. We had taken in $2.60. Our profit is $950. Celebration may be a bit premature because we're still short the April $15 call. If we can buy it back for $.05 in the next few days, we will. If not, we'll just let it expire worthless. Friday, BRCM traded as high as $13.30, which would have allowed the alert trader to buy back the April $15 call for about $1.90 – thereby locking in a profit of $700. Position #3 – MMM Iron Condor – $132.91. We created an Iron Condor with a 15-point range $115 to $130 for April. We were able to take in $1,550 for our 10-contract position. The objective is for the underlying, to finish anywhere within the spread. The market has gone up too far and much to fast. We have only four more days for calmer heads to prevail and return MMM, to a more reasonable level (below $130). We'll see if Fibonacci was right. We're getting down to the short hairs. It looks like we may be taking a small haircut on this one. If we closed out the MMM bear-call spread at current levels, we'd have to pay a net $3.00. That would be a loss of $1,450. Ongoing Position #1 -- QQQ ITM Strangle – $25.51. This is a long-term position we created four months ago. We own the January 2005 $21 LEAPS calls and the January 2005 $29 LEAPS puts. We sold 10 contracts of the QQQ April $28 the QQQ April $22. Our cost basis for the position is $5.30. Since premiums are so low, the chances of making a substantial profit from this position are slim. Plus, it ties up a lot of money. We closed this four-month position with a $400 profit. Ongoing Position #2 – OIH - Diagonal Calendar Spread – $56.21. We felt there was a great deal of uncertainty built into the price of a barrel of oil. When, and if, the war is resolved, the price of oil should work its way down. We bought 10 contracts of the July OIH $55 puts and sold 10 contracts of the March OIH $50 put at a debit of $3.85. According to plan, the March $50 put expired worthless. We then sold the April $50 put for $.70 to bring our cost basis down to $3.15. Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************** TRADERS CORNER ************** It's Gotta Make Sense By Steve Gould Last week I was listening to a polarizing radio talk show host. He relayed that the Iraqi propaganda minister, Muhammed Saeed al-Sahhaf, just announced that Iraqi troops had invaded New York City and have conquered Shea Stadium. The troops were soon to be on their way down Broadway where they would take control of the tickets to all the hot Broadway shows. Not much later a listener called in and said he had phoned his local news station and asked them why he had not heard anything about this on the news. When asked where his source was, he mentioned the controversial talk show host. The news station said that they would check into it. As it turned out, the talk show host was illustrating absurdity with absurdity. I suspect that the news station found out that this was a prank and did not broadcast the "news". The news station was understandably a bit hesitant to broadcast such news until they had confirming information that the story was true. Otherwise they risked embarrassment and loss of credibility. As a trader, you need to have confirming information that a trend is true otherwise you stand to lose much, much more. Namely your money. Whether you use Elliott Wave analysis or your own mix of technical indicators, you had better verify that the trend you are seeing is valid in a longer time frame or you stand to make some very costly mistakes. Looking at a graph in a longer time frame helps to verify that a trend is really in effect. The shorter time frame will help you find an advantageous entry point. For example, a stock may be rising on the daily chart, but the weekly chart shows that the stock is still in a downtrend. It would be foolhardy to buck the larger trend and go long the stock. However, you may be able to use the shorter time frame trend to find the entry point at the top of the longer time frame channel for a profitable short. To illustrate this concept on an actual stock, take a look at the daily chart of ADP starting at 3/8/2002. Chart: ADP Type I Setup On 8/27/2002, ADP displayed the classic Elliott Wave Type I setup meeting the following criteria: 1. Wave 4 retraced about 38% of wave 3. 2. The oscillator retraced about 110%. 3. Wave 4 is a very recognizable A-B-C correction. 4. Wave C of the wave 4 correction subdivided into a 5 wave basic pattern. 5. The wave 4 time frame is between 138 – 162% of wave 3. I dream about these set ups. In fact, it is so good, that I am drooling all over my keyboard right now wanting to buy some $35 puts. But if I did that, I would lose money. Ideal as this set up seems, it still fails one very vital criteria. The weekly time frame does not confirm the start of daily wave 5. To see why, let's take a look at the weekly chart of ADP. Chart: Weekly ADP Comparing the weekly chart to the daily chart we can see a tremendous amount of correlation. In fact, the weekly 3 wave (blue circle) is the daily 5 wave basic pattern unfolding. What we see on the weekly is that it, too, is undergoing a wave 4 countertrend rally. Except, it is no where near complete. The unfolding wave 4 has not yet retraced even 30% and the oscillator has a long way to go before it retraces even 90%. So, as much as the daily chart is screaming this is an ideal set up, the weekly chart is whispering, nope, I am not quite done yet. This is what the weekly ADP looks like two months later. Chart: ADP Weekly 2 Months Later We now see a much more favorable Elliott Wave Type I set up. 1. Wave 4 retraced about 52% of wave 3. 2. The oscillator retraced 100%. 3. Wave 4 is a very recognizable A-B-C correction. 4. Wave C of the wave 4 correction subdivided into a 5 wave basic pattern. In the meantime, let's see what the daily chart is up to. Chart: ADP Daily 2 Months Later The daily ADP played out exactly like we expected. Sure it went down a bit, and if you were nimble, you might have even made money on the $4 move down. But patience was the better choice here as it ultimately moved up just as the weekly chart predicted. Now, however, we have an important decision to make. Both the daily and weekly chart are signaling this is the moment to place the trade. But the daily chart violates one of the criteria. Namely, the oscillator retraced more than 138%. This is a warning sign that should be heeded. However, everything else lines up quite nicely. It would be hard to pass this one up. Our first target would be the low of the 3 wave which is $31.37. ADP could go as low as $29, but that is not much of a difference from $31. My philosophy is to take the money and run rather than squeeze out every last point in the trade. The old adage, bulls make money, bears make money, but pigs get slaughtered is just too true. In this scenario where the difference between the two targets is small, I suggest using only one target. This would be a long term trade as other indicators suggest that the target price may not be met until July. Chart: ADP Weekly End ADP hit the target around 3/7/2003, way ahead of schedule. This is a good point to take all the profits. There are three reasons for this. First, this was our original game plan and it is generally best to stick with the plan. Second, the 5 wave (blue circle) subdivides very nicely into a well defined 5 wave basic pattern. Once this pattern is complete, ADP will reverse trends. Third, the oscillator is starting to flatten out signaling a reversal of trends. Since reasons two and three confirm reason one, the trade should be exited. (ADP went down to 27.24 the next week. Even so, I still believe exiting at 30.60 was the correct play.) When placing trades, I admonish you to verify that the price pattern in the next larger time frame confirms the price pattern of the smaller time frame. Only when two time frames correlate should you pull the trigger on the trade. Otherwise, the sound you hear could be the one of you shooting yourself in the foot. ********** Correction. In last week's article I incorrectly stated that Fibonacci was a 16th century mathematician. Fibonacci was a 13th century mathematician. ************** FUTURES CORNER ************** Stack Your Stochastic I've been getting some emails asking for more information about how I trade, what I look for, and how I've set up my trading workspace. This article started out trying to answer that question, but as usual, I was waylaid by my own curiosity when I started talking about stacking indicators. I kept seeing charts that I wanted to post showing what I had found, and it turned into a specific discussion on stacking the stochastic. The first thing I'd like to talk about is the stacking of multiple indicators into one panel. I started experimenting with this two years ago, and have found some interesting patterns. What I mean by indicator stacking is the placement of several different settings for an indicator on top of each other. For example, many people use stochastics, and there are some standard settings that are used without question. Each setting has its strengths and weaknesses, with some being too slow, and others being too fast. These settings can, and should be used according to the current market. Lately, the market has been in a rather tight range, and I changed one of my slower setting of (27,9,4) to (17,7,3). The problem was that the slow setting was just sitting there, barely moving, and giving me almost no useable information. In markets that whipsaw, a fast setting can also be rather useless as it continues to move from overbought to oversold too fast, again, not giving any useful information. When it seems that Stochastics can be almost of no use at all due to market conditions, I turn to stacking several different settings on top of each other. Most charting services allow this stacking, and they all follow the same process: first you create several individual stochastics studies, and then you just lay them on top of each other. For example, in Esignal, you would hold down the SHIFT key while dragging one indicator on top of the other to merge them. To unmerge the studies, just Right-Click on the indicator pane, and select the Un-Merge-Studies label. When I was first started out, the first thing that I tried was putting together the settings of (21,3,1) and (11,11,1), which is how Esignal displays it. For QCharts users, these would be equal to: %K = 21, %D = 1, Smoothing = 3 (21,3,1) %K = 11, %D = 1, Smoothing = 11 (11,11,1) This produces a single line for each of the two indicators, and the two stochastics are now a single indicator with two lines. Dual Stochastic Setting Chart 1: Rather than trying to use the crossovers of the %K and %D lines for a single setting, I'm using the interaction of the two indicators to each other for generating possible trade signals. The vertical purple lines are there just to show where the Stochastics values are with respect to price. First look at the area labeled A. Here you can see that both of the lines are rolling over in unison from the overbought area of 80 (yellow line). This uniformity of action is a fairly strong signal, and can be traded. The area labeled B shows where both of the indicators are still in unison, and are crossing the centerline, yet another trade signal, or one that keeps you in the trade if you went short at 'A'. Once the Stochastics gets into oversold territory, below 20, once can pull out of their short trade, or wait to see what happens from here (or cover half of a position). Now look at the area marked as C, where the (21,3) setting (red line) crosses the centerline, but does so without the (11,11) Stochastic. In fact, they cross the centerline 5 bars apart, and soon thereafter price fails in its move upwards. The pattern that I've noticed is this, if the two settings cross over together or within 2 bars of each other, it is a fairly strong signal. Once the crossing is 3 bars apart the signal is weaker, and anything over 3 bars often fails as a tradable signal, like in the chart above. Like any indicator, there are false signals and there are exceptions to the rule, but as a whole, the 3-bar crossover rule seems to work rather well. Let's take a look at another example. Dual Stochastic Setting Chart 2: At area labeled A, you can see that even though both of the settings were not working in tandem, they still crossed the centerline together. The crossover at A ended up being a good signal for a long entry. At area labeled B, you can see how the two setting are working at cross purposes, with one rising, and the other crossing down. The start of the price rollover was bought and the dual Stochastics kept you from a losing trade. Dual Stochastic Setting Chart 3: This dual setting works well with price that has some momentum behind it, but in a very choppy, narrow range, they tend to lag behind. In the chart above, the vertical lines show where the stochastics cross over the centerline in unison. In both cases, the signal was of poor quality. The first one signals near the top, and the second signal is given just before a strong rise that would have stopped out anyone short. So my search for a better stochastic for today's market was not over. I needed a better setup. The next idea was to shorten the settings, and to make them a little more similar to each other in order to avoid the strange formations that the first attempt seemed to produce. The next chart shows a single pane with the following three stochastic settings: (17,9,1), (13,7,1), (11,5,1). This is in Esignal format, for QCharts users this is equivalent to: (%K, Smoothing, %D). Three Stochastic Setting Chart 1: I looked at months of data and noticed that a fairly persistent pattern emerges. The three lines give rather good signals when they act, for a better word, cleanly. Note how box A and B both show a bottoming, and then a clean crossover as fast, slower, slowest lines reverse and cross over each other one by one. The key in this pattern seems to be that once they cross, they either continue to diverge from one another (pull apart), or they stay at an equal length apart. Even the large, red stick in the rise on the right hand side doesn't change the general slope of the three lines, although the fast line does turn down, it still stays within the trend. Also notice how the price chart shows the curve of the rise in price increasing while the slope of stochastics remains the same, and actually starts to curl over as it moves into the overbought area. Soon after, price rolled over hard from such extremes. The reversal patterns shown in the boxes above can give some good signals, but they are not the cleanest or best signals. In the next chart below, is an example where a crossover like the ones above, are actually messy compared to the base-and-reverse pattern. Three Stochastic Setting Chart 2: The area marked 'Messy Top' in the stochastics pane gives a reversal signal when all three lines cross and start to diverge. Still, price had some unfinished business, as it tried to break above recent highs several times. Stochastics kept falling, and only the fast (black) managed to cross over the other two lines, with hardly any convergence of the other lines to show weakness, one might have stayed in the short, but would most likely be stopped out. Look at the two arrows on the stochastics chart. They point to lines that are both in overbought/oversold areas, have gone flat and are basing, then all three diverge from each other and point up, crossing the upper boundaries at 20 and 80, and giving nice signals for a long and a short. This idea of 'unison' with the three lines is an important aspect in the reading of these stacked indicators. Three Stochastic Setting Chart 3: The first vertical line shows how the stochastics lines didn't get to oversold, but they did get into that unison phase where they were all together, crossed up and diverged from each other. As long as they are diverging and moving in the same direction, crossover of the fast line over the centerline at 50 can be taken as a signal. The signal gave a nice rise up which actually formed a bearish divergence at exactly the same time that the three stochastics lines converged into a tight unison grouping in the overbought level, a simultaneous crossover and rollover occurs and gives a nice sell signal, which can be taken because we have: 1. Divergence 2. Complete convergence and unison in stochastics 3. Rollover from overbought 4. Divergence between the three lines (they are moving apart from each other). In the next crossover from the bottom, you can see that there was no unity in the actions of the three stochastics lines, and a crossover signal, while good for the overall trend change, came from a messy setup, and would most likely have stopped out a long. It all looks great, and the results are much more consistent than in the first attempt at using twin stochastics lines. While it would probably be prudent to wait only for the best signals, such as the unison-and-reverse pattern from above, you could lose out on some nice trades while waiting for that perfect setup. Three Stochastic Setting Chart 4: The above chart shows a nice long rise in price that was not preceded by a unison pattern. Like all indicators, the multi- stochastic cannot be used alone, and in order to have caught the above move, we would have needed additional information. The next chart adds RSI and a 78 period Regression Channel (standard deviation 2) to the mix, and will help us either filter out some bad signals, or verify some good signals from the multi- stochastic. In chart 5 you can see a nice setup where stochastics merged, and then started to rollover just as the RSI crosses over and verifies the short signal. After a nice decline, you can see how price pierces the bottom of the regression channel in chart 6, prints a doji reversal candle, and stochastics start to converge in the oversold area, giving you a good place to exit the scalp trade. Three Stochastic Setting Chart 5: Three Stochastic Setting Chart 6: The following chart shows how even loose groupings of the multi- stochastic can give good signals when used in tandem with other indicators. Three Stochastic Setting Chart 7: At loose grouping B the vertical line is drawn just after price gapped above the top of the regression channel. Since I don't like to take trades on indicator settings after gaps because they are skewed, it would be best to wait. As I watch, there is a slight selloff, another push is made and is again repelled at the upper channel. Now you have a gap, a failure, a push into regression resistance, and a stochastic which didn't react at all to the push up after the gap was sold. Not only that, RSI is still under the moving average and Macd is moving down, and did not cross over on the push up. This second failure at the regression channel is a fine place to go short. Covering the short is easy as well, at the bottom of the regression channel when stochastics has flat-lined, and RSI is starting to turn up along with Macd (label Loose Grouping 6). The bounce up could be played long, or, since the slope of the regression channel slope is pointing down, you can just wait for another shorting opportunity. Once price reaches the upper channel, there is another rollover by the indicators, but the rollover at the area of Loose Grouping D, is very sloppy, with no unison. Even this leads to a decent selloff, but it is reluctant selling, as is shown by the rather sloppy movement of the stochastics, and sideways motion of the RSI. If you chose to take the signal at Grouping D, you would most likely have been stopped out. Again, once can choose to trade these signals, or wait for the best setups with the highest probability. It all depends on the risk one is willing to take. Three Stochastic Setting Chart 8: One more chart to briefly discuss the centerline. The vertical line above marked 'A' shows where stochastics and RSI both give a long signal, but since price is at the top of the channel, it is not a good idea to go long at that point. Stochastics pulls back, but bounces at the centerline and starts to move in unison upward just as RSI crosses the moving average giving a long signal. With room to go up to the top of the regression channel, you can go long at vertical line 'B'. The turn back down is a little sloppy on the stochastic, but RSI crosses back down, and price has turned over again from the upper channel, and with plenty of room to move down to the other side of the channel, a short could be taken at vertical line 'C'. Keep in mind that the centerline is a place of support/resistance. For some indicators like the RSI, it is not very strong support/resistance, and it is why I use a moving average and trendlines on RSI. However, for the stochastic, the centerline plays a fairly key role, and it should be respected. Three Stochastic Setting Chart 9: The chart above shows how the centerline will act as support as price continues to climb while pausing twice for a little profit taking. I've tried to give some ideas on what to look for, and how to use this multi-stochastic setting. It can be a valuable tool, especially when used with other indicators for verification of signals, or to keep you out of a trade due to a possible false signal. When used with support/resistance lines, trendlines, and moving averages (for example, don't take a long signal when price is just below a pivotal moving average), you can reduce the number of imperfect trade signals, and increase your odds of a good trade. The examples above are all shown on 5 minute charts, but as with any indicator or pattern, these carry over to any chart period that you prefer. Try a few different settings and see how they act together at key reversals in price. If you see a pattern emerge, you may end up creating your own personal trading tool that matches how you prefer to trade. Vlada Raicevic ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. 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The Option Investor Newsletter Sunday 04-13-2003 Sunday 5 of 5 In Section Five: Covered Calls: Covered-Calls On Portfolio Stocks Naked Puts: Success Basics Spreads/Straddles/Combos: Economic Woes Return To U.S. Equity Markets Updated In The Site Tonight: Market Posture: Who Said Range-bound? ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************* COVERED CALLS ************* Trading Basics: Covered-Calls On Portfolio Stocks By Mark Wnetrzak One of our readers is using this conservative strategy to recover from the large declines in the stock market. Attn: Covered-Calls Editor Subject: Selling Calls On Long-Term Holdings Hello Mark, I have some blue-chip style stocks in my portfolio and I plan on keeping them for the long-term. With the market slump, many of them have fallen in value so I have started selling covered-calls to reduce my cost basis in each issue. I was hoping you could give me some guidelines or suggestions as to how to make this strategy work best, such as which options (OTM/ATM) I should be selling, how far out they should be, and what criteria I should use to close an ITM option that might be exercised. Thanks in advance for any ideas or comments you have to offer. OL Regarding covered-calls on portfolio stocks: Selling covered calls is one of the most popular option strategies among conservative investors because income can be generated from portfolio holdings and this income helps reduce the risk of stock ownership. The amount of money produced by a covered-call position depends on how close the sold calls are to the current price of the underlying issue. As you know, writing in-the-money covered-calls will yield the largest premium, but the gain comes at a higher risk of being "called" and possibly having to sell the stock for a loss. When choosing which call to sell, most investors gravitate to the at-the-money strikes because they offer a equitable balance between upside potential and downside safety in the overall position. If the implied volatility in a particular series is extremely high, you may be able to move further in-the-money, using the inflated time value to establish a more conservative risk-reward outlook. The key to choosing the correct strike to sell lies in a comparison of the various series and their related premiums, which will reveal the best combination of risk (cost basis) and reward (potential for profit) in the overall position. With regard to the appropriate time frame, it is unlikely you will be able to write front-month options on a consistent basis because option premiums on blue-chip issues are generally less robust. You will probably need to use options in the second and third expiration months, in order to receive an acceptable premium for the written calls. The biggest concern for an investor who sells covered-calls against long-term portfolio stocks is the possibility of early exercise of the short options. If the share value rises substantially after the calls are written, the easiest way to avoid assignment is to adjust the position by "rolling" the calls up (or up and forward) to a higher strike price. When you roll up (buy-back the current sold calls and sell higher strike calls), you increase the profit potential of the position. The catch, of course, is you surrender downside protection. The new (downside) break-even point will be increased by the amount of money required to complete the roll-out transaction; the cost of closing the sold calls minus the premium received for selling the new calls. Any time a debit is incurred in a position adjustment, it is considered to be a negative move because you placing more money at risk. One way to offset this effect is to roll to a future expiration date in the sold option. Selling a longer-term option will reduce the cost required for the new position, possibly even yielding a credit in the transaction. Regarding early assignment: As long as there is time premium left in the call, there is little risk of assignment. However, if the option is in-the-money, even slightly, and the expiration date is near, it may be best to roll forward to reduce the likelihood of the short options being exercised. You can simply buy-back the sold options and sell new, longer-term calls, either at the same strike price or in a different series; whatever is consistent with your outlook for the underlying issue. The percentage of options exercised prior to expiration is very low but when the time value falls to zero (bid price at parity or a discount), there is a much higher probability of arbitrage by floor traders. If you encounter this situation (little or no time value in the sold calls), you should consider rolling the position up, or up and forward, to prevent an unanticipated loss of your stock (and possibly your portfolio capital). Regards, Mark OIN SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Note: Margin not used in calculations. Stock Price Last Option Price Gain Potential Symbol Picked Price Series Sold /Loss Mon. Yield EP 5.20 6.25 APR 5.00 0.70 0.50* 9.7% VRTS 17.93 18.55 APR 17.50 1.20 0.77* 6.7% CPN 2.93 3.67 APR 2.50 0.60 0.17* 6.3% ADLR 13.75 13.19 APR 12.50 1.60 0.35* 6.3% MSCC 10.93 10.99 APR 10.00 1.30 0.37* 5.6% MRVL 21.91 20.45 APR 20.00 2.65 0.74* 5.6% DCLK 7.69 8.80 APR 7.50 0.55 0.36* 5.5% OAKT 3.23 3.94 APR 2.50 0.90 0.17* 5.3% IDCC 19.99 18.80 APR 17.50 3.30 0.81* 5.3% FEIC 16.23 15.45 APR 15.00 1.75 0.52* 5.2% WYNN 15.04 16.22 APR 15.00 0.55 0.51* 5.1% VECO 15.91 15.15 APR 15.00 1.70 0.79* 4.8% SOHU 11.73 12.21 APR 10.00 2.05 0.32* 4.8% PEGS 10.90 11.45 APR 10.00 1.40 0.50* 4.6% ILXO 8.40 9.59 APR 7.50 1.20 0.30* 4.5% BCGI 16.14 16.08 APR 15.00 1.70 0.56* 4.2% TELK 13.37 12.78 APR 12.50 1.20 0.33* 3.9% ALTR 13.84 13.93 APR 12.50 1.80 0.46* 3.3% ELBO 18.21 17.19 APR 17.50 1.10 0.08 1.0% NLS 15.31 10.96 APR 15.00 0.95 -3.40 0.0% NEOL 13.50 13.60 MAY 12.50 1.80 0.80* 5.0% UNTD 19.23 19.67 MAY 17.50 2.80 1.07* 4.7% COMS 5.17 5.16 MAY 5.00 0.45 0.28* 4.3% MSCC 11.77 10.99 MAY 10.00 2.25 0.48* 3.7% * Stock price is above the sold striking price. Comments: Murphy's Law was in force this week as two of the previously closed positions (listed below) rebounded while Nautilus Group (NYSE:NLS) was hammered on Tuesday after issuing an earnings warning (what happened to ignoring "bad" news?). We will show the position closed in the interest of capital preservation. Two other positions on the "early exit" watch-list were closed as they continued to deteriorate technically. The next few sessions should be interesting with April's option expiration occurring on a 4-day trading week. This current watch-list includes: Marvell Technology (NASDAQ:MRVL) - downgraded on Tuesday; Veeco Instruments (NASDAQ:VECO) - earning due 4/28; Telik (NASDAQ:TELK), and Electronics Boutique (NASDAQ:ELBO). Positions Previously Closed: Manugistics (NASDAQ: MANU), RSA Security (NASDAQ:RSAS); both are now profitable (sigh), Sandisk (NASDAQ:SNDK), and S1 Corp. (NASDAQ:SONE). NEW CANDIDATES ********* Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield IMMU 2.95 MAY 2.50 QUI EZ 0.65 8 2.30 35 7.6% CAL 5.68 MAY 5.00 CAL EA 1.00 552 4.68 35 5.9% SEAC 7.80 MAY 7.50 UEG EU 0.75 19 7.05 35 5.5% CTLM 5.18 MAY 5.00 UUM EA 0.45 12 4.73 35 5.0% RINO 13.29 MAY 12.50 AGQ EV 1.40 118 11.89 35 4.5% UNTD 19.67 MAY 17.50 QAB EW 2.95 218 16.72 35 4.1% PLCE 13.34 MAY 12.50 TUY EV 1.40 24 11.94 35 4.1% NEOL 13.60 MAY 12.50 UOE EV 1.65 34 11.95 35 4.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** IMMU - Immunomedics $2.95 *** Cheap Speculation! *** Immunomedics (NASDAQ:IMMU) is a biopharmaceutical company focused on the development, manufacture and marketing of monoclonal antibody-based products for the detection and treatment of cancer and other serious diseases. The company has developed a number of advanced proprietary technologies that allow it to create humanized antibodies that can be used either alone in unlabeled form or conjugated with radioactive isotopes, chemotherapeutics or toxins to create highly targeted agents. Using these technologies, IMMU has built a broad pipeline of diagnostic and therapeutic product candidates that utilize several different mechanisms of action. Its technologies are supported by an extensive portfolio of intellectual property that includes approximately 80 issued patents in the United States and 233 other issued patents worldwide. Immunomedics has recently settled with CIS Bio International of France regarding issues arising from past sales of Scintimun CEA in relation to Immunomedics' carcinoembryonic antigen patents. In addition to this settlement, Immunomedics' CEA patent portfolio has been licensed to Beckman Coulter, Daiichi Pure Chemicals, Medix Biochemica, and Dako. This position offers traders a method to speculate on the near-term performance of IMMU as the issue forges a Stage I base. MAY 2.50 QUI-EZ LB=0.65 OI=8 CB=2.30 DE=35 TY=7.6% ***** CAL - Continental Airlines $5.68 *** Bottom Fishing *** Continental Airlines (NYSE:CAL) is a United States air carrier engaged in the business of transporting passengers, cargo and mail. The company, together with its indirect 53.1%-owned subsidiary, ExpressJet Airlines, and its wholly owned subsidiary, Continental Micronesia (CMI), served 223 airports worldwide as of January 31, 2003. The company flew to 129 domestic and 94 international destinations and offered additional connecting service through alliances with domestic and foreign carriers. Continental directly served 15 European cities, seven South American cities, Tel Aviv, Hong Kong and Tokyo as January 31, 2003. It served 28 cities in Mexico and Central America. Through its Guam hub, CMI provides service in the western Pacific, including service to more Japanese cities than any other United States carrier. Pure speculation on a hammered sector with a favorable cost basis in a basing stock. MAY 5.00 CAL-EA LB=1.00 OI=552 CB=4.68 DE=35 TY=5.9% ***** SEAC - SeaChange $7.80 *** More Bottom Fishing *** SeaChange International (NASDAQ:SEAC) is a developer, manufacturer and marketer video storage servers that automate the management and distribution of long-form video streams, such as movies or other feature presentations, and short-form video streams, such as advertisements. The company sells its products and services to cable system operators, telecommunications companies and broadcast television companies. Using its systems, the company customers can increase their revenues by offering additional services, such as video-on-demand movies and subscription video-on-demand programming, both of which allow subscribers to watch content at any time with pause, rewind and fast forward features. With the strong buying support near the cost basis (since July), this position offers speculators a favorable method to "target-shoot" an entry point in SEAC. MAY 7.50 UEG-EU LB=0.75 OI=19 CB=7.05 DE=35 TY=5.5% ***** CTLM - Centillium $5.18 *** On The Move! *** Centillium Communications (NASDAQ:CTLM) is a provider of highly integrated silicon solutions that enable broadband communications for homes and business enterprises. CTLM designs, develops and supplies communications semiconductor solutions for applications in the DSL and voice over packet (VoP) markets. The company's DSL and VoP products include the CopperFlite CO (Central Office), CopperFlite CPE (Customer Premises Equipment), Optimizer, Palladia and Entropia families of products. The company's DSL products are based on a type of DSL technology known as asymmetrical DSL (ADSL). ADSL technology provides substantially faster transmission of data from the network to the end user than from the user to the network. The company's VoP products, Entropia CO and Entropia CPE, are positioned to support current and evolving VoP applications. The chart of Centillium continues to show improvement and the recent move above the March high on heavy volume bodes well for the near future. Reasonable speculation on a recovering stock. MAY 5.00 UUM-EA LB=0.45 OI=12 CB=4.73 DE=35 TY=5.0% ***** RINO - Blue Rhino $13.29 *** A Wal-Mart Boost? *** Blue Rhino (NASDAQ:RINO) is a national provider of propane grill cylinder exchange and complementary propane and non-propane products to consumers through many retailers worldwide. Uniflame Corporation, the company's subsidiary, focuses on selling a wide assortment of charcoal, electric and propane grills through retailers and also sells propane-fueled outdoor patio heaters and other outdoor hearth products that complement the use of grills by extending outdoor living in cooler weather conditions. Its branded propane grill cylinder exchange service is offered at more than 26,000 retail locations in 48 states and Puerto Rico at home improvement centers, mass merchants, hardware, grocery and convenience stores. The company's retail partners include Home Depot, Lowe's, Wal-Mart, Sears, Kmart, Kroger, Food Lion, Winn-Dixie, SuperAmerica, Circle K and ExxonMobil. Wal-Mart recently named Blue Rhino its supplier for the fourth quarter ended January 31, 2003. Does this bode well for RINO's earnings? Apparently investors believe it will as the stock rallied sharply off its recent lows. Option traders can use the inflated premiums to establish a (relatively) low-risk position in the issue. MAY 12.50 AGQ EV LB=1.40 OI=118 CB=11.89 DE=35 TY=4.5% ***** UNTD - United Online $19.67 *** Rally Mode! *** United Online (NASDAQ:UNTD) is an Internet service provider offering consumers free and value-priced Internet access and e-mail. Its Internet access services are offered through its NetZero and Juno subsidiaries under their brands, and are available in more than 5,000 cities across the United States and Canada. In addition, the company offers marketers numerous online advertising products, as well as online market research and measurement services. As of June 30, 2002, the company had approximately 1.7 million subscribers to its pay Internet access services and approximately 4.8 million active users, including pay users. Active users include all pay users and those free users that have logged onto its services during the preceding 31-day period. The company provides billable dial-up Internet access services for $9.95 per month. The recent price history of United Online reveals one of the better charts we've seen in the technology group (Uh oh, jinx?) and investors who want to diversify their portfolio should consider this position. The company will report earnings before the opening on April 30. MAY 17.50 QAB-EW LB=2.95 OI=218 CB=16.72 DE=35 TY=4.1% ***** PLCE - The Children's Place $13.34 *** Earnings Rally? *** The Children's Place Retail Stores (NASDAQ:PLCE) is a specialty retailer of apparel and accessories for children from newborn to 12 years of age. The company designs, sources and markets its products under its proprietary The Children's Place brand name for sale exclusively in its stores and on its Website. As of March 15, 2002, the company operated 543 stores in 47 states, located primarily in regional shopping malls. The company's merchandising strategy is built on offering a collection of interchangeable outfits and accessories to create a coordinated look distinctive to The Children's Place. It offers a focused assortment of styles in a variety of colors and patterns. PLCE divides the year into quarterly merchandising seasons: Spring, Summer, Back-to-School and Holiday. Within each season, the company also introduces a new merchandise line each month. PLCE rallied this week after reporting earnings that were above expectations, even though same-store sales fell in March. The company also received several upgrades on the positive surprise and this position offers excellent reward potential at the risk of owning the issue at a favorable cost basis. MAY 12.50 TUY-EV LB=1.40 OI=24 CB=11.94 DE=35 TY=4.1% ***** NEOL - NeoPharm $13.60 *** Own This One! *** NeoPharm (NASDAQ:NEOL) is a biopharmaceutical company engaged in the research, development and commercialization of drugs for the treatment of various cancers. NEOL currently has a portfolio of eight anti-cancer drugs, six of which are in clinical trials. The company has built its drug portfolio based on its two novel proprietary technology platforms: the NeoLipid electrostatic liposome drug delivery platform and a tumor-targeting platform. NeoPharm has developed an electrostatic liposome encapsulated antisense cRaf oligonucleotide, LE-AON, which inhibits the expression of the cRaf protein and thus may have potential to enhance the effectiveness of radiation in the treatment of certain cancers. The company intends to develop LE-AON as a treatment for radiation resistant tumors and as an enhancement to standard chemotherapeutic agents. NeoPharm recently announced that it has reached an agreement with Pharmacia Corporation and Upjohn, to settle pending lawsuits. We simply favor the bullish move above the 150-dma and the March high supported by heavy volume. Traders with a bullish outlook for the company will view any pullback as a second chance to own NEOL at a reasonable cost basis. MAY 12.50 UOE-EV LB=1.65 OI=34 CB=11.95 DE=35 TY=4.0% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Option Option Last Open Cost Days Target Symbol Price Series Symbol Bid Int. Basis Exp. Yield LGND 7.55 MAY 7.50 LQP EU 0.70 292 6.85 35 8.2% MVSN 12.75 MAY 12.50 MVU EV 1.10 16 11.65 35 6.3% BOBJ 18.25 MAY 17.50 BBQ EW 1.85 374 16.40 35 5.8% FFIV 13.05 MAY 12.50 FLK EV 1.30 128 11.75 35 5.5% TSO 7.50 MAY 7.50 TSO EU 0.45 1580 7.05 35 5.5% SEPR 15.77 MAY 15.00 ERQ EC 1.65 799 14.12 35 5.4% JBL 17.75 MAY 17.50 JBL EW 1.25 1613 16.50 35 5.3% MSCC 10.99 MAY 10.00 QMS EB 1.55 0 9.44 35 5.2% PHG 17.70 MAY 17.50 PHG EW 1.15 867 16.55 35 5.0% RETK 5.94 MAY 5.00 QRD EA 1.20 72 4.74 35 4.8% WYNN 16.22 MAY 15.00 UWY EC 2.00 278 14.22 35 4.8% IGEN 34.75 MAY 30.00 GQ EF 6.30 128 28.45 35 4.7% MU 8.37 MAY 7.50 MU EU 1.20 2526 7.17 35 4.0% ***************** NAKED PUT SECTION ***************** Options 101: Success Basics By Ray Cummins Knowing how to read a chart is the most basic skill of technical analysis and it's a prerequisite to profits for option traders. There are two major schools of thought when it comes to picking stocks: fundamental analysis and technical analysis. While many investors believe that things like earnings growth, profit margin, return on equity, and debt level determine the cost of a company's shares, history suggests that short-term stock prices are based more on the market's perception of what a stock should be worth, rather than its actual value. Technical analysis more accurately reflects this perception (which is the public's immediate outlook for an issue), because all of the "known" information about the company is factored in the current market value of its stock. In addition, most option-trading strategies are based on time-frames of three months or less, thus technicals-based analysis seems more appropriate for the majority of participants in the derivatives market. For traders who focus on directional trends, one of the easiest indicators to use, and profit from, is Relative Strength. Relative strength is generally defined as how well a given issue or instrument performs in relation to an industry average or the overall market. A favorable relative strength is indicated when the stock achieves a higher rate of gain than the specific index or market gauge. The formula for measuring relative strength is simply the price of the issue divided by the price of the average and it can be calculated for any time period. Momentum traders should review various time periods to assess relative strength, including monthly, weekly and daily charts. Trend-lines as well as moving averages of relative price can be used to help identify break-outs and reversals. Changes in a stocks' relative strength are also important and that's why some traders focus specifically on crossovers -- where abrupt increases or decreases in relative strength can signal a sharp move in one direction or another. In short, if a stock has underperformed for a long period, but then begins to outpace a major equity index such as the S&P 500, it can presage a reversal and a long period of out-performance. Here is an illustration of that concept in a bullish technology issue: RELATIVE STRENGTH CHART (JCOM) All other things being equal, stocks with strong and/or improving relative strength tend to outperform comparable issues in similar markets. At the same time, poor relative strength demonstrates that the issue is an inferior performer compared to the industry group or overall market and should not be considered for a long position. In those cases where relative strength is extremely is favorable in the underlying issue, a bullish option position can often be held through periods of widespread consolidation, even when other forms of analysis suggest an early exit. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. Stock Price Last Option Price Gain Simple Max Symbol Picked Price Series Sold /Loss Yield Yield NFLX 21.06 20.77 APR 17.50 0.40 0.40* 3.4% 11.0% IMCLE 15.70 14.59 APR 12.50 0.50 0.50* 3.0% 9.9% CREE 20.54 21.35 APR 17.50 0.50 0.50* 3.2% 9.6% MOGN 10.96 12.26 APR 10.00 0.50 0.50* 3.8% 9.2% XLNX 25.38 23.61 APR 22.50 0.75 0.75* 3.0% 8.1% MVK 18.71 18.20 APR 17.50 0.35 0.35* 3.0% 7.7% IDCC 22.69 18.80 APR 17.50 0.25 0.25* 2.1% 7.6% AMZN 24.71 25.75 APR 22.50 0.65 0.65* 2.6% 6.8% NVLS 30.87 26.65 APR 25.00 0.40 0.40* 1.8% 6.3% ADTN 37.10 36.18 APR 30.00 0.35 0.35* 1.7% 6.3% AMZN 27.93 25.75 APR 22.50 0.35 0.35* 1.7% 6.2% MATK 25.32 27.85 APR 22.50 0.55 0.55* 2.2% 6.1% CYBX 19.15 20.89 APR 17.50 0.45 0.45* 2.3% 6.1% CVC 20.30 19.56 APR 17.50 0.30 0.30* 1.9% 5.8% CYBX 21.26 20.89 APR 20.00 0.30 0.30* 2.2% 5.8% OVTI 21.18 22.66 APR 15.00 0.30 0.30* 1.8% 5.7% CMCSA 30.80 28.65 APR 27.50 0.50 0.50* 2.0% 5.7% LLTC 32.58 30.48 APR 27.50 0.55 0.55* 1.8% 5.6% YHOO 23.97 24.43 APR 20.00 0.30 0.30* 1.7% 5.5% EXPE 37.14 52.00 APR 30.00 0.50 0.50* 1.5% 5.3% JCOM 27.54 31.96 APR 22.50 0.30 0.30* 1.5% 5.2% PSUN 19.73 21.20 APR 17.50 0.35 0.35* 1.8% 5.1% JCOM 30.05 31.96 APR 25.00 0.25 0.25* 1.5% 5.0% MEDI 30.68 32.41 APR 27.50 0.65 0.65* 1.8% 4.8% IMCLE 18.36 14.59 APR 15.00 0.25 -0.16 0.0% 0.0% RMBS 15.75 15.44 MAY 12.50 0.55 0.55* 3.3% 10.8% NFLX 19.55 20.77 MAY 15.00 0.60 0.60* 3.0% 9.6% EYE 11.96 11.75 MAY 10.00 0.35 0.35* 2.6% 8.0% JCOM 32.12 31.96 MAY 25.00 0.75 0.75* 2.2% 7.6% SEPR 16.35 15.77 MAY 12.50 0.35 0.35* 2.1% 7.0% RIMM 14.88 13.95 MAY 12.50 0.35 0.35* 2.1% 6.5% BOBJ 18.31 18.25 MAY 15.00 0.35 0.35* 1.7% 5.8% CMCSK 28.44 27.50 MAY 25.00 0.60 0.60* 1.8% 5.1% * Stock price is above the sold striking price. Stocks retreated this week amid renewed concerns about the U.S. economy and the cost of the recent war with Iraq. Share values in the hi-tech segment were hardest hit and the bearish activity did not help the majority of positions in our portfolio. One of the most surprising moves occurred in ImClone (NASDAQ:IMCLE), whose shares were halted after the company said regulators were investigating its failure to pay at least $60 million in taxes on stock options. ImClone said it will have to restate earnings after the tax bill is settled and the delay has made the stock subject to delisting from the NASDAQ because the company failed to comply with filing requirements. Rather than wait for the situation to get sorted out, investors bolted for the exits and that may be the best course of action in our positions as well. Issues currently on the watch-list include: Xylinx (NASDAQ:XLNX), Maverick Tube (NYSE:MVK), Novellus (NASDAQ:NVLS), Interdigital Communications (NASDAQ:IDCC) and Comcast (NASDAQ:CMCSA). Previously Closed Positions: International Rectifier (NYSE:IRF) WARNING: THE RISK IN SELLING NAKED OPTIONS IS SUBSTANTIAL! ***** The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. MARGIN REQUIREMENTS The Initial Margin is the amount of collateral you must have in your account to initiate the position. In specific terms, margin refers to cash or securities required of an option writer by his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest if assigned through an exercise. The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option and the underlying stock changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price declines and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the formula listed above) and traders should always consider not only the initial margin requirement, but also the maximum margin needed for the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Please consider these facts carefully before you initiate any "naked" option positions. For more information on margin requirements, please refer to: http://www.cboe.com/LearnCenter/pdf/MarginManual2000.pdf MONTHLY YIELD: MAXIMUM & SIMPLE The Maximum Monthly Yield (listed in the summary and with each new candidate) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The Simple Monthly Yield is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the position. NEW CANDIDATES ********* Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield FTS 10.06 MAY 7.50 FTS QU 0.25 400 7.25 35 3.0% 9.6% WYNN 16.22 MAY 12.50 UWY QV 0.40 358 12.10 35 2.9% 9.5% AVID 25.54 MAY 22.50 AQI QX 0.80 7 21.70 35 3.2% 8.7% SEPR 15.77 MAY 12.50 ERQ QV 0.30 2529 12.20 35 2.1% 7.5% GTRC 21.10 MAY 20.00 UGR QD 0.65 101 19.35 35 2.9% 7.1% JCOM 31.96 MAY 22.50 JQF QX 0.50 92 22.00 35 2.0% 6.3% NFLX 20.77 MAY 15.00 QNQ QC 0.30 501 14.70 35 1.8% 5.9% ADRX 14.71 MAY 12.50 QAX QV 0.25 27 12.25 35 1.8% 5.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). ***** FTS - Footstar $10.06 *** Premium Selling! *** Footstar (NYSE:FTS) is a holding company that, through its wholly owned subsidiaries, owns the capital stock of the subsidiaries that operate its discount and family footwear segment (Meldisco), athletic footwear and apparel segment (Footaction and Just For Feet) and its discontinued Thom McAn segment. The company is principally a specialty retailer conducting business in the discount and family footwear segment through Meldisco, and in the branded athletic footwear and apparel segment through its Footaction and Just For Feet businesses. The newly acquired J. Baker licensed footwear departments have been combined with and reported in the Meldisco segment. Footstar recently announced it would file its annual report about a month late because it needs time to finish restating results in the wake of previously disclosed accounting problems. The news has caused speculation among traders, including some "short" activity and higher volume in FTS put options. Traders who believe the delayed report will offer no surprises can profit from that outcome with position. MAY 7.50 FTS QU LB=0.25 OI=400 CB=7.25 DE=35 TY=3.0% MY=9.6% ***** WYNN - Wynn Resorts $16.22 *** Own This One! *** Wynn Resorts (NASDAQ:WYNN) is constructing and will own and operate Le Reve, a luxury hotel and destination casino resort in Las Vegas, Nevada. Le Reve will be situated on approximately 192 acres at the site of the former Desert Inn Resort on the Las Vegas Strip. The facility will feature approximately 2,700 guest rooms and suites, a casino featuring an estimated 136 table games and 2,000 slot machines, a baccarat salon and private, high-limit gaming rooms; an eight-story manmade mountain enclosing a three-acre lake in front of the hotel and 18 dining outlets, including six fine-dining restaurants; an 18-hole championship golf course on the premises; a water-based entertainment production; on-site Ferrari and Maserati dealerships and an art gallery. The facility is scheduled to open to the public in April 2005. WYNN is a relatively new issue but it has quickly become a favorite among Gaming and Entertainment sector investors. Traders can speculate conservatively on the company's future share value with this position. MAY 12.50 UWY QV LB=0.40 OI=358 CB=12.10 DE=35 TY=2.9% MY=9.5% ***** AVID - Avid Technology $25.54 *** 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 on 4/17/03 and AVID investors are hoping for favorable data. Traders can speculate on the outcome of the earnings report with this position. MAY 22.50 AQI QX LB=0.80 OI=7 CB=21.70 DE=35 TY=3.2% MY=8.7% ***** SEPR - Sepracor $15.77 *** Drug Sector Speculation *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical compounds, including product candidates directed toward serving unmet medical needs. The firm's proprietary compounds are either single-isomer or active metabolite forms of existing drugs, which Sepracor refers to as improved chemical entities, or new chemical entity compounds, which are unrelated to current products. In February, Sepracor was awarded a patent covering the use of Estorra for the treatment of insomnia. Earlier this month, Sepracor said the FDA had filed the company's New Drug Application for Estorra and last week, Merrill Lynch raised its rating on the company's shares to "buy" from "neutral," saying the stock is "attractive." Investors who wouldn't mind owning this popular drug stock near a cost basis of $12 should consider this position. MAY 12.50 ERQ QV LB=0.30 OI=2529 CB=12.20 DE=35 TY=2.1% MY=7.5% ***** GTRC - Guitar Center $21.10 *** Retail Of A Different Note! *** Guitar Center (NASDAQ:GTRC) is a musical instruments retailer that operates Guitar Center and American Music stores. Guitar Center stores are organized into five departments, each focusing on one product category. The American Music stores sell band as well as orchestral instruments and related accessories, primarily to the school band market. In addition to its musical products, Guitar Center offers, through its retail and direct response operations, technical product information, confirmation of needs by a live person and after-sale support from a musician-based staff. The company's Musician's Friend unit is an integrated e-commerce and catalog business that offers an assortment of products and online promotions throughout the year. Standard & Poor's said Thursday that it revised its outlook on Guitar Center to "positive," based on the firm's improved operating performance and credit measures. Investors can establish a low risk cost basis in a unique retail issue with this position. MAY 20.00 UGR QD LB=0.65 OI=101 CB=19.35 DE=35 TY=2.9% MY=7.1% ***** JCOM - j2 Global Communications $31.96 *** Entry Point! *** 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 has been one of the best performing technology issues over the past 12 months, with its shares up over 200% from year-ago levels. Investors are bullish on the company's future and traders who believe the rally will continue can speculate on that outcome with this position. The company's quarterly earnings report is due 4/21/03. MAY 22.50 JQF QX LB=0.50 OI=92 CB=22.00 DE=35 TY=2.0% MY=6.3% ***** NFLX - Netflix $20.77 *** Move Over Blockbuster! *** Netflix (NASDAQ:NFLX) is an online entertainment service in the United States that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month and they select these titles at the firm's Website (www.netflix.com) aided by its proprietary CineMatch technology. They receive them on DVD by first-class mail and return them to the company at their convenience using prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber's queue. Netflix is becoming popular among home-movie watchers and their subscription base is growing exponentially. The solid fundamental outlook for this up-and-coming company has translated into higher share values and traders can profit from future upside activity in the stock with this position. MAY 15.00 QNQ QC LB=0.30 OI=501 CB=14.70 DE=35 TY=1.8% MY=5.9% ***** ADRX - Andrx Corporation $14.71 *** New FDA Approval! *** Andrx Corporation (NASDAQ:ADRX) is a specialty pharmaceutical company engaged in the formulation and commercialization of oral controlled-release generic and brand pharmaceuticals utilizing its proprietary drug delivery technologies. Andrx also markets and distributes pharmaceutical products manufactured by third parties. Andrx shares soared last week after U.S. regulators approved its generic version of the hypertension drug Tiazac. The decision ended a five-year legal fight against the original manufacturer of the product, Biovail, and Andrx said the Tiazac copy would be a "significant contributor" to its 2003 results. Investors who want to speculate on a continued recovery in ADRX shares can do so in a conservative manner with this position. MAY 12.50 QAX QV LB=0.25 OI=27 CB=12.25 DE=35 TY=1.8% MY=5.5% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Maximum Yield (monthly basis - margin) ***** Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield MSTR 26.13 MAY 22.50 EOU QX 0.90 93 21.60 35 3.6% 10.1% SANG 13.71 MAY 12.50 QDY QV 0.55 11 11.95 35 4.0% 9.9% OVTI 22.66 MAY 17.50 UCM QW 0.55 415 16.95 35 2.8% 9.4% CREE 21.35 MAY 17.50 CVO QW 0.50 81 17.00 35 2.6% 8.4% MMR 11.55 MAY 10.00 MMR QB 0.30 32 9.70 35 2.7% 7.7% XLNX 23.61 MAY 20.00 XLQ QD 0.55 2340 19.45 35 2.5% 7.5% CKFR 21.11 MAY 17.50 FCQ QW 0.45 1434 17.05 35 2.3% 7.4% FLO 27.47 MAY 25.00 FLO QE 0.70 159 24.30 35 2.5% 6.6% THOR 11.45 MAY 10.00 TQU QB 0.25 6 9.75 35 2.2% 6.4% DSPG 18.59 MAY 17.50 DPQ QW 0.50 15 17.00 35 2.6% 6.3% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Economic Woes Return To U.S. Equity Markets By Ray Cummins Stocks finished lower Friday, despite an early morning rally, as renewed concerns about the lackluster economy and the upcoming earnings season created a "wait and see" attitude among investors. The blue-chip Dow Jones industrial average ended down 17 points at 8,203 with Wal-Mart (NYSE:WMT) and Boeing (NYSE:BA) among the day's big losers. The NASDAQ Composite Index slid 6 points to 1,358 amid a slump in semiconductor and software issues. The broad Standard & Poor's 500 Index slipped 3 points to 868 as losses in oil and gas drillers and defense stocks outweighed gains in aluminum, hospital, tobacco, publishing, utility, and apparel issues. The number of advancing stocks was roughly even with declining issues on both the New York Stock Exchange and the NASDAQ. Trading volume was light with 1.1 billion shares changing hands on the Big Board, while 1.2 billion shares were swapped on technology exchange. The treasury was little changed as fixed-income investors awaited the results of next week's earnings reports. The benchmark 10-year note fell 9/32 as its yield rose to 3.97%. ***************** PORTFOLIO SUMMARY ***************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT CREDIT SPREADS ****************** Symbol Pick Last Month LP SP Credit CB G/L Status AMGN 55.70 57.88 APR 47 50 0.25 49.75 $0.25 Open EXPE 35.19 52.00 APR 27 30 0.30 29.70 $0.30 Open APOL 47.44 51.52 APR 40 45 0.50 44.50 $0.50 Open MMM 125.55 132.91 APR 110 115 0.50 114.50 $0.50 Open FLR 32.11 35.00 APR 25 30 0.50 29.50 $0.50 Open OEX 424.07 440.97 APR 375 380 0.45 379.55 $0.45 Open CAT 52.55 52.98 APR 45 47 0.30 47.20 $0.30 Open EXPD 37.68 33.87 APR 30 35 0.60 34.40 -$0.53 Closed GILD 41.53 41.80 APR 35 37 0.35 37.15 $0.35 Open ANSI 42.08 38.81 APR 35 40 0.45 39.55 -$0.74 Closed BJS 35.08 36.11 APR 30 32 0.25 32.25 $0.25 Open IBM 80.85 78.75 APR 70 75 0.60 74.40 $0.60 Open AZO 76.38 75.24 MAY 65 70 0.55 69.45 $0.55 Open BSTE 42.33 40.51 MAY 30 35 0.50 34.50 $0.50 Open GILD 44.15 41.80 MAY 37 40 0.30 39.70 $0.30 Open OIH 54.58 56.21 MAY 45 50 0.55 49.45 $0.55 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss As noted last week, Expeditors International (NASDAQ:EXPD) is testing support near $35 and conservative traders should exit the bullish position. Advanced Neuromo Systems (NASDAQ:ANSI) should have been closed during Thursday's move below the sold strike at $40. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status TOT 65.30 65.79 APR 75 70 0.60 70.60 $0.60 Open XAU 67.44 65.73 APR 80 75 0.50 75.50 $0.50 Open ACS 44.26 41.43 APR 55 50 0.55 50.55 $0.55 Open NOC 82.35 80.22 APR 95 90 0.60 90.60 $0.60 Open SII 34.10 36.36 APR 40 37 0.25 37.75 $0.25 Open FNM 66.70 69.01 APR 75 70 0.50 70.50 $0.50 Open QLGC 38.22 38.00 APR 45 42 0.25 42.75 $0.25 Open SYMC 40.25 39.75 APR 50 45 0.30 45.30 $0.30 Open CAM 49.39 49.02 MAY 60 55 0.45 55.45 $0.45 Open DRYR 67.40 63.69 MAY 75 70 1.10 71.10 $1.10 Open HCA 37.70 36.44 MAY 45 42 0.25 42.75 $0.25 Open VAR 49.04 53.26 MAY 60 55 0.60 55.60 $0.60 Open OIH 54.58 56.21 MAY 65 60 0.50 60.50 $0.50 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss Previously closed positions include: International Paper (NYSE:IP) and Chiron (NASDAQ:CHIR), both of which are positive, and United Health (NYSE:UNH). Federal National Mortgage (NYSE:FNM) and Smith International (NYSE:SII) are testing recent resistance areas and any further upside movement would indicate a potential early exit in each position. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status STN 19.40 21.01 APR 17 20 1.60 19.10 0.90 Open EBAY 83.91 88.29 APR 70 75 4.50 74.50 0.50 Open PPD 18.16 18.55 APR 15 17 1.75 16.75 0.75 Open LXK 67.80 68.45 APR 60 65 4.40 64.40 0.60 Open BGEN 35.67 34.12 MAY 30 32 2.20 32.20 0.30 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status QLGC 39.98 38.00 APR 47 45 2.30 45.20 0.20 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss The bearish spread in Federal Express (NYSE:FDX) has been closed to limit potential losses. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status MEDI 32.65 32.41 APR 35 30 0.10 0.70 Open? ADTN 38.14 36.18 APR 45 30 0.10 0.60 Open? OVRL 15.99 16.15 MAY 17 15 -0.15 0.00 No Play Overland Storage (NASDAQ:OVRL) "gapped-up" at the open on Monday, thus the bullish position was not initiated as the target price was unavailable. Medimmune (NASDAQ:MEDI) has achieved the target exit profit as has Adtran (NASDAQ:ADTN). The speculative position in Multimedia Games (NASDAQ:MGAM) has been previously closed to limit potential losses. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status BMET 28.52 29.77 JUL-30C APR-30C 0.80 1.40 Open OTEX 29.29 27.99 MAY-25C APR-30C 3.60 4.10 Open ESI 29.11 27.86 OCT-30C APR-30C 2.40 2.60 Open OCR 27.07 26.75 JUN-27C APR-27C 0.90 0.80 Open MO 32.13 28.30 JUN-27P APR-27P 1.25 1.60 Open The positions in Altria Group (NYSE:MO) and Omnicare (NYSE:OCR) were available at a higher-than-expected entry price, thus the risk/reward outlook may not be as favorable. Integrated Circuit Systems (NASDAQ:ICST) has been previously closed to limit losses. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status MYG 20.28 21.05 APR 20 20 1.75 0.00 No Play LNC 29.88 29.29 MAY 30 30 3.00 2.80 Open Maytag (NYSE:MYG) "gapped-up" at the open on Monday, thus the position was not initiated as the short-term straddle was not available near the target price. CREDIT STRANGLES **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************** READER'S WRITE ************** Attn: Spreads/Combos Editor Subject: Credit Versus Debit Spreads Ray, I am getting pretty well acquainted with credit spreads. I really like this strategy better than naked puts/calls. Why would one trade debit spreads vs. credit spreads? Is there a certain type of market in which one type of spread works better than the other? I understand that you can make a better ROI on debit spreads as the margin requirements do not apply. BJN Hello Again, I hope the market is treating you well. Stock and option traders have endured some difficult conditions over the past month and few have been very successful, regardless of the strategy they favor. As far as the comparison between credit and debit spreads, I assume you are referring to vertical spreads such as the Bull-Call and Bull-Put spreads, not calendar or diagonal (time-selling) strategies. In that case, the two approaches are similar because the theoretical risk/reward outlook is the same and both techniques include one long and one short option. But, the ability to initiate these strategies with the same (actual) risk/reward outlook is vastly different when you move away from "at-the-money" options. The two primary obstacles are the large bid-ask spreads and the relative lack of premium in "in-the-money" options. A good example of that condition can be seen in a comparison of an "in-the-money" debit spread (bull-call) and an "out-of-the-money" credit spread (bull-put). Rarely can these two strategies be utilized with equal success in the derivatives market because you simply can't find as many favorable opportunities with debit spreads. The few that do occur are generated by extreme demand in a particular option series, or a premium disparity, both of which are often suitable for spreading. Regarding the collateral requirements: As you know, a broker requires that you have enough collateral (cash or securities or ?) to cover the maximum possible loss in a credit spread position. Using an example from a past newsletter: OHP - Oxford Health $42.62 PLAY (conservative - bullish/credit spread): BUY PUT OCT-32.50 OHP-VZ OI=90 A=$0.30 SELL PUT OCT-35.00 OHP-VG OI=149 B=$0.60 INITIAL NET CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$34.70 The maximum possible loss in a credit spread is the difference between the two strike prices, minus the credit received in the position. In this case, the spread is $2.50 and the credit received is $0.30. The maximum loss is $2.20 (X 100) X number of contracts. If you traded 10 contracts in this position, the collateral requirement would be $2200. The maximum gain is $300, so the potential profit is 13.6% (300/2200) and the point at which the play starts to lose money (break-even) is at $34.70. If this were an equivalent debit spread, it would look something like this: OHP - Oxford Health $42.62 PLAY (conservative - bullish/debit spread): BUY CALL OCT-32.50 OHP-IZ OI=90 A=$10.10 SELL CALL OCT-35.00 OHP-IG OI=149 B=$7.90 INITIAL NET DEBIT TARGET=$2.15-$2.20 POTENTIAL PROFIT(max)=14% B/E=$34.70 The maximum possible loss in a debit spread is the cost of the spread; the difference between the option bought and the option sold. In this case, the cost is $2.20 and the potential profit is $0.30. Thus the maximum loss is $2.20 (X 100) X number of contracts. If you traded 10 contracts in this position, the initial cost would be $2200. The maximum gain is $300, so the potential profit is 13.6% (300/2200) and the point at which the play starts to lose money (break-even) is at $34.70. As you can see, the risk/reward outlook is the same but the difficulty in finding equivalent (ITM) debit spreads makes the (OTM) credit spread a more viable technique for traders who use high probability, low profit strategies. Since you are familiar with OTM credit spreads, and we have numerous candidates in that category each week, you should have no problem finding some plays for your options portfolio. Hope that helps! ************* NEW POSITIONS ************* This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. ************** CREDIT SPREADS ************** These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may be higher than other plays in the same strategy, due to small disparities in option pricing. Current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its outcome. ***** MDT - Medtronic $46.90 *** Trading Range? *** Medtronic (NYSE:MDT) is a medical technology firm that provides lifelong solutions for people with chronic disease. With roots in the treatment of heart disease, Medtronic has expanded beyond its historical core business and provides a range of products and therapies that help solve many challenging, life-limiting medical conditions. The company operates in five major business segments that make and market device-based medical therapies. These are: cardiac rhythm management, vascular, cardiac surgery, neurological and diabetes and spinal and ear, nose and throat. MDT - Medtronic $46.90 PLAY (conservative - bullish/credit spread): BUY PUT MAY-42.50 MDT-QV OI=5958 A=$0.45 SELL PUT MAY-45.00 MDT-QI OI=2515 B=$0.75 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$44.70 ***** NBR - Nabors Industries $41.11 *** Bullish Oil Driller! *** Nabors Industries (NYSE:NBR) is a land drilling contractor, with over 550 land drilling rigs. The company conducts oil, gas and geothermal land drilling operations in the lower 48 states, Alaska and Canada, and internationally, primarily in South and Central America, the Middle East and Africa. Nabors also is a land well-servicing and workover contractor in the United States. The company owns 745 land workover and well-servicing rigs, in the southwestern and western United States, and 40 well-servicing and workover rigs in certain international markets. Nabors also provides offshore platform workover and drilling rigs. Nabors markets 42 platform, 16 jackup and three barge rigs in the Gulf of Mexico and international markets. These rigs provide well servicing, workover and drilling services. The company also owns and operates a net of nine rigs through an international joint venture in Saudi Arabia. NBR - Nabors Industries $41.11 PLAY (conservative - bullish/credit spread): BUY PUT MAY-35.00 NBR-QG OI=303 A=$0.45 SELL PUT MAY-37.50 NBR-QU OI=29 B=$0.75 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$37.20 ***** BAC - Bank of America $71.34 *** Trading Range? *** Bank of America (NYSE:BAC) is a bank holding company and as well as a financial holding company that provides a diversified range of banking and non-banking financial services and products. The company operates in four major segments: consumer and commercial banking, asset management, global corporate & investment banking and equity investments. Operations are conducted principally in the mid-Atlantic (Maryland, Virginia and the District of Columbia), the midwest (Illinois, Iowa, Kansas and Missouri), the southeast (Florida, Georgia, North Carolina, South Carolina and Tennessee), the southwest (Arizona, Arkansas, New Mexico, Oklahoma and Texas), the northwest (Oregon and Washington) and the west (California, Idaho and Nevada) regions of the United States and in selected international markets. Quarterly earnings are due 4/14/03. BAC - Bank of America $71.34 PLAY (conservative - bearish/credit spread): BUY CALL MAY-80.00 BAC-EP OI=15120 A=$0.15 SELL CALL MAY-75.00 BAC-EO OI=22684 B=$0.75 INITIAL NET-CREDIT TARGET=$0.60-$0.75 POTENTIAL PROFIT(max)=14% B/E=$75.60 ***** GSK - GlaxoSmithKline $38.09 *** Sell The Bounce! *** GlaxoSmithKline plc (NYSE:GSK) is a research-based pharmaceutical and healthcare firm that is engaged in the creation and discovery, development, manufacture and marketing of pharmaceutical products, vaccines, over-the-counter medicines and health-related consumer products. GlaxoSmithKline is committed to making products aimed at improving the quality of human life. GlaxoSmithKline also is active in four major therapeutic areas: anti-infectives, central nervous system, respiratory and gastro-intestinal/metabolic. In addition, it has a growing portfolio of oncology products. GSK - GlaxoSmithKline $38.09 PLAY (conservative - bearish/credit spread): BUY CALL MAY-42.50 GSK-EV OI=397 A=$0.25 SELL CALL MAY-40.00 GSK-EH OI=4048 B=$0.50 INITIAL NET-CREDIT TARGET=$0.30-$0.40 POTENTIAL PROFIT(max)=14% B/E=$40.30 ************* LLL - L-3 Communications $36.24 *** Sector Slump! *** L-3 Communications Holdings (NYSE:LLL) is a merchant supplier of sophisticated secure communication systems and other specialized products. The company derives all of its operating income and cash flow from its wholly owned subsidiary, L-3 Communications. The company produces secure, high-data-rate communication systems, training and simulation systems, engineering development and integration support, avionics and ocean products, fuzing products, telemetry, instrumentation, space & guidance products and various microwave components. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's systems and specialized products are used to connect a variety of airborne, space, ground- and sea-based communication systems, and are used in the many transmission, processing, monitoring and dissemination functions of these communication systems. LLL - L-3 Communications $36.24 PLAY (conservative - bearish/credit spread): BUY CALL MAY-45.00 LLL-EI OI=614 A=$0.20 SELL CALL MAY-40.00 LLL-EH OI=1081 B=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.60 POTENTIAL PROFIT(max)=12% B/E=$40.55 ***** OEX - S&P 100 Index $440.97 *** Market "Bears" Only! *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is equal to the share price multiplied by the number of shares outstanding. OEX - S&P 100 Index $440.97 PLAY (conservative - bearish/credit spread): BUY CALL MAY-480.00 OXB-EP OI=3152 A=$1.60 SELL CALL MAY-475.00 OXB-EO OI=1847 B=$2.15 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$475.55 ***** WLP - WellPoint Health $76.80 *** Premium-Selling! *** WellPoint Health Networks (NYSE:WLP) is a managed healthcare firm. As a result of the January 2002 completion of its merger with RightCHOICE Managed Care, the company has over 12 million members. The company offers a broad spectrum of network-based managed care plans, including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), as well as point-of-service (POS) and other hybrid plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The firm also provides an array of specialty and other products, including pharmacy, dental, workers' compensation managed care services, utilization management, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. WLP - WellPoint Health $76.80 PLAY (less conservative - bearish/credit spread): BUY CALL MAY-90.00 WLP-ER OI=94 A=$0.25 SELL CALL MAY-85.00 WLP-EQ OI=456 B=$0.70 INITIAL NET-CREDIT TARGET=$0.45-$0.60 POTENTIAL PROFIT(max)=9% B/E=$85.45 ************* DEBIT SPREADS ************* These candidates offer a risk-reward outlook similar to credit spreads, however there is no margin requirement as the initial debit for the position is also the maximum loss. Since these positions are based primarily on technical indications, traders should review the current news and market sentiment surrounding each issue and make their own decision about the outcome of the position. ***** WMT - Wal-Mart $52.98 *** Slumping Retail Giant *** With annual sales of $218 billion, Wal-Mart Stores (NYSE:WMT) operates more than 2,800 discount stores, Super-Centers and Neighborhood Markets, and more than 515 SAM'S CLUBS in the U.S. Internationally, the firm operates over 1,200 units and employs 1.3 million associates worldwide. Last year, Wal-Mart associates raised and contributed $196 million to support communities and local non-profit organizations. FORTUNE magazine recently named Wal-Mart the third "most admired" company in America and one of the 100 best companies to work for in the U.S. According to a recent study, Americans say Wal-Mart is the company they think of first in supporting local causes and issues, and that is one of the main reasons people shop at Wal-Mart. WMT - Wal-Mart $52.98 PLAY (less conservative - bearish/debit spread): BUY PUT MAY-60.00 WMT-QL OI=95 A=$7.20 SELL PUT MAY-55.00 WMT-QK OI=3263 B=$2.85 INITIAL NET-DEBIT TARGET=$4.25-$4.35 POTENTIAL PROFIT(max)=15% B/E=$55.65 ******************* SYNTHETIC POSITIONS ******************* These stocks have momentum-based trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these plays attractive. ***** QQQ - Nasdaq-100 Trust $25.51 *** Bearish Speculation Play! *** The Nasdaq-100 Trust Series I is a pooled investment designed to provide results that generally correspond to the price and yield performance of the Nasdaq-100 Index. The issue was created to provide investors with the opportunity to purchase units in the Nasdaq-100, representing proportionate undivided interests in the portfolio of securities held by the Trust, which consists of substantially all of the securities, in substantially the same weighting, as the component securities of the underlying index. QQQ - Nasdaq-100 Trust $25.51 PLAY (speculative - bearish/synthetic position): BUY PUT MAY-24.00 QAV-QX OI=58898 A=$0.55 SELL CALL MAY-27.00 QAV-EA OI=78575 B=$0.45 INITIAL NET CREDIT TARGET=$0.00-$0.10 INITIAL TARGET PROFIT=$0.35-$0.70 Note: Using options, the position is similar to being short the stock. The minimum initial margin/collateral requirement for the sold option is approximately $920 per contract. However, do not open this position if you can not afford to purchase the tracking stock (QQQ) at the sold put strike price ($27). ***** ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. 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