The Option Investor Newsletter Sunday 04-27-2003 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: Small World Futures Market: Home In The Range Index Trader Wrap: A Fifth Term! Editor’s Plays: Gray Momentum Market Sentiment: Awash in Red Ask the Analyst: Is now the time to be bearish? Coming Events: Earnings, Splits, Economic Events Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 4-25 WE 4-17 WE 4-11 WE 4-04 DOW 8306.35 - 31.30 8337.65 +134.24 8203.41 - 73.74 +131.38 Nasdaq 1434.54 - .96 1425.50 + 66.65 1358.85 - 24.66 + 13.99 S&P-100 456.10 + 2.49 453.71 + 12.74 440.97 - 5.72 + 8.75 S&P-500 898.81 + 5.23 893.58 + 25.28 868.30 - 10.55 + 15.37 W5000 8525.89 + 59.04 8466.85 +239.31 8227.54 - 92.43 +134.60 RUT 388.50 + 4.80 383.70 + 12.40 371.30 - 1.98 + 4.58 TRAN 2352.61 - 9.58 2326.19 +131.63 2194.56 + 6.28 + 25.47 VIX 23.90 - .69 24.59 - 3.68 28.27 - 4.53 + 0.62 VXN 33.70 - 2.18 35.88 - 3.74 39.62 - 2.83 - 0.24 TRIN 1.95 0.50 0.88 1.00 Put/Call 0.87 0.52 0.79 0.76 ****************************************************************** Small World by Jim Brown The global economy sounds huge but it is really a small world with thousands of interconnecting flights across all countries on a daily basis. Unfortunately in that small world the SARS virus is spreading faster than chicken pox in a kindergarten class if you believe the hype in the news. The impact of this previously unknown disease is taking a toll on the already weak global economy. Dow Chart - Daily Nasdaq Chart - Daily The U.S. economy grew slower in the first quarter than analysts previously expected but we should be excited that it grew at all. The GDP rose +1.6% compared to estimates as high as +2.3%. The hero sector was residential investment at +12% with nonresidential investment dropping -4.2%, exports -3.2%, imports -7.9% and equipment/software -4.4%. Clearly without the residential sector the numbers would have been substantially different. The difference between imports/exports added about +0.9% to the headline number and was helped by the weaker dollar. The headline number may have been positive but there was nothing to cheer about. If you take out exports the headline number would have only been +0.7%. Consumer spending slowed, business investment was down and inventories continue to fall. Many analysts are discounting this report as "pre-war" and taking a wait and see approach for the 2Q. Now that the war is over there should not be anything holding back the economy but SARS and pessimism. March Existing Home Sales dropped to their lowest level since last September with an annualized rate of 5.53 million units. Most analysts had expected a decline but the strong -6% drop caught everyone off guard. The drop was due to blizzards in the North East and colder than normal temperatures in the Midwest. The low mortgage interest rates are losing their luster as unemployment and job cutbacks are felt. This was the second monthly decline and inventory levels are rising, up +10% in the last month. Contradicting the Existing Home Sales was the New Home Sales, which rose substantially by +7.3% in March. The surge was attributed to home builders offering stronger incentives as inventory levels rose and mortgage rates started to climb. The statistical +7% jump is misleading since the Jan/Feb numbers had been artificially low due to the bad weather. Confused? Home builders simply have more incentive to dump inventory and resort to more freebies and gimmicks to sell homes than John Doe homeowner. With the Jan/Feb slump the incentives kicked into high gear. Also the bad weather delayed completion of homes in Jan/Feb resulting in a wave of houses coming to market all at once in March. The biggest indication of post war relief came in the Michigan Sentiment which bounced from 77.6 in March to 86.0 in April. This was the final reading for April and slightly above the 83.2 preliminary number. Because the initial estimate had already telegraphed the change the market was not excited by the release. Despite the economic reports on Friday investors were more interested in the impact of SARS and the increasing wave of downgrades now that the pattern of earnings results is clear. The SARS impact is increasing. The ACER Computer CEO said computer sales in Asia were down -20% last week and dropping. Companies are closing offices, airlines are refusing to fly to Asia and the convention and trade show business is coming to a halt. A third hospital was sealed off in Beijing due to a rapid spread of the disease and widespread contamination. Doctors, patients, workers and visitors are locked up until they get control of the contagion unless they hold a special pass. Over 4000 people are quarantined at home with nearly 1000 confirmed cases in Beijing alone. There are now confirmed cases in 26 countries. The CDC in the U.S. said it was "very unrealistic" to think you can "magically" stop the spread of this disease. In an effort to stop the spread Beijing has announced that any building (office/hotel/factory/apt/store) that has a confirmed case of SARS will become a restricted area and subject to quarantine. Now that China has ratcheted up their activity level there is the assumption that control of the disease will eventually be achieved. However, officials warn that countries with a less developed medical system like Vietnam, Cambodia, Thailand or many of the African countries could become a breeding ground for the disease and infect hundreds of thousands before any medical cure can be produced. I am explaining this completely because it is beginning to impact the global economy in a big way. Whether fear of the disease is truth or hype, chip companies are starting to see order cancellations and deferrals because of slowing sales in Asia. The already suffering airline industry is being crushed again by the lack of overseas travel. Some are reporting less than 20% passenger traffic on many flights. This not only depresses the airlines but the entire tourist industry and the lack of business travel will eventually depress profits. This problem has been exploding rapidly. Toronto, not an Asian city half a world away, was literally crippled by the "fear" of the disease more than by the disease itself. If an explosion of cases occurs in a U.S. city then the illusion we are somehow protected could evaporate in a week. As long as reported cases continues to climb the impact on the global economy from the perception of danger will continue to rise. The other major factor impacting the markets on Friday was a high profile downgrade of the entire chip sector by Salomon Smith Barney. The company cut semiconductors to underweight citing increased customer inventories, evidence of end market deterioration, valuation and upcoming seasonal weakness in chip orders. The SOX dropped -5% and took the Nasdaq with it. Even the AMZN earnings win with the stock up nearly $4 failed to hold the Nasdaq in the green. The addition of the SARS concerns in Asia where most chip and fabrication companies have their plants is yet another factor. Several chip earnings announcements warned of the SARS impact. Motorola reported that they were seeing weakening end user demand and QCOM said channel inventories were relatively high and rising. Factors impacting the Dow on Friday included the Intel reaction to the chip downgrade and the continued MSFT drop from CEO Ballmer's cautionary comments on Thursday. MO also dropped after RJR fell -$6 on a profit warning due to slowing sales, higher litigation costs and steep discounting. They also suspended share buybacks and said their credit status was in danger of being reduced to junk. They said higher state taxes required lower selling prices to remain competitive. Clearly the tobacco sector is not a safe haven any more. Dow component MO fell -$2 intraday on the news. MMM also dropped nearly $3 after a downgrade from Banc America which said the good news was already priced in and the stocks was overvalued based on the current economic picture. MMM has fallen from $136 to $122 in the last three weeks. Boeing continued to fall on fears the new crisis in the airline sector from SARS would cause more bankruptcies and cancellation of orders. GM dropped -$1 on a downgrade from UBS Warburg on valuation concerns. GM was cut to neutral and Ford to reduce (sell). IBM was down -1.32 on worries about a potential profit warning from falling sales in Asia and slowing orders in its chip business. MRK lost -1.55 on news that it had cancelled trials of a promising drug for lung disease due to dangerous complications. This was the second MRK experimental drug this year that MRK has had to stop trials. The confusion in the markets is running contrary to the current S&P estimates for earnings growth for the rest of the year. According to S&P, with 330 S&P companies already reported for this quarter, the 1Q earnings growth will be around +5.3%. No problem there. However, their estimates for the rest of the year are producing some raised eyebrows. They are projecting earnings growth for the 2Q of +13%, 3Q +19% and 4Q +22%. Did I lose a couple of years while I slept last night? Did we revert back to a bull market just like we turn the clocks back for daylight savings time? I think S&P has a severe case of irrational exuberance. We will see another 90 S&P companies announce earnings next week along with five more Dow components. (PG, DIS, XOM, MCD, DD) That brings to 27 the number of Dow components to report, (420 S&P) and brings to a close the majority of the material earnings reports. We still have HPQ, CSCO and Dell to report in May. Our challenge next week will be keeping investors focused on the market. The old adage of "sell in May before you go away" still applies. Investors planning family vacations and kids out of school typically go dormant during the summer and pick up the activity after kids go back to school in September. The next four months of summer doldrums in the tech sector also weigh on the market as sales slow to a crawl even during normal years. With SARS taking the place of Iraq as the global concern there is not likely to be a strong urge to invest. On Friday the Dow broke its recent uptrend line and came to rest at 8300 support. This is right in the middle of its recent range but there was a noticeable lack of buyers. The volume was moderate but it was decidedly negative with declining volume beating advancing volume 3:1. This was a far cry from the 5:1 up volume on Tuesday. Current support is 8150. The Nasdaq also pulled back from its weekly highs with a drop to 1434 at the close. The chip sector downgrade broke its recent uptrend as investors took profits. Initial support is in the 1420 range with stronger support at 1375. Was this a change in trend? There are conflicting viewpoints with the majority thinking it was just a profit taking dip as traders took profits off the table from the huge pre earnings rally. The Nasdaq has risen +215 points since the March 12th lows. This is a huge amount of profit for investors to risk while thinking about a slow summer. Did you follow my suggestion last Sunday? I suggested Dow 8500 would be a good place to close long plays on any weakness. Dow 8526 was the high for the week and +222 points above Friday's close. Friday's close is still +900 points above the March 12th lows. While I am not going to step in front of a bullet and proclaim the rally dead there are significant hurdles to overcome. The Dow/Nasdaq/S&P all failed exactly at strong and critical resistance points of 8522/1467/920. They failed on strong volume, 5:1 advancing over declining, 4 billion shares with 446 new 52-week highs to 68 new lows. Tuesday/Wednesday were very bullish and the bulls could not break the barrier. They were excited and motivated by the better than expected earnings reports. Now that earnings are drawing to a close the economic concerns and SARS will likely captivate investor attention. There is also some scuttlebutt that the cash flowing into the market early last week was tax cash. Extra cash that had been held back to pay taxes and then not needed or cash moving into retirement accounts. This concept is possible because TrimTabs.com reported net outflows of $700 million for the week ending April 23rd. That includes the big gains on Tue/Wed. However there were cash inflows of $6.6 billion for the prior week that included April 15th. This would lend credence that it was some sort of tax cash that powered the gains since this week was negative. If that is true then the tax cash wave has passed and we could be left in calm seas with no wind at our back. Without any new cash flowing into the markets, earnings coming to a close and the summer doldrums ahead of us there may not be enough excitement to break those resistance barriers in the coming weeks. There is very strong resistance at S&P 920 and it will take more than wishful thinking to penetrate that level. For next week I would continue to advise caution should we retest those highs. With another 150+ companies reporting earnings the dip buyers could return but without cash flowing into funds it will be up to retail investors to hold up the market. May is not typically a positive month and according to the Stock Traders Almanac it is the fourth worst month of the year since 1950. The worst months being Feb, Aug and Sept with Sept being the worst. October is know for huge drops but it also is known for huge rebounds making it only the 6th worst month and even a better month than May. The optimistic view is we are moving into a typically bullish week with Wed-Fri typically up days. With SARS being an uncharted external force we will have to wait to see if the historical uptrend comes true. The market is also reacting to the drop in oil to $26 and the prospects for a coming glut. Bulls claim the sluggish economy is priced in and now is the time to buy. The pessimistic view is a week full of critical economic reports that could point to another weak quarter in progress. Monday has Personal Income/Spending, Tuesday Employment Cost Index and Consumer Confidence again. The confidence number is expected to be up around 71 from a prior disaster of 62.5. We could see a market reaction only if the number failed to recover and little impact if it exceeds estimates slightly. Wednesday we have the PMI, Thursday Jobless Claims, Productivity, Construction Spending and the worst report of all, the ISM. The ISM is the current gauge of the economy and it is expected to rise slightly to 47.1 from last months 46.2. Should this number drop again it would be taken as negative to the recovery. Conversely a sharp rise could bring out the bulls again. Any bounce could be short as Friday reports include Factory Orders and the Nonfarm Payrolls again. We lost -357,000 jobs in February and -108,000 jobs in March. With the jobless claims rising well over 400,000 for the tenth consecutive week the odds are good we will see another large drop in the payroll number. How investors will take the 1-2 punch of the ISM and Payrolls remains to be seen. Since these numbers crossed the end of war boundary they may or may not be influenced by it. My guess is little or no influence since jobless claims are still rising and the ISM is not really a sentiment measure. This means we could continue to see negative numbers but investor reaction may still be muted. As traders this could be a volatile week. The uptrend has paused and we could see another retest of the highs or a complete trend change which could be a directional change into the summer. It is a tossup but we do have stronger resistance above us than support below us. We can move up from here but it is not likely to be on the backs of huge triple digit gain days. We have yet to digest completely the gains since March and that should slow any future up moves now that earnings are over. Should investors decide those gains are in danger then we could see some backing and filling until the end of May when the post war economic reports begin appearing. Add in the threat of an expanded SARS epidemic and investors could start devoting more time to planning their summer than trading. Yes, the war is over, now what? Until the post war economic direction is known the market direction will remain confused as well. Enter Very Passively, Exit Very Aggressively! Jim Brown ************** FUTURES MARKET ************** Home In The Range By Jim Brown 04-25-2003 High Low DJIA 8306.35 -133.69 8439.33 8288.49 NASDAQ 1434.00 - 23.23 1452.17 1432.02 S&P 500 898.81 - 12.62 911.43 897.52 NDX 1082.63 - 25.49 1101.76 1081.34 ES03M 898.50 - 11.25 912.75 896.00 YM03M 8286.00 -123.00 8435.00 8260.00 NQ03M 1085.50 - 22.50 1112.50 1082.00 Daily Pivots (rounded to nearest point) R2 R1 Pivot S1 S2 DJIA 8496 8401 8345 8250 8194 COMPX 1460 1447 1439 1427 1419 ES03M 919 909 902 892 886 YQ03M 8502 8394 8327 8219 8152 NQ03M 1124 1105 1093 1074 1063 After a couple of bullish days this week Friday was anything but bullish. The indexes opened down and did not pause for a breath until 11:00. If you missed the initial drop you missed the entire day. The ES traded in a five point range for the rest of the session. Home, home on the range, where the bulls and the bears hate to play. Unfortunately, we are about to drop back into the trading range for the past month between 860-900. We closed right on the uptrend line from March 12th and a break on Monday will put us back in a range of trading where every five points is another support level. Special note: The ES is the only major index that did not break its uptrend line. The Dow, Nasdaq, NDX all broke through the corresponding levels. This sets up a potential break for the ES on Monday on any market weakness. With ES 920 such strong resistance and without any meaningful potential for bullish news the odds are very good we are going down instead of up next week. The game plan for me is to go short under 900 at the open on Monday and stay short under that level and long above it. I think the potential is good for another drop back to 860 but it may take a couple weeks. If we do get another retest of the highs I would short 918 with a stop at 922. I just do not think they can break out with the SARS news on every channel. Strong resistance at 920, strong support at 885, 875, 865. ES Chart - 60 min The YM futures broke a serious uptrend line at 8313 which dates back to March 12th. The resistance at 8500 has held for the week and it appears the YM is headed for a retest of support at 8200 and possibly 8150. The S1/S2 levels fell right on those support levels for Monday making them even more likely to attract attention. YM03M Chart - 60 min The NDX futures have broken their uptrend line from April 11th and appears ready to start a new down trend. Strong overhead resistance at 1120 is well out of reach without a very positive economic surprise. The potential for the NQ appears to be a new down trend to the 1045 range which is decent support and near the bottom of the current trading range. A 50% retracement of the last move would put it in the 1068 range and not far below our current position. NQ03M Chart - 30 min The Dow cash still controls our fate regardless of how much analysis we do of the individual futures contracts. The Dow is poised to retest 8250 and eventually 8150 support. This is the bottom of the current trading range and should hold unless we have some serious news event over the weekend. Resistance at 8520 is well overhead and probably out of our reach for Monday. The Dow showed no buying interest on Friday afternoon and it appears the earnings excitement has worn off. Several Dow components were under pressure, IBM, MRK, MO, BA, INTC and MSFT. I would look for a dead cat bounce on Monday and then a sell off into Friday's jobs report. Dow Chart - 60 min The MOST critical resistance is the longer term down trend on the S&P cash that is resistance at 920. The S&P failed at that level on Thursday and again at 900 on Friday. The bottom of the bearish wedge is around 895 and very close to the Friday close of 899. If the S&P breaks 880 which is the first real support then we should be looking at a drop to 860 and the bottom of our range. S&P Cash - Daily The game plan for Monday would be to remain SHORT under ES 900 and stay LONG on any bounce over 920. Anything in the middle is dangerous chop. Jim Brown ******************** INDEX TRADER SUMMARY ******************** A Fifth Term! By Leigh Stevens That's not the President who can only re-up for one more as there is the matter of the U.S. Constitution's term limits - that would be 2 or 8 years. No, that would be Alan (king of the Fed) Greenspan. Really quite amazing, especially considering he's of an age where - well, when I'm that age I hope I am tending my rose bushes or racing cars at Indy or something else. Since President Bush indicated that Greenspan would have his support for his fifth 4-year appointment in June 2004. Chairman Greenspan, whose life probably consists of making those ponderous speeches before Congress promptly said "I do" or some such. Anyway, you got to admire the guy - all this was pretty darn reassuring to the country's business leaders, who mostly like Greenspan's fiscal conservatism and fierce independence. He will need that fiscal restraint and independence to be a finger in the dyke as we approach another round of tax cuts bound to cause U.S. Government debt to increase at an even faster rate. Getting back to business heads, they are still a pretty pessimistic lot and we need them to unloose the hounds and spend some bucks, buy software, new PC's, and especially NEW employees. THE BOTTOM LINE – Well, while some "technicians" interviewed by the Wall Street Journal are getting bullish, more bullish or just less bearish (this article also means that the Journal probably couldn't find the fundamentally oriented investment advisors agreeing on much), Technically, a bullish is case is not indicated UNTIL a prior significant rally peak is exceeded and this is not the case yet - The S&P 500 (SPX) needs to get above its prior closing high at 929 (and the cluster of intraday highs in the 928-932 area in general) and the Nasdaq Composite (COMPX) has to close above 1461 per the right hand chart above. We got very close to this last week as you can see - but, until proven otherwise, what we got here is a potential double top. Now, I love to short stock and/or buy puts on such patterns, ESPECIALLY when a double top occurs at an overbought reading on the 14-day day Stochastic model as shown below the price chart. Some might say that we even have a bearish price/RSI divergence on the COMPX. While the prior RSI peak was from slightly over a month ago is not as valid a signal so to speak as if it had happened a week or two ago - still, you like to see a "confirming" HIGHER high on the oscillator type indicators. The pattern of higher (down) swing lows and higher (up) swing highs is what has some market technicians figuring the trend is looking bullish. But, it ain't over until the fat lady sings the song of a new rally high. Buy puts at the rally peaks that don't exceed the last one - this strategy is also based on a favorable risk to reward outlook. At a prior significant top, you can stop out or exit a trade just over the prior closing high. Downside (reward) potential relative to this is usually quite favorable, such as 3 to 1 or more. Lets say you bought NDX puts or shorted QQQ when COMPX got to 1461 again - hold risk to a move of 7-8-10 Composite points above that - downside potential on a rally failure may be back to as much as to recent prior lows in the 1360 area in COMPX. But I digress, as I want to go on to happenings on Friday and for the week. FRIDAY'S TRADING ACTIVITY – First-quarter GDP or our attempt to gauge the output of all the goods and services produced in the U.S., rose 1.6% (after growing 1.4% during Q4), according to the Commerce Department. The economy continued to barely maintain growth during the first 3 months of 2003 as the war in Iraq and horrible weather put a lid on growth. The White House said the weak performance adds urgency to its tax-cut plan. Now, myself, I am not filled with confidence on this - a dividend cut will not put money in the hands of individual consumers although it should allow more dividend paying corporations to retain some cash. However, the problem with business spending is what I've already mentioned - the LACK of confidence felt by CEO's. Time will tell. Though Q1 growth is encouraging for the U.S. not being headed into a double-dip recession, the growth rate is slower than the 3% rate economists say is needed to help revive the struggling labor market. This is why the current growth rate is called a job-LESS recovery. Since early-2001 when a recession began, there have been cuts of more than 2 million jobs. While I am not pessimistic on the economy, I can't yet be optimistic on a growth in jobs. Hey, if you have kids graduating soon, send em to grad school! Back at the Fed - the anemic GDP number probably won't affect the Federal Reserve's decision on interest rates in a few weeks. Alan Greenspan has been sounding less than optimistic on an economic rebound so seems more likely to ease than anything. At the close, the Dow was down about 133.69 (1.6%) to 8306.35, while the Nas Composite dropped 22.69 to 1434.54. For the week, the Industrials were down only 31 points to 8306 and COMPX finished at 1434, actually up 9 points on the week or a gain of 0.6%. The S&P 500 (SPX) was also higher week-over-week with a close just under 899 which put it up 5 points (also a +0.6%). Earnings reporting slows down next week - last week saw Sony announce some disappointing figures due to weak demand for TV's and other core products. Starbucks fell after indicating that weak earnings from overseas took its toll although it had an overall jump of some 60% in its Q2 profits. Hey, maybe their not buying American over there. Amazon, one of my favorite online retailers rallied another 15% after reporting a lower than expected Q1 loss. Is it only in America that you can lose money and still win big in the market sweepstakes? OTHER MARKETS - The 10-year T-Note rose a quarter point as its yield fell 3.88. The greenback traded at 120.19 yen to the dollar, up slightly from 119.93 and the euro gained against the buck with a close at 1.1039 versus 1.1034. The euro is holding well above parity or 1 to 1 which, given our trade deficit, is not surprising I guess. MY INDEX OUTLOOKS – S&P 500 Index (SPX) – Weekly & Hourly charts: SPX's daily chart started off my "bottom line" commentary above, so what is a new view here is of the weekly and daily chart. The weekly chart suggests that SPX has come right up to significant technical resistance at the top of the broad downtrend channel that it has been in for some time. The Index could break out above this trendline, but it remains to be seen. The market is not that oversold yet on a 13-week basis. A weekly close over 900 is what is needed to suggest a bullish breakout - if this developed the index would need to hold this area on subsequent pullbacks. The hourly chart is of interest too. Looks like a bearish flag has formed, projecting a further move to around 885 even though the longer hourly stochastic is oversold. Pattern trumps indicator so to speak. If long puts stay with them with an objective to the 890-885 zone. I would be a call buyer on a further drop to 875. S&P 100 Index (OEX) – Daily & Hourly charts: The same hourly bear flag as on the 500 chart is outlined on the S&P 100 (OEX) hourly chart below (right). The last extreme in "sentiment", according to my call/put indicator (see lower left on the daily chart below) was a bullish one and I think that will start to have its common contrary bearish effect. The bear flag implies possible downside to as low as 450-452. Oversold on both hourly stochastic models implies normally some potential to rally, but the bigger picture daily chart RSI which I discussed earlier on in my Index Trader wrap will work against the shorter-term oversold. There is some near support in the 454-455 area suggested by the prior hourly highs - this will be a key area to watch. Strong buying interest there would suggest some rally potential, say to resistance at 460 where I suggest put purchases again. On balance I think OEX is headed lower before there is much of a near-term rebound. Nasdaq Composite Index (COMPX) – Weekly & Hourly: The weekly chart (the daily chart has already been shown above) is of interest in terms of the Composite putting in the possible "V" bottom that is outlined. This secondary bottom developed of course after the earlier lower low. Near-term the Composite maintains a bullish chart if it can find support and buying interest comes in at the prior highs - if prior resistance in the 1427-1430 "becomes" support, the bulls more or less look like they have the control. The oversold hourly stochastics would support the idea of some rally potential from this area. The chart and technical picture for Nasdaq looks like this sector continues to outperform the S&P for a while. If there is another dip into the 1375 area, I want to look at calls or stock to buy that are key Nasdaq components. But that's ahead of the game - if in puts, stay with unless COMPX closes above 1450 again. QQQ charts - Daily & Hourly: I suggest buying QQQ on pullbacks to the lower trendline intersecting around 25.5 currently. However, I don't have major bullish conviction due to the continued low volume and the fact that the Q's got pushed back right where anticipated in the mid- 27 area. Look for lower prices in the short-term on QQQ. Note that from a daily to hourly time frame, there is downward momentum showing. The daily stochastic (left, above) is looking like it can and will generate a crossover downside sell "signal" on a further sideways to lower trend. If short (or long puts) stay with that - if not in, but wanting to be, I suggest new or added shorting in the 27.25 area. ************************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 ************************************************************** ************** Editor's Plays ************** Gray Momentum OK, I give up. Let's just play a simple momentum stock with great potential and forget about it. It is not a tech stock and it is not a deep cyclical. It has a guaranteed market and a list of products that sells for far less than the competition. Give up? The company is IVAX (IVX) a generic drug maker. With the graying of America the generic drug market is going to explode. Many insurance companies now will not even pay for a drug unless it is a generic. The company that discovers and patents a new drug gets sole marketing rights for a set period of time and we all know how much those drugs cost. Have you tried to buy Celebrex or Prilosec before? Once a proven drug becomes generic the prices drop and there is already a proven market. On Friday IVAX received tentative approval for a generic form of Permax. This is another in a string of successful ANDA applications and the company has 38 more in progress at the FDA. They said they were going to aggressively continue their filing schedule for new ANDA submissions. Once the composition of drugs is known the process for making them generically is very simple and profitable. On Thursday Bristol Meyers agreed to pay $55 million to settle a suit on delaying IVAX from making generic copies of Taxol and BuSpar. BMY had filed false patent applications trying to extend the initial license for those drugs and prevent IVAX from selling cheaper generics. IVAX is now allowed to sell the drugs. Taxol alone produced over $1 billion a year for BMY. Investors fled IVAX over the last two years while the Taxol suit was in progress. They feared BMY would win and take a significant revenue source from IVAX. The company used the drop in stock price to repurchase 58 million shares (20% of the total outstanding) over the last five years, 550,000 shares in the last quarter. It also repurchased $20 million in convertible debentures in the first quarter. With 38 Abbreviated New Drug Applications (ANDA) in progress IVAX is set to add a significant amount of revenue to its pipeline over the next 12 months. For example IVAX just received permission to market the cancer drug Tamoxifen in a generic form ($500 million a year). They recently applied to produce a generic Flonase in March which GSK saw revenue of $810 million during the past year. While nobody can guarantee success I have seen IVAX pop up on several buy lists recently with price targets in the $35 range which was the pre Taxol suit level. Volume has increased significantly over the last week and IVX has cleared strong resistance at $14.50 dating back to last August. With the strong gains on news this week I would love to buy this on a pullback instead of jumping in on the breakout. Unfortunately we could be left at the train station if the rise continues. There is the potential for a drop on profit taking which would deflate the premiums if we just jumped in at the current level. To combat this problem I considered buying a short term put to go with a long term call. Unfortunately the June $15 put at 75 cents was too expensive for me and the June $12.50 put is too far out of the money to be worthwhile even at 25 cents. Cancel that idea. I also looked at selling a short term call against a long term call but the next strike up ($17.50) had insufficient value to justify the risk. Nix that. However there are several different ways to solve this problem. We can stage into a call position by purchasing some calls on Monday and at the current price and then entering an order for more at $14.50 and again at $14. With strong support around $13 I don't think we will get much below $14 if at all. The second method is to use a bull put spread which caps our upside but limits the downside. The June $15/$20 is priced at .75/4.50 for a net of $3.75 if the stock moves over $20 by the end of June. You are profitable at anything over $16 and your risk is limited to the 75 cents paid for the long put. (round numbers) I like this for a long-term play, we need those applications to approve, so I would be more interested in a Jan $15/$30 at $1.60/$14.40. This would represent a risk of $1.60 and a potential profit of $12.80 if IVX is over $30 by January. The problem with this approach is the lack of open interest in the Jan-$30 strike. There is none. This would put you at the mercy of the market maker on the first day. If the sell stuck overnight you have a good chance of it sticking permanently. The greatest risk of execution is the first day when the market maker sees the $1440.00 leave his account. To get it back he must buy stock and put it to the put holder. Once past the first day it drops off their radar screen and you have a much better chance of it sticking. Of course, if you are put the stock you can resell the stock at the open and the put at the same time and only be out a few cents for bid/ask spread. I have had some luck with doing this 2-3 days in a row until the market maker gives up. He is required to make a market in those strikes and closing positions daily is not making a market. Still the simplest way to play IVX is with a straight call. The only risk is the premium paid and you are in control. Since this is a long-term play I like the Jan-$15 call at $2.10. This should be reasonably close to free money with only one or two more applications approved. I am going to suggest a five contract position and we are going to stage into the play. Buy 2 contracts Jan-$15 Call KIV-AC $2.10 Monday morning Buy 1 contract Jan-$15 Call KIV-AC on a drop to $14.50 Buy 2 contracts Jan-$15 Call KIV-AC on a drop to $14.00 If we get a drop back to $14.50 the price should be in the $1.60 range. If we get a drop back to $14.00 the price should be in the $1.25 range. Assuming we get a drop to $14.00 the total price for five contracts should be in the $830 range. ($1.66 avg each) If we "KNEW" it was going back to $14 the solution would be simple. Wait and buy then. Unfortunately we do not know that and we could be waiting indefinitely while the stock moved up to $20. The 100 EMA on the 30 min chart has held support since mid March and that EMA is $14 today. As a betting man I would bet IVX pulls back after the strong week it had. I would not have a problem with simply waiting for the pull back for the initial contracts IF you are also ready to buy at a higher price if the run continues. If the stock dipped to $15 on Monday and then spurted higher you would have to set a price where you would buy regardless of how extended it looked. A buy stop a $15.50, just over the high of the day on Friday would work, or maybe even $15.75. Just don't wind up losing dollar while penching pennies. IVX Chart - Weekly IVX Chart - Daily ******************************** Play updates: I am only listing the current recommendations with a link to the initial write up and unless the play changed substantially. QQQ - Put - $26.93 4/20/03 ($26.82 when recommended) Still holding our May $25 puts with a cost basis of 15 cents. Maybe this is the week we will finally get the break. http://members.OptionInvestor.com/editorplays/edply_042003_1.asp http://members.OptionInvestor.com/editorplays/edply_041303_1.asp ORCL - Put - $11.79 4/6/03 ($11.37 when recommended) http://members.OptionInvestor.com/editorplays/edply_040603_1.asp CY - Cypress Semi Call - $8.24 ($9.54 week high) 3/2/03 ($6.41 when recommended) http://members.OptionInvestor.com/editorplays/edply_030203_1.asp EMC Call from Feb-2nd $8.82 ($9.50 week high) ($7.70 when recommended) http://members.OptionInvestor.com/editorplays/edply_020203_1.asp Powerball - From 12/29/02 FLEX joined RFMD and TLAB on the top losers list. We still have nine months until expiration. 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 **************** Awash in Red - James Brown The markets were awash in red this Friday as investors chose to focus on weak GDP growth and the ever-increasing media coverage on the SARS crisis. U.S. stocks were battered lowered with tech issues taking most of the heat despite some encouraging economic news. It has been interesting to note a small shift in Wall Street's focus. Instead of corporate earnings, which have been in the limelight, all eyes are now on economic news. Traders need to be careful. While two-thirds of the S&P 500 have already reported, we still have a very full week of earnings announcements to come. Plus, the economic calendar is busy as well. Offering some encouragement for the bulls were new home sales jumping to 7.3%. This pushed the annualized rate to 1.01 million, which is the highest level since December 2002's 1.08 million. Another bullish surprise was the University of Michigan's sentiment readings. Economists had been forecasting 84.7 but the survey jumped to 86.0. Consumers are still opening their wallets but businesses have yet to follow suit. It is this lack of spending in corporate America that resulted in a less than exciting GDP growth for the first quarter of 2003. The estimate was for 2.1% GDP growth and the result was a discouraging 1.6% growth. This is the ninth time in the last ten quarters that business spending has declined. The impression many analysts came away with was most of the growth was felt in January while the economy contracted through February and March. This is not a bullish set up for the second quarter. Many traders think that the FOMC will cut rates again to help speed up the economic turnaround. So far the Fed has slashed the overnight lending rate between banks a dozen times since January 2001. The last cut was 50 basis points to 1.25 percent. This is a 41-year low and now the expectation is for another reduction between June and September. The timing might be on target as economic activity is slower during the summer months. Of course rate reductions normally don't affect the economy until six to nine months after the fact. As mentioned earlier the tech sectors felt the brunt of the profit taking today. Spurring the decline into the weekend was a downgrade of the semiconductor sector by a Soloman Smith Barney analyst. The $SOX chip index lost nearly five percent, dropping 17 points to 324.95. Smith Barney's analyst said the reason for the downgrade was four factors affecting the chip industry. Rising inventories, high valuations, end-market deterioration in generic equipment sales, and the start of a three to four month period of seasonal weakness would hamper the sectors performance. This combination of factors when painted across a backdrop of a SARS crisis in Asia and Toronto does not encourage new investments into the equity markets. Overseas exchanges continue to reel from the SARS affect on economic activity and the Japanese NIKKEI 225 index fell another 155 points, or -1.97% to 7699. On the mainland, China's Hang Seng index dropped 33 points to 8409. Also worth noting was a huge increase in short positions by the Commercial traders in the e-mini contracts. That's not a good sign for the bulls. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8306 Moving Averages: (Simple) 10-dma: 8363 50-dma: 8081 200-dma: 8311 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 899 Moving Averages: (Simple) 10-dma: 895 50-dma: 859 200-dma: 879 Nasdaq-100 ($NDX) 52-week High: 1573 52-week Low : 795 Current : 1083 Moving Averages: (Simple) 10-dma: 1075 50-dma: 1033 200-dma: 993 ----------------------------------------------------------------- The broader market indices may have seen two days of profit taking but the general trader outlook is still complacent and lacking in fear as viewed by the volatility indices. The VIX and the VXN remain near their lows with nothing but extremely minor gains to show for Friday's session. Our market top warning remains in affect. CBOE Market Volatility Index (VIX) = 23.90 +0.61 Nasdaq-100 Volatility Index (VXN) = 33.70 +0.02 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.87 432,699 377,471 Equity Only 0.76 339,644 259,512 OEX 1.15 15,413 17,660 QQQ 1.29 11,713 15,147 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 50.0 + 0 Bull Confirmed NASDAQ-100 65.0 + 0 Bull Alert Dow Indust. 50.0 + 0 Bull Alert S&P 500 54.6 + 0 Bull Confirmed S&P 100 53.0 + 1 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 1.16 10-Day Arms Index 1.04 21-Day Arms Index 1.18 55-Day Arms Index 1.30 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 -NYSE- -NASDAQ- Advancers 1016 1235 Decliners 1828 1761 New Highs 97 88 New Lows 36 24 Up Volume 573M 687M Down Vol. 1192M 887M Total Vol. 1622M 1491M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 04/22/02 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 We see some shuffling here in the Commercials as both short and long positions rise but new shorts increase by more than 13K contracts. Small traders remain net long but the tide of bears is growing. Commercials Long Short Net % Of OI 04/01/03 417,637 409,332 8,305 1.0% 04/08/03 420,084 407,452 12,632 1.5% 04/15/03 424,219 409,853 14,366 1.7% 04/22/03 430,758 423,295 7,463 0.9% Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: 14,366 - 4/15/03 Small Traders Long Short Net % of OI 04/01/03 143,580 126,594 16,986 6.3% 04/08/03 136,173 122,006 14,167 5.5% 04/15/03 148,434 137,680 10,754 3.8% 04/22/03 147,068 140,153 6,915 2.4% Most bearish reading of the year: 10,754 - 4/15/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Meanwhile, on the smaller e-mini contracts a wave of new bearish activity has appeared in the Commercials. This is not good news for the markets as the "smart money" is usually right and we just saw 47,000 new short positions. Retail traders remain excessively long with nearly 30K new long positions and a drop of 3600 short positions. 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%) 04/15/03 119,316 390,555 (271,239) (53.2%) 04/22/03 124,200 437,597 (313,397) (55.7%) Most bearish reading of the year: (313,397) - 04/22/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 04/08/03 319,460 35,629 283,831 79.9% 04/15/03 365,876 44,137 321,739 78.5% 04/22/03 395,596 40,480 355,116 81.4% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 355,116 - 04/22/03 NASDAQ-100 Interestingly enough, the Commercials remain net long on the NDX with the Nasdaq breaking out to the upside this week and the small traders remain next short (almost 2 to 1). Commercials Long Short Net % of OI 04/01/03 40,493 36,893 3,600 4.7% 04/08/03 44,257 36,711 7,546 9.3% 04/15/03 44,976 37,929 7,047 8.5% 04/22/03 45,647 38,531 7,116 8.5% 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 04/01/03 9,771 13,306 ( 3,535) (15.3%) 04/08/03 11,365 17,790 ( 6,425) (22.0%) 04/15/03 11,182 17,438 ( 6,256) (21.9%) 04/22/03 10,929 20,376 ( 9,447) (30.2%) 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 There has not been much change in the futures positions for either the commercials or the small traders. The retail trader is pretty much neutral and the big guy is slightly bullish. Commercials Long Short Net % of OI 04/01/03 19,068 12,672 6,396 20.2% 04/08/03 18,566 12,616 5,950 19.1% 04/15/03 17,881 13,124 4,757 15.3% 04/22/03 16,942 14,750 2,192 6.9% 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 04/03/01 5,142 7,459 (2,317) (18.4%) 04/08/03 5,886 7,964 (2,078) (15.0%) 04/15/03 7,748 8,704 ( 956) ( 5.8%) 04/22/03 8,081 8,275 ( 194) ( 1.2%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************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 ************************************************************** *************** ASK THE ANALYST *************** Is now the time to be bearish? Hi Jeff: Love your work and I think I almost understand it :-) Question, I wondered your thoughts on using the Rydex URSA in my IRA because I can't short in there and use the SPY as a stop-loss tool. The reason I am thinking this way is as you know you can't get out of the Rydex fund until the end of the day. Your thoughts would be greatly regarded, Thanks Hey! This is an interesting question. Before you stock and options traders "tune out," you might be interested in what we "discover" or at least observe as it relates to the Rydex URSA fund, which is an open-end mutual fund that looks to profit from a declining market as depicted by the S&P 500. With an open mind, bulls and bears will be challenged to assess if now is the time to be trading "bearish" or "bullish." And if you're a "perma bear" then this mutual fund might have a place in your retirement or investment account holdings. For you bulls that have seen a major support level give way to further downside the past couple of years, you might be interested in reading on! Some investors will turn to a fund manager to do their bearish trading for them, simply because the investor himself is just "uncomfortable" trading bearish on their own. First off, there are investment houses that will allow the use of options to hedge "like positions," and there are brokers that will even allow the trader to buy put options. However, the subscriber that is interested in establishing a position in a "bear fund" where the fund manager does the shorting for you, where YOUR maximum risk is the principle involved, has become a popular investment the past year or two. As the subscriber points out, the Rydex URSA Fund (RYURX) $12.28 +1.4% on Friday's session (S&P 500 was down 1.3% on Friday), which is an open-end fund and is "marked to the market" at the close of each trading day, allows a retirement account investor/trader access to a security that seeks to provide investment results that INVERSELY CORRELATE with the performance of the S&P 500. However, since the fund is "marked to the market" at the close of each day's trade and does not allow for exit opportunity during the course of the trading day, the subscriber above is concerned that some type of LARGE intra-day bullish move in the S&P 500 could cause damage to his retirement account. Now, I'm not going to say that I think it necessarily "prudent" to try and "hedge" a mutual fund trade, based on an intra-day move. Especially a broader-based basket of bearish positions that a "bear-oriented" fund would hold. Still, with a minimum investment requirement of $25,000, a nice little 3% daily gain the SPX could inflict a -3% decline in RYURX, which is approximately $750. Now, if a 3% hit on $25K is going to severely impact an investors retirement status, maybe we should think about buying a Treasury bond or something? Still, I thought this question was interesting and would give ALL OF US bulls and bears a way to look at things as if we were trying to decide if WE should give our money to a professional money manager who's main focus EVERY DAY is shorting stocks REGARDLESS of the market environment. For the most part, if you give your money to this fund manager, you WANT him to SHORT or trade BEARISH in stocks, or select investments that trade INVERSE the S&P 500, or DECLINE, REGARDLESS of what the S&P 500 does. Let's take a look at the Rydex Ursa Fund (RYURX) and just look at it as if it were a stock. Since the bar charts only show a closing day "tick," they're somewhat useless when trying to analyze a mutual fund's performance. Ahhhhh, but point and figure charts are just the ticket as they allow the trader/investor to COMBINE price moves into a more meaningful display of supply and demand at work. Since RYURX is trading below $20.00, the conventional box size to represent MEANINGFUL price action is $0.50. Today's +1.4% gain has the RYURX gaining $0.17 per mutual fund share. The $0.50 box size is probably going to remove too much noise for what the subscriber is attempting to do, but lets start with the big picture and we'll fine tune things as we go along. You shorter-term stock and option traders pay attention now! Rydex URSA Fund (RYURX) - $0.50 box size The longer-term trend for RYURX is bullish (or should I say bearish) with "risk to trend" of $10 being $2.28 (18.5%), while the first sign of meaningful weakness would be a trade at $11.50, which would be a double-bottom sell signal, and negate the current bullish vertical count of $21.50, which is still in play. Now, its very difficult to truly say that a bullish or bearish vertical count on any mutual fund is all that reliable or useful as the fund manager most likely "turns over" or changes positions over time. Still... on a longer-term basis, if this were a stock's chart, I'd have to say it looks bullish. Keeping in mind that the RYURX gained 1.4% in today's trade, while the SPX fell 1.38%, we could also "conclude" that the RYURX did its job and traded almost DIRECTLY INVERSE the SPX. However, we're going to encounter some problems when it comes to the SPDRS (AMEX:SPY) $90.23 -1.23%, which often times doesn't necessarily "track" the SPX on a "mark to market" 04:00 PM EST close like the SPX does. Still, I think we can get "close." To figure out a "hedge" type of trade, we need to find the ratio of movement in the SPX on an intra-day basis, to then equate that directly to the RYURX, with the assumption that the price action in the SPY will be a direct 1:1 inverse relationship. Right? To do this, simply take the RYURX's price of $12.28 and divide it by the SPY's price of $90.23 (using the 04:00 mark would be more accurate). This gives us a ratio of 0.136. The SPY fell $1.13 today, so if I multiply that price movement ($1.13) by my scale factor of 0.136, I should come close to a 17-cent move in the RYURX right? Hmmm... I came up with $0.15. (The SPY 04:00 tick was $90.15, while the closing tick at 04:15 was $90.23) so I lose a bit of accuracy. Remember that mutual funds are marked to their holding's 04:00 close. Anyway...once you get your ratio, you can now set whatever type of "threshold" on an intra-day move in the SPY that would serve as a hedge against your bearish mutual fund holding. All you're doing is setting a "percentage" threshold, then applying that percentage to the SPY. Now, I bet you thought that this was going to be a very simplistic article when the word "mutual fund" was used right? Wrong! What we're actually working toward here is HEDGING and using a bearish fund that tends to trade directly inverse and index is actually the EASIEST hedge a trader can ever try and put on. But hedging is ALL about trying to determine what weight you apply to the hedge, and why institutional computers are so good at buying and selling S&P futures contracts as they HEDGE their stock inventories and use the PIVOT ANALYSIS calculations to determine levels where the programs need to "kick in." Anyway... lets get back to the "power of point and figure charts." Let's say I'm only willing to take 1% hit in a given day if I'm holding a long position in the RYURX and I either want to be ready to protect a gain I'm carrying, or I'm putting together a plan to hedge my bearish trade the day BEFORE an important economic report, or "bellwether" stock is set to release earnings. I can do some things with a point and figure chart from www.stockcharts.com that I can't really do with a bar chart. Since I "know" that the RYURX and SPY move in a relative 1:1 ratio of opposite direction, can't I (or your) as a trader simply assign a percentage "stop loss" and figure out a level where I would need to buy the SPY in order to hedge? Sure! Option and stock traders! Are you tying any of this in with the term "Beta?" What is beta? It's the measure of systematic RISK of a security. Beta or beta coefficient is a means of measuring the volatility of a security or PORTFOLIO of securities in comparison with the MARKET as a whole. Hey! The S&P 500 is a pretty good MARKET index. Let me show you how you can set your chart scale on a point and figure chart, so that it measures supply/demand based on percentage change. I'm going to continue to use the conventional 3-box reversal technique of percentage fluctuation, but each box represents a 1% move in price. Change to Percentage and box size After you type in the stock/mutual fund symbol you're interested in charting, you change the "Scaling" to percentage and use whatever box size you'd like to measure against. The smaller you make the box size, the more "noise" or action you introduce to the chart. Always try and keep the box size, so it gives you good "buy" and "sell" signals that tend to be "profitable" and accurate. Here, I'll show you the chart, with the selection made above. Rydex URSA Fund (RYURX) - 1% box size Here's the RYURX fund, plotted on a 1% box size. Remember, this is a rather low priced security, so 1-penny may not have each box being exactly 1% due to rounding, but it's pretty darned close. If this were a stock, what would you say about it? I hid the chart's title from James Brown and I asked him the same question. You see, he had NO bias, since he didn't know what it was and simply looked at the technicals. He said, "if it breaks much below $11.93 it looks like it could fall to about $11.36. I'm not sure if James is bearish on the markets or not, but his eyebrows seemed to raise a bit when I told him it was a bearish stock fund. Anyway, do you see how you can put on a bullish trade at $12.17 and a trader that does so, can count down 1 then 2 boxes (2%) to $11.93 and see that this chart, on 1% box size would generate a spread-triple-bottom sell signal? He could give it a little more room to $11.83, which would be 3-boxes, or 3%. So, there you have it! A trader that placed an order to buy the fund today could figure out from the above chart, that he might need to hedge the trade if the SPY gains 3% (assuming a 1:1 INVERSE CORRELATION with the SPY). Now, I'm going to anticipate a question: But Jeff, I don't want to wait until the above chart gives a "buy signal," because right now, that would be clear up at $13.18 and that's a "BIG" move! OK. Do this. What has been the MINIMUM gain found, if on the above 1% box size, you at least waited for a 3-box reversal up (3%) before entering a "bullish" trade in this bearish fund? Go ahead! Back test it. The smallest one I see is the most recent column of X, where I might have bought at $12.80 (I don't know for sure that the RYURX closed exactly at $12.80) and it traded the $13.05 box (approximately 1.95% gain before a 3% reversal). Is the Rydex URSA fund manager losing his touch based on the comparative buy and sell signals? Was the fund manager a great shorter between February and August, but suddenly he can't pick the was from his hears? Do you see how you can "back test" a chart and envision how it may have been very simplistically traded, by letting the supply/demand chart tell you what to do? Compare the chart above (on % scale) and then go back up and look at the conventional $0.50 box size chart of the RYURX fund. It's still longer-term bullish right? Do you sense at all, that we, or should I say the MARKET, is at a pretty interesting juncture right now? After you're done reading this, go check out the S&P 500 Bullish % ($BPSPX) chart if you've ever had a tough time "understanding" or "believing" in it. Look at the HIGHS in the RYURX. Since it's a bearish fund, it should be at its HIGHS when the bullish % is at a low right? Or the RYURX might show some type of reversal action taking place at a high right? Go ahead! Do it! In December (red C) on a point and figure chart, the S&P 500 Bullish % ($BPSPX) was at 68% and very close to the "overbought" 70% level. This was a "higher level of risk for bulls." If it was a high level of risk for bulls, then what might we have been looking for from the RYURX fund? ONCE the bullish % reversed lower at 62% from 68% (a 3-box reversal on the bullish % charts) that signaled that a more meaningful amount of stocks in the S&P 500 were generating point and figure sell signals and internal weakness was taking place. This occurred after the completion of trading on Wednesday, December 18th. "Hello, Rydex URSA? Yes, I'm interested in sending you $25,000 and buying your fund at $12.65." (Then perhaps you set up an SPY hedge if the SPY rose more than 5.7% (based on an RYURX trade at $11.93). When you set up your business/trading plan http://www.OptionInvestor.com/ask/ask_111702_1.asp , what was the MAXIMUM percentage loss you were allowed to take on a full position? Was it 7% or 10% of the stocks underlying value? If so, do you think you could perhaps use the technique of quickly changing a p/f chart to reflect a 2% box size (then a 3-box reversal would be about 6%) or a 3% box size (then a 3-box reversal would be about 9%). For those of you that like to study and use the point and figure charting technique of relative strength, then a comparison of its chart versus the SPX may also be useful. http://www.OptionInvestor.com/ask/ask_122902_1.asp This was a great question and it really gave me some different observations, other than just how to try and hedge an open-end fund on an intra-day basis. I'm going to do this. Some of you may think I get a bit crazy from time to time when I've talked about the Pacholder High Yield Fund (NYSE:PHF) $8.24 -0.12% in the market monitor. You'll think I'm really crazy when some evening, after the market closes and all the mutual funds turn in their daily tabulations of net asset value, I post either an "upside" or "downside" alert on the Rydex URSA Fund! Jeff Bailey ************* COMING EVENTS ************* ========================================== Market Watch for the week of April 28th ========================================== ------------------------ Major Earnings This Week ------------------------ Symbol Company Date Comment EPS Est ------------------------- MONDAY ------------------------------- ABN ABN Amro Holdings Mon, Apr 28 Before the Bell N/A ASX Advanced Semicon Eng Mon, Apr 28 -----N/A----- 0.02 AGN Allergan Mon, Apr 28 Before the Bell 0.53 LNT Alliant Energy Mon, Apr 28 Before the Bell 0.32 ALTR Altera Corporation Mon, Apr 28 After the Bell 0.07 ARBA Ariba Mon, Apr 28 After the Bell 0.02 AN AutoNation Mon, Apr 28 Before the Bell 0.27 STD Bnco Santander Cent Mon, Apr 28 Before the Bell N/A BOH Bank Hawaii Corp Mon, Apr 28 Before the Bell 0.46 ABX Barrick Gold Mon, Apr 28 -----N/A----- 0.06 CHK Chesapeake NRG Corp Mon, Apr 28 After the Bell 0.17 ETR Entergy Mon, Apr 28 -----N/A----- 1.05 FCNCA First Cit BancShares Mon, Apr 28 -----N/A----- N/A FHCC First Health Group Mon, Apr 28 Before the Bell 0.37 FTI Fmc Technologies, Inc Mon, Apr 28 After the Bell 0.10 GGP Gen Growth Properties Mon, Apr 28 After the Bell 1.38 GR Goodrich Corporation Mon, Apr 28 Before the Bell 0.33 HMY Harmony Gold Mining Mon, Apr 28 -----N/A----- 0.22 HUM Humana Inc. Mon, Apr 28 Before the Bell 0.31 IFF Intl Flavors & Frag Mon, Apr 28 Before the Bell 0.49 JP Jefferson-Pilot Mon, Apr 28 After the Bell 0.85 KIM Kimco Realty Mon, Apr 28 After the Bell 0.77 LH Laboratory Corp of Am Mon, Apr 28 After the Bell 0.49 MC Matsushita Elec Indl Mon, Apr 28 Before the Bell N/A MCD McDonalds Corp Mon, Apr 28 -----N/A----- 0.28 WFR MEMC Elec Materials Mon, Apr 28 After the Bell 0.09 MCY Mercury General Mon, Apr 28 -----N/A----- 0.61 MCL Moore Corporation Ltd Mon, Apr 28 After the Bell 0.18 NFS Nationwide Finl Serv Mon, Apr 28 After the Bell 0.69 NHY Norsk Hydro Mon, Apr 28 Before the Bell N/A STO STATOIL ASA Mon, Apr 28 Before the Bell 0.28 SYY SYSCO Corporation Mon, Apr 28 Before the Bell 0.27 TKR The Timken Company Mon, Apr 28 After the Bell 0.21 TSN Tyson Foods Mon, Apr 28 Before the Bell 0.00 UDR United Dom Realty Mon, Apr 28 After the Bell 0.38 VCI Valassis Comm Mon, Apr 28 Before the Bell 0.49 VOLVY Volvo AB Mon, Apr 28 -----N/A----- N/A VMC Vulcan Materials Mon, Apr 28 After the Bell -0.02 WRI WEINGARTEN RLTY INVS Mon, Apr 28 Before the Bell 0.84 WEG Williams Energy Part Mon, Apr 28 Before the Bell 0.70 XL XL Capital Ltd Mon, Apr 28 After the Bell 1.86 ------------------------- TUESDAY ------------------------------ ABB ABB Tue, Apr 29 Before the Bell N/A ACE ACE Limited Tue, Apr 29 After the Bell 0.96 RKY Adolph Coors, Co. Tue, Apr 29 Before the Bell 0.27 ALA Alcatel Tue, Apr 29 -----N/A----- -0.37 AC Alliance Cap Mngmnt Tue, Apr 29 -----N/A----- 0.44 AW ALLIED WASTE INDS INC Tue, Apr 29 After the Bell 0.10 AHC Amerada Hess Tue, Apr 29 -----N/A----- 1.88 AEP American Elec Power Tue, Apr 29 -----N/A----- 0.51 AMKR Amkor Technology, Inc Tue, Apr 29 -----N/A----- -0.36 AVZ AMVESCAP PLC Tue, Apr 29 Before the Bell 0.20 ADRX Andrx Corporation Tue, Apr 29 Before the Bell 0.09 ARI Arden Realty Inc Tue, Apr 29 -----N/A----- 0.68 AVB Avalonbay Communities Tue, Apr 29 After the Bell 0.78 BF BASF Tue, Apr 29 Before the Bell N/A BVF Biovail Corporation Tue, Apr 29 Before the Bell 0.38 BOW Bowater Incorporated Tue, Apr 29 Before the Bell -0.91 BP Bp PLC Tue, Apr 29 Before the Bell 0.94 BNN BRASCAN CORP Tue, Apr 29 -----N/A----- N/A BMY Bristol-Myers Squibb Tue, Apr 29 -----N/A----- 0.38 BTI British Am Tobacco Tue, Apr 29 Before the Bell 0.47 BG Bunge Limited Tue, Apr 29 Before the Bell 0.33 CMX CareMark Rx, Inc. Tue, Apr 29 -----N/A----- 0.23 GIB CGI Group Tue, Apr 29 Before the Bell N/A CGI Commerce Group Tue, Apr 29 After the Bell 0.70 CTC Compania Telecom Chle Tue, Apr 29 After the Bell 0.04 CE Concord EFS Tue, Apr 29 Before the Bell 0.17 CAM Cooper Cameron Tue, Apr 29 Before the Bell 0.24 CFC Countrywide Finl Corp Tue, Apr 29 Before the Bell 2.08 CVH Coventry Health Care Tue, Apr 29 Before the Bell 0.70 DD DuPont Tue, Apr 29 Before the Bell 0.54 DYN Dynegy Inc. Tue, Apr 29 Before the Bell -0.17 EDMC Education Mngmnt Corp Tue, Apr 29 Before the Bell 0.50 EC Engelhard Corporation Tue, Apr 29 Before the Bell 0.31 EOP Eq Office Prop Trust Tue, Apr 29 Before the Bell 0.71 ERICY Ericsson LM Telephone Tue, Apr 29 -----N/A----- -0.24 FLR Fluor Corporation Tue, Apr 29 After the Bell 0.50 FTE France Telecom Tue, Apr 29 -----N/A----- N/A FDP Frsh Del Mnte Produce Tue, Apr 29 Before the Bell 1.27 GGB Gerdau S.A. Tue, Apr 29 -----N/A----- N/A TV Grupo Televisa, S.A. Tue, Apr 29 After the Bell 0.16 HAL Halliburton Company Tue, Apr 29 Before the Bell 0.19 IM Ingram Micro Tue, Apr 29 After the Bell 0.15 IDC Interactive Data Corp Tue, Apr 29 Before the Bell 0.17 JNS Janus Capital Group Tue, Apr 29 Before the Bell 0.17 JDSU JDS Uniphase Corp Tue, Apr 29 After the Bell -0.04 JNY Jones Apparel Group Tue, Apr 29 -----N/A----- 0.85 KEG Key Energy Services Tue, Apr 29 Before the Bell -0.01 TVL LIN TV Corp. Tue, Apr 29 Before the Bell -0.07 MLM Martin Marietta Mat Tue, Apr 29 Before the Bell -0.28 MXIM Mxm Integrated Prod Tue, Apr 29 -----N/A----- 0.23 MCK McKesson Corporation Tue, Apr 29 After the Bell 0.59 MDP Meredith Corporation Tue, Apr 29 Before the Bell 0.49 MX Metso Corporation Tue, Apr 29 Before the Bell N/A MBT Mobile Telesystems Tue, Apr 29 Before the Bell N/A NBR Nabors Industries Tue, Apr 29 -----N/A----- 0.24 NEU Neuberger Berman Tue, Apr 29 Before the Bell 0.40 NWL Newell Rubbermaid Tue, Apr 29 Before the Bell 0.27 NI NiSource Tue, Apr 29 Before the Bell 0.94 NOC Northrop Grumman Tue, Apr 29 Before the Bell 0.56 OMC Omnicom Group Tue, Apr 29 -----N/A----- 0.70 PFGC PERFORMANCE FOOD Tue, Apr 29 -----N/A----- 0.34 PER Perot Systems Tue, Apr 29 Before the Bell 0.14 PCZ Petro-Canada Tue, Apr 29 -----N/A----- 1.17 PD Phelps Dodge Tue, Apr 29 Before the Bell -0.32 PXD Pioneer Natl Res Comp Tue, Apr 29 Before the Bell 0.59 PDG Placer Dome Tue, Apr 29 Before the Bell 0.08 PPL PPL Corporation Tue, Apr 29 Before the Bell 0.99 PCP Precision Castparts Tue, Apr 29 -----N/A----- 0.71 PCO Premcor Inc. Tue, Apr 29 Before the Bell 0.87 QLGC QLogic Tue, Apr 29 After the Bell 0.30 RCI Renal Care Group Tue, Apr 29 -----N/A----- 0.49 RSG Republic Services Tue, Apr 29 After the Bell 0.33 RHA Rhodia S.A. Tue, Apr 29 Before the Bell N/A HOT Starwood Hotels Resrt Tue, Apr 29 Before the Bell -0.02 SEO Stora Enso Tue, Apr 29 Before the Bell 0.11 SWFT Swift Transportation Tue, Apr 29 After the Bell 0.09 SBL Symbol Technologies Tue, Apr 29 After the Bell 0.04 SYT Syngenta Tue, Apr 29 Before the Bell N/A TPP Teppco Tue, Apr 29 -----N/A----- 0.37 MHP The McGraw-Hill Comp Tue, Apr 29 Before the Bell 0.19 PFS The Provident Bank Tue, Apr 29 Before the Bell 0.17 RSE The Rouse Company Tue, Apr 29 -----N/A----- 0.95 SWK The Stanley Works Tue, Apr 29 Before the Bell 0.34 TMPW TMP Worldwide Inc. Tue, Apr 29 After the Bell 0.06 RIG Transocean Inc. Tue, Apr 29 Before the Bell 0.12 TSM TSMC Tue, Apr 29 Before the Bell 0.02 X UNITED ST STL CORP Tue, Apr 29 Before the Bell -0.28 WMI Waste Management Tue, Apr 29 Before the Bell 0.23 WON Westwood One Tue, Apr 29 Before the Bell 0.15 XEL Xcel Energy Tue, Apr 29 -----N/A----- 0.29 ----------------------- WEDNESDAY ----------------------------- AGU Agrium, Inc. Wed, Apr 30 After the Bell -0.11 AEE Ameren Corporation Wed, Apr 30 Before the Bell 0.47 AMT American Tower Corp. Wed, Apr 30 Before the Bell -0.29 AHM Amersham Wed, Apr 30 -----N/A----- N/A AU Anglogold Limited Wed, Apr 30 -----N/A----- 0.38 ATH Anthem, Inc. Wed, Apr 30 Before the Bell 1.18 APPB Applebee's Intl Wed, Apr 30 After the Bell 0.41 AZN AstraZeneca PLC Wed, Apr 30 Before the Bell 0.43 AVE Aventis Wed, Apr 30 -----N/A----- N/A AVX AVX Corporation Wed, Apr 30 Before the Bell -0.02 BLDP Ballard Power Systems Wed, Apr 30 -----N/A----- -0.27 BCE BCE Wed, Apr 30 Before the Bell N/A BE BearingPoint, Inc. Wed, Apr 30 Before the Bell 0.12 CAJ Canon Wed, Apr 30 -----N/A----- N/A CZ Celanese AG Wed, Apr 30 -----N/A----- 0.30 CRL Charles River Lab Wed, Apr 30 After the Bell 0.40 CB Chubb Corporation Wed, Apr 30 After the Bell 1.05 CCU Clear Channel Comm Wed, Apr 30 Before the Bell 0.12 KOF COCA-COLA FEMSA Wed, Apr 30 Before the Bell N/A COP ConocoPhillips Wed, Apr 30 Before the Bell 1.72 CEG Constel Energy Group Wed, Apr 30 Before the Bell 0.42 COCO Corinthian Colleges Wed, Apr 30 Before the Bell 0.34 CSX CSX Wed, Apr 30 Before the Bell 0.17 DB Deutsche Bank Wed, Apr 30 Before the Bell N/A DUK Duke Energy Corp Wed, Apr 30 Before the Bell 0.35 DRE Duke Realty Corp Wed, Apr 30 -----N/A----- 0.58 ELN Elan Corporation, PLC Wed, Apr 30 Before the Bell -0.30 ELE Endesa, S.A. Wed, Apr 30 -----N/A----- N/A EPD Enterprise Prod Part Wed, Apr 30 Before the Bell 0.23 EQR Equity Residential Wed, Apr 30 -----N/A----- 0.56 ESS Essex Property Trust Wed, Apr 30 After the Bell 1.08 EXC Exelon Corporation Wed, Apr 30 Before the Bell 1.06 FMX FEMSA Wed, Apr 30 Before the Bell N/A FE FirstEnergy Wed, Apr 30 -----N/A----- 0.47 FSH Fisher Scient Intl Wed, Apr 30 After the Bell 0.46 FUJIY Fuji Photo Film Wed, Apr 30 -----N/A----- N/A GRMN Garmin Ltd. Wed, Apr 30 Before the Bell 0.31 GSK GlaxoSmithKline Wed, Apr 30 Before the Bell N/A HAR Harman Intl Ind Wed, Apr 30 -----N/A----- 0.87 HMT Host Marriott Wed, Apr 30 Before the Bell 0.15 ICOS ICOS Corporation Wed, Apr 30 -----N/A----- -0.82 NDE IndyMac Bancorp, Inc. Wed, Apr 30 Before the Bell 0.65 IRM Iron Mountain Incorp Wed, Apr 30 Before the Bell 0.20 KMT Kennametal Inc. Wed, Apr 30 During the Market 0.34 KMG Kerr-McGee Wed, Apr 30 -----N/A----- 1.08 LNC Lincoln National Wed, Apr 30 Before the Bell 0.62 MKL MARKEL CORP Wed, Apr 30 -----N/A----- 2.54 MON Monsanto Company Wed, Apr 30 -----N/A----- 0.22 MRH Montpelier Re Holding Wed, Apr 30 After the Bell 1.14 MUR Murphy Oil Corp Wed, Apr 30 After the Bell 0.75 NXTP Nextel Partners Wed, Apr 30 Before the Bell -0.19 NBL Noble Energy, Inc. Wed, Apr 30 -----N/A----- 0.74 NVO Novo-Nordisk Wed, Apr 30 Before the Bell N/A OGE OGE Energy Wed, Apr 30 Before the Bell -0.06 OKE ONEOK Inc. Wed, Apr 30 -----N/A----- 1.11 PHSY PacifiCare Health Sys Wed, Apr 30 After the Bell 1.23 PTEN Patterson-UTI Energy Wed, Apr 30 Before the Bell 0.05 PT Portugal Telecom SGPS Wed, Apr 30 During the Market N/A PL Protective Life Corp Wed, Apr 30 Before the Bell 0.67 PFGI Provident Finl Group Wed, Apr 30 Before the Bell 0.54 STR Questar.com Wed, Apr 30 After the Bell 0.81 SHR Schering AG Wed, Apr 30 Before the Bell N/A SO Southern Company Wed, Apr 30 Before the Bell 0.33 STN Station Casinos Wed, Apr 30 -----N/A----- 0.23 TNE Tele Norte Leste Part Wed, Apr 30 After the Bell 0.00 TU TELUS Wed, Apr 30 -----N/A----- N/A EL The Estie Lauder Comp Wed, Apr 30 Before the Bell 0.28 SPC The St. Paul Comp Wed, Apr 30 Before the Bell 0.89 UMC Un Microelect Corp Wed, Apr 30 Before the Bell 0.02 VSH Vishay Intertech Inc. Wed, Apr 30 Before the Bell 0.04 VSH Vishay Intertech Wed, Apr 30 -----N/A----- 0.04 WGL WGL Holdings Wed, Apr 30 After the Bell 1.63 WEC Wisconsin NRG Corp Wed, Apr 30 Before the Bell 0.73 ------------------------- THURSDAY ----------------------------- AES AES Corporation Thu, May 01 Before the Bell 0.06 AFG American Financial Thu, May 01 Before the Bell 0.63 APCC American Power Conv Thu, May 01 After the Bell 0.14 ASN Archstone-Smith Trust Thu, May 01 Before the Bell 0.45 CPT Camden Property Trust Thu, May 01 After the Bell 0.74 CLU Canada Life Financial Thu, May 01 -----N/A----- N/A CRE Carramerica Realty Co Thu, May 01 After the Bell 0.81 CTL CenturyTel, Inc. Thu, May 01 Before the Bell 0.52 CXR COX RADIO INC Thu, May 01 Before the Bell 0.08 DDR DEVELOPERS DIV RLTY Thu, May 01 After the Bell 0.63 DTC Domtar Inc. Thu, May 01 -----N/A----- 0.15 DQE DQE Thu, May 01 After the Bell 0.25 EXPE Expedia, Inc Thu, May 01 Before the Bell 0.23 XOM Exxon Mobil Corp Thu, May 01 -----N/A----- 0.70 HPC Hercules Thu, May 01 Before the Bell 0.14 ROOM Hotel Reservations Thu, May 01 Before the Bell 0.34 ICI Imperial Chemical Ind Thu, May 01 -----N/A----- N/A JHF John Hancock Finl Ser Thu, May 01 After the Bell 0.72 KSE KeySpan Thu, May 01 Before the Bell 1.47 LANC Lancaster Colony Corp Thu, May 01 Before the Bell 0.52 LIZ Liz Claiborne Thu, May 01 Before the Bell 0.57 NST NSTAR Thu, May 01 -----N/A----- 0.70 ORH Odyssey Re Holdings Thu, May 01 After the Bell 0.40 OCR Omnicare Thu, May 01 -----N/A----- 0.42 PPE Park Place Enter Thu, May 01 -----N/A----- 0.14 PDS Precision Drilling Thu, May 01 Before the Bell 0.69 O Realty Income Corp Thu, May 01 -----N/A----- 0.71 SWY Safeway, Inc. Thu, May 01 Before the Bell 0.44 SRE Sempra Energy Thu, May 01 Before the Bell 0.68 SHPGY Shire Pharm Group Thu, May 01 Before the Bell 0.36 SRCL Stericycle Thu, May 01 After the Bell 0.31 SLF Sun Life Finl Serv Ca Thu, May 01 -----N/A----- 0.39 TEVA Teva Pharmaceutical Thu, May 01 -----N/A----- 0.46 TOC The Thomson Corp Thu, May 01 -----N/A----- -0.03 TKC Turkcell Iletsim Hizm Thu, May 01 -----N/A----- N/A TXU TXU Corp. Thu, May 01 Before the Bell 0.21 TYC Tyco International Thu, May 01 Before the Bell 0.32 USAI USA Interactive Thu, May 01 Before the Bell 0.14 DIS Walt Disney Thu, May 01 After the Bell 0.11 ------------------------- FRIDAY ------------------------------- AXL Am Axle & Manu Hold Fri, May 02 Before the Bell 0.99 CCJ Cameco Fri, May 02 -----N/A----- 0.39 FUN Cedar Fair LP Fri, May 02 -----N/A----- -0.59 CVX ChevronTexaco Fri, May 02 Before the Bell 1.81 CI CIGNA Fri, May 02 Before the Bell 1.42 DTE DTE Energy Company Fri, May 02 -----N/A----- 1.30 GRP Grant Prideco Inc Fri, May 02 Before the Bell 0.03 HCN Health Care REIT, Inc Fri, May 02 -----N/A----- 0.69 HTV Hearst-Argyle Tele Fri, May 02 Before the Bell 0.09 PNW Pinn West Capital Fri, May 02 Before the Bell 0.44 RD Royal Dutch Petroleum Fri, May 02 -----N/A----- 1.05 SC Shell Trans and Trad Fri, May 02 -----N/A----- 0.90 UL Unilever PLC Fri, May 02 Before the Bell 0.51 ---------------------------------------------- Upcoming Stock Splits In The Next Two Weeks... ---------------------------------------------- Symbol Company Name Ratio Payable Executable SFNCA Simmons First Nat'l Corp 2:1 May 1st May 2nd ZQK Quicksilver 2:1 May 8th May 9th -------------------------- Economic Reports This Week -------------------------- The last few days appear to have seen a shift in focus from earnings news to economic news but the Q1 earnings season is far from over. Plus, we have a full calendar of economic news this week as well with the Personal Income and Spending on Monday. The ECI report, which can be crucial comes out on Tuesday. Plus the PMI and other reports hit later in the week. ============================================================== -For- Monday, 04/28/02 ---------------- Personal Income (BB) Mar Forecast: 0.4% Previous: 0.3% Personal Spending (BB) Mar Forecast: 0.6% Previous: 0.0% Tuesday, 04/29/02 ----------------- Employment Cost Index(BB)Q1 Forecast: 0.8% Previous: 0.7% Consumer Confidence (DM)Apr Forecast: 69.4 Previous: 62.5 Wednesday, 04/30/02 ------------------- Chicago PMI (DM) Apr Forecast: 48.5 Previous: 48.4 Thursday, 05/01/02 ------------------ Initial Claims (BB) 04/26 Forecast: 428K Previous: 455K Auto Sales (NA) Apr Forecast: 5.9M Previous: 5.5M Truck Sales (NA) Apr Forecast: 7.3M Previous: 7.0M Productivity-Prel (BB) Q1 Forecast: 2.5% Previous: 0.8% ISM Index (DM) Apr Forecast: 47.0 Previous: 46.2 Construction Spnding(DM)Mar Forecast: 0.1% Previous: -0.2% Friday, 05/02/02 ---------------- Nonfarm payrolls (BB) Apr Forecast: -50K Previous: -108K Unemployment Rate (BB) Apr Forecast: 5.9% Previous: 5.8% Hourly Earnings (BB) Apr Forecast: 0.2% Previous: 0.1% Average Workweek (BB) Apr Forecast: 34.2 Previous: 34.3 Factory Orders (DM) Mar Forecast: 0.4% Previous: -1.5% Definitions: DM= During the Market BB= Before the Bell AB= After the Bell NA= Not Available ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 04-27-2003 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/g06v_2.asp In Section Two: Market Watch: A Mixed Bag To Watch Stock Pick: Where is the Dow Going? Daily Results Call Play of the Day: None Put Play of the Day: INTU Dropped Calls: BBBY, BBOX Dropped Puts: None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ MARKET WATCH ************ A Mixed Bag To Watch Bard C R Inc. - BCR - close: 62.43 change: +0.39 We thought the action in BCR was interesting. Its point-and- figure (PnF) chart is showing a three-box pull back after its triple-top breakout pattern. On the daily chart this is seen as a dip to the $60 level of support. What you don't see on the PnF is shares have been pretty strong the last couple of sessions and the MACD looks ready to turn bullish. We'd consider this a long play on a bounce at $60 or a move above $63. Chart= http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/BCR042703.gif --- Mylan Labs - MYL - close: 26.86 change: +0.26 Shares of MYL saw a steep round of profit taking from $30 to $26 and its 100-dma most of April. The bounce appears to be underway and while this drug company probably deserves more digging before committing capital it's worth watching. Chart= http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/MYL042703.gif --- EchoStar - DISH - close: 28.60 change: -0.18 DISH has been on the OI watch list recently and it's returning because of its relative strength and ability to maintain support at the 50-dma. Aggressive players could try longs here on the 50-dma with a very tight stop. Otherwise, the best bet appears to be a breakout over $30 or $30.50. Earnings should be on May 6th. Chart= http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/DISH042703.gif --- Coca-Cola Co - KO - close: 39.42 change: -0.49 Patient put players might want to consider KO. The stock has slowly been trying to hold onto the $40 level and it lost again on Friday. Mark Phillips may have added KO to the OI LEAPs put list, be sure to check out the LEAPS this weekend. Next support appears to be $37 but KO's PnF chart looks terrible and it could easily see new lows. Chart= http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/KO042703.gif --- QUALCOMM - QCOM - close: 31.12 change: -1.51 The chart of QCOM is looking pretty ugly these days. Earnings were earlier this week and they obviously didn't impress Wall Street. One broker actually reiterated their SELL rating on the stock. The week-long failure to get back above its 200-dma looks bad. We'd be watching a breakdown below the $30 mark as a new entry point to get short. Chart= http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/QCOM042703.gif ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- COX $32.67 - The pull back to previous resistance may be an entry point for more aggressive bulls. Look for a bounce above $32.50 RKY $48.74 - Shares abruptly reversed course and are now under the $50 level. Should the stock close under its 50-dma, it might be a decent short. Keep in mind that earnings are expected on April 29th. MDT $48.08 - MDT is still hanging in there and really hasn't seen much of a sell-off given the last couple of days. Look for earnings on May 14th. TEVA $46.07 - Shares of TEVA looks incredibly over-extended and a break below the $45 level might be an aggressive entry point to try and catch some profit taking. EK $29.29 - This looks like another put candidate for the bears. Shares broke the $30 level and next support is near $27.00. Technical indicators look weak. PCAR $57.64 - If the recent trend is any indication of future results then PCAR might pull back to the $56 level before bouncing into its next leg higher and aiming for the $60 mark. Keep in mind the $59 level was very strong resistance with plenty of selling (looks like a wall). Use a tight stop, shares are overbought. ********** Stock Pick ********** Where is the Dow Going? By Steve Gould Last week I presented two alternate paths for the Dow. Here is the chart and analysis for the first scenario. If the Dow continues its present course of unfolding the III wave, then we would expect the Dow to behave in the following fashion. Chart: Dow 4/17/2003 weekly What this chart is saying is that within the III wave, we will see a 5 wave basic pattern. So far, wave 1 and wave 2 have traced out and we are just starting wave 3. Within wave 3 we will see a 5 wave basic pattern. It has so far traced out the (1) wave and the (2) wave and is just started the (3) wave. If this pattern continues we will see a downward thrust until the end of wave (5) of wave 3 and then see a substantial wave 4 retracement. Here was the chart and analysis for the alternate scenario. Chart: Dow 4/17/2003 monthly alternate In the alternative count, the Dow has not yet completed the II wave up. The Dow is undergoing a much larger A-B-C correction and is in the beginnings of a c wave of the C wave (III, C, c). If this scenario plays out, then the Dow could go as high as 9350 (62% retracement of wave I) before heading back down. We will know this scenario is playing out should the Dow breach the top of the a wave at 8522. Over the last week, the Dow did breach the 8522 mark. Not by a lot, but it did breach it. Does this mean that we are in the alternate scenario? Not yet. The verdict is still out. But not for long. Here is an updated chart of the Dow. Chart: Dow 4/25/2003 preferred I made some subtle changes to the wave count. Notice how the 2 wave is now over this week's bar. It has also traced out a nice A-B-C pattern. Even though the Dow breached the 8522 mark, the whole pattern shifted without invalidating the count. This slightly longer wave 2 comes in at 38% of wave 1 in terms of time. Pricewise, the 2 wave retraced a bit more than 62%. This new labeling is more in line with what we would expect given this pattern. From the new peak of the 2 wave, I drew the anticipated 5 wave pattern for the coming 3 wave. The Dow could still go a little bit higher over the next week to complete the c wave (green) but if this pattern unfolds, we will soon see a downward thrust. If we see the Dow below 8145, we can be rather confident the Dow is headed lower. Unless of course, it goes up. Here is an alternate count for the Dow. Chart: Dow 4/25/2003 alternate Again, we see the current move up as the C wave of a larger A-B-C correction. Since the B wave came so close to the end of the I wave, the C wave in progress could either peak at around the A wave (9043) making it a flat correction, or continue on up to a 62% retracement (9351) making it a zig zag correction. Until we see a completed 5 wave pattern in the c wave of the C wave, we should anticipate that the Dow can still go higher. It is my opinion that the first scenario where the Dow goes down is the more likely. However, seeing that we are at a critical juncture, it is best to wait until the Dow reveals its direction before committing any capital. *********************************************************** DAILY RESULTS *********************************************************** For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week AZO 78.13 -1.20 2.71 1.52 -0.69 1.14 Just a pull back BBBY 37.92 -0.33 -0.20 -0.24 -0.05 -1.73 DROP, broke $38 BBOX 30.69 -0.24 0.98 0.41 -0.70 -0.95 DROP, tight stop ERTS 59.47 0.33 1.11 -0.71 -1.00 -0.71 Potential Entry IMDC 36.38 -0.62 1.02 0.90 0.02 1.38 Great Strength MEDI 34.81 0.07 0.57 0.84 0.55 1.46 Long-term, no update MXIM 38.39 -0.07 1.36 -0.01 -0.34 -1.42 Very Cautious OMC 62.14 -0.85 1.72 0.66 0.34 0.59 Hanging tough PUTS FITB 48.60 -0.56 -0.40 -0.10 -0.87 -1.18 Not triggered yet INTU 37.24 -1.65 NEW, weakness KSS 55.02 -1.54 NEW, watch $55 ************************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 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* None Put Play of the Day: ******************** Intuit Inc. - INTU - close: 37.24 change: -1.65 stop: 40.00 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 ^^^^^ Bed Bath & Beyond - BBBY cls: 37.92 change: -0.80 stop: 37.75 Right through Thursday's session, BBBY's pullback looked like little more than an orderly pullback for another let higher, but things changed significantly on Friday. First the 10-dma failed to provide support for the stock and then the 6-week ascending trendline was broken. These are important measures of support and their violation presaged the stock's close below the $38 level. While our stop wasn't violated on Friday, it appears there is very little to prevent that from happening early next week. As noted in the Market Monitor during the day on Friday, we advocated conservative traders look to close out open positions. With the close below $38, we've lost enough confidence in the stock, that it seems prudent to just close out the play this weekend. Traders still holding open positions will want to use any price strength early next week to exit at a more favorable level. Picked on April 8th at $37.18 Change since picked: +0.74 Earnings Date 07/02/03 (unconfirmed) Average Daily Volume = 3.31 mln --- Black Box Corp - BBOX - close: 30.69 change: -1.41 stop: 30.90 The downgrade of the chip sector really hit the rest of the tech group pretty hard. Hardware and software sector indices were both lower and shares of BBOX dropped some 4.4% on Friday. We were a bit concerned Thursday night and suggest traders not take new positions until we saw how the market reacted on Friday. Especially since we expected more profit taking but didn't know how severe it would be. Fortunately, we started this play with a tight stop at $30.90 because if BBOX broke back below the $31 level we didn't want to ride it all the way down. Those traders still wishing to follow the play need to watch the $29.50-30.00 level for support. Picked on April 22nd at $32.39 Change since picked: -1.49 Earnings Date 05/07/03 (confirmed) Average Daily Volume = 2.8 million PUTS ^^^^ None *********** 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. ************************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 ************************************************************** ********** 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 04-27-2003 Sunday 3 of 5 In Section Three: New Calls: None Current Calls: AZO, ERTS, IMDC, MXIM, OMC New Puts: INTU, KSS ************************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 ************************************************************** ************** NEW CALL PLAYS ************** None ************************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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** AutoZone, Inc. - AZO - close: 78.13 change: -1.18 stop: 74.75 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: While the price action in AZO over the past couple days certainly can't be termed bullish, we are far from disappointed with the way the stock is behaving. Our initial profit target of $80 was achieved on Wednesday, and traders that took advantage of that strength to harvest gains should be happy with that decision. Since the opening bell on Thursday, AZO has seen some orderly profit taking, with mild support being felt near the $78 level. Particularly encouraging is the light volume that has accompanied the price decline over the past couple days, with Friday's tally of 787K shares just barely over 60% of the ADV. Support gets a bit firmer near $77, becoming fairly strong at $76 and (hopefully) impenetrable just above $75, with additional support provided by the ascending trendline and 20-dma ($75.02). Oscillators are starting to look a bit toppy, but we'll stick with the dominant trend as long as it lasts. Judging by the mild pullback so far, a rebound from the $76-77 area should provide for another solid entry ahead of a renewed push towards the $80 resistance level. Provided the bulls can push through that level this time, we'll look to harvest gains again in the $83-84 area. Until we see the depth of the current pullback, maintain stops at $74.75. Suggested Options: Shorter Term: The May 75 Call will offer short-term traders the best return on an immediate move, with manageable risk. 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 June 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 MAY-75 AZO-EO OI= 689 at $4.40 SL=2.75 BUY CALL MAY-80 AZO-EP OI=1096 at $1.45 SL=0.75 BUY CALL JUN-80 AZO-FP OI= 532 at $3.00 SL=1.50 Annotated Chart of AZO: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/AZO042703.gif Picked on April 13th at $75.24 Change since picked: +2.89 Earnings Date 06/03/03 (unconfirmed) Average Daily Volume = 1.25 mln --- Electronic Arts - ERTS - close: 59.47 change: -0.52 stop: 57.00 Company Description: ERTS creates, markets and distributes interactive entertainment software for a variety of hardware platforms, including Sony's PlayStation 2, the PC, Nintendo GameCube and the recently launched Xbox. The company's EA.com business segment is engaged in the creation, marketing and distribution of entertainment software which can be played or sold online, as well as the ongoing management of subscriptions of online games and Website advertising. Why we like it: To say our ERTS play is at a critical juncture would be an understatement. As noted in the Thursday update, the $59.00-59.50 area should have proved a pivotal support level and that's exactly how Friday's session played out. After a brief dip to $58.80, the stock rebounded ever so slightly to end the day just below $59.50. So what's so special about this area you ask? Well, it is the site of the converged 20-dma ($59.30) and 200-dma ($59.48), which sit right on top of the descending trendline from the October highs ($59.30). That trendline acted as formidable resistance in early April and now that it has been broken to the upside, it should provide support. Only time will tell if this support zone will hold, but with the rather light volume seen on the pullback of the past few days (less than two-thirds of the ADV on Friday), odds favor a continuation of the recent bullish trend. Traders that waited for the pullback after last week's break above our $61.25 trigger level can now look to enter the play on a rebound from this $59.00-59.50 area, setting stops at $57, which is just below solid historical support from the past 6 weeks. Those looking to enter on strength will now need to wait for a breakout over the $62 level, just above last Tuesday's intraday high. Our first upside target remains the $64 level, the lower edge of the $64-68 resistance zone that prevailed for most of last Fall. Suggested Options: Shorter Term: The May 60 Call will offer short-term traders the best return on an immediate move, with manageable risk. Traders who desire a bit more insulation from time decay, while still reaping the benefits of using an ITM option will want to use the June 60 Call. Longer Term: Traders looking to capitalize on a sustained breakout move over the $62 level will want to look to the May 65 Call or even the June 65 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 MAY-60 EZQ-EL OI=3953 at $1.70 SL=0.75 BUY CALL MAY-65 EZQ-EM OI=3296 at $0.30 SL=0.00 BUY CALL JUN-60 EZQ-HH OI=4540 at $3.00 SL=1.50 BUY CALL JUN-65 EZQ-HH OI=8472 at $1.10 SL=0.50 Annotated Chart of ERTS: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/ERTS042703.gif Picked on April 20th at $60.04 Change since picked: -0.52 Earnings Date 05/08/03 (unconfirmed) Average Daily Volume = 3.13 mln --- Inamed Corp - IMDC - close: 36.38 change: -0.14 stop: 32.86 Company Description: Inamed is a global healthcare company with over 25 years of experience developing, manufacturing, and marketing innovative, high-quality, science-based products. Current products include breast implants for aesthetic augmentation and for reconstructive surgery; a range of dermal products to treat facial wrinkles; and minimally invasive devices for obesity intervention, including the LAP-BAND. System for morbid obesity. (source: company press release) Why We Like It: We are very encouraged by IMDC's relative strength this week. The stock has stood up very well, especially given the recent weakness in the broader markets. Readers might remember that this entire sector of medical device & supply companies has been out-performing the general market for months. As one reporter put it, the healthcare-medical field has a "tailwind" of millions of baby boomers all approaching their golden years. Strangely enough, IMDC gets a big chunk of its revenues from its breast implants business. Despite a souring economy, demand has continued to expand. The company's latest earnings results were very positive with double-digit growth in all three of its businesses. Total sales were up 21% for the quarter. A recent article by Forbes also shed some bullish light on IMDC. The drop in the dollar has had a positive affect on the significant portion of sales that IMDC does overseas. Industry analysts believe the company will turn in an annual growth rate nearing 17% for the next three to five years. Keen investors will also note that IMDC is trading at a discount to its peers in the S&P 500. Most medical device companies in the S&P 500 have a P/E of 23 while IMDC's is only 15 (on future 12 months). The trend looks good but new entries for call positions are probably best made on a pull back to $35 or a breakout above $37, which is possible resistance from a year ago. We're going to leave our stop at 32.86 for now but more conservative traders could use the 50-dma near 33.46 as a guide for possible stop placement. Suggested Options: While the trend looks strong for IMDC we would not call this one a "fast" mover. We're going to post one short-term call (May), a couple of July's (recommended) and one October for traders who really want some time. BUY CALL MAY 35 UZI-EG OI=145 at $2.50 SL=1.20 BUY CALL JUL 35*UZI-GG OI=641 at $3.60 SL=1.50 BUY CALL JUL 40 UZI-GH OI= 20 at $1.30 SL=0.00 BUY CALL OCT 40 UZI-JH OI=115 at $2.45 SL=1.00 Annotated Chart of IMDC: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/IMDC042703.gif Picked on April 17th at $35.00 Change since picked: +1.38 Earnings Date 02/25/03 (confirmed) Average Daily Volume = 215 K --- Maxim Integrated - MXIM - cls: 38.39 chg: -2.42 stop: 38.00 Company Description: Maxim Integrated Products is a leading international supplier of quality analog and mixed-signal products for applications that require real world signal processing. (source: company press release) Why We Like It: There's nothing like the timing on some of these broker downgrades when they decide to yank the carpet out on some sector. Makes you wonder if they have a short-position to protect. This time an analyst from Salomon Smith Barney downgraded the entire semiconductor sector on Friday due to four factors. First was rising inventories, second was rising valuations, third was deterioration at the end-user level for generic PCs and handset, and fourth was the beginning of a seasonally slow three to four month period. Of course the SOX had risen up toward significant resistance as well. The downgrade sent the SOX falling five percent by day's end. Shares of MXIM out-performed to the downside with a 5.9% loss. In Thursday's update we stated that traders needed to watch the SOX and the 340 level and that a breakdown below 340 would likely produce a breakdown below $40 in MXIM. Now we see similar reflections in the SOX's 320 level and MXIM's $38 level. Both are acting as support and a breakdown in the SOX is likely to send MXIM lower again. We did originate this play as an aggressive call play should MXIM breakout over $40.51. That happened four sessions ago and we used a stop loss at $38 to keep our risk at a decent level. Our original write also suggested that should the markets pull back then MXIM could pull back to the $36 level (see the chart below) and this might make an alternative entry. Yes, this will violate our stop and we'll be out but nimble traders can keep this secondary entry in mind. Be sure to use a tight stop to keep risk at a minimum. Odds are we'll be dropping this play on Tuesday anyway since MXIM is expected to announce earnings on Tuesday after the close. Should MXIM close under $38 on Monday, we'll drop it on Monday. Given the proximity of its earnings announcement and the pull back in the SOX, it's probably not prudent to consider new entries despite unless you can handle the event risk. Suggested Options: This is a short-term play. We don't expect to hold it more than seven or eight session. We're listing two short-term options (May) and one longer-term option for those traders who just have to have more time. BUY CALL MAY 40 XIQ-EH OI=7052 at $1.25 SL=0.00 BUY CALL AUG 40 XIQ-HH OI=1920 at $3.90 SL=2.00 Annotated Chart of MXIM: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/MXIM042703.gif Picked on April 22nd at $40.51 Change since picked: -2.12 Earnings Date 04/29/03 (confirmed) Average Daily Volume = 8.30 mil --- Omnicom Group - OMC - close: 62.14 change: -1.29 stop: 59.50 Company Description: Omnicom Group Inc. (NYSE-OMC) is a leading global marketing and corporate communications company. Omnicom's branded networks and numerous specialty firms provide advertising, strategic media planning and buying, direct and promotional marketing, public relations and other specialty communications services to over 5,000 clients in more than 100 countries. (source: company press release) Why We Like It: The steady climb higher for shares of OMC remains intact. We initially wrote the long play for OMC on the breakout over $60. Shares were in rebound mode now that the war was over and the consumer was found to be alive and well. The stock's point-and- figure chart continues to show a spread-triple-top breakout. We've been expecting some profit taking for a couple of days now and OMC has surprised us with some resiliency. Looking at a 30- minute or 60-minute interval chart, one can see the narrow ascending channel that OMC is trading in. By the looks of it OMC is near the bottom of that channel and should bounce but given the state of the broader markets it may be better to look for a dip to the $61-60 area. Should that occur, our stop at $59.50 would make the risk-reward ratio much more appealing. We did note that OMC's English rival WPP Group missed the estimates but shared some optimism that the bottom appeared to be behind the industry. However, they did note that SARS was a concern. The chart on OMC still shows potential resistance at $65 but if we're patient we're still aiming for $68. For more fundamental comments on OMC, see previous updates on OptionInvestor.com. Suggested Option: Short-term traders can still look to the May calls but given the pace of OMC's advance those July's are looking like the better bet. October should give conservative traders plenty of time. BUY CALL MAY 60 OMC-EL OI=1852 at $3.60 SL=1.50 BUY CALL JUL 60 OMC-GL OI=1400 at $5.70 SL=3.00 BUY CALL JUL 65*OMC-GM OI=1026 at $3.00 SL=1.25 BUY CALL OCT 65 OMC-JM OI= 571 at $5.20 SL=2.75 Annotated Chart of OMC: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/OMC042703.gif Picked on April 15th at $61.30 Change since picked: +0.84 Earnings Date 04/29/03 (confirmed) Average Daily Volume = 2.18 mil ************* NEW PUT PLAYS ************* Intuit Inc. - INTU - close: 37.24 change: -1.65 stop: 40.00 Company Description: Intuit Inc. is a leading provider of business and financial management solutions for small businesses, consumers and accounting professionals. Its flagship products and services, including QuickBooks., Quicken. and TurboTax. software, simplify small business management and payroll processing, personal finance, and tax preparation and filing. ProSeries. and Lacerte. are Intuit's leading tax preparation software suites for professional accountants. Founded in 1983, Intuit has annual revenue of more than $1 billion. The company has nearly 7,000 employees with major offices in 13 states across the U.S. and offices in Canada and the United Kingdom. (Source: company press release) Why We Like It: One look at Intuit's chart and you're likely to say "ouch". Shares were in a very strong recovery mode from its February lows and the stock had successfully broken back above the $50 level when management came out with an earnings warning. Earnings for fiscal 2003 were going to be about 5% below estimates. However, Wall Street tends to overreact and investors hammered the stock for a 24 percent loss or $12.17 to $38.72 on the news. There was a minor bounce back to $40 before failing again. Investors now worry that further slowdowns in sales of its TurboTax and Quickbooks software could be an issue. Now INTU has tried multiple times to rebound and the stock just can't seem to break above the bottom of its gap down. The latest sell-off from the $41 area started a couple of sessions before the Thurs-Friday weakness in the broader markets. We see this relative weakness as a bad sign for its short-term future. Here's the plan: Traders have two ways they can try and enter this play. First would be a failed rally at $38 or possibly $39. Second would be a break below its March 31st, 2003 low of 36.72, but more aggressive traders could just target a move under $37.00. The MACD is rolling over again, daily stochastics are falling and still have farther to drop. The point-and-figure chart looks terrible and after $37, the next serious support looks like $30. We're going to start the play with a stop at $40.00 but $39.00 doesn't look too bad either. There is one caveat. Earnings are coming up on May 15th, 2003. This last quarter is probably their strongest of the year given the April 15th tax deadline. However, seeing how they have already pre-warned lower earnings we doubt there will be any pre- earnings run up. Keep an eye on the GSO software index as well. A pull back to the 100 level could certainly weigh on INTU too. Suggested Options: Short-term traders are probably better off playing the Mays or he Junes while longer-term traders can look to July or Octobers. BUY PUT MAY-40 IQU-QH OI=6596 at $3.50 SL=1.50 BUY PUT MAY-35 IQU-QG OI=3776 at $0.90 SL=0.00 BUY PUT JUL-35 IQU-SG OI=1099 at $2.35 SL=1.00 BUY PUT OCT-35 IQU-VG OI= 878 at $3.70 SL=1.70 Annotated chart of INTU: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/INTU042703a.gif Picked on April 27th at $37.24 Change since picked: +0.00 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 4.53 mil --- Kohl's Corporation - KSS - close: 55.02 change: -1.54 stop: 58.00 Company Description: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why we like it: While the Retail index (RLX.X) finally managed to claw its way through the $290 resistance level, the constant stream of negative economic news kept the bears patiently lying in wait. It appears they were waiting just a bit higher near the $298-300 level, which provided a practical top for the sector last October. While the RLX hasn't really weakened appreciably just yet, a quick search for some relatively weak stocks in the sector quickly turns up KSS. While it may have been stronger than the sector at certain points over the past year, "relative strength" is definitely not a term we'd use to describe the stock right now. After posting a double top near the $60 level earlier this month, the stock has had a rough five days, losing nearly $5 in the process. Even the impressive rally on Tuesday resulted in a red candle. The decline is now really starting to pick up steam, with Friday's 2.7% loss dropping KSS to within striking distance of a major breakdown. The stock has had two selloffs prior to this one during the month of April, the first of which bottomed at $54.70, just below the current level of the 50-dma ($54.77) and the second one at $55.65. That higher low was violated today, and a break below the April 1st intraday low will have the stock entering that fast move territory down to the $51 level. With a corresponding double top in the daily Stochastics, which are now breaking below their two most recent lows, KSS looks like fertile playground for the bears over the near term. We're setting an entry trigger at $54.70 and looking for a decline to the $50-51 area as our cue to exit with a healthy gain. Aggressive traders can use the initial breakdown as their entry signal, while those with a more cautious approach will want to wait for a subsequent rebound to test the $56 area as new-found resistance. We're initially placing our stop at $58, which is just above the 10-dma ($57.99) and 20-dma ($57.62), both of which are just starting to roll over. Suggested Options: Short-term traders will want to focus on the May 55 Put, as it will provide the best return for a short-term play. Those looking for additional staying power to hold through the recent (and expected future) volatility will want to use the June 50 strike. BUY PUT MAY-55 KSS-QJ OI=16477 at $2.20 SL=1.00 BUY PUT MAY-50 KSS-QI OI= 6513 at $0.75 SL=0.40 BUY PUT JUN-50 KSS-RI OI= 456 at $1.45 SL=0.75 Annotated Chart of KSS: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/KSS042703.gif Picked on April 27th at $55.02 Gain since picked: +0.00 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 3.54 mln *********************************************************** DROPS *********************************************************** http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/WFMI042703.gif ************************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 ************************************************************** ********** 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 04-27-2003 Sunday 4 of 5 In Section Four: Current Put Plays: FITB Leaps: Inflection Point Traders Corner: Owning Stocks Can Be Hazardous To Your Health, Unless ... Traders Corner: Money Management Part II Brokers Corner: Choosing which Futures Contract to Trade. ************************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 ************************************************************** ***************** CURRENT PUT PLAYS ***************** Fifth Third Bancorp - FITB - cls: 48.61 change: +0.88 stop: 50.25 Company Description: Fifth Third Bancorp is a registered financial holding company and a multi-bank holding company. At the end of 2001, the company's wholly owned second tier holding company, Fifth Third Financial Corporation, had 11 wholly owned direct subsidiaries, consisting of banks in Florida, Kentucky, Indiana and Michigan, as well as Fifth Third Community Development Corporation, Fifth Third Insurance Services, Fifth Third Investment Company, and Heartland Capital Management. Why we like it: When we initiated coverage of FITB on Thursday, one of the key aspects of the play was the way it had consistently under- performed the Banking sector (BKX.X) over the past month. The BKX had worked its way right up to the critical $800 resistance level, while at the same time, FITB had worked its way down to the critical $47 support level. Our premise was that something (either resistance or support) had to give way soon. In reality, Friday's weak session saw neither event come to pass, with the BKX retreating from resistance and FITB showing some life and bouncing nearly 2% from Thursday's close. The possibility of a rebound in shares of FITB is precisely why we initiated coverage of the stock with an entry trigger just below the recent intraday lows. Despite Friday's bounce, we can't help but feel that we're going to end up on the right side of the trade. With the 20-dma now nearing the $49 level and the descending trendline eclipsing the $50 level, that's some formidable resistance for the stock to deal with. Should the BKX continue to weaken next week, FITB will have a hard time holding above $47, and should be heading substantially lower after breaching that level. While we are waiting for that breakdown to trigger the play to active status, more aggressive traders may want to front-run the expected breakdown by opening partial positions on a failed rally below the 20-dma, waiting to round out to a full position until after the stock breaks below support. Suggested Options: Short-term traders will want to focus on the May 50 Put, as it will provide the best return for a short-term play. Those looking for additional staying power to hold through the recent (and expected future) volatility will want to use the June 45 strike. BUY PUT MAY-50 FTQ-QJ OI=2628 at $1.95 SL=1.00 BUY PUT MAY-45 FTQ-QI OI=1247 at $0.30 SL=0.00 BUY PUT JUN-45 FTQ-RI OI= 23 at $0.80 SL=0.40 Annotated Chart of FITB: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-27/FITB042703.gif Picked on April 24th at $47.73 Gain since picked: +0.88 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 2.64 mln ************************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 ************************************************************** ***** LEAPS ***** Inflection Point By Mark Phillips mphillips@OptionInvestor.com When I departed for my vacation last weekend, I had a very clear picture of what I expected from the broad market -- I was dead wrong -- but more on that in a bit. What it reminded me of is the inherent danger of attempting to force my will on the market. Without fail, I'm going to lose that battle every time. There's certainly plenty of recent evidence to that fact! Most notably is my extensive analysis and prognostication with respect to what I expected to see the VIX do over the past month. After nearly a year without the VIX even dipping as low as 25 (the middle of its historical range), I finally accepted the theory that the fear index had moved into a permanently higher range. When I publicly stated that belief, it was the market's cue to prove me wrong. First, I was looking for the VIX to find possible support at 287-29 (didn't happen), then 26 (didn't happen either) and finally at just above 24 at the 32% extension below the 200- dma. That was the final support level that I was looking at as evidence that the new, higher range idea had validity. With all of those failed tests to my theory (the VIX spent most of last week testing the 23 level), I'm forced to conclude that the VIX has once again settled into its normal historical range. They don't call the market The Great Humiliator for nothing! If you think I have been sitting here feeling like the market is taunting me with its recent behavior, you're partially correct. In actuality, I'm also thankful for the reminder that the market can do anything it wants. We have the choice to either accept what it gives us and trade accordingly, or stubbornly try to argue with the market. Given the choice, I'll select the former option every time. It is in trying to determine what the market is really telling us that we learn and grow into more accomplished traders. Properly chastised by the market, I am forced to acknowledge that the next likely inflection point will occur with the VIX testing the historical bottom of its range in the 20-22 area. Of course, now that I've said that, the VIX is sure to launch higher with the market falling apart early next week! GRIN Should the VIX actually dip below the 20 level, then it will be time to load up on LEAP Puts on the broad indices and hold on for some very nice gains later in the year. That is actually my personal fantasy for the next several weeks, even though I do not have a lot of confidence that it will in fact play out that way. I'm not overly sophisticated in my market analysis -- I have a defined group of technical tools that I rely on. They aren't always right, but they do help me to be right more often than wrong in terms of being on the right side of the market. Note that even though I've been consistently proven wrong with respect to the VIX in recent weeks, that has not translated into losing trades, because the VIX is only one of those indicators that I use to build my personal market view. So let's examine the evidence and see what the market may be trying to tell us about what to expect in the weeks ahead. My proxy for the market as a whole is the S&P 500 (SPX.X) and when looking for the long-term picture, I fall back to the weekly chart. So let's take a look, ok? S&P 500 Weekly Chart There are two critical trendlines converging near the $920 level - - the first and most important is the upper line of the descending channel that has been in force since the SPX put in its highs in 2000. But we also have the descending trendline connecting the highs from August and December of last year, as well as the January highs earlier this year. That's going to be a tough nut to crack, especially with weekly Stochastics nearing overbought territory again and looking a bit top-heavy. Isn't it interesting how the SPX ended the week of 3/16 at $896 and this week (5 weeks later) has only managed to advance by a paltry 3 points, while that weekly Stochastics has stretched from near oversold to near overbought? In other words, the SPX has used up a tremendous amount of its potential energy just holding its ground over the past month. We can see the same thing in the bullish percent readings as well. Let's look at the bullish percent for the SPX, which surged through the 40 level during that week of 3/16 and since then has continued to climb higher, reaching 54.60% last week, without being able to generate a breakout in price. My interpretation is that internal strength has been building, but without the ability to drive the index appreciably higher. That doesn't mean that it can't happen -- just that it hasn't produced that result yet. There is still significant POTENTIAL upside available from the bullish percent readings and a push up towards overbought readings may be enough to propel the SPX through those two trendlines. But in my view, risk is shifting ever more in favor of the bears. Don't forget to check out the Market Sentiment section this weekend, as I'm sure James will cover the important shift in the Commercials' positions. The "cliff notes" version is that the Commercials added significantly to their net short position in the E-mini S&P contracts. To me, that's a warning sign that the big boys are starting to shift their weight from one side of the boat to the other. Make sure to hang on so you don't get capsized! While we are nearing that important inflection point, I'm certainly not convinced that it is upon us yet. I thought we could see a pretty sharp drop last week, with a toppy picture on both the daily and weekly Stochastics in the major indices. Much to my surprise, that bearish setup led to the SPX charging to new 3-month highs and then a decline to round out the week. The bulls could continue to hold this market up right through the end of earnings season and there is room to the upside in terms of bullish percent and downside in terms of the VIX. Both those measures could continue their recent trend while at the same time the SPX grinds along below the 920 level. Or, this boat could turn on a dime and head south first thing on Monday morning. I don't know which path will prevail, but as noted above, I'm hoping for a more classic bearish setup with bullish percents in overbought territory and the VIX dropping near 20. Until the turn comes, I think our current strategy is serving us well. Cautiously playing the upside, but getting more aggressive with position management and gradually scaling into some bearish positions for the expected decline ahead. Hopefully nobody has lost sight of the fact that this is still a secular bear market and until there is real evidence of an economic turnaround, the "new bull market" mantra should be regarded as so much hype. We'll take a more detailed look at some of the metrics I'm using to gauge market conditions in my articles next week. With that, I think it's time to take a quick look at our current list of plays. It should come as no surprise that with the gyrations of last week, we had some excitement in some of our plays as well! Portfolio: ADBE - I've been talking for the past couple weeks about a likely top for ADBE in the $35-36 area and imagine my surprise to see that level reached last week. As expected, that level served as strong resistance for the stock and Friday's broad market weakness handed the stock a 3.1% decline. With my distinct feeling that the market is getting top-heavy, I only want to focus on exiting the play with a handsome gain. For ADBE, weekly Stochastics are reaching overbought territory and the dailies are just starting to tip over from overbought with price action finding solid resistance at the top of the June-2002 gap. Those of you that followed my advice to close open positions near the $35-36 area made the right choice in my opinion, and hopefully the Portfolio won't be far behind. I'm getting aggressive with the stop, raising it to $33, which is just below the 20-dma ($33.24). Should ADBE get another bounce into the $35-36 area next week, I'll be manually closing the position for an expected 100% gain. EMC - Another stellar week for EMC saw a strong breakout over the $8.50 level, with the stock reaching as high as $9.50 on Wednesday before the bulls ran out of conviction. Friday's drop certainly wasn't encouraging, but we can take heart in noting that the stock still closed the week with a slight gain. I see two possibilities here: either EMC will continue to power higher in the weeks ahead, or we just witnessed a double top at $9.50 and the stock will fall back into its consolidation zone. I tend to think the former is the correct answer, but at the same time, I'm not willing to risk all the gains accrued thus far in the play, especially with the broad market starting to look a bit top heavy. So our stop is moving up somewhat aggressively to the $8.00 level. This locks in a moderate gain if EMC falls apart, while at the same time putting it just below some important technical levels that should hold on any pullback. The top of the post-earnings gap on 4/16 is $8.10, and the 20-dma ($8.08) should reinforce this support level. Ever the optimist, I'm holding out for a break above the $10 level, which ought to correspond to the play delivering that 100%+ return that we're looking for. We'll re-evaluate when that bridge is crossed, but it would be foolish to not harvest partial gains at that point. Stay tuned! Watch List: NEM - We just can't seem to get a break on the NEM play. While it hasn't really launched higher just yet, neither has it demonstrated the weakness necessary to give us a solid entry. One thing that I've learned from following this stock is that it is extremely unforgiving of traders that succumb to the chase urge. Notice that over the past 6 weeks, NEM has climbed from just above the $24 level (oh how I wish I had taken that entry in early March!) to just below $28 last week, the weekly Stochastics have now worked their way up near the overbought region. The ascending trendline (now near $24.50) is still what I view as the best area for taking new entries into the play and I'm willing to wait for another test of that trendline to enter the play or else let it go. Ideally, the gold futures (GC03M) will make one more trip down into the mid $320s to give us that entry over the next couple weeks. Such a decline in the price of the yellow metal should give us the entry we want into NEM near the $25 level. GD - If there is one theme that has run through the LEAPS Watch List in recent months, it is that I've missed a lot of very nice entries, being a bit too stingy on my requirements for the "perfect" entry. GD is certainly one of those, as the dip to $52.20 a few weeks back has now shown itself to have been THE entry I wanted. The past 2 weeks has seen some serious buying hit the Defense sector, with the DFI index blasting through the $460 resistance level, taking our GD play along for the ride. My analysis on direction following the completion of the Iraq war was right on target, but I missed the entry. That said, I think there still may be significant upside available, both for the DFI index and GD, if only we can get one more dip back to support over the next couple weeks. I think our best shot at a belated entry into the play will now be on a decline and subsequent rebound near $56. So we'll ratchet our entry target up one last time to $56-57. If the market refuses to give us an entry near that level, then we'll just have to let it go. If we do get an entry into the play, our initial stop will be set at $52, just below the early April low. AMZN - Should I or shouldn't I? That was the question that dominated my thinking on AMZN from the time the stock popped higher after its earnings announcement until the closing bell on Friday. I noted on Friday morning that we'd take an entry into the play so long as it didn't continue to power higher throughout the session. Well, that's precisely what happened, with the stock closing at its high of the day on volume nearly 6 times the ADV. No matter how you look at it, that is a very strong performance, especially with the broad market closing at its lows. AMZN close above the top of its 18-month ascending channel, above its upper Bollinger band (on the daily chart) and ended the session with a 15% gain in response to the better than expected earnings report. As I've stated, I think this bullishness is completely irrational, but the thing that finally made my decision was recalling the sage advice that "the market can remain irrational far longer than I can remain solvent". An entry taken at the close on Friday may turn out to be the "entry that got away", but taking it would go against the disciplined approach that I've tried to foster in this column. So we wait and watch for weakness before entering the play. With formidable resistance in the $29-30 area, that opportunity might not be too far away either. So I'm raising the entry target slightly this weekend, looking for a rollover before playing. AIG - Here I was all worried about missing out on a decent entry on AIG last week and we got a runup into earnings. Wasn't that nice? The stock ran right up to major resistance and then reversed in the wake of earnings. I'm sure glad we waited. See below for full details. As I see it, the tide is gradually starting to shift from the bulls favor back into the bearish camp. That's a big part of why I finally pulled the plug on our QQQ Watch List play this weekend. I just can't see sufficient upside to justify keeping it as a potentially live trade. On the other hand, I don't see a huge advantage to playing the downside in the Technology sector of the market, based on my bias that Tech will outperform the rest of the market this year. That brings up the issue of when we start looking bearish on the DOW again via the DJX index. If you were wondering why we didn't get to it this week, fear not as I expect we'll be listing it as a new bearish Watch List play next weekend. While I think we're getting close to that inflection point, I don't think we need to be in a hurry, with what I think is a fairly well balanced playlist right now. There are a lot of things lining up that point to down as being the next intermediate (2-4 month) trend, not the least of which is the fact that May is looming just around the corner -- ushering in the bad six months of the year. Throw in a still struggling economy, the concerns over the SARS epidemic, things getting uglier in North Korea, and earnings winding down over the next couple weeks, and it becomes more and more difficult to see what could possibly drive this market much higher. I'm not bearish on the market just yet, but I'm starting to shift back in that direction again. We know that a lot of market participants walk away from the market this time of year, and I say good for them. I'm actually looking forward to what I think will be a fairly active summer -- and I wouldn't rule out a repeat of the fireworks we saw last July. In the meantime, manage your open bullish positions aggressively and step gingerly into those new bearish positions! 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 $ 7.90 +68.09% $33 '05 $ 30 ZAE-AF $ 7.50 $10.70 +42.67% $33 EMC 03/12/03 '04 $ 7 LUE-AU $ 1.40 $ 2.30 +64.29% $8.00 '05 $ 7 ZUE-AU $ 2.15 $ 3.20 +48.84% $8.00 Puts: AIG 04/24/03 '04 $ 55 LAJ-MK $ 5.60 $ 6.20 +10.54% $61.00 '05 $ 55 ZAF-MK $ 8.50 $ 9.10 + 7.06% $61.00 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: NEM 03/09/03 $24.50-25.00 JAN-2004 $ 25 LIE-AE CC JAN-2004 $ 20 LIE-AD JAN-2005 $ 25 ZIE-AE CC JAN-2005 $ 20 ZIE-AD GD 03/23/03 $54-55 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 $29-30 JAN-2004 $ 25 LOH-ME JAN-2005 $ 25 ZWE-ME KO 04/27/03 $41.50-42.50 JAN-2004 $ 40 LKO-MH JAN-2005 $ 40 ZKO-MH New Portfolio Plays AIG - American International Group $55.37 **Put Play** Well, it looks like my advice to wait for earnings from AIG before entering the play was a mixed blessing. While it kept us from prematurely entering the play and suffering some heat as the stock ramped higher ahead of earnings, it certainly looks like the optimum entry would have come at the close the evening before earnings were released. The company beat estimates by the requisite penny, but that wasn't enough to keep the bulls happy, especially with the forward looking statement that sales could suffer as a result of the SARS epidemic. Thursday's session saw pretty heavy selling volume drive AIG back from the 200-dma (which capped the rally the day before), with the stock settling just above $55. While not the ideal entry I wanted in the $56-57 area, it looks like the best shot we're likely to get. AIG hasn't yet broken its ascending trendline from the March lows (currently $54), and it still trading within the confines of its ascending bearish wedge. I expect that wedge to break to the downside in the next week or two, and with both daily and weekly Stochastics tipping over from overbought territory, odds certainly favor that outcome. At the same time, I understand that there is significant bullishness in the market (rational or not) and I don't want to get stopped out of the play just before the real decline commences. So the initial stop will be rather wide at $61. While it is well above the 200-dma, it is just fractionally above the top of the late-January gap, which should act as strong resistance should AIG make another push higher before breaking down. For traders still looking for an entry into the play, I would still view any failed rally attempt below the $58 level as attractive for initiating new positions. BUY LEAP JAN-2004 $55 LAJ-MK $5.60 BUY LEAP JAN-2005 $55 ZAF-MK $8.50 New Watchlist Plays KO - Coca Cola Company $39.42 **Put Play** To say that shares of KO are in a pronounced downtrend would be an understatement of galactic proportions. Looking at the weekly chart, the stock hasn't been able to log a higher high since peaking just below $89 in July of 1998. I started watching the stock for a solid rally failure several months ago, but even with the recent market rebound, KO hasn't been able to get anywhere near the 4-year descending trendline, currently clear up at $53.50. I can't see what is going to propel the stock up near that area anytime soon, especially in light of what appears to be a trend of flat revenues and flat earnings. The company's most recent earnings report (4/16) is particularly telling, with operating income only rose 3.5% on a 10% rise in revenue. Something just doesn't seem right there. I think the pivotal technical shift occurred when the stock broke below the $43 support level in January, a support level that had held on several occasions in the past 3 years. That gives us an important line in the sand that should not be broken without a substantial improvement in the company's business. So I've lowered my aspirations as to what would constitute a solid entry, with the $42.50 area likely defining the latest top in the stock. The PnF chart paints the picture pretty clearly, with the big Sell signal from last July giving a bearish price target of $30. Weekly Stochastics have already rolled over, On Balance Volume is at its lowest level in over a decade, and KO looks to be headed substantially lower. Our only challenge is in gaining a favorable entry that can hold through any near-term volatility. Any pop up into the $41.50-42.50 area should make for a very nice entry into the play, with a breakdown below the $37 level (March lows) giving the confirmation we're looking for. In order to give the stock room to move before breaking down, we'll use a rather wide stop at $45, which is just above the descending trendline that connects the July and October lows. The 200-dma ($45.35) is nearing that level as well and should reinforce that resistance level if challenged anytime in the near future. BUY LEAP JAN-2004 $40 LKO-MH BUY LEAP JAN-2005 $40 ZKO-MH Drops QQQ - $26.93 As I noted a week ago, I was getting a bit nervous about the QQQ Watch List play, and last week's price action did nothing to allay my concerns. The stock continued to waffle in the $26-27 area, while the NASDAQ-100 Volatility index (VXN.X) continued to drop to new lows. Despite my bullish prognostications for the NASDAQ market (vs. the rest of the market) for this year, the technicals are looking less favorable by the day. Even if the QQQ is able to work higher, I don't see enough upside potential to justify the risk in taking on the position. Rather than take the risk of getting triggered into a less than desirable position, I'm pulling the plug this weekend to make room for better candidates. QQQ will be back on the Call Watch List in the future, but I'll need to see a much better technical setup than what appears in the charts this weekend. ************** TRADERS CORNER ************** Owning Stocks Can Be Hazardous To Your Health, Unless . . . By Mike Parnos, Investing With Attitude Apparently there are still people out there who still own stocks or who want to own stocks. Then again, there are people who still buy Florida swampland, Spam and bell-bottom pants. Some new OI subscribers haven't gotten the message yet. We can't wait for common sense, or even osmosis, to kick in. We need to address this subject before they get hurt. It's my duty, as CPTI's chief (and only) strategist, to outline for you the only practical way to own a stock – step by step. At the Couch Potato Trading Institute we stress that less is more – especially when it comes to risk. When you own 1,000 shares of a $25 stock, you're exposed for the full $25,000. Let's protect ourselves. Here's how. Pick A Stock – Any Stock For our example, let's use MSFT. Perhaps people think that MSFT, a former market leader, will rise from the ashes and lead the next bull market. Maybe it will. Maybe it won't. But a hell-of-a-lot of people own it. You can apply the method I'm about to explain to almost any (optionable) stock in your portfolio. MSFT closed today at $25.21 and the shareholder believes that, over time, it will move significantly higher. Let's buy a hypothetical 1,000 shares of CSCO. We just spent $25,210 and now it's at the mercy of the stock market. Some people spend that for a car, a new roof on their house or a Russian mail-order bride. With MSFT, it's at risk. The mail-order bride, however, might yield some interesting benefits. Our Protection Look at the January, 2005 MSFT $25 LEAPS put. It can be purchased for $4.90 and would completely protect the stockholder from any MSFT transgressions below $25. Ten contracts will cost $4,900. The first reaction of a typical stockholder is, "You're bleeping nuts! I'm not going to pay that!" Actually, the real tragedy is that probably 99% of investors didn't (and still don't) know that it's possible to protect, or insure, their investments. The blame for that can be placed in the laps of financial planners, "full-service" brokers and 401K account administrators who either didn't know or didn't care enough to let their clients know of this alternative. There's no excuse either way. Well, that's a subject that we've hashed out in columns past. Cheap Insurance Take a closer look at that "outrageous" $4,900. There are 21 months left until expiration of the January, 2005 - $25 put. Do the math. It works out to the insurance costing $.23 per share per month. Seems a pretty cheap price to pay for peace of mind. Let's Help Pay For The Insurance Followers of Microsoft know that, in the good old days, it moved in large swings – mostly up. However, still being in the jaws of a bear market, volatility isn't what it used to be. MSFT is no longer as spry as it once was and moves more like an elephant than a debutant at a frat party. It seems to bounce up and down and perhaps moves a buck or two a month. We own 1,000 shares of MSFT stock. Perusing the option chain, we should be able to sell a call a few points out of the money in a typical four-week option cycle for $.20. That $.20 call, sold on a monthly basis, would almost defray the entire cost of the insurance. Let's look at the numbers. 10 contracts of Jan. 2005 $25 put @ $4.90 $4,900 21 OTM calls sold at $.20 $4,200 Net cost of insurance: $ 700 What Happens If . . . A strategy analysis wouldn't be complete without a peek into the future. If MSFT is trading at $30 in two months what do we do? We want to lock in some profits. a) We sell the insurance Jan. 2005 $25 put for $2.50. Even though the $25 put is now $5 out of the money, there are still 19 months of time value remaining and a lot of time premium. b) Buy new insurance in the form of the Jan. 2005 $30 put for $4.20. The $2.40 we received from the sale of the $25 put now helps to defray the cost of the new $30 put. We have now locked in $5 of profit from the appreciation of the stock. c) Don't forget, we've also taken in about $.40 of premium from selling covered calls twice as MSFT has been moving up. The numbers: Profit from stock appreciation - $5 $5,000 Selling the Jan. 2005 $25 put @ $2.50 $2,500 Selling covered calls twice @ $.20 $ 400 Buying the Jan. 2005 $30 put @ $4.20 ($4,200) From the $5,000 stock appreciation, we've locked in $3,700 and we are once again protected against any downward movement for the next 19 months. Too Far To Fast? What happens if MSFT goes up too quickly and violates the covered call? A simple adjustment of rolling out and up will usually take care of it. If it's a gap up situation, you'll still need to roll the call, plus it may be time to roll up your protective put (as in the example above). Going Nowhere? If MSFT goes nowhere or down, you won't lose any value because of the protective 2005 put. The insurance will almost entirely be paid for by the monthly covered call sales. Remember, the numbers used in the option prices in above examples are projections. They're close, but subject to market movements and volatility. The whole point we're trying to make is that intelligent stock ownership can be done with insurance. It might be worth doing some calculations before buying a stock (or fund) – just to make sure that the appropriate options are available for your insurance. Can We Insure Mutual Funds? Absolutely. If you own an S&P 500 index fund, you can use the SPX options for insurance. You'll have to determine how much you have invested in the fund and use the appropriate number of contracts. If you own a mid-cap fund, there is likely a mid-cap index option that can be used for protection. There are also sector options for sector funds, etc. There's No Excuse Anymore Now you know how. If you choose to own a stock or a mutual fund, and you do not insure your investment, don't look in this direction for sympathy. Some investors are like cockroaches. They refuse to evolve, but they somehow manage to survive. But mere survival is not the objective – unless you like the cockroach lifestyle. Watch out! Sooner or later someone is going to turn the lights on. _____________________________________________________________ CPTI Replacement Position (Replaces BRCM Position) Position #4 – DJX Minage-A-Qua – Friday's Close: $83.06 The DJX tracks the DOW. It looks like the DOW is in a minor uptrend with resistance at $85 and support at $82. Sell 10 contracts of the May DJX $84 puts and buy the May DJX $80 puts for a credit of $1.45. Sell 10 contracts of the May DJX $84 calls and buy the May DJX $88 calls for a credit of $.80. Total credit of $2.25. Exposure is the $4 difference in the strikes less the credit ($4.00 - $2.25 = $1.75). You will be profitable if the DOW closes anywhere between 8175 to 8625. That's a 450-point range. The closer it finishes to 8400, the greater the profit. Maximum profit potential: $2,250 _____________________________________________________________ May CPTI Portfolio Positions Position #1 -- SMH Baby Condor. Thursday's Close: $25.88 SMH is the Semiconductor Holder Trust. We feel that semiconductor baby condor by selling the May SMH $25 calls and $27.50 puts. For protection, we bought the May $22.50 puts and $30 calls. The net credit is $1.05stocks have moved up a little too far and too fast. We created a Our maximum profit range is $25 to $27.50. We're only exposed for the 2 1/2 point difference between the strikes ($25/$22.50 or $27.50/$30) less what we've taken in ($1.05) = $1.45. Maximum potential profit is $1,050. ____________________________________________________________ Position #2 – SPX Iron Condor. Friday's Close: 898.81 We believe the market may be a bit extended so we gave it a big sandbox to play in. We sold the SPX May 825 puts and the May 950 calls. Then we bought the SPX May 800 puts and May 975 calls for protection. The net credit was $2.95. Our exposure is a little more than usual – 25 points less the $2.95 we took in = $22.05. That's why we're only doing five contracts. Our maximum potential profit is $1,475. ______________________________________________________________ Position #3 – MSFT Minage-A-Qua – Friday's Close: $25.21 Microsoft just came out with respectable earnings and unenthusiastic guidance. We believe that MSFT will finish at or around $25. We sold the May MSFT $25 puts and calls for a credit of $1.80. We bought the $27.50 calls and $22.50 puts for protection at a cost of $.45 – yielding a net credit of $1.35. Our maximum profit occurs if MSFT closes right at $25. Our profit range is from $23.65 to $26.35. Our risk is only $1.15 with the potential to make $1.35. Maximum potential profit is $1,350. _____________________________________________________________ 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 ************** Money Management Part II By Steve Gould In part I, I presented a mechanical system for managing money. Overall, it is not a bad system and many people use it. Many people also have saved lots of money by using it because generally, if an option loses about 1/2 it's value, chances are the trade has gone bad and it is time to get out. In part II, I am going to present how Elliott Wave analysis allows you to analyze a trade set up to see if the trade is worth the risk and if so, where the stop loss is. Most people place a trade expecting the stock to move in the chosen direction. The big question is at what point do you decide that the trade has moved against you and exit? If you are like me, the moment you place a trade, the stock moves the opposite direction. I have come to accept that fact. I just need to know at what point does moving in the opposite direction represent a trade gone bad. With Elliott Waves, stop losses are calculated using a different paradigm. Instead of exiting a trade when the value of the option decreases a certain amount, we would use the wave count to determine if the direction of the stock is still valid. If so, no need to exit. Even if the option decreases substantially in value. However, if the stock is behaving differently than expected, then it is time to exit the trade. Using Elliott Waves the stop loss is based on a wave count that changes. In the famous words of Obi-Wave-Kenobe, "Use the waves, Luke. Use the waves." (OK, OK, I couldn't help myself.) In practical terms, if we initiate a trade at the beginning of a wave 1 (Type II), then we would stop loss the trade once we realize that wave 5 is still in effect. If we initiate a trade at the beginning of a wave 5 (Type I) then we would stop loss the trade once we realize that wave 4 is still in effect. The stop loss triggers when the wave pattern changes and our count is wrong. Sometimes we can reduce our risk even more by examining the wave count and not even initiating the trade because the pattern just doesn't match up with known Elliott Wave rules and guidelines. For example, I follow many stock "experts" who make stock recommendations. After examining the chart, I do not place a trade because although the expert says it is going to go up, the wave pattern says it is going down first (sometimes significantly) and then up. I may enter the trade, but I will wait for a more strategic entry point. So let's look at a real time example. Here is a chart of a generic stock that is exhibiting the classic Type I set up. Chart: XYZ Type I Setup Notice the Type I criteria: 1. Wave 4 retracement of almost 38% 2. Oscillator retraced 100% 3. Wave 4 in A-B-C corrective pattern 4. Although not shown, wave 4 ended at 138% of wave 3 in terms of time. Currently, the last bar closed at about $65. The bottom of wave 3 is at about $58. We could expect at least a 7 point move. The question now is, where do we place the stop loss? We have to think about what could go wrong. In order to do that, we have to know how corrective waves behave. Let's review just a bit. All impulse waves (waves 1, 3, 5, C and sometimes A) are 5 wave basic patterns. All corrective waves (waves 2, 4, B and sometimes A) are A-B-C patterns. Many type of A-B-C patterns exist. Too many. But they can be classified into some basic patterns: ZigZags, Flats, Triangles and Combinations. Entire chapters are devoted to these corrections. I could not do justice to an explanation here in just a few short paragraphs. Let me just show two patterns here for the purpose of figuring out a stop loss. Figure: Zig Zag and Flat On the left is a zigzag pattern. This is a simple three wave pattern. Defining characteristics of zigzags are 1. The B wave retraces the A wave less than 100% 2. The C wave extends past the A wave 3. The A wave subdivides into a 5 wave basic pattern. On the right is a flat pattern. This is another simple three wave pattern. Defining characteristics of flats are 1. The B wave retraces the A wave about 100% 2. The C wave extends to the A wave 3. The A wave subdivides into a 3 wave basic pattern. Knowing these basic corrective patterns, what could go wrong with our set up? Well, for one thing, if the A-B-C currently traced out is the beginning of a 5 wave pattern (1, 2, 3 instead of A-B-C) then we are at the start of a fairly large zigzag pattern. Also, look at the current C wave. I can only make out an A-B-C pattern in it. C waves are always 5 wave patterns. To me this is a red flag. I do not think the C wave is complete yet. Consequently, I would not place this trade. I very much would like to see a 5 wave basic pattern in the C wave something like this. Chart: XYZ Prediction 1 The completion of the v (five) wave would accomplish two things. One, the retracement would be closer to 38% and two the C wave rule (must be a 5 wave basic pattern) would be satisfied. Upon deeper analysis, this is actually a non-ideal set up. Stay out of the trade. (No risk) A few days later, this is what the stock looked like Chart: XYZ Type I setup number 2 At first, we could have felt a little more confident as the stock went up the next two days. This could have been the completion of the 5 waves we were looking for in the C wave. However, the stock never penetrated the high of the C wave (now labeled A). Then the stock fell almost $5 and we were kicking ourselves for not getting in. This looked like the start of a wave 1 down. Then during the next four days the stock retraced just like we would expect it to. The stock dropped substantially on March 2 and March 3 followed by some consolidation. Then we see that the stock gapped up taking out the high on the old C wave. Since we breached the top of the old wave A, the wave count relabeled and we now have the above chart. This looks like a more accurate labeling of the 4 wave. Notice how I labeled in green the most likely wave count for the final C wave. However, if you blur your eyes and look cross eyed, you might be able to hallucinate a 5 wave pattern here. I know someone is going to try and place a trade here thinking that the A-B-C correction is now complete. I do not think so. It would be best to wait a few days to see how the stock plays out. Three days later the stock looks like this. Chart: XYZ Progression It moved higher as expected. I have moved the iii label to accurately label the move. Look carefully. You should be able to see a 5 wave pattern within the iii wave We know that from Elliott Wave theory that after a 3 wave we will get a 4 wave correction. This iii wave may go a bit higher or it could correct now. It would make sense for it to correct very soon and retrace the iii wave to about $69. A few days later the stock looks like this. Chart: XYZ Type I setup number 3 Up until now, I have not discussed anything about stop losses. However, I have shown you how Elliott Wave analysis has kept you out of trades that you should not have been in. This is even better because you have risked nothing and lost nothing. But now, the moment to trade has arrived. We have a very nice Type I set up. The salient features are 1. The 4 wave has retraced about 53% of the 2 wave. 2. The 4 wave retraced to the level of the 4 wave in the 3 wave. 3. The 4 wave traces out a very nice A-B-C pattern with all the proper counts. 4. The oscillator retraced a bit more than 138%. 5. It looks like the 5 wave has started. The stock closed at 70.85. If the stock moves above the top of the C wave (73.21), then the wave count for the C wave could be incomplete. The C wave could be extending to the 62% retracement level at 75.74. In that case, set your stop at 73.21 and wait for a confirmation that the 5 wave down has started. We may reenter the trade at that point. A few days later, this is what the stock looks like. Chart: XYZ Expectation 1 The stock is behaving just like we would expect it to if it is indeed a 5 wave down. In red is the 5 wave pattern we would expect to see for the 5 wave. Within the 1 wave, we expect a 5 wave pattern and so far the stock has traced out a i, ii, iii, iv pattern. Right on schedule. The next day, the stock did this. Chart: XYZ Stop Loss 3 This throws our wave count for a loop. I left the labeling there from the last chart just to show you that the stock is not behaving properly. And even though we have not officially hit our stop loss, something has gone wrong. If we exit now, we will have only lost about $2.00 in the stock price. I do not know what the original option cost was. I do not know what the current value of the option is. I do know that the wave count is not what I was anticipating for a 5 wave down and the trade is going against me. Time to exit. Several days later, the stock looks like this. Chart XYZ Progression 2 The stock went up another $7 and the wave count changed. You might be thinking that this looks like the end of the 4 wave. I do not think so. Here is why. The C wave as it is currently labeled has the 5 wave longer than the 3 wave. This violates an Elliott Wave rule. The 3 wave must be the longest. Here is another example of where Elliott Wave theory saves you money by keeping you out of a trade. At this point, it might be best to take this stock off our watch list. At least for a put. The oscillator is already above the 38% retracement and if it goes higher, the risk in the stock continuing higher is just too great. This 4 wave may actually turn out to be a 5 wave pattern up. If we use the wave count to determine our entry and stop loss points, we can reduce our risk by avoiding trades that are high risk and cutting our losses should the wave count go against us. We won't have to wonder/hope/pray if the stock will ultimately be profitable. We will know by the wave count. ************** FUTURES CORNER ************** Choosing which Futures Contract to Trade. by Alan Hewko Abbreviations used in this article: Ticker $ move per index pt ES = E-mini SP500 June futures ES03M $ 50 per ES pt YM = E-mini Dow $5 June futures YM03M $ 5 per YM pt NQ = E-mini NDX 100 June futures NQ03M $ 20 per NQ pt pt = point pts= points There had been some questions received regarding how one selects which of the above three US Futures contracts make the best trade vehicle at any one particular moment in time. Also, perhaps some of you have only traded the ES contract and have not generated many trades yet with either YM or NQ; and there are times when YM or NQ do indeed provide a better rate of return than ES does. Let's examine each contract a bit closer. YM of course is the Dow Futures contract, and mirrors the 30 stocks in the Dow. ES mirrors the 500 stocks in the S&P 500 (SPX) Index. NQ follows the NDX, which is comprised of the 100 stocks in this index; however, a handful of stocks provide the majority of this index's movement. The single most important stock in the NDX is MSFT with its 11% weight; with the rest being AMGN, CMCSA (Comcast), CSCO, DELL, EBAY, INTC, ORCL, and QCOM. MSFT of course is also in the Dow and S&P500; and by example, if MSFT moved 2 points today, and every other stock did not change at all (impossible of course but humor me), then due to its massive weight in the NDX, the NDX index would move the largest percentage amount vs. the Dow and S&P500 index. The single most important stock in the Dow based on possible point movement criteria is MMM. If the two Dow stocks of MMM ($125) and T ($15) each moved 10% today (again, not likely but makes for easy math to follow), MMM $ 137.50 + $12.50 + 10% T $ 16.50 + $ 1.50 + 10% And based on how the Dow is computed, MMM's impact on the Dow (and therefore the YM Dow futures) is vastly greater than T's impact. Let's now discuss rate of return on the three Futures contracts: It's very common for ES and YM to match almost exactly both on point movement and your possible money gain. If ES is +10 points today, it is very likely the Dow (and YM) are +100 points then as the ratio is usually about 1 in 10. Meaning that for each 1 ES (S&P 500) point move, there is a 10-point movement in YM (Dow cash). Also, the money matches as well. 10 ES pts at $50 per point = $ 500 100 YM pts at $5 per point = $ 500 So then why not just stay with the more liquid ES and ignore the YM? One easy answer is those times when ES is closed at 4:15PM and some news event occurs at 4:30PM when YM is still trading. But the other answer is this: Scenerio: The Dow stock MMM pre-open just had some great news and will be going higher all day. Its impact is going to be vastly greater in the Dow 30 than its impact in the S&P 500 (where it only 1 of 500 stocks); so YM would likely provide a better Long trade than ES. Bringing NQ into the equation: 10 ES pts = 100 YM pts = 25 NQ pts There are days when the Tech stocks lead the market, either higher or lower. If you feel that today is one of those days, when the percentage movement in the COMPX is going to outweigh the movement in the more sector-balanced S&P 500 and Dow, then very likely a NQ futures trade will provide a greater monetary rate of return than either a YM or ES futures trade. Example might be the day ending at: DOW + 89 + 0.9% SP 500 + 9 + 1.2% COMPX + 38 + 2.1% On such a day as this, a Long NQ most likely provided a better return than either Long YM or Long ES. SECTOR DIVERGENCE: Let's take an example where this scenario occurs: The Financials (Banks, Brokers and Insurance stocks) have had a very nice strong up move and very shortly CSCO is due to report its earnings. CSCO says wonderful things about its forward guidance, and on the same day, several analysts downgrade the Financial sector based on valuation after their recent run-up. You sense that Big Money is going to be taking profits on its Longs in the Financial sector (therefore selling them) and rotating those gains into Tech stocks based off CSCO's comments. So - SELL Financial sector stocks = SELL YM (or ES) BUY tech stocks = BUY NQ And you the trader follow along in perhaps this fashion: 1. Long (Buy) NQ or perhaps even in this fashion: 2. Short YM and Long (Buy) NQ SELECTING JUST ONE FUTURES CONTRACT BASED OFF NEWS The key XYZ stock just warned at 4:05 PM --- Which Futures contract do I short? Well, if MSFT just warned, then very likely, Shorting NQ makes the most sense. If MMM just warned, then a YM short makes the most sense. As strange as it may sound, if some event occurs which will move the entire market, such as something Iraq related which was so common last month, ES is not always the best choice. Why? Because it's the most liquid and trades the largest number of contracts. I know that sounds foolish, but Big Money may be going to buy 1000 full size SP500 Spoos futures contracts right NOW because that's the only place they can get that type of size liquidity. So therefore, ES has already moved the first and fastest; and YM or NQ might (repeat might) be lagging behind a bit offering us retail-size traders a better fill in YM or NQ simply because the big-money is chasing the full-size Spoos price. I appreciate that this article was mostly common sense, but I felt it was worth a mention. There are many Futures traders who only trade ES; and there is nothing wrong with that at all. However, if you have never tried YM or NQ, they may be worth adding to your trade selection choices. Alan Hewko ************************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 ************************************************************** ********** 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 04-27-2003 Sunday 5 of 5 In Section Five: Covered Calls: Option Pricing Basics: Volatility Revisited Naked Puts: Options 101: Success With Changing Trends Spreads/Straddles/Combos: Market Bulls Get A Reality Check! Updated In The Site Tonight: Market Posture: Techs Take a Tumble ************************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 ************************************************************** ************* COVERED CALLS ************* Option Pricing Basics: Volatility Revisited By Mark Wnetrzak One of our new readers asked a question about a very important requirement for successful option trading: Understanding the fundamentals of volatility. Attn: Covered-Calls Editor Subject: Evaluating options for LEAPS and covered-calls Hi Mark, I have started doing some of my own research for candidates and I am having some difficulty determining which options to choose based on their implied volatility. I have enjoyed some success with call/put buying but those were mostly short-term plays and now I am looking for longer-term stuff -- such as buying LEAPS and selling 2-3 month out-of-the-money covered-calls. What time frame do you normally use in analyzing options for longer-term plays like LEAPS? Also, do you compare historic volatility to implied volatility, or just look at all options for the highest or lowest implied volatilities, to find out which ones are cheap or expensive? Thanks in advance for any help you can provide! LJ Regarding volatility and option pricing: Volatility is the most important variable in valuing an option. All other factors are known; share value, option strike price, dividends, interest rates, and time remaining until expiration. The future volatility of the underlying issue is also the most difficult value to forecast. Professional traders use several different timeframes to assess a stock's potential movement. In most cases, the 20-day historical volatility provides a reasonable projection of the short-term volatility of any instrument. But, for longer-term strategies, the 50-day and/or 100-day historical volatility values should be compared with the near-term numbers to identify any disparities in the recent character of the issue. A significant move in the underlying instrument, due to an earnings report or other major event, can cause an artificial change in volatility, thus skewing the short-term data. In general, 20-day, 50-day, 90-day and 1-year periods are the most common timeframes used to reflect the magnitude of future movement that can be expected over the life of an option. Indeed, comparing historic volatility to implied volatility helps a trader determine whether an issue's options are currently cheap or expensive with regard to its past pricing trends. If that is your desire, simply view an average of some past period of time, such as a 100-DMA. Many traders also use an adverse volatility estimate, based on historical volatility, in order to provide a more conservative appraisal of an option's true value. Another important quality of an option's price is its implied volatility relative to other options in the market. Comparing this data for stocks in a specific group or industry (or even market-wide) is a great way to find options that favor a particular strategy such as buying cheap puts for earnings announcements or selling expensive calls in covered-call positions. Regardless of the approach you use, understand that implied volatility is a mathematical measure of the relative cost of an option, and it is largely based on the historical volatility of the underlying issue. At the same time, the implied volatility of an option can be significantly affected by market expectations of the underlying security due to upcoming events (earnings, FDA reviews) or unique situations such as merger speculation. When evaluating historical and implied volatility for specific option trades, it is best to use the most conservative values in pricing calculations. For example, if you are going to sell an an option, use a high estimate, perhaps the maximum value of the most common (20, 50 and 100-DMA) short-term volatility data. With that approach, the current price of the option will have to be inflated for the premium to appear "overpriced." In contrast, if you plan to engage in a strategy where you expect the underlying issue to be active, then a low volatility estimate (the minimum of the 20, 50, or 100 DMA) would be more appropriate. Using that technique, the option will look "cheap" only when it is relatively inexpensive, based on historical stock movement. For more information, read the appropriate chapters in McMillan's "Options as a Strategic Investment" and Sheldon Natenburg's "Option Volatility and Pricing." These are the bibles of floor traders and they will help you understand the complex subject of volatility and derivatives pricing. 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 XICO 5.09 5.52 MAY 5.00 0.45 0.36* 8.4% IMMU 2.95 3.79 MAY 2.50 0.65 0.20* 7.6% ASML 7.59 7.78 MAY 7.50 0.55 0.46* 7.1% CAL 5.68 8.40 MAY 5.00 1.00 0.32* 5.9% SEAC 7.80 7.83 MAY 7.50 0.75 0.45* 5.5% CCRD 11.05 11.76 MAY 10.00 1.50 0.45* 5.1% ALTR 15.78 15.86 MAY 15.00 1.45 0.67* 5.1% IFX 8.17 7.50 MAY 7.50 1.00 0.33 5.0% CTLM 5.18 5.56 MAY 5.00 0.45 0.27* 5.0% NEOL 13.50 13.84 MAY 12.50 1.80 0.80* 5.0% UNTD 19.23 19.78 MAY 17.50 2.80 1.07* 4.7% RINO 13.29 13.54 MAY 12.50 1.40 0.61* 4.5% COMS 5.17 5.07 MAY 5.00 0.45 0.28* 4.3% AAII 11.43 11.50 MAY 10.00 1.80 0.37* 4.2% PLCE 13.34 15.07 MAY 12.50 1.40 0.56* 4.1% UNTD 19.67 19.78 MAY 17.50 2.95 0.78* 4.1% NEOL 13.60 13.84 MAY 12.50 1.65 0.55* 4.0% MSCC 11.77 11.16 MAY 10.00 2.25 0.48* 3.7% * Stock price is above the sold striking price. Comments: Positive earnings surprises enticed the bulls to run this week and helped push the SP-500 and NASDAQ above their March highs, but not the DJ-30. Is it time to consolidate already? Next week should offer some clues. Monitor closely your positions as they correct and be critical of any issues that act weaker than expected. The gap-open higher by Xicor (NASDAQ:XICO) on Monday was nice but would have required a roll-in (buy the stock -- sell the calls later) to achieve our listed cost basis. As for early-exit candidates, Microsemi (NASDAQ:MSCC), Infineon Technologies (NYSE:IFX), and 3Com (NASDAQ:COMS) will make the non-inclusive watch list for this week. Positions Previously Closed: None. 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 OSTE 8.39 MAY 7.50 OQQ EU 1.30 762 7.09 21 8.4% NOVN 14.45 MAY 12.50 NPQ EV 2.50 1360 11.95 21 6.7% BMRN 12.06 MAY 10.00 NUR EB 2.35 18 9.71 21 4.3% PDE 15.17 MAY 15.00 PDE EC 0.60 581 14.57 21 4.3% MVSN 15.97 MAY 15.00 MVU EC 1.40 5 14.57 21 4.3% TOM 8.01 MAY 7.50 TOM EU 0.70 1782 7.31 21 3.8% OVRL 18.02 MAY 17.50 QOJ EW 0.95 249 17.07 21 3.6% 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). ***** OSTE - Osteotech $8.39 *** Trading Range? *** Osteotech (NASDAQ:OSTE) provides services and products primarily focused in the repair and healing of the musculoskeletal system. These products and services are marketed primarily to the spinal, orthopaedic, neurological, oral/maxillofacial, dental and general surgery markets in the United States and Europe. The allograft bone tissue the company processes is procured by independent tissue banks or other Tissue Recovery Organizations (TROs), mainly through the donation of tissue from deceased human donors and is used for transplantation. The company has two primary operating segments: the Grafton Demineralized Bone Matrix (DBM) Segment, and the Base Allograft Bone Tissue Segment. Osteotech recently said that it has reached an agreement in principle with GenSci, which filed bankruptcy, to settle Osteotech's claim against GenSci arising out of the patent lawsuit in which GenSci was found to have infringed certain of Osteotech's patents. Osteotech is also due to report earnings before the open on April 29. We simply favor the year-long trading range near $7 and this position offers traders a reasonable way to speculate on the near-term trend. MAY-7.50 OQQ EU LB=1.30 OI=762 CB=7.09 DE=21 TY=8.4% ***** NOVN - Noven $14.45 *** Earnings Rally? *** Noven Pharmaceuticals (NASDAQ:NOVN) is engaged in the development and manufacture of advanced transdermal drug delivery products and technologies and prescription transdermal products. Noven's principal commercialized products are transdermal drug delivery systems for use in hormone replacement therapy. The company's first major product was an estrogen patch for the treatment of menopausal symptoms marketed under the brand name Vivelle in the United States and Canada, and under the brand name Menorest in Europe and other markets. Noven's second-generation estrogen patch was launched in the United States under the brand name Vivelle-Dot. Noven also developed a dual estrogen/progestin transdermal patch for the treatment of menopausal symptoms, which is marketed under the brand name CombiPatch in the U.S. and under the brand name Estalis in Europe and certain other markets. Noven rallied strongly in February after the company announced the dismissal of a lawsuit filed against Noven and reported strong earnings with revenues, pre-tax income and cash increasing for the 5th consecutive year. With this quarter's earnings due prior to the open on April 30, investors appear to be grabbing shares in anticipation of continued "good" news. Our outlook is also bullish, due to the recent technical strength and this position offers a favorable cost basis in the issue. MAY-12.50 NPQ EV LB=2.50 OI=1360 CB=11.95 DE=21 TY=6.7% ***** BMRN - Biomarin $12.06 *** Hot Sector! *** Biomarin Pharmaceutical (NASDAQ:BMRN) develops enzyme therapies to treat serious, life-threatening diseases and conditions. The company's lead product candidate Aldurazyme, is being developed for the treatment of Mucopolysaccharidosis I (MPS I) disease. The company is developing its 2nd product candidate, Neutralase, for reversal of anticoagulation by heparin in patients undergoing Coronary Artery Bypass Graft (CABG) surgery and angioplasty. In addition to Aldurazyme and Neutralase, Biomarin is developing other enzyme-based therapeutics for the treatment of a variety of diseases and conditions. Genzyme (NASDAQ:GENZ), which is in a joint venture with Biomarin to produce the enzyme replacement therapy drug, Aldurazyme, has recently received positive opinion from a European Union committee, which is the final step prior to marketing the drug. As for the U.S., BioMarin said the FDA would decide by April 30 whether to allow the marketing of its Aldurazyme drug. The drug was recently judged safe and effective by an advisory committee to the FDA. A short-term speculative play that offers an entry point closer to technical support. Due diligence is a "must" with this position. MAY-10.00 NUR EB LB=2.35 OI=18 CB=9.71 DE=21 TY=4.3% ***** PDE - Pride $15.17 *** Oil Sector Hedge *** Pride International (NYSE:PDE) is an international provider of contract drilling and related services, operating both offshore and on land. The company operates a global fleet of 328 rigs, including two ultra-deepwater drillships, 12 semisubmersible rigs, 35 jackup rigs, 29 tender-assisted, barge and platform rigs, and 250 land-based drilling and workover rigs. Pride operates in more than 30 countries and marine provinces. The significant diversity of the company's rig fleet and areas of operation enables it to provide a broad range of services, and to take advantage of market upturns while reducing its exposure to sharp downturns in any market sector or geographic region. A purely technical play on the long-term base or trading-range of Pride. This position, a hedge to the broader market, offers investors a favorable entry point on a Stage I stock with a cost basis near technical support. MAY-15.00 PDE EC LB=0.60 OI=581 CB=14.57 DE=21 TY=4.3% ***** MVSN - Macrovision $15.97 *** Own This One! *** Macrovision (NASDAQ:MVSN) develops and licenses rights management and copy protection technologies. The company's customers include Hollywood studios, independent video producers, enterprise and consumer software vendors, digital set-top box manufacturers and digital pay-per-view (PPV) network operators. Macrovision provides content owners with the means to market, distribute, manage and protect video, software and audio content. The company also is in the business of consumer software copy protection. Macrovision offers CD-ROM copy protection and rights management technologies to a variety of software publishers in the personal computer games, home education, information publishing and desktop applications software markets. Macrovision recently said it reached a licensing deal with Microsoft (NASDAQ:MSFT) to offer record labels the capability to design and produce CDs that can play on both traditional stereos and PCs. We simply favor the bullish move above the March high on heavy volume and investors who are interested in a long-term portfolio stock in the media sector should consider this position. MAY-15.00 MVU EC LB=1.40 OI=5 CB=14.57 DE=21 TY=4.3% ***** TOM - Tommy Hilfiger $8.01 *** Buy-Out Rumors? *** Tommy Hilfiger (NYSE:TOM) designs, sources and markets men's and women's sportswear, jeanswear and childrenswear under the Tommy Hilfiger trademarks. Through a range of strategic licensing agreements, Tommy Hilfiger also offers a broad array of related apparel, accessories, footwear, fragrance and home furnishings. The company's products can be found in department and specialty stores throughout the U.S., Canada, Europe, Mexico, Central and South America, Japan, Hong Kong and other countries in the Far East, as well as the company's own network of specialty and outlet stores in the United States, Canada and Europe. Tommy Hilfiger has rallied sharply on news that clothing maker Jones Apparel (NYSE:JNY) may be interested in a buy-out. Traders who believe the upside activity will continue can speculate on that outcome with this short-term position. MAY-7.50 TOM EU LB=0.70 OI=1782 CB=7.31 DE=21 TY=3.8% ***** OVRL - Overland $18.02 *** Stellar Earnings! *** Overland Storage (NASDAQ:OVRL) designs, develops, manufactures, markets and supports magnetic tape data automation solutions. Businesses use these solutions for backup, archival and data interchange functions in high-availability network computing environments. The company's primary products are automated tape libraries, minilibraries and loaders that combine electro- mechanical robotics, electronic hardware and firmware. Overland also distributes products manufactured by other OEMs and markets various other products, including spare parts and tape media. The company licenses a proprietary tape encoding technology that it developed and patented under the name Variable Rate Randomizer (VR2). For the quarter ended March 31, 2003, OVRL reported record revenue of $56.2 million compared to revenue of $42.8 million in the 3rd-quarter of the prior fiscal year. Net income reached a record $2.4 million, or $0.20 per diluted share, compared to $2.1 million, or $0.18 per diluted share, last year. The solid fundamental outlook has translated into higher share values and investors who wouldn't mind owning the issue near a cost basis of $17 can profit from future upside activity with this position. MAY-17.50 QOJ EW LB=0.95 OI=249 CB=17.07 DE=21 TY=3.6% ***** ***************** 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 FTS 11.12 MAY 10.00 FTS EB 1.70 717 9.42 21 8.9% DRIV 15.00 MAY 15.00 DQI EC 0.75 619 14.25 21 7.6% BCGI 18.46 MAY 17.50 QGB EW 1.60 253 16.86 21 5.5% XICO 5.52 MAY 5.00 UOB EA 0.70 62 4.82 21 5.4% CYBX 23.08 MAY 22.50 QAJ EX 1.35 153 21.73 21 5.1% QSFT 10.56 MAY 10.00 QUD EB 0.90 372 9.66 21 5.1% MCRL 10.19 MAY 10.00 MIQ EB 0.50 264 9.69 21 4.6% CTEC 10.30 MAY 10.00 UBC EB 0.60 0 9.70 21 4.5% ICOS 25.13 MAY 22.50 IIQ EX 3.30 599 21.83 21 4.4% GNSS 16.59 MAY 15.00 QFE EC 2.00 1951 14.59 21 4.1% ***************** NAKED PUT SECTION ***************** Options 101: Success With Changing Trends By Ray Cummins A number of readers have offered their concerns about the staying power of the recent rally, however the more important question is how to profit from the near-term bullish activity with the stock market in a primary downtrend. We all know how difficult it has been to forecast market direction over the past few months and it's no surprise that investors are leery of any (apparently) unexplainable upside activity in share values. At the core of this anxiety are worries that unfavorable economics and mediocre company fundamentals will soon bring an end to the current exuberance, probably within days after they have committed to an optimistic viewpoint for stocks. So, considering the current conditions, what is the correct course of action for a conscientious, well-informed investor? There are a number of alternatives, most of which fall into three categories: attempt to trade the market's short-term gyrations for limited profits, adopt a bullish, long-term outlook and use conservative strategies that will benefit from a recovery in stocks, or remain on the sidelines until the primary directional trend (even if it is a lateral one) is better defined. This week, we will focus on the first choice: trading the market's short-term gyrations for limited profits. The first step in this process is to define the risk-reward outlook of the strategy used to profit in the current bullish trend. If the strategy is stock ownership, the reward potential is relatively small, but the risk in a carefully selected issue is also lower than normal, due to the oversold condition of most stocks. This situation exists because of the extensive selling pressure produced by the collapsing market over the past three years. Most stocks fell from grace sharply, in such a short time there has been little opportunity to build bases on the way down. After these stocks finally hit bottom and begin to recover, there are few resistance levels to impede their climb. In addition, stocks make larger (percentage) moves in the initial stages of a rally as opposed to the final few weeks of a bullish trend when the issue is struggling to maintain its upward momentum. While stock ownership is the driving force behind market movement, option traders are better equipped to take advantage of this unique opportunity with speculative, low cost techniques such as buying out-of-the-money calls and call-debit spreads. The key to success with this approach is to concentrate on option pricing and leverage (often referred to as delta - a measure of the relative percentage changes between the stock and the option. More on that in a future narrative). Some traders focus on "percent to double," which is a relatively ineffective calculation that tells you what percent the underlying stock must move in order for the price of the option to double. Without going into great detail, there are simply too many variables (time value and implied volatility being the most obvious) that affect an option's price while it is trading and the only time the "percent to double" calculation is truly accurate is at option expiration. Ok, back to the important stuff. Option pricing comes first because you must know the difference between a fairly valued option; one that has good theoretical opportunity for profit, and a overpriced option; where the initial cost of the of the position is artificially inflated, thus reducing its profit potential. You must also understand the various ways of measuring leverage, such as the concept of delta, or you will not know which option (or combination position) provides the best ratio or risk and reward, based on a specific magnitude of movement in a given time-frame. Once you have mastered the fundamentals of option pricing and the essentials of percentage-related components of an option and its underlying stock (for a given percentage change in the stock, the option will increase by a larger percentage, thus magnifying the profit potential of a given move) you will have an excellent basis for choosing the correct strategy in a particular market situation. Of course, you could always choose to stay on the sidelines...but that wouldn't be much fun at all, would it? 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 RMBS 15.75 13.83 MAY 12.50 0.55 0.55* 3.3% 10.8% LSCC 8.54 8.06 MAY 7.50 0.25 0.25* 3.7% 10.3% NFLX 19.55 21.15 MAY 15.00 0.60 0.60* 3.0% 9.6% FTS 10.06 11.12 MAY 7.50 0.25 0.25* 3.0% 9.6% WYNN 16.22 17.02 MAY 12.50 0.40 0.40* 2.9% 9.5% AVID 25.54 27.48 MAY 22.50 0.80 0.80* 3.2% 8.7% EYE 11.96 13.85 MAY 10.00 0.35 0.35* 2.6% 8.0% BOBJ 20.75 21.52 MAY 17.50 0.40 0.40* 2.5% 8.0% OVTI 25.29 24.20 MAY 20.00 0.40 0.40* 2.2% 8.0% JCOM 32.12 28.87 MAY 25.00 0.75 0.75* 2.2% 7.6% SEPR 15.77 19.00 MAY 12.50 0.30 0.30* 2.1% 7.5% GTRC 21.10 23.25 MAY 20.00 0.65 0.65* 2.9% 7.1% SEPR 16.35 19.00 MAY 12.50 0.35 0.35* 2.1% 7.0% BCGI 18.90 18.46 MAY 15.00 0.25 0.25* 1.8% 6.7% RIMM 14.88 14.77 MAY 12.50 0.35 0.35* 2.1% 6.5% JCOM 31.96 28.87 MAY 22.50 0.50 0.50* 2.0% 6.3% MRVL 23.15 22.35 MAY 20.00 0.35 0.35* 1.9% 5.9% NFLX 20.77 21.15 MAY 15.00 0.30 0.30* 1.8% 5.9% BOBJ 18.31 21.52 MAY 15.00 0.35 0.35* 1.7% 5.8% INTC 18.66 18.28 MAY 17.50 0.35 0.35* 2.2% 5.7% ADRX 14.71 15.44 MAY 12.50 0.25 0.25* 1.8% 5.5% CMCSK 28.44 29.96 MAY 25.00 0.60 0.60* 1.8% 5.1% * Stock price is above the sold striking price. Comments: Friday's retreat brought investors back to reality as the major equity averages gave up a large portion of their recent gains. The public's renewed optimism for stocks, which can be clearly seen in the complacent attitude reflected by popular sentiment gauges, suggests another downturn may be looming large. Traders are cautioned to initiate new bullish positions in only the most favorable issues and diligently manage any positions with less than outstanding technical strength. Issues on the watch-list include j2 Global (NASDAQ:JCOM), Intel (NASDAQ:INTC), Marvell Technology (NASDAQ:MRVL), Lattice Semiconductor (NASDAQ:LSCC), and Rambus (NASDAQ:RMBS). Previously Closed Positions: None 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 WYNN 17.02 MAY 15.00 UWY QC 0.50 694 14.50 21 5.0% 13.7% PHSY 30.20 MAY 27.50 HYQ QY 0.70 314 26.80 21 3.8% 10.1% MSTR 30.35 MAY 25.00 EOU QE 0.50 205 24.50 21 3.0% 9.9% GTRC 23.25 MAY 22.50 UGR QX 0.50 70 22.00 21 3.3% 8.0% SEPR 19.00 MAY 17.50 ERQ QW 0.35 2706 17.15 21 3.0% 7.9% VRTS 21.20 MAY 20.00 VIV QD 0.40 7399 19.60 21 3.0% 7.5% CMCSA 31.73 MAY 30.00 CCQ QF 0.40 1192 29.60 21 2.0% 5.1% 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). ***** WYNN - Wynn Resorts $17.02 *** All-Time High! *** 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 man-made 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. The company's shares closed at a new "all-time" high on Friday and traders can speculate conservatively on the near-term performance of the stock with this position. MAY-15.00 UWY QC LB=0.50 OI=694 CB=14.50 DE=21 TY=5.0% MY=13.7% ***** PHSY - PacifiCare Health Systems $30.20 *** Earnings Due! *** PacifiCare Health Systems (NASDAQ:PHSY) offers managed care and other health insurance products to employer groups and Medicare beneficiaries in eight western states and Guam. The company's commercial and senior plans include various health maintenance organizations (HMOs), preferred provider organizations (PPOs), and Medicare Supplement products. The firm also offers a variety of specialty managed care products and services that employees can purchase as a supplement to basic commercial and senior medical plans or as stand-alone products. These products include pharmacy benefit management (PBM), behavioral health services, group life and health insurance, dental and vision benefit plans. Pacificare recently said its first-quarter profit may be double the company's earlier projections because it overestimated prior health-care costs. Management said a light flu season and better membership trends helped reduce health-care expenditures. Goldman Sachs backed that outlook, raising its rating on Pacificare's shares to "in-line" from "under-perform." The company's quarterly report is due next week and traders can speculate on the outcome of the announcement with this position. MAY-27.50 HYQ QY LB=0.70 OI=314 CB=26.80 DE=21 TY=3.8% MY=10.1% ***** MSTR - MicroStrategy $30.35 *** Premium Selling! *** 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. Shares of MSTR have been in "rally mode" since its lows in mid-2002, up over 500% in just 9 months. The issue is testing 52-week highs near $30 and with earnings due next week, there is lots of speculation in the May put options. Traders with a bullish outlook on the issue can take advantage of the inflated option premiums with this position. MAY-25.00 EOU QE LB=0.50 OI=205 CB=24.50 DE=21 TY=3.0% MY=9.9% ***** GTRC - Guitar Center $23.25 *** Solid Earnings! *** 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. On Thursday, Guitar Center said its quarterly income rose 53% on strong sales at Guitar Center and American Music stores. The firm also said full-year earnings will be higher than Wall Street estimates and investors can establish a cost basis near $20 in a unique retail issue with this position. MAY-22.50 UGR QX LB=0.50 OI=70 CB=22.00 DE=21 TY=3.3% MY=8.0% ***** SEPR - Sepracor $19.00 *** New 52-Week High! *** 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 Merrill Lynch followed that announcement with a "buy" rating on the company's shares, saying the drug stock is "attractive." Last week, Sepracor said its first-quarter loss narrowed on higher sales of its allergy and asthma drugs, helping revenue rise to $84 million from $56 million a year-ago. Sepracor also said it was still conducting clinical trials to support an application for approval of allergy drug Soltara, which was rejected by U.S. regulators in March 2002. Investors who wouldn't mind owning this popular drug stock near a cost basis of $15 should consider this position. MAY-17.50 ERQ QW LB=0.35 OI=2706 CB=17.15 DE=21 TY=3.0% MY=7.9% ***** VRTS - Veritas Software $21.20 *** Solid Earnings! *** Veritas Software (NASDAQ:VRTS) is an independent supplier of storage software products and services. The company's storage software includes storage management and data protection software, as well as clustering, replication and storage area networking software. The company offers solutions to help solve the problems of data-intensive business environments by providing essential storage software and storage virtualization solutions that enable customers to protect and access their business-critical data. The company's products operate across computing environments ranging from the desktop computer to the large enterprise data center, including storage area networks, to protect critical data, to provide high availability and to guard against disasters. Last week, Veritas reported that first-quarter revenue increased 6.5% year over year, while income was $0.01 lower than in the year-ago period. Both earnings and revenue exceeded consensus estimates and analysts at Wachovia and Legg Mason upgraded the company on the news. Investors who wouldn't mind owning the issue at a cost basis near $20 should consider this position. MAY-20.00 VIV QD LB=0.40 OI=7399 CB=19.60 DE=21 TY=3.0% MY=7.5% ***** CMCSA - Comcast $31.73 *** Portfolio Issue? *** Comcast (NASDAQ:CMCSK) is a cable operator involved in three principal lines of business: cable, through the development, management and operation of broadband communications networks; commerce, through QVC, its electronic retailing subsidiary; and content, through its consolidated subsidiaries Comcast Spectacor, Comcast SportsNet, Comcast SportsNet Mid-Atlantic, Comcast Sports Southeast, E! Entertainment Television, The Golf Channel, Outdoor Life Network, G4 Media, and through other programming investments. The company has deployed digital cable applications and high-speed Internet service to most of its cable communications systems. The media-cable TV sector is "in the news" right now and Comcast has been one of the best performing issues in the group over the past few months. Analysts say Comcast's broadband ownership is the key to success and earnings growth may be in the double-digits for 2003. The stock is also fundamentally cheap, trading at 8.5 times 2003 earnings, and investors who believe the issue is a "good buy" at a cost basis near $30 should consider this position. MAY-30.00 CCQ QF LB=0.40 OI=1192 CB=29.60 DE=21 TY=2.0% MY=5.1% ***** ***************** 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 XMSR 8.70 MAY 7.50 QSY QU 0.25 2471 7.25 21 5.0% 14.3% APPX 20.65 MAY 17.40 AQO QW 0.50 2122 16.90 21 4.3% 13.1% MLNM 10.82 MAY 10.00 QMN QB 0.30 1558 9.70 21 4.5% 11.4% ILXO 10.91 MAY 10.00 IUE QB 0.25 108 9.75 21 3.7% 9.8% AVID 27.48 MAY 25.00 AQI QE 0.50 154 24.50 21 3.0% 8.0% IART 26.30 MAY 25.00 UJI QE 0.50 0 24.50 21 3.0% 7.5% CVTX 18.91 MAY 17.50 UXC QT 0.30 274 17.20 21 2.5% 6.7% ERES 30.05 MAY 27.50 UDB QY 0.45 978 27.05 21 2.4% 6.6% AVCT 30.08 MAY 27.50 QVX QY 0.40 204 27.10 21 2.1% 5.9% SNDK 23.01 MAY 20.00 SWQ QD 0.25 1057 19.75 21 1.8% 5.6% BBY 32.80 MAY 30.00 BBY QF 0.40 2710 29.60 21 2.0% 5.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Market Bulls Get A Reality Check! By Ray Cummins Stocks retreated Friday, giving back much of their recent gains as uninspiring earnings reports and mediocre economic forecasts moderated investor optimism for a quick recovery in share values. The Dow Jones industrials slid 133 points to 8,306 on weakness in Altria Group (NYSE:MO), General Motors (NYSE:GM), 3M (NYSE:MMM), Merck (NYSE:MRK), Disney (NYSE:DIS), Johnson & Johnson (NYSE:JNJ), and Honeywell (NYSE:HON). The technology-laden NASDAQ Composite index fell 22 points to 1,434 as semiconductor-equipment shares sank on a sector downgrade from Smith Barney. Telecom, computer storage, disk-drive, and software stocks also drifted lower. The S&P 500-stock index lost 12 points to 898 with selling pressure seen in tobacco, auto manufacturers, oil & gas services, retail, and financial shares. Breadth was negative with losers outpacing winners by roughly 3 to 2 on both the NYSE and the NASDAQ. About 1.33 billion shares traded on the Big Board, while 1.48 billion shares changed hands on technology exchange. In the bond market, the benchmark 10-year note gained 11/32 to 99-30/32, taking its yield down to a three-week low of 3.88%. ***************** 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 AZO 76.38 78.13 MAY 65 70 0.55 69.45 $0.55 Open BSTE 42.33 41.55 MAY 30 35 0.50 34.50 $0.50 Open GILD 44.15 46.14 MAY 37 40 0.30 39.70 $0.30 Open OIH 54.58 56.53 MAY 45 50 0.55 49.45 $0.55 Open MDT 46.90 48.08 MAY 42 45 0.35 44.65 $0.35 Open NBR 41.11 41.40 MAY 35 37 0.30 37.20 $0.30 Open BBBY 39.52 37.92 MAY 35 37 0.30 37.20 $0.30 Open PFCB 42.47 41.03 MAY 35 40 0.55 39.45 $0.55 Open LP = Long Put SP = Short Put CB = Cost Basis G/L = Gain/Loss The bullish position in Bed, Bath and Beyond (NASDAQ:BBBY) is on the watch-list and conservative traders should consider closing the spread on any further downside movement. CALL CREDIT SPREADS ******************* Symbol Pick Last Month LC SC Credit CB G/L Status CAM 49.39 47.50 MAY 60 55 0.45 55.45 $0.45 Open DRYR 67.40 63.00 MAY 75 70 1.10 71.10 $1.10 Open HCA 37.70 31.13 MAY 45 42 0.25 42.75 $0.25 Open VAR 49.04 54.24 MAY 60 55 0.60 55.60 $0.60 Open OIH 54.58 56.53 MAY 65 60 0.50 60.50 $0.50 Open BAC 71.34 72.58 MAY 80 75 0.60 75.60 $0.60 Open GSK 38.09 39.80 MAY 42 40 0.30 40.30 $0.30 Open LLL 36.24 44.00 MAY 45 40 0.55 40.55 ($1.55) Open OEX 440.97 456.20 MAY 480 475 0.55 475.55 $0.55 Open WLP 76.80 74.25 MAY 90 85 0.50 85.50 $0.50 Open SYK 66.35 66.40 MAY 75 70 0.65 70.65 $0.65 Open IGT 79.55 83.83 MAY 90 85 0.55 85.55 $0.55 Open LC = Long Call SC = Short Call CB = Cost Basis G/L = Gain/Loss As noted last week, L-3 Communications (NYSE:LLL) was a candidate for early exit and the company's bullish earnings report produced a rally in the issue. Conservative traders should have exited the position on Monday when the issue closed above the sold strike at $40. The portfolio summary reflects the loss as of the following morning, after the firm posted quarterly earnings. Other issues on the "early exit" watch-list are GlaxoSmithKline (NYSE:GSK) and International Game Technology (NYSE:IGT) and conservative traders should consider closing those positions on any additional upside activity. CALL DEBIT SPREADS ****************** Symbol Pick Last Month LC SC Debit B/E G/L Status BGEN 35.67 38.51 MAY 30 32 2.20 32.20 0.30 Open GILD 44.04 46.14 MAY 38 40 2.25 39.75 0.25 Open SLM 115.05 113.23 MAY 105 110 4.50 109.50 0.50 Open LC = Long Call SC = Short Call B/E = Break-Even G/L = Gain/Loss Traders should monitor the position in SLM Corporation (NYSE:SLM) closely in the coming sessions as a test of support near $112, and possibly at $110, appears likely. PUT DEBIT SPREADS ***************** Symbol Pick Last Month LP SP Debit B/E G/L Status WMT 52.98 55.00 MAY 60 55 4.30 55.70 0.29 Open BSX 42.19 42.91 MAY 47 45 2.10 45.40 0.40 Open LP = Long Put SP = Short Put B/E = Break-Even G/L = Gain/Loss Wal-Mart (NYSE:WMT) rallied again this week, however the technical resistance area near $55 (and again at $57) seems to be limiting the upside activity. We will continue to monitor the issue for signs of a confirmed upside "break-out" in the coming sessions. SYNTHETIC (BULLISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Call Put Credit Value Status OVRL 15.99 18.02 MAY 17 15 0.10 1.00 Open DCTM 16.09 17.30 MAY 17 15 (0.30) 1.20 No Play SMH 26.43 25.88 AUG 30 22 0.10 0.00 Open Documentum (NASDAQ:DCTM) did not offer the target entry price, but the position was profitable for traders who paid a small debit to initiate the position. The suggested entry price was available in the Semiconductor Holdrs (AMEX:SMH) position late in the week, however it appears the semiconductor group will move lower in the coming sessions. SYNTHETIC (BEARISH) ******************* Stock Pick Last Expir. Long Short Initial Max. Play Symbol Price Price Month Put Call Credit Value Status QQQ 25.51 26.95 MAY 24 27 0.10 0.00 Closed As noted last week, conservative traders should have exited this position when the issue closed above recent resistance near $27. CALENDAR & DIAGONAL SPREADS *************************** Stock Pick Last Long Short Current Max Play Symbol Price Price Option Option Debit Value Status BMET 28.52 30.26 JUL-30C MAY-30C (0.20) 0.70 Open ESI 29.11 27.90 OCT-30C MAY-30C 2.00 2.40 Open OCR 27.07 25.48 JUN-27C MAY-27C 0.60 0.40 Open MO 32.13 32.19 JUN-27P MAY-27P 0.95 0.45 Open Biomet (NASDAQ:BMET) ended the April expiration period at maximum profit and traders were able to transition to May options for a credit near $1.00, making the position risk-free. Positions in Altria Group (NYSE:MO), which has already offered a small profit, and Omnicare (NYSE:OCR) were not available at the target entry prices, however we are tracking the plays at the higher initial debits. DEBIT STRADDLES *************** Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status LNC 29.88 31.73 MAY 30 30 3.00 3.70 Open? Lincoln National (NYSE:LNC) rallied early in the week and traders who closed the bullish portion of the position after the straddle passed the break-even point were treated to a nice profit on both sides of the play. 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 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. ***** GENZ - Genzyme General $39.82 *** Fabrazyme Approved! *** Genzyme General Division (NASDAQ:GENZ) is a division of Genzyme Corporation, a biotechnology and human healthcare company that develops products and provides services for unmet medical needs. Genzyme General develops and markets therapeutic products and diagnostic products and services with an emphasis on genetic disorders and other chronic debilitating diseases with defined patient populations. The company is organized into two segments, Therapeutics, which focuses on developing and marketing products for genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, and specialty therapeutics, and Diagnostic Products, which develops, markets and distributes in vitro diagnostic products. The company also operates a wholly owned subsidiary, GelTex Pharmaceuticals. GENZ - Genzyme General $39.82 PLAY (conservative - bullish/credit spread): BUY PUT MAY-35.00 GZQ-QG OI=6357 A=$0.30 SELL PUT MAY-37.50 GZQ-QO OI=1669 B=$0.55 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$37.25 ***** IVGN - Invitrogen $31.45 *** Biotech Bottom-Fishing! *** Invitrogen (NASDAQ:IVGN) develops, manufactures and markets research tools in kit form and provides other research products and services to biotechnology and biopharmaceutical researchers and companies worldwide. The company manufactures and markets thousands of products and services that simplify and improve gene cloning, gene expression, and gene analysis techniques for corporate, academic and government entities. The company also engages in technology licensing, research services, large-scale production, and life science technical expertise and support. Founded in 1987, Invitrogen is headquartered in Carlsbad, California and has operations in more than 20 countries and distributor relationships in 50 more. The company employs approximately 2,800 people at its worldwide locations. IVGN - Invitrogen $31.45 PLAY (conservative - bullish/credit spread): BUY PUT MAY-27.50 IUV-QY OI=1818 A=$0.15 SELL PUT MAY-30.00 IUV-QF OI=552 B=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$29.75 ***** SEE - Sealed Air $41.62 *** Solid Earnings! *** Sealed Air (NYSE:SEE), operating through its subsidiaries, is engaged in the manufacture and sale of a wide range of food, protective and specialty packaging products. The firm operates in two business segments: Food Packaging, which provides a wide variety of flexible films, bags and associated packaging and absorbent pads, and Protective and Specialty Packaging, which include its cushioning and surface protection products and also certain other products. Sealed Air conducts substantially all of its business through two direct wholly owned subsidiaries, Cryovac and Sealed Air Corporation. These two subsidiaries directly and indirectly own substantially all of the assets of the business and conduct operations themselves and through subsidiaries around the globe. SEE - Sealed Air $41.62 PLAY (less conservative - bullish/credit spread): BUY PUT MAY-35.00 SEE-QG OI=4749 A=$0.25 SELL PUT MAY-40.00 SEE-QH OI=573 B=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$39.40 ***** INTU - Intuit $37.24 *** Next Leg Down? *** Intuit (NYSE:INTU) is a provider of business tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. INTU - Intuit $37.24 PLAY (conservative - bearish/credit spread): BUY CALL APR-45.00 IQU-EI OI=911 A=$0.15 SELL CALL APR-40.00 IQU-EH OI=6065 B=$0.55 INITIAL NET-CREDIT TARGET=$0.45-$0.50 POTENTIAL PROFIT(max)=9% B/E=$40.45 ***** MCK - McKesson $23.94 *** Earnings Speculation Only! *** McKesson (NYSE:MCK), a healthcare service and technology company, delivers supply and information management solutions designed to reduce costs and improve quality for healthcare customers. The firm conducts its business through three segments: Pharmaceutical Solutions, Medical-Surgical Solutions and Information Solutions. The Pharmaceutical Solutions segment includes the company's U.S. and Canadian pharmaceutical and healthcare products distribution businesses and an equity interest in a pharmaceutical distributor in Mexico. The Medical-Surgical Solutions segment distributes medical-surgical supplies and equipment, and provides logistics and related services within the United States. The Information Solutions segment delivers enterprise-wide patient care, clinical, financial, supply chain, managed care and strategic management software solutions, as well as outsourcing and other services, to healthcare organizations throughout the United States and some foreign countries. MCK - McKesson $23.94 PLAY (conservative - bearish/credit spread): BUY CALL MAY-27.50 MCK-EY OI=1058 A=$0.15 SELL CALL MAY-25.00 MCK-EE OI=1703 B=$0.40 INITIAL NET-CREDIT TARGET=$0.25-$0.35 POTENTIAL PROFIT(max)=11% B/E=$25.25 ***** NVLS - Novellus Systems $27.21 *** Chip Sector Retreat! *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $27.21 PLAY (very conservative - bearish/credit spread): BUY CALL MAY-32.50 NLQ-EZ OI=1976 A=$0.10 SELL CALL MAY-30.00 NLQ-EF OI=5657 B=$0.30 INITIAL NET-CREDIT TARGET=$0.25-$0.30 POTENTIAL PROFIT(max)=11% B/E=$30.25 ************* 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. ***** CCMP - Cabot Microelectronics $42.68 *** Margin Concerns? *** Cabot Microelectronics (NASDAQ:CCMP) is a global supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to planarize or flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. Planarization is a polishing process that levels, smoothes, and removes the excess material from the surfaces of these layers. CMP slurries are liquid formulations that facilitate and enhance this polishing process and generally contain engineered abrasives and proprietary chemicals. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. CCMP - Cabot Microelectronics $42.68 PLAY (less conservative - bearish/debit spread): BUY PUT MAY-50.00 UKR-QJ OI=321 A=$7.60 SELL PUT MAY-45.00 UKR-QI OI=1627 B=$3.20 INITIAL NET-DEBIT TARGET=$4.30-$4.40 POTENTIAL PROFIT(max)=14% B/E=$45.60 **************** CALENDAR SPREADS **************** A calendar spread (or time spread) consists of the sale of one option and the simultaneous purchase of an option of the same type and strike price, but with a future expiration date. The premise in a calendar spread is simple: time erodes the value of the near-term option at a faster rate than the far-term option. The positions in this section are speculative (out-of-the-money) spreads with low initial cost and large potential profit. ***** ATN - Action Performance $23.73 *** Reader's Request! *** Action Performance (NYSE:ATN) is a designer and seller of licensed motorsports products related to the National Association of Stock Car Auto Racing (NASCAR), including die-cast scaled replicas of motorsports vehicles, apparel and memorabilia. NASCAR is a popular motorsports sanctioning body in the United States and sanctions the Winston Cup series of stock car races. The firm designs and sells products relating to other motorsports including racing sanctioned by the National Hot Rod Association (NHRA), Formula One, the Indy Racing League (IRL) and the World of Outlaws. The firm's quarterly earnings are due on 4/28/03. ATN - Action Performance $23.73 PLAY (very speculative - bullish/calendar spread): BUY CALL JUL-25.00 ATN-GE OI=573 A=$1.40 SELL CALL MAY-25.00 ATN-EE OI=36 B=$0.60 INITIAL NET DEBIT TARGET=$0.70-$0.75 INITIAL TARGET PROFIT=$0.40-$0.75 ***** FILE - FileNet $13.75 *** Cheap Speculation! *** FileNet (NASDAQ:FILE) develops, markets, sells and supports a software platform and framework for enterprise content management (ECM). ECM refers to various functions used by organizations of all types, including businesses and governmental agencies, to control and track the wide range of information that is important to the organization's operations. The content the firm's software manages includes Web pages, word processing documents, spreadsheets, HTML, XML, PDF, images, e-mail messages and various other types of electronic content. In 2003, the company introduced the FileNet P8 ECM architecture, which is intended to offer customers the ability to configure, design, build and deploy various enterprise-wide ECM solutions to meet various content management needs within a single scalable framework. FILE - FileNet $13.75 PLAY (very speculative - bullish/calendar spread): BUY CALL JUL-15.00 ILQ-GC OI=219 A=$0.85 SELL CALL MAY-15.00 ILQ-EC OI=21 B=$0.20 INITIAL NET DEBIT TARGET=$0.55-$0.60 INITIAL TARGET PROFIT=$0.35-$0.60 ***** ************************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”. 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