The Option Investor Newsletter Wednesday 04-16-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Tale of Two Markets Futures Wrap: 15 Minute Momentum Index Trader Wrap: See Note Weekly Fund Family Profile: Killen Group: The Berwyn Funds Options 101: Complacency Reigns! Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 04-16-2003 High Low Volume Advance/Decline DJIA 8257.61 -144.75 8446.47 8233.73 2,999 mln 1477/1777 NASDAQ 1394.99 + 3.74 1418.52 1391.99 1,792 mln 1393/1649 S&P 100 446.78 - 5.30 455.47 445.69 totals 2870/3426 S&P 500 879.91 -10.90 896.77 877.93 RUS 2000 377.73 - 1.87 381.81 377.36 DJ TRANS 2299.69 –16.93 2330.96 2293.36 VIX 25.93 + .05 26.55 25.10 VXN 37.04 + .54 37.71 36.37 Put/Call Ratio 0.66 ******************************************************************* Tale of Two Markets Jonathan Levinson Last night's session and the early morning futures almost caused a massive capitulation- by the bears. An almost perfect bullish consensus seemed to be underway, marred only by the persistent weakness in the US Dollar Index overnight. Despite a massive infusion of 11.25B via overnight and 5-day repurchase agreements by Al Green, the indices were unable to hold their opening gains, and spent the day headed lower. Chart of the INDU Chart of the COMPX The day opened with the CPI and housing starts data at 8:30. The CPI data came in showing a 0.3% increase, less than the .4% analysts expected. This reading was down from a .6% gain in February. The core rate of inflation, which ignores food and energy prices, was flat. These low readings show that inflation is very tame, giving the Fed more room in which to manoeuvre with monetary policy, but then, the 4 year low on core rate and the decrease in the overall rate from February is also deflationary. I believe that this latter interpretation was at least in part responsible for Al Green's rather aggressive open market operations at 10AM. Housing starts posted their largest gain in 6 months, rising 8.3% in March to a 1.780M annualized rate. Single family housing starts was up 7.7% to 1.4M annualized units. Permits for new construction fell however, by 7%, the largest drop in one year. The blowoff top in housing that many have been calling for months continues to advance, but the drop in permits clearly removed whatever elation that the otherwise bullish housing starts number might have inspired. As the charts above show, today was a tale of two markets, with the INDU getting croaked for 144 points while the COMPX finished up by 3. This is attributable, other than for technical reasons, to carryover from the strong bullish reaction to INTC and MSFT the night before, and from some less than stellar results in the Dow components. MER announced earnings of 72 cents a share, well above First Call estimates of 61 cents and up from 67 cents in Q1 2002. It cited gains in its fixed income business that offset weakness in its equity-related businesses. CAT also surprised to the upside, reporting 37 cents per share, 12 cents above First Call estimates and up from Q1 2002's 213 cents per share. KO, however, got hammered for 6.18% on the day on analyst comments that while earnings were on track, the quality of those earnings was "poor", and that case sales were due to fall about 2% short of estimates. MMM was down 3.47% after seeing its earnings cut by J.P. Morgan. Altria (NYSE:MO) beat by a penny at $1.07 per share, down from $1.09 per share in Q1 2002. The stock sold off for more than 2% notwithstanding, not helped by the announcement that its stock buyback would be suspended. The Nasdaq, as mentioned, was more resilient, actually finishing in the green and assisted by residual bullishness from the after- hours feeding frenzy yesterday on the earnings announcements from INTC and MSFT, which finished up 6.01% and 1.22% respectively. After the bell, SUNW reported a quarterly profit of $4M on revenues of $2.8B, meeting analyst expectations on profits but falling short on revenues by $100M. SUNW was trading down 8 cents in afterhours from its close at $3.32. BRCM reported increased revenues of $327.5M and announced a narrower-than-expected loss of 25 cents per share, down from 63 cents per share a year earlier. It was trading 49 cents above its close of $14.05 in afterhours trading. AAPL beat by 2 cents, coming in at 4 cents per share, but down from 11 cents last year. Revenue dropped by $275M from $1.5B. The stock was up 11 cents afterhours. AMD was off 20 cents afterhours at $7.70 after announcing wider losses on a decrease in demand for CPUs. Nonetheless, QQQ was trading $26.28 afterhours, up 6 cents from its close. Stocks received a lift around 10:30 when Tom Ridge announced that the National Threat Level was being lowered from Orange ("high") to Yellow ("elevated"), citing a fresh assessment of ongoing threats by the intelligence community and the continued protective measures in place domestically. Ridge added that he felt that the US is safer under a yellow alert today than it was under the same alert one year ago, due to the extensive security practices that have now become routine. President Bush spoke in St. Louis today, and said that while the work in Iraq is far from over, Iraqis can look forward to a brighter future, and that Saddam Hussein's regime is finished. This followed his signing a $79B appropriations bill covering the initial cost of the war, reconstruction and humanitarian aid. It was also announced that the US and North Korea will hold diplomatic talks for the first time in 6 months. The multilateral talks will include China as a full participant, and will be held in Beijing. The Bush administration had refused to engage in talks that did not include other concerned nations in the regions, stating that it would not give in to "nuclear blackmail." The talks in China actually represent a concession by North Korea, which had initially insisted on holding talks with the US in Washington. While news was plentiful today, the markets appeared to trade more on technicals than anything else. The major indices found a wall of sellers in the area of the 200 day exponential moving average. Amid the hysteria of the open following a strong and sustained rally in the futures yesterday afternoon and overnight, we saw the put to call ratio hit a multi-month low at .43. Breadth was tilted so far to the bullish side at the open, following an extended advance all this week, that there was simply insufficient energy to sustain the move. While the Nasdaq closed in the green, its gap open above the 200 day EMA felt the real thing, and even tech-bears considered today a victory. However, the bullish case cannot be dismissed. The Dow gave back nearly all of this week's gains, but the Nasdaq barely filled today's opening gap. While weeks and months' worth of bad economic news has been discounted by attention to the war, we saw last night with the reaction to INTC's and, to a lesser extent, MSFT's earnings report, that there is still a great deal of enthusiasm for good corporate news. The deep pullback in the INDU stopped at solid support, and while the COMPX is at loftier heights, the 1380 level is strong support as well. I believe that a great deal of the weakness seen in the INDU today can be attributed to the selloff in the US Dollar Index as depicted in today's bearish engulfing print. The selling of US dollars today occurred despite treasury bonds closing in the green, with the thirty year yield down 3.1 basis points, the ten down 3.3 basis points, and the five year down 2.3 bps. The Fed's 11.25B in overnight and five day repos no doubt helped keep bonds in positive territory, as Governor Bernanke has stated it intends to do. However, it looks like little was left over to support blue chip stocks, the other asset class in which foreign money tends to reside. If this analysis is correct, then the selling in the Dow should continue, or at least follow the moves in the US Dollar Index. Direction for tomorrow is anyone's guess. The indices closed near their lows of the day with little show of strength after the first hour. However, with support nearby below and volumes thinning ahead of the long weekend, with Good Friday and Passover this week and the majority of options expiring tomorrow, it promises to be an interesting session. Traders should continue to exercise great caution and underleverage. We can all remember easier markets in the past, and until the market gets easy again, capital preservation remains our top priority. ************ FUTURES WRAP ************ 15 Minute Momentum By Vlada Raicevic Daily Settlement Numbers 4:15pm ET > DOW Last: 8257.61 Net: -144.75 High: 844.47 Low: 8233.73 > YM 03M Last: 8227 Net: -173 High: 8490 Low: 8209 > S&P 500 Last: 879.91 Net: -10.90 High: 896.77 Low: 877.93 > ES 03M Last: 879 Net: -15 High: 903.50 Low: 876.50 > Nas 100 Last: 1054.89 Net: +1.81 High: 1078.23 Low: 1051.52 > NQ 03M Last: 1057.50 Net: -3 High: 1084 Low: 1052.50 DAILY PIVOTS > YM 03M R2: 8569 R1: 8367 Pivot: 8288 S1: 8086 S2: 8007 > ES 03M R2: 911 R1: 893 Pivot: 885 S1: 866 S2: 858 > NQ 03M R2: 1094 R1: 1073 Pivot: 1063 S1: 1042 S2: 1031 When the futures opened yesterday, there was much euphoria from earnings and it looked like today was going to be the day that bulls could call their own, with a potential not only to meet, but possibly exceed recent highs. During the night session, ES hit 903.25, sold off, then moved up again to 903.50, this double top then led to selling which brought the ES down to open the day session at 895.25, down 8.25 from the overnight highs. Some buying managed to take price up to 896.75, but from there the ES pulled back to fill the gap, and to break below yesterdays highs before more buying came in. Buyers then pushed the ES up to a lower high at 895.50, but couldn't get any momentum and selling took over again, this time on heavy volume. At this point, it seems that there were slack jaws all across the trading landscape. Bulls couldn't believe the continued selling, and bears were stunned to have either been stopped out of their positions, or were wailing because most were waiting for higher levels to enter into shorts. Selling took the ES down to 882.75 which produced a mild bounce. Volume fell off a cliff, and price did very little for an hour, then started grinding slowly down again, making new lows by .25 with each little burst of selling. Finally, more selling kicked in, but again, without much momentum as the volume stayed quite thin. Price finally bottomed out at 876.50 before some short decided to take enough profits to push the ES back up 3-4 points on lackluster buying. Here is the amazing chart of the overnight session: ES 30 Minute Overnight Session Chart: Most short term and long term traders that I know have been very confused by a market that continues to throw a monkey wrench into the works. It really doesn't matter if one follows E-wave, Fibonacci, Time Cycles, or just the Macd, almost all known ways to interpret the market have been practically useless. Yesterday we looked to have almost confirmed a bullish market, and today....well, today looked like a bad hangover from the party last night. Not only that, but somebody stole the punch bowl. Do we take this as a bearish reversal day? Well yesterday we looked like a bullish confirmation day. A few days back when we had all those lovely upper tails on the daily chart it looked like we were failing at every attempt to move the market higher. It certainly seems like the markets are either just completely confused, or there are powerful forces pushing on the markets and trying to make 'certain' things happen. Again, it is all irrelevant. All we can do is try our best to analyze what's happening and try to swim with the current. The ES daily chart has a bearish engulfing candle, completely eliminating yesterdays rise, and a good part of Monday's rise as well. I noticed that the bulls are saying that today's selloff was on low volume. Yet, the volume was greater than the last two days which caused all the bullishness. Still, with all the selling, we have not reversed the bullish slant of the daily charts. Macd and RSI are close to, but have not crossed back down. ADX is still on a bullish rise, and stochastics are generally unconvinced of anything and have decided to just flatten out. Price did not reach the recent high, and instead sold off at the upper tine of the regression channel (blue). There are two rising trendlines of support near the 875 area as well as horizontal support. ES Daily Chart: The ES 135 minute chart shows how price stopped well above the rising trendline which sits around the 875 area. Macd and RSI both were repelled from breaking above their falling trendlines, with RSI dropping enough to pierce it's 21 period moving average. Multi-Stochastics doesn't look healthy with two rolling over and crossing, but the longer term is still pointing up and not moving in unison, showing that longer term indicators are having trouble keeping up with all the wild price swings. Fast stochastic (5,5,2) peaked at yesterday's close, and is now in full rollover. The ADX shows selling increasing and buying decreasing, but it is far from crossing over bearish. This all shows that yes, we had selling today, but not enough to completely remove the bullish case. Yesterday was the first time that actual buying during the day caused indicators to roll up positive. The other two recent crossovers to the upside were done via gaps. This is also why the selling today was a surprise. Raising the futures overnight on very low volume does not necessarily verify the market mood, and smells of manipulation, but the buying on Monday and yesterday was done during the day session, and should lend a touch of validity to the rise. Nevertheless, like most other gaps up, today was sold, and sold hard. ES 135 Minute Chart: The ES 60 minute chart shows the proper resolution of a rising wedge into resistance. Yesterday's close attempted to break above the pattern, but in the end, it sold off. Indicators are decidedly bearish, with Macd having made a bearish divergence at the top (two equal height peaks but price made higher high), before rolling over and now breaking the centerline. RSI broke out of the rising channel it had been moving in, and ADX is on the verge of crossing bearish. Stochastics are also showing no sign of stopping the decline, since all of them are still moving in perfect unison. ES 60 Minute Chart 1: I also wanted to put up a 60 minute, all sessions chart to show that this chart shows selling reaching the oversold levels with all indicators bottoming out and price reaching the bottom of the regression channel. There will be plenty of time for price to work off those oversold levels overnight, but it can be a good thing to look at this chart during the day session to see if perhaps it may tell you something the other charts are not. In this case, with price reaching this level, it could have told you that the selling was most likely done for the day. It might not bounce, but additional selling would have to wait. ES 60 Minute Chart 2: Yesterday I said that the NQ daily chart still had not conclusively verified as bullish. Today did surprisingly little to change that daily chart. In fact, the indicators are almost at the exact same place that they were yesterday: on the verge of crossing bullish, but not quite there. The NQ's were much more bullish this morning, and after the first round of selling, they made a higher high, unlike the ES, before selling too over. They did not fall as far as the ES, and in fact, they closed at the same spot that they closed at yesterday, although they did probe down close to yesterdays opening price. Therefore, the damage to the daily chart was negligible, and the NQs still have the opportunity to turn back up without having to work as hard as the ES. NQ Daily Chart: Unlike the daily chart, the NQ 135 minute chart shows the damage done by today's selling. You can see how price tried to cheat and gap above all that resistance where the arrow is pointing, and ended up closing yet again below those converging regression channel lines. Macd did a very nice crossover of the trendline and centerline but is now in danger of rolling back over. RSI is still holding above the trendline but has taken a rather sharp turn down; the fast and the multi-stochastics are also rolling over, and D+ on the ADX is crossing below the rising trendline it has had since 4/10. This is a chart in the first throes of rolling over and could portend what the daily is poised to do. NQ 135 Minute Chart: The NQ 60 minute chart shows a closer look at the selling, with indicators fully rolled over and no where near being oversold. The center of the regression channel indicates that the 1045 area could see some support, but with further selling that centerline could tilt to the 1041 area, which coincides with yesterday's low of 1041. NQ 60 Minute Chart: After today, we are left again to ponder the mysteries of the market via mixed signals. Bullish one day, bearish the next. It IS a cycle. However, one would like to see market cycles a little longer than 1-2 days, and momentum lasting more than 15 minutes. Tomorrow will most likely be a very low volume day, and unless some kind of strong news shows up, we are unlikely to get any real verification on whether this market wants to go up or go down. For that kind of resolution, I think we will have to wait for next week. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_041603_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Killen Group: The Berwyn Funds The Killen Group, based in Berwyn, PA is the investment advisor to the Berwyn Funds, a trio of mutual funds that have different objectives, strategies and risk-reward potential. The flagship Berwyn Fund (BERWX), a small-cap value fund, was started on May 7, 1984. Berwyn Income Fund (BERIX), an income-oriented hybrid fund with a current Morningstar 5-star rating, began operations on September 3, 1987. Berwyn Cornerstone Fund (BERCX) recently was added to the mutual fund lineup, and applies Killen Group's value-oriented style/strategy to U.S. stocks with market values of $1 million to $15 million (i.e. mid-caps). The Killen Group, Inc. was formed in September 1982. Robert E. Killen is Chairman and CEO of the Killen Group and the Chairman and President of the Berwyn Funds. He also serves as co-manager of both the Berwyn Fund and Berwyn Cornerstone Fund. Edward A. Killen is Vice President of the Killen Group, and is manager of the Berwyn Income Fund. Other key members include Lee S. Grout, Head of Investment Research. Grout also serves as co-manager of the Berwyn Fund and Berwyn Cornerstone Fund. Raymond J. Munsch, the fourth member of the firm's investment management committee, is President and Chief Operating Officer of the Killen Group. The Berwyn Funds have a minimum initial investment of $3,000 to open a regular account ($1,000 for initial IRA). Berwyn Income Fund has an annual operating expense ratio of 0.69%, the lowest of the three Berwyn mutual funds. The annual expense ratios of the Berwyn Fund and Berwyn Cornerstone Fund are 1.24% and 2.00%, respectively, per the fund prospectus. The Berwyn Funds may be purchased directly or through one of several brokerage networks, including Ameritrade, Accutrade, Fidelity, Schwab, Vanguard and others. For more information or to download a prospectus, logon to the Berwyn Funds' website at www.berwynfunds.com. Fund Overview The Berwyn Fund and its younger sibling, Berwyn Cornerstone Fund seek to achieve long-term growth of capital; current income is a secondary consideration. Berwyn Income Fund as its name implies seeks to provide investors with current income, while seeking to preserve capital, by taking what the Killen Group's considers to be "reasonable" portfolio risks (in other words, consistent with a low-risk policy). The Berwyn Fund (BERWX) co-managed by Robert E. Killen and Lee S. Grout, pursues the fund's objective by investing in common stocks and fixed income securities offering a potential for appreciation (income secondary). In security selection, Killen and Grout seek undervalued common stocks and base their decisions on fundamental investment values. Fixed income securities are limited to 20% of assets. The fund is registered with the SEC as a non-diversified open-end investment company. So, it may invest a greater portion of its net assets in the shares of individual issuers. The Berwyn Cornerstone Fund (BERCX) is very similar in objective, style and strategy as its older sibling, Berwyn Fund, and is also co-managed by Robert E. Killen and Lee S. Grout. It is different from Berwyn Fund only in terms of its market capitalization range ($1 million and $15 million), maintaining a mid-cap bias overall. Berwyn Fund tends to buy stocks with market caps of $1 billion or less, maintaining a small-cap bias. Mid-cap stocks theoretically have less risk than small-cap stocks, and offer greater potential return than large-cap stocks. The Berwyn Income Fund (BERIX) seeks current income by investing in debt securities and dividend-paying stocks, with appreciation a secondary consideration. Common stock investments can't exceed 30% of the value of net assets. Fixed income investments include corporate bonds, preferred stocks and government debt securities, as well as lower-rated, high-yield fixed income securities. This income-driven fund generally maintains enough equity exposure to land it in Morningstar's domestic hybrid category and in Lipper's mixed equity category. It recently sported a trailing (12-month) yield of 5.99%, per Morningstar, higher than the average balanced fund. Please read the fund prospectus for additional information on the risks incurred by each fund. In the next section, we take a look at how well the Berwyn mutual funds have performed in relation to similar funds. Fund Performance and Ratings Because of its income objective, Berwyn Income Fund has done well over the past three years relative to more equity-oriented hybrid funds and pure stock funds. Its trailing 3-year annualized total return of 11.2% was high enough to rank in the top 2% of all U.S. hybrid funds according to Morningstar. Over the same period, the average domestic hybrid fund lost an average of 5% per year while the S&P 500 large-cap index declined at an annual-equivalent rate of 11.8%. But the story doesn't end there. The Berwyn Income Fund compares favorably to other domestic hybrids in both the short-term and in the long run. The fund's trailing 1-year return of 5.7% was high enough to rank in the top 4% of the category. Its average annual return of 4.7% over the past five years was strong enough to land in the category's top 5%. And its trailing 10-year average total return through March 31 of 8.3% ranked in the top 18% of the U.S. hybrid fund category, per Morningstar, nearly beating the S&P 500 large-cap index in the process. Overall, the Berwyn Income Fund has produced high return with low risk within the domestic hybrid category for a Morningstar 5-star (highest) risk-adjusted performance rating. However, things were not always this good. In 1997, 1998 and 1999, when equity prices were rising, the portfolio produced annual returns that ranked in the bottom quintile of the domestic hybrid category. When stocks are advancing, this fund may lag more equity-oriented hybrids and when stocks are declining, this fund will fare better than hybrid funds with larger equity stakes. Berwyn Fund's long-term record of performance is not as strong as its income-oriented sibling, but over the past three years it has shined. Lee Grout addition as co-manager in July 2001 appears to have helped this fund gets things turned around. In 2001, it had a 28.9% annual total return, ranking in the top 10% of the small- cap value category per Morningstar. In 2002, the fund lost 6.9%, ranking in the top one-third of the category, and so far in 2003, the fund is up 0.5%, ranking in the category's 15th percentile of performance. The result, a trailing 3-year average annual return of 12.1% and top quintile ranking in the small-cap value category per Morningstar. Relative to its small-cap value peers, the Berwyn Fund produced above average returns the past three years while maintaining an average risk level, for a Morningstar risk-adjusted rating of 4 stars (above average overall). The fund's 5-year, 10-year, and overall rating 2 stars of isn't worth bragging about, but since Grout became co-manager in 2001 the fund's relative performance has improved. The Berwyn Fund's younger sibling, Berwyn Cornerstone Fund, is relatively new and does not yet have a Morningstar fund report. For the quarter ended March 31, 2003, the fund lost 2.4%, less than 3.2% decline by the S&P 500 index and the 4.4% decline by the S&P Midcap 400 index. You may want to come back and review this fund's performance after May 1, 2003, when it reaches its one-year anniversary. Conclusion Value investors seeking capital appreciation may want to consider the Berwyn Fund or Berwyn Cornerstone Fund as a supporting player in their equity portfolio. Value investors seeking a high-income level consistent with a lower risk strategy may prefer the income oriented, Berwyn Income Fund, for their investment needs. Because the Killen Group is a value manager that emphasizes small and mid-cap stocks, their equity funds may potentially lag other styles (blend and growth funds) when value stocks are out of sync with the market or large-cap stocks do better than small and mid- cap stocks in general. Berwyn Income Fund tends to maintain more fixed income exposure than other domestic hybrids, see it'll tend to lag in rising markets and lead in falling markets (relative to more equity-oriented hybrid peers). For further information on the Berwyn Funds or Killen Group, Inc. as an investment manager, go to www.berwynfunds.com website. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** Complacency Reigns! By Mark Phillips mphillips@OptionInvestor.com I've been writing about the Volatility Index (VIX.X) so much lately that I feel like a bit of a one-trick pony, but I keep coming back to it because the action is so compelling and I feel it is sending us some big warning signals that we can't afford to ignore. Despite continued volatile action in the broad market, the VIX has continued to drill to new multi-month lows, very clearly telegraphing that option writers are becoming less and less nervous. The big question is "why"? The economy is not in good shape, and while this earnings season probably won't be a disaster, neither will it provide any evidence of the much-ballyhooed second half recovery. While I touch on the topic of the VIX every week in the LEAPS column, the strange behavior of this indicator has prompted me to write a couple of lengthy articles on the topic in recent months. For those of you just tuning in, here are the links to what I think are the pertinent issues related to the VIX. Best of Intentions http://members.OptionInvestor.com/options101/opt_022603_1.asp Consolidation http://members.OptionInvestor.com/options101/opt_032603_1.asp Let's summarize what we were looking for, so that we can put the recent action in the VIX into the proper context. Stepping backward in time just a couple weeks, I was looking at some potential support levels in the VIX, first at the ascending trendline (just below 29) and then at the November/January double bottom near 26.20. Well the trendline was violated late last week, and yesterday's close of 26.04 fractionally broke the double bottom support. With last night's bullish reception of the MSFT/INTC earnings results, a strong move at the open (and hence more weakness in the VIX) seemed to be a certainty. While we did get a slight gap up at the open, it isn't the price action in the major indices that I think was important. It was the weakness in the VIX, which traded down to 25.10 this morning, its lowest level since June 11th, 2002. There was one other, more esoteric support floor that I came up with for the VIX and it came from a historical calculation I did with respect to the VIX and its 200-dma. This study demonstrated that over the past several years, there has been a floor under the VIX at a level 30-32% below the 200-dma. Based on the 200-dma at 35.82 this morning, that pegged the practical floor for the VIX in the 24.36-25.07 area. So isn't it interesting how the VIX bottomed right at the top of this range today? We've looked at this chart before, but I think an updated picture as of today will prove most enlightening. Daily Chart of the CBOE Volatility Index (VIX.X) Those two potential support levels near 29 and 26 didn't hold, but the calculated floor for the VIX based on the 200-dma was spot on! And I like the way the VIX drifted up to close just over 26 this afternoon. On several occasions in recent months (specifically in the Best of Intentions article), I've noted the strange divergence between the VIX and the S&P 100 (OEX.X). Over the past several months, there has been a consistent draining of fear out of the market, and that phenomenon caught my attention big time. Today I want to take a different look at this relationship, in a way that I think will better demonstrate what I'm seeing. Relative Strength Chart of the VIX vs. OEX Those two charts may look the same, but take a closer look and you'll notice some subtle, but I believe very important differences. See that island candle that was entirely above the upper trendline in the first chart? In the relative strength chart, the close was back below the trendline. And look at the action over the past week. While the past five days have been below the lower trendline on the first chart, when we look at the VIX in this relative strength format, we see that the lower trendline has been respected on both of the past 2 days. In addition, look at the horizontal support produced by the November/January double bottom. That level of support also held today, whereas it has been violated on the standard VIX chart. Alright, I know I've probably already made my case, but I want to present one more perspective of the inter-relationship between the VIX and the OEX that shows how fear has been draining out of the market. OEX Daily Chart with VIX Overlay Normally, the VIX and OEX should move opposite of one another, but that is clearly not what has been happening lately. Even though the OEX is actually below its 10/21/02 level, the VIX is also lower, by 34%!! The aberration from the normal VIX/OEX relationship was further highlighted today, as the OEX fell back to $446 while the VIX essentially ended the day unchanged. Let's go back in time a mere 10 trading days, and we can see the OEX came to rest on 4/02 at $447. Where was the VIX at the time? 31.29. The OEX is marking time, while the VIX continues to show a shocking lack of fear. This strangeness is not confined to the OEX/VIX relationship though. Have you taken a look at the NASDAQ-100 Volatility index (VXN.X) lately? Yesterday, the VXN hit a new all-time low of 35.98. Now I realize there isn't as much historical data for the VXN as there is for the VIX, but the last time the VXN was in the area of 36 was at the end of March 2002. Do you remember what happened to the NASDAQ for the next four months? It got clobbered to the tune of a 38% loss. Here's a fun exercise for those of you that use Qcharts. Pull up your own relative strength chart of the VXN vs. the NASDAQ-100. The actual entry for the symbol field is "index:vxn.x /index:ndx.x" Don't forget the space between the first symbol and the "/". Do you see anything there that looks vaguely familiar? So what does it all mean? Is the market ready to fall apart again? Well, yes and no. I've made no secret of my opinion that the equity market is still headed lower -- much lower. And this blatant display of complacency being demonstrated by the volatility indices only solidifies that belief. As traders, determining direction is only one part of our daily struggle. Perhaps more important is timing. While I think this bear market rally is getting a bit long in the tooth right now, I keep coming back to the bullish percent readings and they tell me that I'm still a bit too early to start getting aggressive to the downside. Based on the discussion above, I think we are very close to a bottom in the VIX. But at the same time, I am holding off on entering bearish position trades on the major indices because of my expectation for further upside due to the position of the bullish percents. My ideal situation is to see the VIX fall near the 24 level, the OEX climb up to the site of its descending trendline (on the exponential chart shown in the Consolidation article referenced above), which is currently at $468 and for the bullish percents to work their way closer to overbought territory. Currently the OEX bullish percent is only 45%, so clearly there is further upside POTENTIAL. But I'll also point out that I have no conviction in seeing further upside. The bullish percents could halt their advance right where they are and the markets could proceed south from here. That's why I'm not trading the major indices (even on a short-term basis) from the bullish direction. My attention is focused on the bearish setups now and I'm just hoping the stars line up for the entries I want. As you can see, there are still several factors that need to line up for that great shorting opportunity, but if my analysis on the VIX is accurate, I certainly wouldn't rule out a repeat of what transpired between May and July of 2002. No matter how you slice it, we're likely to see some excitement in the weeks and months ahead! Mark Note: I'm taking a brief respite from the markets next week, so I won't be doing my normal Monday and Wednesday articles. So rest up in my absence and we'll get back to educating as usual on April 28th. ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* 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 Wednesday 04-16-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Market Watch: Five More to Keep Watch Premium Selling Plays: Earnings Season Rally Sputters! Updated on the site tonight: Market Posture: The old Switcharoo! ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ Five More to Keep Watch Johnson & Johnson - JNJ - close: 54.39 change: -1.59 Shares of JNJ are sliding despite positive earnings growth in their Q1 report. Wall Street appears to be worried about competition and they're showing it. Volume has been very strong the last two days. Wednesday's session was a 2.8 percent drop that placed the blue chip below the $55 mark and its 50, 100, and 200-dma's. This is NOT a bullish show of strength! MACD has rolled over as are other oscillators. It may feel like a chase here, but the stock looks like it is headed for $50.00. Optimistic bulls might be hoping for some support at the $51.50 level. Chart= --- SLM Corp - SLM - close: 114.59 change: -1.91 SLM Corp, or better known as Sallie Mae, has been incredibly strong lately. As of yesterday, even this morning, it was hitting new all-time highs. The bad news for bulls is the stock is looking pretty overbought and today's session painted a bearish engulfing candlestick. This could be a potential reversal in the making. To add more volatility to the mix, the company is expected to announce earnings tomorrow. Now, you're probably thinking we're bearish, but we're not. Yes, we expect the stock to trade lower but in reality we're looking for an entry point to play the stock's up coming 3-for-1 split. The split is to be approved in May. Now our outlook may change if the earnings report tomorrow comes out negative. Hopefully, SLM will get a big enough drop to pull back to what should be support at $110. Keep in mind; the stock is so overbought on a weekly basis that a much bigger round of profit taking could ensue. This is a good case to take a wait and see approach. Chart= --- Wellpoint Health Network - WLP - close: 73.83 change: -3.72 Wow! Talk about selling the news. Investors are selling WLP on the news and it's not even WLP's news they are selling. WLP is one of the biggest health insurance companies out there but they trade in close tandem with UnitedHealth (UNH) who is the biggest. This morning UNH came out with very strong Q1 earnings reports. Revenues were up 37% and UNH said they expect revenue to rise by 16% for 2003. This is great news but traders sold it. WLP is guilty by association. Shares of WLP fell 4.79% and dropped out of its rising trend and broke the $75 level. It's currently resting just above the 200-dma. Volume was very strong on the decline today. The MACD for WLP has rolled over into a bearish crossover. There is potential support at $73 and again at $70 but with the market on the verge of a turnover (see the comments on the VIX tonight) WLP may actually fall to the $65 area. WLP's earnings are due on April 23rd after the close. Chart= --- St. Jude Medical - STJ - close: 48.50 change: -1.15 STJ is another medical stock that announced strong earnings this morning, beating by three cents. What did traders do? They sold it. So far the up trend is still intact but a close under $48 or $47.50 could have the bears crowding in. The stock is primed for some profit taking. Should this occur we'd look for a move to the $42.50 area while being wary of potential support at $45. Keep in mind, that we'll be looking for a bottom as STJ is one of the stronger stocks bulls will be playing for a rebound. Chart= --- Burlington Resources - BR - close: 46.71 change: -0.39 This oil & gas company is a potential bullish candidate for the patient trader. Shares don't move very fast but there is no denying their relative strength. The plan would be to wait for shares to complete their consolidation back down to the bottom of their rising channel. Shares might rebound at the $46 mark but if you're patient, odds are bulls might get a better entry by waiting for a dip towards $45. If a long position is created a stop is essential. We'd make the stop pretty tight if your entry is near the $45 mark. Earnings are expected on April 24th but considering the pace of the stock you may be better off by waiting until after earnings to initiate a position and by using options six to nine months out. Chart= ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Earnings Season Rally Sputters! By Ray Cummins Stocks ended mixed today as technology shares edged higher on favorable news from Microsoft and Intel, while broader-market issues drifted lower amid a glut of negative earnings reports. The NASDAQ added 3 points to 1,394, its first test of the 1,400 level since early January. Buying pressure emerged in computer, networking and Internet stocks. The Dow Jones Industrial Average slid 147 points to 8,255 after two consecutive sessions of gains. The big losers on the blue-chip gauge were Coca-Cola (NYSE:KO), SBC Communications (NYSE:SBC) and 3M (NYSE:MMM). The S&P 500 stock index retreated 10 points to 879. Biotechnology, drug and tobacco shares slumped while defense and airline stocks enjoyed limited upside activity. Trading volume was moderate with 1.56 billion shares exchanged on the NYSE while 1.51 billion shares were swapped on the NASDAQ. Losers outpaced winners 6 to 5 on the Big Board and bearish stocks outnumbered bullish issues 8 to 7 on the technology exchange. In the U.S. bond market, treasury issues firmed, sending yields marginally lower as strong housing data failed to convince traders the economy is on solid footing. The 10-year bond rose 12/32 for a yield of 3.94%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 4/15/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CELG APR 22 21.25 25.90 $1.25 8.68% 5.88% ERES APR 20 19.20 28.18 $0.80 8.04% 4.17% EXPE APR 40 39.50 54.10 $0.50 4.15% 1.27% GENZ APR 30 29.60 35.79 $0.40 4.69% 1.35% KLAC APR 32 31.95 37.36 $0.55 5.84% 1.72% MSFT APR 24 23.35 24.61 $0.40 4.85% 1.71% APPX APR 20 19.45 16.53 ($1.25) 0.00% 0.00% * GENZ APR 30 29.70 35.79 $0.30 4.56% 1.01% KLAC APR 32 32.10 37.36 $0.40 5.35% 1.25% NVLS APR 25 24.65 26.28 $0.35 6.36% 1.42% ROOM APR 50 49.10 67.17 $0.90 8.23% 1.83% YHOO APR 22 21.90 24.81 $0.60 9.63% 2.74% BSTE APR 35 34.75 41.48 $0.25 4.56% 0.72% CAT APR 47 47.10 52.70 $0.40 4.51% 0.85% GENZ APR 35 34.60 35.79 $0.40 6.10% 1.16% KLAC APR 32 32.25 37.36 $0.25 4.87% 0.78% CMCSA APR 27 27.25 30.08 $0.25 8.20% 0.92% DCX APR 30 29.55 31.85 $0.45 14.07% 1.52% AVID MAY 20 19.50 26.47 $0.50 5.89% 2.56% ERES MAY 22 21.90 28.18 $0.60 6.03% 2.74% GILD MAY 40 39.60 42.90 $0.40 5.36% 1.01% JCOM MAY 25 24.70 34.26 $0.70 6.83% 2.83% RYL MAY 42 41.50 49.75 $1.00 4.45% 2.41% AVID MAY 20 19.70 26.47 $0.30 4.53% 1.52% CTSH MAY 18 17.27 19.79 $1.10 14.54% 6.37% The bullish position in American Pharmaceutical Partners (NASDAQ:APPX), which has been on the watch-list since 4/2, was closed when the issue hit a new multi-week low. The loss reflected in the summary is based on Monday's (4/14) closing prices. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield COF APR 32 33.05 37.49 ($2.19) 0.00% 0.00% * MERQ APR 35 35.80 33.50 $0.80 7.15% 2.23% IGEN APR 45 45.55 34.93 $0.55 7.71% 1.21% MCHP APR 25 25.40 18.15 $0.40 7.37% 1.57% BSX APR 45 45.40 43.11 $0.40 3.93% 0.88% IGEN APR 45 45.45 34.93 $0.45 7.93% 0.99% NE APR 35 35.50 31.44 $0.50 6.06% 1.41% VIA.b APR 42 39.00 41.24 $0.30 3.37% 0.77% IGEN APR 42 42.95 34.93 $0.45 11.18% 1.05% NE APR 35 35.30 31.44 $0.30 5.39% 0.85% QCOM APR 37 37.90 33.08 $0.40 7.07% 1.06% CCMP MAY 50 50.70 44.18 $0.70 5.44% 1.38% MERQ MAY 37 37.95 33.50 $0.45 5.59% 1.19% QLGC MAY 42 43.40 39.17 $0.90 6.76% 2.07% Capital One Financial (NYSE:COF), which has been on the watch-list for two weeks, became an "early-exit" victim on 4/10/03 when the issue closed at a three-month high. The loss reflected in the summary is based on Thursday's closing prices. The position in Pulte Homes (NYSE:PHM) has previously been closed to limit losses. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status AMGN 55.33 60.15 APR 47 50 0.30 49.70 $0.30 Open NKE 46.48 53.77 APR 40 42 0.30 42.20 $0.30 Open ADBE 33.02 33.88 APR 25 30 0.50 29.50 $0.50 Open CMCSA 29.91 30.08 APR 25 27 0.30 27.20 $0.30 Open FRX 53.10 53.40 APR 45 50 0.60 49.40 $0.60 Open LXK 65.89 68.69 APR 55 60 0.50 59.50 $0.50 Open SLM 110.21 116.50 APR 95 100 0.45 99.55 $0.45 Open BSTE 38.47 41.48 APR 30 35 0.40 34.60 $0.40 Open CFC 58.00 60.34 APR 50 55 0.40 54.60 $0.40 Open ERTS 59.56 59.11 APR 50 55 0.50 54.50 $0.50 Open IBM 81.46 82.79 APR 70 75 0.50 74.50 $0.50 Open BBH 97.50 96.05 MAY 85 90 0.60 89.40 $0.60 Open CAT 51.71 52.70 MAY 45 47 0.30 47.20 $0.30 Open RYL 47.52 49.75 MAY 40 42 0.25 42.25 $0.25 Open VIP 37.73 37.10 MAY 30 35 0.60 34.40 $0.60 Open Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status BHI 30.13 28.01 APR 35 32 0.25 32.75 $0.25 Open INTU 50.44 40.13 APR 60 55 0.55 55.55 $0.55 Open OMC 53.96 61.30 APR 65 60 0.50 60.50 ($0.80) Open * CCMP 44.61 44.18 APR 55 50 0.50 50.50 $0.50 Open DVN 47.70 47.99 APR 55 50 0.45 50.45 $0.45 Open IP 35.63 34.06 APR 40 37 0.20 37.70 $0.20 Open APC 46.05 45.43 MAY 55 50 0.50 50.50 $0.50 Open ATK 53.08 50.00 MAY 65 60 0.45 60.45 $0.45 Open TOT 65.30 66.91 MAY 75 70 0.65 70.65 $0.65 Open CAH 56.55 58.33 MAY 65 60 0.80 60.80 $0.80 Open GM 34.48 35.17 MAY 40 37 0.30 37.80 $0.30 Open MXIM 35.51 37.05 MAY 45 40 0.75 40.75 $0.75 Open MHP 56.65 59.41 MAY 65 60 0.65 60.65 $0.65 Open * The position in Omnicom (NYSE:OMC) became a candidate for early exit when the issue closed above the sold strike. Mcgraw Hill (NYSE:MHP) and Maxim Integrated Products (NASDAQ:MXIM) are on the "early exit" watch-list and conservative traders should consider closing these spreads on any further upside movement. Positions in Centex (NYSE:CTX), Lennar (NYSE:LEN), and Lehman Brothers (NYSE:LEH), have previously been closed to limit potential losses. Synthetic Positions ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status GGP 54.02 54.50 APR 55 50 0.00 0.40 Open? Calendar Spreads **************** No Open Positions Credit Strangles **************** No Open Positions Questions & comments on spreads/combos to Contact Support ************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** ADI - Analog Devices $30.26 *** Favorable Earnings! *** Analog Devices (NYSE:ADI) is engaged in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing (DSP) integrated circuits. The firm's many products play a fundamental role in converting real-world phenomena, such as temperature, motion, pressure, light and sound, into electrical signals to be used in a wide array of electronic equipment, ranging from industrial process control, automation systems equipment, smart munitions, base stations, central office equipment, wireless telephones, computers, cars, computer-aided tomography (CAT) scanners, digital cameras and DVD players. ADI - Analog Devices $30.26 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 25 ADI QE 484 0.35 24.65 4.9% 1.4% * SELL PUT MAY 30 ADI QF 312 1.70 28.30 12.7% 6.0% ************** BBY - Best Buy Company $30.79 *** Bullish Retailer! *** Best Buy Company (NYSE:BBY) is specialty retailer of consumer electronics, personal computers, entertainment software and appliances. Best Buy operates retail stores and commercial Websites under the brand names Best Buy, Media Play, On Cue, Sam Goody, Suncoast, Magnolia Hi-Fi and Future Shop. The firm operates three segments: Best Buy, Musicland and International. Best Buy is mainly a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. Also included in the Best Buy segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video products. Their Musicland segment is primarily a mall-based retailer of movies, prerecorded music, video games and other entertainment-related products. The International segment consists of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances with operations in Canada. BBY - Best Buy Company $30.79 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 27.5 BBY QY 3,256 0.50 27.00 5.3% 1.9% * SELL PUT MAY 30 BBY QF 708 1.15 28.85 9.2% 4.0% ************** KLAC - KLA Tencor $38.51 *** Chip-Equipment Leader! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. KLAC - KLA Tencor $38.51 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 32.5 KCQ QZ 3,460 0.45 32.05 4.6% 1.4% * SELL PUT MAY 35 KCQ QG 3,942 0.95 34.05 7.5% 2.8% SELL PUT MAY 37.5 KCQ QU 1,147 1.70 35.80 10.7% 4.7% ************** LLTC - Linear Technology $33.13 *** More Chip Stocks! *** Linear Technology (NASDAQ:LLTC) designs, manufactures and sells a broad line of standard high-performance linear integrated circuits (ICs). Applications for the company's products include telecommunications, cellular telephones, networking products, optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products, digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control and military and space systems. LLTC - Linear Technology $33.13 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 27.5 LLQ QY 749 0.35 27.15 4.5% 1.3% * SELL PUT MAY 30 LLQ QF 1,464 0.90 29.10 8.3% 3.1% SELL PUT MAY 32.5 LLQ QZ 1,393 1.75 30.75 12.3% 5.7% ************** MSTR - MicroStrategy $27.66 *** New 52-Week High! *** MicroStrategy (NASDAQ:MSTR) is a global leader in the increasingly critical business intelligence software market. Large and small firms alike are harnessing MicroStrategy's business intelligence software to gain vital insights from their data to help them proactively enhance cost-efficiency, productivity and customer relations and optimize revenue-generating strategies. The firm's business intelligence platform offers exceptional capabilities that provide organizations, in virtually all facets of their operations, with user-friendly solutions to their data query, reporting, and advanced analytical needs, and distributes valuable insight on this data to users via Web, wireless, and voice. MSTR - MicroStrategy $27.66 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 22.5 EOU QX 93 0.50 22.00 7.9% 2.3% * SELL PUT MAY 25 EOU QE 73 1.10 23.90 11.7% 4.6% ************** SLAB - Silicon Laboratories $27.58 *** Trading Range! *** Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and sells proprietary high-performance mixed-signal integrated circuits for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. The company's mixed-signal design engineers utilize standard complementary metal oxide semiconductor (CMOS) technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. SLAB - Silicon Laboratories $27.58 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 22.5 QFJ QX 2,340 0.35 22.15 5.6% 1.6% * SELL PUT MAY 25 QFJ QE 759 0.90 24.10 9.8% 3.7% ************** XLNX - Xilinx $25.53 *** Semiconductor Sector Rally! *** Xilinx (NASDAQ:XLNX) is the world's leading supplier of complete programmable logic solutions. Xilinx develops, manufactures, and markets a broad line of advanced integrated circuits, software design tools and intellectual property. Their customers use the automated tools and intellectual property, which are predefined system-level functions delivered as software cores, from Xilinx and its partners to program the chips to perform custom logic operations. XLNX - Xilinx $25.53 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 20 XLQ QD 2,477 0.20 19.80 3.8% 1.0% TS SELL PUT MAY 22.5 XLQ QX 1,997 0.60 21.90 7.8% 2.7% * SELL PUT MAY 25 XLQ QE 587 1.40 23.60 12.8% 5.9% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** EVG - Evergreen Resources $47.07 *** New 18-Month High! *** Evergreen Resources (NYSE:EVG) is an independent energy company engaged in the operation, development, production, exploration and acquisition of natural gas properties. Evergreen is also a developer of coal bed methane reserves in the United States. Its operations are focused on developing and expanding its coal bed methane project located in the Raton Basin in Colorado. The company has begun coal bed methane projects in the United Kingdom and Alaska. In addition, the firm is engaged in the exploration of natural gas prospects in Northern Ireland and the Republic of Ireland, and owns additional interests in other domestic and international areas. EVG - Evergreen Resources $47.07 PLAY (conservative - bullish/credit spread): BUY PUT MAY-40.00 EVG-QH OI=5 A=$0.20 SELL PUT MAY-45.00 EVG-QI OI=0 B=$0.70 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$44.50 ************** KRON - Kronos $43.41 *** Pre-Earnings Rally? *** Kronos (NASDAQ:KRON) develops, manufactures and markets frontline labor management systems that improve workforce productivity and the utilization of labor resources by planning, tracking and analyzing time and activities information about a company's employees. By eliminating the need for manual data collection and data entry, the systems reduce the time needed to collect employee work-related information, improve payroll accuracy and provide time-sensitive labor information to frontline managers. Kronos offers an integrated suite of employee-centric solutions for labor management, payroll and human resources. The software incorporated in the company's frontline labor management systems is parameter-driven, which allows it to be configured upon installation to meet the needs of an individual customer and reconfigured as customer needs evolve without the need for expensive custom software coding. KRON - Kronos $43.41 PLAY (conservative - bullish/credit spread): BUY PUT MAY-35.00 KUE-QG OI=8 A=$0.40 SELL PUT MAY-40.00 KUE-QH OI=50 B=$0.85 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$39.50 ************** TBL - Timberland $47.84 *** Awesome Earnings! *** Timberland (NYSE:TBL) is a global leader in the design, engineering and marketing of premium-quality footwear, apparel, and accessories for consumers who value the outdoors and their time in it. The company's products offer quality workmanship and detailing and are built to withstand the elements of nature. They can be found in leading department and specialty stores as well as Timberland-brand retail stores throughout North America, Europe, Asia, Latin America, and the Middle East. TBL - Timberland $47.84 PLAY (conservative - bullish/credit spread): BUY PUT MAY-42.50 TBL-QV OI=48 A=$0.35 SELL PUT MAY-45.00 TBL-QI OI=65 B=$0.60 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$44.75 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** IGEN - IGEN International $34.25 *** Speculation Only! *** IGEN International develops and markets products that incorporate its proprietary electrochemiluminescence (ORIGEN) technology, which permits the detection and measurement of various biological substances. ORIGEN provides a combination of speed, sensitivity, flexibility and throughput in a single technology platform. The product is incorporated into instrument systems and other related consumable reagents, and IGEN also offers assay development and services used to perform analytical testing. Products based on ORIGEN technology address the Life Sciences, Clinical Testing and Industrial Testing worldwide markets. IGEN - IGEN International $34.25 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAY 37.5 GQ EU 872 1.95 39.45 15.9% 4.9% SELL CALL MAY 40 GQ EH 646 1.25 41.25 13.8% 3.0% SELL CALL MAY 42.5 GQ EV 251 0.80 43.30 10.6% 1.8% SELL CALL MAY 45 GQ EI 383 0.50 45.50 6.9% 1.1% * ************** QCOM - Qualcomm $32.72 *** Competition From Samsung! *** Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division multiple access (CDMA)-based integrated circuits and system software for wireless voice and data communications and global positioning system (GPS) products. Qualcomm offers complete system solutions, including software and integrated circuits for wireless handsets and infrastructure equipment. This complete system solution approach provides customers with advanced wireless technology and enhanced component integration and interoperability, as well as reduced time to market. QCOM - Qualcomm $32.72 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAY 32.5 AAW EZ 2,550 1.90 34.40 12.7% 5.5% SELL CALL MAY 35 AAW EG 10,457 0.85 35.85 7.4% 2.4% * SELL CALL MAY 37.5 AAW EU 6,342 0.30 37.80 3.5% 0.8% TS ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** DGX - Quest Diagnostics $56.70 *** Sell-Off Underway! *** Quest Diagnostics (NYSE:DGX) offers a wide range of clinical laboratory testing services to physicians, hospitals, managed care organizations, employers, governmental institutions and other independent clinical laboratories. Quest provides full esoteric testing, including gene-based testing and testing for drugs of abuse. The company also provides anatomic pathology services and testing to support clinical trials of new drugs worldwide. The company manufactures and markets diagnostic test kits and systems primarily for esoteric testing. Also, the company develops clinical connectivity and data management solutions for healthcare organizations and clinicians and provides workflow and content management solutions. Quest offers diagnostic testing, information and related services used by physicians and other healthcare customers to diagnose, treat and monitor diseases and other medical conditions. DGX - Quest Diagnostics $56.70 PLAY (moderately aggressive - bearish/credit spread): BUY CALL MAY-65.00 DGX-EM OI=1350 A=$0.40 SELL CALL MAY-60.00 DGX-EL OI=1270 B=$1.30 INITIAL NET-CREDIT TARGET=$0.90-$1.00 POTENTIAL PROFIT(max)=21% B/E=$60.90 ************** EASI - Engineered Support $37.91 *** Trading Range? *** Engineered Support Systems (NASDAQ:EASI) along with its various subsidiaries, designs and manufactures military support equipment and electronics for the United States armed forces. The company also engineers and manufactures air handling and heat transfer equipment, material handling equipment and custom molded plastic products for commercial and industrial users. Engineered Support Systems' six wholly owned subsidiaries are Systems & Electronics (SEI), Engineered Air Systems (Engineered Air), Keco Industries, (Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered Electric Company (d/b/a Fermont) and Engineered Specialty Plastics. EASI - Engineered Support Systems $37.91 PLAY (less conservative - bearish/credit spread): BUY CALL MAY-43.37 RUF-EZ OI=190 A=$0.35 SELL CALL MAY-40.00 RUF-EH OI=72 B=$0.80 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=17% B/E=$40.50 ************** MMM - 3M Corporation $129.00 *** Premium Selling Only! *** 3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an integrated enterprise characterized by intercompany cooperation in research, manufacturing and sale of products. 3M's business has developed from its research and technology in coating and bonding for coated abrasives, the company's original product. Coating and bonding is the process of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper (repositionable notes). The company conducts business through six operating segments: Industrial Markets; Transportation, Graphics and Safety Markets; Health Care Markets; Consumer and Office Markets; Electro and Communications Markets, and Specialty Material Markets. MMM - 3M Corporation $129.00 PLAY (less conservative - bearish/credit spread): BUY CALL MAY-140.00 MMM-EH OI=2429 A=$0.55 SELL CALL MAY-135.00 MMM-EG OI=1423 B=$1.35 INITIAL NET-CREDIT TARGET=$0.80-$0.90 POTENTIAL PROFIT(max)=18% B/E=$135.80 ************** SEE DISCLAIMER - SECTION 1 ************** ************** MARKET POSTURE ************** The old Switcharoo! 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