The Option Investor Newsletter Wednesday 04-30-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Distribution Zone Futures Wrap: So Close But just Out of Reach Index Trader Wrap: See Note Weekly Fund Family Profile: Fayez Sarofim & Co. Options 101: Setting Up For MOPO Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 04-30-2003 High Low Volume Advance/Decline DJIA 8480.09 - 22.90 8528.75 8432.12 1.98 bln 1974/1285 NASDAQ 1464.31 - 6.99 1472.69 1459.04 1.64 bln 1754/1377 S&P 100 465.53 - 0.40 468.25 462.75 Totals 3728/2662 S&P 500 916.92 - 0.92 922.01 911.70 RUS 2000 398.68 + 2.90 399.85 394.46 DJ TRANS 2408.87 + 7.99 2419.78 2381.30 VIX 23.63 + 0.27 24.12 23.35 VXN 33.67 + 0.09 33.64 32.59 TRIN 1.30 PUT/CALL 0.68 ******************************************************************* Distribution Zone Jonathan Levinson A lot of shares changed hands today, with no significant technical developments taking place other than the upper resistance lines on the charts holding back the indices. They traded flat to slightly down on volume that was heavier than yesterday on the NYSE and unchanged from yesterday on the COMPX. The VIX and VXN put in higher lows and higher highs, while finishing only marginally higher from yesterday. Chart of the INDU The ascending triangle continued to develop today without any sign of breakout in either direction, and the 8300-8500 range remains in play. Note that the ascending triangle is a bullish formation. Note as well that if not for the tweezer top printed on the 24th of March, it would be a bearish ascending wedge instead. No conclusion can be drawn either way- the market will have to tell us. Chart of the COMPX The COMPX continues to print its large bearish ascending wedge with the oscillators in topping territory. While this formation is characterized by higher lows and higher highs, it tends to break to the south in nearly 75% of cases, as discussed in my futures wraps over the past week. The real news took place in the US Dollar Index, which got croaked all night, and then began printing lower lows throughout the day, setting a 4 year low against the Euro and a new bear market low of 97.10. This occurred as word circulated concerning the Treasury's record-breaking note sale next week, which will comprise $22 billion in 3-years, $18 billion in 5-years, and $18 billion in 10-years for a total of $58B. The Treasury said that these auctions will not be impacted by the debt ceiling, but added that without a change in the law the government will only have sufficient funding through mid-May. Weekly Chart of the US Dollar Index Note that today's price is not reflected in the above weekly chart, and today's print of 97.10 took out downside support. Unless the index bounces from here, the MacD could give a fresh signal from way below the zero line- a distinctly not-bullish indication if it occurs. Gold put in a solid day, breaking the 340/oz resistance level and tacking on gains of over $6 as of the time of this writing. The day started with disappointing economic data. The Mortgage purchase index decreased by 1% to 356 from 359.9 the previous week, with the refi index down .25% to 5092. These figures are significant to the extent that mortgage loans and refinancings create a significant amount of the liquidity currently available to the US financial markets. At 10AM, the Chicago Purchasing Managers Index for April disappointed to the downside, coming in at 47.6 vs. the 49.3 reading forecast by economists. Any reading below 50 is indicative of contraction in industrial activity. Mr. Greenspan testified before Congress today, and in his inimitable fashion had much to say, and implied exponentially more than he said. As always, I recommend reading his comments directly, accessible at http://www.federalreserve.gov/boarddocs/hh/2003/april/testimony.htm. What I took away from his testimony, listened to on Bloomberg radio while posting in the Market Monitor, was that he feels it necessary to caution that the fabled "2nd half recovery" may not actually come in the 2nd half of this year. He sounded very short of solutions, and Congress seemed to be pushing for suggestions in that direction. At issue were national and state deficits, continued unemployment, continued economic contraction and the like. He mentioned that SARS had not significantly impacted the economy, either domestically or in other countries, at this point in time. The market held up quite well during his testimony and continued to do so throughout the remainder of the session. Mainstream media services noted the Chairman's optimism about stock prices and the economy in general, but also acknowledged his "cautious" tone and comments. The White House announced that the President will address the nation on Thursday night from the deck of the USS Abraham Lincoln to declare the end of "major combat operations" in Iraq. TYC was halted for good part of the morning when it was announced that the company would report a loss of 23 cents per share for Q2, in line with Wall Street's consensus estimate, along with a story in the Wall Street Journal that the company would disclose fresh accounting problems to the tune of over $1B. Tyco was originally scheduled to report on Thursday. It traded heavily throughout the session, managing to close higher by 1.50%, and then gave back nearly all of its gains following the release of its numbers after the bell. It posted a loss, with earnings of 23 cents vs. consensus expectations of 34 cents per share and news of $1B in accounting charges. It was reported that GE is in talks to sell its Financial Guaranty Insurance unit for more than $2B to a group including PMI, BAC, private-equity firms the Blackstone Group and Cypress Group, the Post said. FGIC provides insurance for municipal bonds, and in light of my views regarding the credit bubble and state and municipal finances, I think that this is great decision by GE. Best Buy reaffirmed guidance for a 14 to 16 percent increase this year in profits and a rise of 11 to 13 percent in sales. Adobe rose 3% after hours after raising guidance on stronger than expected sales of its Acrobat software. DELL's COO stated today that he "sees no sign of an uptick in corporate technology demand", which confirms what we've been hearing recently from the majority of the tech companies that have just reported. Ingram Micro got smoked as it announced earnings in line with estimates but forecasted a sequential drop in earnings for the second quarter to between $14 million to $19 million, or 9 to 12 cents per share, due to "softer demand" in North America. Despite this, the COMPX and QQQ saw only minor losses today, as investors continued to ignore the fundamentals and shrug off negative news. On the "he-said-she-said" front, the NYSE refused to confirm that it had invited former U.S. Secretary of State Madeline Albright to join its board, following a Reuter's story that Richard Grasso had asked her to do so. The NYSE is seeking to fill the void caused by Sandy Weill's withdrawal of his candidacy. For tomorrow, the trendlines on the charts above will be key, as will the action in the US Dollar Index overnight. Heavy selling came in just before the bell on the indices, and QQQ was trading 27.43 after hours. Until the lower supports get taken out, we'll continue to print an ever-narrowing range near what remains the top of the current rally. The market continues to prove resilient and entirely resistant to bad news, but bulls' inability to propel the indices above resistance today despite solid volume was a telling sign. The volatility indices remain severely oversold, and the oscillators on the indices remain overbought. With no sign of economic data to celebrate, other than the consumer confidence numbers yesterday which are admittedly "soft" data, bulls are going to need a lot of will to take out the sellers just above current levels. The wildcard, in my opinion, will be short sellers. We've seen increasing support from short covering, and indeed this entire rally has occurred on a declining US Dollar. The readiness of the put to call ratio to race to the top of its range intraday tells us that shorts are still active, and as long as they are, the potential for a short squeeze above resistance such as we saw yesterday morning is a real risk for bears. Tomorrow's employment data at 8:30AM could prove the catalyst in either direction, either invigorating bears and prompting them hold instead of covering, or igniting the bulls and a short covering rally. One last thing: There's an expression, "Sell in May and go away." With the end-of-month window dressing now complete and this seasonal clichi on traders' minds, there will be expectations of downside in the market. I don't believe that they will be sufficient to reverse a strong reaction to positive employment data tomorrow, but it's worth keeping in mind. See you at the bell! ************ FUTURES WRAP ************ So Close But just Out of Reach By Jim Brown 04-30-2003 High Low DJIA 8490.09 - 22.90 8528.75 8432.12 NASDAQ 1464.31 - 6.99 1472.69 1459.04 S&P 500 916.92 - 0.92 922.01 911.70 NDX 1106.06 - 10.73 1116.85 1104.39 ES03M 915.50 - 0.50 921.50 910.00 YM03M 8453.00 - 24.00 8508.00 8407.00 NQ03M 1107.00 - 9.50 1119.00 1105.50 Daily Pivots (rounded to nearest point) R2 R1 Pivot S1 S2 DJIA 8580 8535 8484 8439 8387 COMPX 1479 1472 1465 1458 1452 ES03M 927 921 916 910 904 YQ03M 8557 8505 8456 8404 8355 NQ03M 1124 1115 1110 1102 1097 I think I can, I think I can the little index kept saying on Wednesday as it neared and briefly touched the top of the hill. The Dow managed to top 8520 for the tenth time since early March but just could not hold over that critical level once again. The end of month window dressing powered the averages to test their resistance over and over but they just cannot get through the strong selling. The SPX is the biggest laggard with 920 resistance very strong and dating back to July 2000. Until the S&P can move over 920 convincingly the rest of the indexes are stuck repeating the same trading range over and over. The ES traded in a narrow range between 910-921 and after two attempts to break the 910 support spent most of the day easing back to the top with multiple levels of pauses. 917-918 provided afternoon support but volume was equal on both sides. At 3:45 as the ES struggled to break 920 again the bottom suddenly fell out of the market and a trio of big brokers, Morgan, Goldman and Merrill began dumping the big S&P contracts. The ES fell from 920 to 912.75 in about 15 min. The end of month sellers were either waiting for an end of quarter buying spurt at the close to sell into or were booking profits from the months gains. Either way the selling was fast and on strong volume. The other futures followed suit with the S&P leading. The Dow futures close at 8453, over 50 points below its late afternoon high. The NDX futures have been struggling with 1118 with a couple of brief forays only slightly above. The end of day drop knocked the NDX back to 1106 and below the troublesome 1118 level once again. In my opinion the rally from the last week has been driven by earnings and expectations that maybe things are not as bad as they seem. So far only the consumer sentiment numbers bear this out. We had a great month with the major indexes up strongly and the Nasdaq posting the second best April ever. Tomorrow we get the ISM report at 10:AM and Friday has the Jobs report. Both of these could sink the current sentiment or give it a significant boost. The indexes are priced to perfection and at a dead stop just under strong resistance. If they could not break the resistance during two strong earnings weeks they could be in trouble if the ISM or Jobs report disappoint. I would not advise positions ahead of the ISM at 10:AM. That should give us an indication of direction going into Friday's Jobs. Historically the Apr-30/May-1st period has been bullish with downtrends beginning soon thereafter. All the factors appear to be lining up for a repeat of that history. Current ES resistance 920, support 910. Current YM resistance 8500, support 8400. Current NQ resistance 1118, support 1100. Dow Chart - 120 min Nasdaq Chart - Daily ES03M Chart - 120 min NQ03M Chart - 120 min YM03M - 120 min S&P Cash Chart - Daily ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_043003_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Fayez Sarofim & Co. This week, we profile Fayez Sarofim & Company, a firm of about 20 investment professionals that manages investment portfolios for a wide range of clients and serves as the sub-investment advisor on four Dreyfus Corp. stock funds including the $3.2 billion Dreyfus Appreciation Fund (DGAGX). Fayez Sarofim, president and chairman of the board of the investment firm he founded in 1958, serves as the lead portfolio manager of all four of the Dreyfus sub-advised equity funds. Mr. Sarofim is a Chartered Investment Counselor as well as a member of the New York Society of Security Analysts and the Houston Society of Financial Analysts. He is also a director of several international companies. Charles Sheedy, Christopher Sarofim, and Catherine Crain serve on the firm's portfolio management team. Mr. Sheedy joined the firm in 1971 and is a senior vice president. He chairs the "Strategy" group at Fayez Sarofim, co-manages the Dreyfus Appreciation Fund, and manages numerous separate accounts. Christopher Sarofim came on board in 1988 and is a vice president. He is a co-manager on the funds that Fayez Sarofim & Co. manages for Dreyfus, Julius Baer, and Global Asset Management. Chris also manages numerous separate accounts. Crain, a Chartered Financial Analyst, joined Fayez Sarofim in 1993 and is a Principal at the firm. Ms. Crain oversees the firm’s relationship as a sub-advisor to the Dreyfus Corp. and is co-manager of the Dreyfus Variable Investment Fund: Appreciation Portfolio. Fayez Sarofim's partnership with The Dreyfus Corp. began in 1990 when his firm was appointed sub-investment advisor of the no-load Dreyfus Appreciation Fund. The firm has been sub-advisor of the fund since 1990, building a solid long-term performance record in the domestic equity class. Total assets exceed $3 billion today, evidence of its the fund's success. Fayez Sarofim & Co. has been the subadvisor of the Dreyfus Premier Worldwide Growth Fund since 1993, the Dreyfus Premier Tax Managed Growth Fund since 1997, and the Dreyfus Premier Core Equity Fund since 1998. More on each of these funds in the Fund Overview section. The no-load Dreyfus Appreciation Fund has a minimum investment of $2,500 to open a regular account ($750 for initial IRAs; $100 for initial AIPs). It currently has an expense ratio of 0.97%, below average relative to the domestic equity fund universe. The three Dreyfus Premier Funds are load funds and are sold and distributed primarily through financial advisors. For our report we will use the Class A shares of the funds, which have an initial sales load of 5.75%, but have the lowest expense ratios of the various load share classes (near 1.35%). The Premier funds require $1,000 to open a regular account ($750 for IRAs, $100 for AIPs). For complete fund information, go to the www.dreyfus.com website. For information on Fayez Sarofim & Company as an investment firm, go to the www.sarofim.com website. Fund Overview Our focus this week is on the four Dreyfus stock funds, which are sub-advised by Fayez Sarofim & Company. In managing these equity portfolios for Dreyfus Corporation, the firm focuses on growth in earnings (and earnings power) to produce return from appreciation and income. Fundamental economic and company-by-company analysis is the foundation of the firm's top-down, flexible process, which emphasizes large-cap, high-quality, multi-national companies with highly predictable earnings growth and market multiples. Fayez Sarofim & Co. has sub-advised the Dreyfus Appreciation Fund since December 1990, using the same philosophy and process as the firm employs in managing its institutional accounts. It seeks to provide long-term capital growth consistent with the preservation of capital by investing primarily in the common stock of domestic and foreign issuers. Dividend income is a secondary objective of the fund. Morningstar calls Dreyfus Appreciation Fund a reliable fund that holds a portfolio of blue-chip stocks for the very long haul. Its competitive returns, moderate risks and costs, and tax efficiency help to make the Dreyfus Appreciation Fund a fine core holding, they say. Dreyfus Premier Worldwide Growth Fund, which the firm has managed since 1993, is comparable to the Dreyfus Appreciation Fund except that it generally has more foreign content and more of a "growth" style bias. At least 25% of fund assets are normally invested in foreign companies (31.7% as of March 31, 2003). Pfizer and Exxon Mobil are the fund's top two holdings as they are for the Dreyfus Appreciation Fund, so owning both funds is likely to result in at least some overlap. At 2%, the fund's portfolio turnover rate is ultra low like its sibling, making for a very tax efficient fund. FS & Co. has been sub-advisor to the Dreyfus Premier Tax Managed Growth Fund since 1997. It has the same large-cap core style as the Dreyfus Appreciation Fund, while adhering to an explicit tax managed strategy. In other words, the fund proactively seeks to minimize realized capital gains and taxable investment income to investors, while providing long-term appreciation for investors. It may be suitable for investors who desire Sarofim's investment style and are looking for an additional level of tax efficiency. The Dreyfus Premier Core Equity Fund (originally called Dreyfus Tax Smart Fund) has been managed by FS & Co. since 1998, and is also managed similarly to the Dreyfus Appreciation Fund. It is geared to investors who are more comfortable investing through a financial advisor. Fund Performance The flagship Dreyfus Appreciation Fund is currently rated 5 stars by Morningstar, their highest overall "risk-adjusted" performance rating. Morningstar gives out 5 stars only to the top 10% within a respective category. Relative to his large-cap blend category peers, Fayez Sarofim has produced "high" returns over time with a "below average" level of risk using Morningstar's return and risk ratings. In addition to being a Lipper Leader for Total Return, the fund is also a Lipper Leader for Preservation (www.lipperleaders.com). Lipper's Lipper Leader ratings are based on trailing 3-year performance (relative to similar funds). Though the Dreyfus Appreciation Fund is up only 2.2% so far this year (compared to a 4.8% YTD return by the S&P 500 index) it has one of the best long-term performance records in the large-blend category. For the 10-year period ended March 31, 2003, the fund had an average annual total return of 9.5%, compared to 8.5% for the S&P 500 index, solid enough to rank in the top decile of the Morningstar large-blend category. Below is a summary of the fund's trailing 1-year, 3-year and 5- year average annual total returns through April 29, 2003, using data from Morningstar. 1-Year Return/% Rank in Category: -12.3% Dreyfus Appreciation (DGAGX) 23rd Percentile -13.9% Morningstar Large-Blend Fund Average 3-Year Annualized Return/% Rank in Category: - 8.6% Dreyfus Appreciation (DGAGX) 12th Percentile -12.6% Morningstar Large-Blend Fund Average 5-Year Annualized Return/% Rank in Category: - 0.7% Dreyfus Appreciation (DGAGX) 20th Percentile - 2.8% Morningstar Large-Blend Fund Average Fayez Sarofim's 10-year numbers show that his buy/hold strategy has potential to outperform both the market and category peers. His trailing 1-year, 3-year and 5-year numbers indicate that he is capable of minimizing losses during market downturns (versus similar funds). So, you really could not ask for anything more if you are a true long-term investor. Sarofim buys and holds a diversified portfolio of blue-chip names for the very long haul, making it an appropriate match for investors with long horizons. Although low portfolio turnover can raise short-term volatility, Sarofim has done a nice job of managing risk over the long term, producing a favorable risk-reward tradeoff for patient investors. Below average expenses and low portfolio turnover make it a good fund for a regular (taxable) account. Each of the three Dreyfus Premier funds that are sub-advised by Fayez Sarofim & Co. has at least one share class that is 4-star rated by Morningstar. The Dreyfus Premier Core Equity Fund has produced "low" risk and "above average" returns relative to its large-cap blend peers, according to Morningstar. The Worldwide Growth and Tax Managed Growth funds have produced below average risk relative to their category peers, while generating average to above average returns on a relative basis to category peers. Below is a summary of the three Dreyfus Premier funds that are managed by Fayez Sarofim & Co., using Morningstar data for the Class A shares of the funds through April 29, 2003. 1-Year Return/% Rank in Category: -13.6% Dreyfus Prem Worldwide Growth (DROGX) 21st Percentile -12.5% Dreyfus Prem Tax Managed Grth (DTMGX) 26th Percentile -12.8% Dreyfus Prem Core Equity (DLTSX) 34th Percentile 3-Year Annualized Return/% Rank in Category: -12.3% Dreyfus Prem Worldwide Growth (DROGX) 33rd Percentile - 9.4% Dreyfus Prem Tax Managed Grth (DTMGX) 16th Percentile - 9.3% Dreyfus Prem Core Equity (DLTSX) 15th Percentile 5-Year Annualized Return/% Rank in Category: -2.8% Dreyfus Prem Worldwide Growth (DROGX) 38th Percentile -1.2% Dreyfus Prem Tax Managed Grth (DTMGX) 24th Percentile N/a Dreyfus Prem Core Equity (DLTSX) N/a You can see that the performance for these Dreyfus Premier funds is similar but perhaps not as strong as the Dreyfus Appreciation Fund, which has lower annual operating expenses to go along with its no-load cost structure. The philosophy and process on these funds are all similar to the Dreyfus Appreciation Fund, so gross performance (before fees) is fairly comparable. After deduction of expenses, however, total returns of the Dreyfus Premier funds aren't quite as good as the Dreyfus Appreciation Fund. With its low 0.97% expense ratio, Dreyfus Appreciation Fund has a moderate cost advantage over similar funds, including its "load" siblings. Conclusion The three Dreyfus Premier stock funds managed by Fayez Sarofim & Co. are similar to the no-load Dreyfus Appreciation Fund and are geared to people that invest through a financial advisor. While they vary in their cost structure and availability, all the load class shares have relatively higher operating expense associated with them. If you are a direct investor, then you are likely to find the Dreyfus Appreciation Fund to be a more attractive stock fund choice because of its below-average expense ratio. Because Fayez Sarofim & Co. buys and holds common stocks for the very long term, the Dreyfus Appreciation Fund may be volatile in the short term. However, over the long term, portfolio risk has been "below average" relative to other domestic stock funds, for an attractive risk-reward tradeoff to investors. Those who seek an actively managed and tax efficient large-cap core equity fund have a reliable option in the Dreyfus Appreciation Fund, managed by Fayez Sarofim & Co. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** Setting Up For MOPO by Mark Phillips mphillips@OptionInvestor.com In Monday's article, we spent some time addressing the question of whether it is time for to start sharpening our claws for another exhilarating ride down the charts. After looking at a long-term chart of the SPX and supporting charts of some of the additional indicators I use for assessing the likelihood of a trend change, I came to the conclusion that we can sharpen those claws, but we better not slip them on just yet. If you missed that discussion, click on the following link to catch up. MOPO - Remember That Term? http://www.OptionInvestor.com/traderscorner/tc_042803_1.asp I'm going to go light on the charts tonight, as those posted on Monday really haven't changed much. But I do want to take a more detailed look at the SPX chart. Actually, we need to look at two separate views in order to show all the important details. SPX Daily Chart -- View #1 Here we can see that the $920-925 area at the top of the descending channel is presenting a stiff obstacle for the bulls. But at the same time, each failure is being bought at progressively higher lows. In fact, bulls are likely encouraged by the fact that the past couple days have had the bulk of price action (and the closes) above the descending trendline from the August, November and January highs. Clearing off the chart and applying a different set of lines gives us another picture of the battle that is currently underway. SPX Daily Chart -- View #2 As the battle over SPX 920 continues, we have a pretty mature bearish ascending wedge in progress. It comes to an apex near 932 (right at the January highs), but there is a slight problem. Bearish ascending wedges that are going to break down in textbook fashion, typically do so about 2/3 of the way between the beginning of the pattern and its apex. As you can see, we are right at that point in the pattern, with the wedge approximately 7 weeks old and only about 3 weeks left until the apex is reached. A break from this wedge should occur in the next 2-5 days in my view. But wait a minute, you say. The VIX hasn't yet fallen into the 19-21 area, the SPX Bullish % is still rising and is not yet in overbought territory. How right you are! See, the price chart of the SPX is telling us that it is at a critical inflection point, but we don't have enough evidence yet to tell us that down is the high-odds bet. I think there are a couple different ways this might play out. The first scenario is that the SPX does fail to push through the top of its channel and we get the bearish breakdown below the bottom of the wedge. Such a development should have the index vulnerable to the bottom of that wedge pattern near the $790-800 level. But that breakdown would not be the high-odds MOPO trade that we're targeting here. It could make for a very nice downside trade, but remember, we're looking to have several disparate indicators all tell us to play the downside -- that we don't yet have. While I don't know what the probabilities are, the better setup for a MOPO trade would be to see the SPX push through the top of the ascending wedge, possibly into the $935-940 area. At the same time, we would likely see the VIX falling into the 19-21 area that has always signaled an impending market top. But we still have the issue of the Bullish %. Looking at it on the PnF chart, we can see that the bearish resistance line comes in at 65% currently. While we're still a ways from there at 56%, I can see where a rally to the $940 area would bring with it some internal strengthening that ought to have the Bullish % approaching that 65% area. This is where the SharpChart version of the Bullish % is so useful, as it really gives us a quantifiable measure with which to gauge that turning point in the Bullish % that might not show up quite as readily on the PnF chart. We have two things to watch for on that chart -- the first is for the Bullish % line to cross down through the 10-dma, while the confirmation comes from the CCI oscillator dropping below 100 and then crossing the zero line. So let's see if I can put it together in a summarized form. Case 1: The SPX confirms the bearish ascending wedge with a break to the downside, but the VIX never drops into that 19-21 range. Partial positions could be entered on the break from the wedge ($900 at this time), but prudent traders would wait for confirmation from the Bullish % SharpChart before rounding out to full bearish positions. Case 2: We get an upside breakout through the upper bound of the descending channel and through the top of the ascending wedge pattern. TAKE NO ACTION on this move. If there is to be a bearish resolution, it will happen when the SPX breaks back down into the wedge and out the other side. That would confirm that the breakout was a bull trap. It is on the break back down through the bottom of the wedge that we can get serious. What I like about this scenario, is the upside break would likely get the VIX closer to our desired action zone (making the options a bit cheaper as well) and have the Bullish % advancing closer to that 65% area. If we got a VIX down in the 19-21 "action zone", I would consider initiating partial bearish positions in the $930- 940 area (see resistance zone laid out on the first chart above), but wait for a break below the lower bound of the wedge in addition to a cross of the Bullish % line back under its 10-dma before rounding out to a full position. Alright, now that we have our scenarios laid out for initiating a MOPO trade, we have to decide on what vehicle to utilize. Should we focus on the SPX or how about the DOW or the NASDAQ? What expiration month? What strikes? So many questions... First off, I would eliminate the NASDAQ or QQQ from consideration. This isn't so much because I don't expect the NASDAQ to fall with the rest of the market, but because I think its downside is more limited. I went into my rationale behind this belief in a couple of articles I wrote at the start of the year. Here are the links in case you missed them. 'Tis The Season http://www.OptionInvestor.com/traderscorner/tc_010603_1.asp 'Tis The Season, Part II http://members.OptionInvestor.com/options101/opt_010803_1.asp So that leaves us with the DOW or the SPX. There's no reason why the OEX couldn't be used as an alternate to the SPX. To me, this is a matter of personal preference and account size. Smaller accounts will want to focus on the DJX because of the lower cost per contract. This allows for legging in and out of the trade with multiple contracts while still remaining within the confines of the money management guidelines laid out in your business plan. Larger accounts will want to focus on the SPX or OEX so they aren't having to deal with excessive commissions or large order sizes. My personal preference is to trade the DJX, but that is a decision based more on personal comfort than anything else. How much time? This strategy is a bit different than the MOCO strategy we've talked about in the past, as market reversals from low extremes on the VIX tend to take longer to work than those that occur from VIX high extremes. Look at a daily chart of the SPX or DJX from last year at this time. While the VIX low was reached in late March, the first leg down completed in early May (6 weeks later), but the real payoff came in July, 4 months after the VIX low. For that reason, I would err on the side of caution and buy at least 4 months of time, preferably more. I like the September expiration for the best odds of minimizing the issue of time decay while we let the trade work through the summer doldrums. The issue of which strike to buy is rather difficult right here, because we don't really know where the market will be trading when we get our entry signals. So rather than specify exact strikes, I think the best way to set up the trade is by selecting strikes a defined distance from current market value at the time the entry signal arrives. We're buying plenty of time, so we want to make leverage work in our favor by going with Out of the Money strikes. For the DJX, I would go 4-5 strikes OTM, while for the SPX, 2 strikes OTM should be optimal. For current levels, that would mean using the DJX SEP-80 Puts, or the SPX SEP-850 puts. You can adjust the selected strikes up or down depending on where the indices are trading at the time of entry. I know I've probably left out some important details here, but I think we've got a pretty good roadmap to work with. Get your action plan laid out now and then wait for the fireworks to begin! If I've left any questions unanswered, feel free to drop me an email and we'll address them in group fashion as time permits. Mark ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. 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The Option Investor Newsletter Wednesday 04-30-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: AZO, NXTL Dropped Calls: None Dropped Puts: None Play of the Day: Call - AZO Big Cap Covered Calls & Naked Puts: The Market "Tug-O-War" Continues! Market Watch: Mostly Four-Lettered Symbols Updated on the site tonight: Market Posture: Bulls Still In Control ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** AutoZone - AZO - close: 80.81 change: +0.47 stop: 77.90*new* AZO continued to trade higher today with positive comments from Merrill Lynch's retail analyst team helping out. We're raising our stop to $77.90. Meanwhile, traders who have not yet considered their profit targets should do so. We're going to set a suggested exit range between $83 and #85. We'll pick a specific target as AZO climbs higher. Picked on April 13th at $75.24 Change since picked: +5.57 Earnings Date 06/03/03 (unconfirmed) Average Daily Volume = 1.22 mln --- Nextel Communications - NXTL - cls: 14.76 chg: -0.85 stop: 13.90 You can send your thanks to the telecom analyst at Deutsche Securities. The company issued a "sell" rating on NXTL claiming that maybe the stock price had risen higher than the company's financial position would dictate. We're wondering if maybe NXTL's stock price had risen higher than they expected and suddenly their short positions were hurting (pure speculation on our part). Guess you can tell we don't trust the timing on some of these buy and sell signals from brokers. At any rate, the pull back is offering readers a chance to gauge their entries on the breakout above major resistance. We would expect NXTL to stay above the $14 level and more specifically to remain above the $14.50 level. Our stop is at $13.90. We listed a range last night of $15.00 to $14.50 to enter the play, so our official entry is $15.00. You, on the other hand, might be able to target shoot a much better entry if the dip continues tomorrow. Look for signs of a bounce. Picked on April 30th at $15.00 Change since picked: -0.24 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 21.6 Million ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** AutoZone, Inc. - AZO - close: 80.81 change: +0.47 stop: 77.90 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 (Sunday, April 28th's write up): 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. Play-of-the-Day Comments (Wednesday, April 30th): Shares of AZO have been very strong and out performing the RLX retail index and the DJIA. The close above $80 looks strong and could have shorts concerned enough to cover some positions. Furthermore, the retail sector team at Merrill Lynch came out with bullish comments on a number of stocks and AZO was one of their favorites. Suggested Options: Originally, we were suggesting the May 75 calls but shares have performed well and short-term traders may do better with May 80 calls. The May 75s have certainly appreciated since we first picked them. 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-80 AZO-EP OI=1108 at $2.55 SL=1.25 BUY CALL MAY-85 AZO-EQ OI= 333 at $0.55 SL=0.00*more risky* BUY CALL JUN-80 AZO-FP OI= 561 at $4.20 SL=2.00 BUY CALL SEP-85 AZO-IQ OI= 271 at $4.40 SL=2.20 Annotated Chart of AZO: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-30/AZO043003.gif Picked on April 13th at $75.24 Change since picked: +5.57 Earnings Date 06/03/03 (unconfirmed) Average Daily Volume = 1.25 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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* The Market "Tug-O-War" Continues! By Ray Cummins Bears battled bulls throughout the session Wednesday with the carnivores coming out on top as technology stocks led a closing retreat in the major equity averages. The NASDAQ Composite eased 7 points to 1,464 with semiconductor and computer hardware shares among the biggest losers. The Dow Jones Industrial Average slid 22 points to 8,480 on weakness in McDonald's (NYSE:MCD), Boeing (NYSE:BA), and Coca-Cola (NYSE:KO). The S&P 500 Index edged down 1 point to 916 despite strength in gold, oil service and airline stocks. Winners outnumbered losers by a 3 to 2 margin on the Big Board and by 9 to 7 on the hi-tech exchange. Trading was heavy, with 1.65 billion shares changing hands on the New York Stock Exchange while 1.58 billion shares were traded on the NASDAQ. Treasuries rallied, with the 30-year bond up almost a full point, propelled by the weak manufacturing data. The benchmark 10-year note rose 22/32 to 100-7/32, pushing its yield down to 3.85%. *************** SUMMARY OF CURRENT POSITIONS - AS OF 4/29/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AVID MAY 20 19.50 27.53 $0.50 5.89% 2.56% ERES MAY 22 21.90 29.76 $0.60 6.03% 2.74% JCOM MAY 25 24.70 28.84 $0.70 6.83% 2.83% RYL MAY 42 41.50 53.84 $1.00 4.45% 2.41% AVID MAY 20 19.70 27.53 $0.30 4.53% 1.52% CTSH MAY 18 17.27 18.64 $1.10 14.54% 6.37% JCOM MAY 22 21.80 28.84 $0.70 8.33% 3.21% ADI MAY 25 24.65 33.82 $0.35 4.94% 1.42% BBY MAY 27 27.00 34.40 $0.50 5.32% 1.85% KLAC MAY 32 32.05 41.20 $0.45 4.64% 1.40% LLTC MAY 27 27.15 35.62 $0.35 4.45% 1.29% MSTR MAY 22 22.00 32.79 $0.50 7.92% 2.27% SLAB MAY 22 22.15 28.70 $0.35 5.63% 1.58% XLNX MAY 22 21.90 27.44 $0.60 7.82% 2.74% AVCT MAY 27 27.20 30.01 $0.30 4.33% 1.10% COF MAY 35 34.50 40.10 $0.50 5.48% 1.45% CELG MAY 22 22.20 26.91 $0.30 5.90% 1.35% ERES MAY 25 24.70 29.76 $0.30 5.22% 1.21% ICOS MAY 22 21.95 26.93 $0.55 9.61% 2.51% KLAC MAY 35 34.60 41.20 $0.40 4.88% 1.16% OVTI MAY 22 22.20 23.79 $0.30 5.86% 1.35% Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CCMP MAY 50 50.70 44.57 $0.70 5.44% 1.38% MERQ MAY 37 37.95 34.43 $0.45 5.59% 1.19% QLGC MAY 42 43.40 41.63 $0.90 6.76% 2.07% * IGEN MAY 45 45.50 34.84 $0.50 6.90% 1.10% QCOM MAY 35 35.85 31.89 $0.85 7.39% 2.37% NE MAY 35 35.35 30.72 $0.35 4.15% 0.99% The bearish play in Qlogic (NASDAQ:QLGC) has previously been closed to limit potential losses. Cabot Micro (NASDAQ:CCMP) remains on the "early-exit" watch-list. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status BBH 97.50 102.26 MAY 85 90 0.60 89.40 $0.60 Open CAT 51.71 52.39 MAY 45 47 0.30 47.20 $0.30 Open RYL 47.52 53.84 MAY 40 42 0.25 42.25 $0.25 Open VIP 37.73 40.60 MAY 30 35 0.60 34.40 $0.60 Open EVG 47.07 47.50 MAY 40 45 0.50 44.50 $0.50 Open KRON 43.41 46.17 MAY 35 40 0.45 39.55 $0.45 Open TBL 47.84 50.90 MAY 43 45 0.25 44.75 $0.25 Open CTX 63.70 65.13 MAY 55 60 0.55 59.45 $0.55 Open RUT-X 394.97 395.78 MAY 370 380 1.10 378.90 $1.10 Open Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status APC 46.05 44.90 MAY 55 50 0.50 50.50 $0.50 Open ATK 53.08 53.75 MAY 65 60 0.45 60.45 $0.45 Open TOT 65.30 65.80 MAY 75 70 0.65 70.65 $0.65 Open CAH 56.55 54.96 MAY 65 60 0.80 60.80 $0.80 Open GM 34.48 36.29 MAY 40 38 0.30 37.80 $0.30 Open MXIM 35.51 40.68 MAY 45 40 0.75 40.75 $0.07 Closed MHP 56.65 60.42 MAY 65 60 0.65 60.65 $0.23 Open? DGX 56.70 58.37 MAY 65 60 0.85 60.85 $0.85 Open? EASI 37.91 34.11 MAY 43 40 0.50 40.50 $0.50 Open MMM 129.00 126.97 MAY 140 135 0.80 135.80 $0.80 Open DRYR 62.30 64.39 MAY 75 70 1.10 71.10 $1.10 Open SYMC 42.85 44.28 MAY 50 45 0.70 45.70 $0.70 Open? UHS 38.50 37.97 MAY 45 40 0.60 40.60 $0.60 Open The bearish spread in Maxim Integrated Products (NASDAQ:MXIM) has previously been closed to limit potential losses. Symantec (NASDAQ:SYMC), Quest Diagnostics (NYSE:DGX), and McGraw-Hill (NYSE:MHP) are "early exit" candidates. Synthetic Positions ******************* Symbol Pick Last Month L/C S/P Credit M/V Status GYI 32.43 32.87 JUL 35 30 (0.10) 1.20 Open Getty Images (NYSE:GYI) has achieved a favorable profit in less than one week. Questions & comments on spreads/combos to Contact Support ************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** APPX - American Pharmaceutical $23.29 *** Premium Selling! *** American Pharmaceutical Partners (NASDAQ:APPX) is a specialty pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. The firm produces over 100 generic injectable pharmaceutical products in more than 300 dosages and formulations. Its primary focus is in the oncology, anti-infective and critical care markets. The company makes products in all of the three basic forms in which injectable drugs are sold: liquid, powder and lyophilized (freeze-dried). APPX - American Pharmaceutical $23.29 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 17.5 AQO QW 2,366 0.15 17.35 5.9% 0.9% TS SELL PUT MAY 20 AQO QD 1,895 0.60 19.40 17.2% 3.1% * SELL PUT MAY 22.5 AQO QX 481 1.15 21.35 22.6% 5.4% ************** BBY - Best Buy $34.58 *** Bullish Retailer! *** Best Buy Company (NYSE:BBY) is specialty retailer of consumer electronics, personal computers, entertainment software and appliances. Best Buy operates retail stores and commercial Websites under the brand names Best Buy, Media Play, On Cue, Sam Goody, Suncoast, Magnolia Hi-Fi and Future Shop. The firm operates three segments: Best Buy, Musicland and International. Best Buy is mainly a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. Also included in the Best Buy segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video products. Their Musicland segment is primarily a mall-based retailer of movies, prerecorded music, video games and other entertainment-related products. The International segment consists of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances with operations in Canada. BBY - Best Buy Company $34.58 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 32.5 BBY QZ 3,392 0.50 32.00 7.8% 1.6% * SELL PUT MAY 35 BBY QG 2,570 1.35 33.65 16.4% 4.0% ************** COF - Capital One $41.87 *** Rally Mode! *** Capital One Financial (NYSE:COF) is a holding company whose major subsidiaries market a variety of financial products and services to consumers using its proprietary information-based strategy. The company's primary business is consumer lending, with a focus on credit cards, but including other consumer lending activities such as unsecured installment lending and automobile financing. The company's principal subsidiary, Capital One Bank, a limited purpose, state-chartered credit card bank, offers credit card products. Capital One, F.S.B., a federally chartered bank, offers consumer lending and deposit products. Capital One Services, the other major subsidiary, provides various operating, administrative and business services to the company and its subsidiaries. COF - Capital One $41.87 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 37.5 COF QU 3,885 0.35 37.15 5.2% 0.9% * SELL PUT MAY 40 COF QH 2,129 0.85 39.15 10.3% 2.2% ************** ICOS - ICOS Corporation $26.74 *** Drug Speculation Only! *** ICOS Corporation (NASDAQ:ICOS) develops pharmaceutical products with significant commercial potential by combining its unique capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and gene expression profiling. The firm applies its integrated approach to erectile dysfunction and other urologic disorders, sepsis, pulmonary arterial hypertension and cardiovascular diseases, as well as inflammatory diseases. The company has established collaborations with pharmaceutical and biotechnology companies to enhance its internal development capabilities and to offset a substantial portion of the financial risk of developing its product candidates. ICOS - ICOS Corporation $26.74 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 22.5 IIQ QX 1,307 0.35 22.15 9.8% 1.6% * SELL PUT MAY 25 IIQ QE 2,699 0.90 24.10 17.4% 3.7% ************** IDCC - InterDigital $22.53 *** Near Multi-Year Highs! *** InterDigital Communications (NASDAQ:IDCC) specializes in the architecture, design and delivery of wireless technology and product platforms. Over the course of its corporate history, the company has amassed a substantial and significant library of digital wireless systems experience and know-how, and holds an extensive worldwide portfolio of patents in the wireless systems field. InterDigital markets its technologies and solutions primarily to wireless communications equipment producers and related suppliers. In addition, the company licenses its Time Division Multiple Access and Code Division Multiple Access patents to equipment manufacturers worldwide. The company's quarterly earnings report is due 5/13/03. IDCC - InterDigital $22.53 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 20 DAQ QD 521 0.30 19.70 8.4% 1.5% * SELL PUT MAY 22.5 DAQ QX 302 1.15 21.35 21.6% 5.4% ************** JPM - J.P. Morgan Chase $29.35 *** Blue-Chip Portfolio Stock *** J.P. Morgan Chase (NYSE:JPM), is a global financial services firm established more than 150 years ago. The company has assets of $755 billion and operations in more than 50 countries. The firm is a global leader in investment banking, asset management, private banking, private equity, custody and transaction services, as well as retail and middle market financial services. A component of the Dow Jones Industrial Average, J.P. Morgan Chase is headquartered in New York and serves more than 30 million consumer customers and the world's most prominent corporate, institutional and government clients. JPM - J.P. Morgan Chase $29.35 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 27.5 JPM QY 16,409 0.25 27.25 4.7% 0.9% TS SELL PUT MAY 30 JPM QF 4,603 1.10 28.90 15.5% 3.8% ************** OVTI - OmniVision $24.29 *** Consolidation Complete? *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells high performance, high quality and cost efficient semiconductor imaging devices for computing, telecommunications, industrial, automotive and consumer electronics applications. The company's main product, an image sensing device called a CameraChip, is used to capture an image in cameras and camera-related products in a range of imaging applications such as personal computer cameras, digital still cameras, security and surveillance cameras, personal digital assistant cameras, mobile phone cameras, and cameras for automobiles and toys that incorporate both still picture and live video applications. Last Quarter, OmniVision exceeded consensus quarterly earnings estimates and revenue projections, aided by exceptionally strong demand from makers of digital still cameras and cameras for cell phones. OVTI - OmniVision $24.29 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 20 UCM QD 339 0.25 19.75 8.4% 1.3% * SELL PUT MAY 22.5 UCM QX 421 0.65 21.85 14.4% 3.0% ************** PHSY - PacifiCare $31.77 *** Favorable Earnings! *** 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. PHSY - PacifiCare Health Systems $31.77 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT MAY 27.5 HYQ QY 690 0.25 27.25 5.5% 0.9% * SELL PUT MAY 30 HYQ QF 791 0.80 29.20 13.0% 2.7% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** CFC - Countrywide Financial $67.60 *** All-Time High! *** Countrywide Financial (NYSE:CFC), formerly Countrywide Credit Industries, is a holding company that originates, purchases, sells and services mortgage loans through its major subsidiary, Countrywide Home Loans. The company's mortgages are principally prime credit first-lien mortgage loans secured by single one- to four-family residences (prime credit first mortgages). The firm also offers home equity loans and sub-prime credit loans. CFC, through its other wholly owned subsidiaries, offers products and services that are largely complementary to its mortgage banking business, including lender-placed mortgage insurance, insurance brokerage, mortgage-backed securities brokerage and underwriting, brokerage of bulk servicing transactions, loan processing and servicing in foreign countries, and retail banking. The company conducts its business through four segments: Insurance Segment, Capital Markets Segment, Global Segment and Banking Segment. The company's quarterly earnings are due 4/29/03. CFC - Countrywide Financial $67.60 PLAY (conservative - bullish/credit spread): BUY PUT MAY-60.00 CFC-QL OI=1897 ASK=$0.25 SELL PUT MAY-65.00 CFC-QM OI=595 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$64.60 ************** PLMD - PolyMedica $36.95 *** DOJ Settlement Pending? *** PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer medical products and services, conducting business through its Chronic Care, Professional Products and Consumer Healthcare segments. The company sells diabetes supplies and products, and provides services to Medicare-eligible seniors suffering from diabetes and related chronic diseases through its Chronic Care segment. Through its Professional Products segment, it provides direct-to-consumer prescription respiratory supplies and services to Medicare-eligible seniors suffering from chronic obstructive pulmonary disease. It also markets, manufactures and distributes a broad line of prescription urological and suppository products. PolyMedica markets prescription oral medications not covered by Medicare to its existing customers through its Professional Products segment. PLMD - PolyMedica $36.95 PLAY (speculative - bullish/credit spread): BUY PUT MAY-30 PM-QF OI=205 ASK=$0.45 SELL PUT MAY-35 PM-QG OI=72 BID=$0.95 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$34.50 *************** NEUTRAL PLAYS - STRADDLES & STRANGLES Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. *************** SNE - Sony $24.74 *** Reader's Request! *** Sony Corporation (NYSE:SNE) and its consolidated subsidiaries develop, design, manufacture and sell electronic equipment, instruments and devices for consumer and industrial markets. It also develops, produces, manufactures and markets home-use game consoles and software, and develops, produces, manufactures and distributes recorded music in all commercial formats and musical genres. Sony is also engaged in the development, manufacture, distribution and broadcasting of image-based software, including film, video and television, and in various financial service businesses, including insurance operations through a Japanese life insurance subsidiary and non-life insurance subsidiaries, banking operations through a Japanese Internet-based banking subsidiary and leasing and credit financing operations in Japan. Sony also has Internet-related businesses, an advertising agency business in Japan and location-based entertainment businesses in Japan and the United States. SNE - Sony $24.74 PLAY (speculative - neutral/debit straddle): BUY CALL JUN-25.00 SNE-FE OI=4843 A=$1.40 BUY PUT JUN-25.00 SNE-RE OI=1442 A=$1.60 INITIAL NET-DEBIT TARGET=$2.90-$3.00 INITIAL PROFIT TARGET=$0.75-$1.25 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** EASI - Engineered Support $34.73 *** Downtrend Intact! *** Engineered Support Systems (NASDAQ:EASI) along with its various subsidiaries, designs and manufactures military support equipment and electronics for the United States armed forces. The company also engineers and manufactures air handling and heat transfer equipment, material handling equipment and custom molded plastic products for commercial and industrial users. Engineered Support Systems' six wholly owned subsidiaries are Systems & Electronics (SEI), Engineered Air Systems (Engineered Air), Keco Industries, (Keco), Engineered Coil Company (d/b/a Marlo Coil), Engineered Electric Company (d/b/a Fermont) and Engineered Specialty Plastics. EASI - Engineered Support Systems $34.73 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAY 36.62 RUF EY 39 0.30 36.93 4.6% 0.8% * SELL CALL MAY 35 UFE EG 45 0.90 35.90 11.8% 2.5% ************** OHP - Oxford Health $29.27 *** Earnings Speculation Only! *** Oxford Health Plans (NYSE:OHP) is a healthcare company providing health benefit plans in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and the Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice plans and also third-party administration of employer-funded benefit plans. The company offers its products through its HMO subsidiaries and also through Oxford Health Insurance, a health insurance subsidiary. OHP - Oxford Health $29.27 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL MAY 32.5 OHP EZ 622 0.35 32.85 7.5% 1.1% * SELL CALL MAY 30 OHP EF 10,242 1.10 31.10 17.3% 3.5% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** APC - Anadarko Petroleum $44.40 *** Next Leg Down? *** Anadarko Petroleum (NYSE:APC), through RME Petroleum Company, RME Holding Company, Anadarko Canada Energy, Anadarko Canada Corporation, RME Land and Anadarko Algeria Company, is a global independent oil and gas exploration and production company. The The company's major areas of operations are located in the United States, primarily in Texas, Louisiana, the mid-continent region and the western states, Alaska and in the shallow and deep waters of the Gulf of Mexico, as well as in Canada and Algeria. APC is also active in Venezuela, Qatar, Oman, Egypt, Australia, Tunisia, Congo and Gabon. APC - Anadarko Petroleum $44.40 PLAY (conservative - bearish/credit spread): BUY CALL JUN-50.00 APC-FJ OI=270 ASK=$0.25 SELL CALL JUN-47.50 APC-FW OI=900 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.35-$0.45 POTENTIAL PROFIT(max)=16% B/E=$47.85 ************** CDWC - CDW Computer Centers $42.63 *** Downgrade = Sell-Off! *** CDW Computer Centers (NASDAQ:CDWC) is a direct marketer of various brands of computers and related technology products and services. CDW's extensive offering of products, including hardware, software and accessories, combined with its service offerings, provide comprehensive solutions for its customers' technology needs. The company offers more than 80,000 products, which include a wide range of product types from manufacturers such as Cisco, Compaq, Hewlett-Packard, IBM, Intel, Microsoft, Sony and Toshiba, among others. The company's value-added services include its ability to custom-configure multi-branded solutions for its many customers and offer technical support 24 hours a day, seven days a week. The company has two main operating segments, corporate, which is comprised of business customers, but also includes consumers, and public sector, which is comprised of federal, state and local government and educational institutions who are served by CDW Government, a wholly owned subsidiary. CDWC - CDW Computer Centers $42.63 PLAY (conservative - bearish/credit spread): BUY CALL MAY-50.00 DWQ-EJ OI=987 ASK=$0.20 SELL CALL MAY-45.00 DWQ-EI OI=1673 BID=$0.55 INITIAL NET-CREDIT TARGET=$0.40-$0.50 POTENTIAL PROFIT(max)=8% B/E=$45.40 ************** MMM - 3M Corporation $126.04 *** Trading-Range Top At $130 *** 3M Company (NYSE:MMM), formerly known as Minnesota Mining and Manufacturing Company, is an integrated enterprise characterized by intercompany cooperation in research, manufacturing and sale of products. 3M's business has developed from its research and technology in coating and bonding for coated abrasives, the company's original product. Coating and bonding is the process of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper (repositionable notes). The company conducts business through six operating segments: Industrial Markets; Transportation, Graphics and Safety Markets; Health Care Markets; Consumer and Office Markets; Electro and Communications Markets, and Specialty Material Markets. MMM - 3M Corporation $126.04 PLAY (less conservative - bearish/credit spread): BUY CALL MAY-135.00 MMM-EG OI=3383 A=$0.15 SELL CALL MAY-130.00 MMM-EF OI=6046 B=$0.70 INITIAL NET-CREDIT TARGET=$0.55-$0.70 POTENTIAL PROFIT(max)=12% B/E=$130.55 ************** SEE DISCLAIMER - SECTION 1 ************** ************ MARKET WATCH ************ Mostly Four-Lettered Symbols Apollo Group - APOL - close: 54.14 change: -0.74 This education stock has been kicking butt with its relative strength against the markets. Actually, the entire sector is doing well. Short-term traders can look for a pull back to the $53 area as an entry point to go long. Use a tight stop. http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-30/APOL043003.gif --- Dollar Tree Stores - DLTR - close: 25.44 change: +0.31 Shares of DLTR have vaulted above their simple 200-dma and the $25 level on an upgrade by Merrill Lynch, which occurred on Tuesday. Shares were able to maintain their strength today and we could be witnessing a runaway gap. The next level of resistance is $27.50. http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-30/DLTR043003.gif --- Citrix Systems - CTXS - close: 19.00 change: +0.20 Software company Citrix has seen its stock explode higher on its stronger than expected earnings news a week ago. This could be part of a short squeeze but looking at the weekly chart we see CTXS currently battling with crucial resistance between $19 and $20. We'd look for a good sized pull back before considering a long play. http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-30/CTXS043003.gif --- Capital One - COF - close: 41.87 change: +1.77 Yup, these are the folks who bring you the "What's in your wallet?" commercials. Shares have been on a steady uptrend for weeks and we mentioned the breakout this morning on the Market Monitor. The $40-41 area has been serious resistance and the breakout could have shorts scurrying for cover. The upside breakout also shows up on the point-and-figure chart. Contributing to the move was an upgrade by JP Morgan this morning. We'd look for a pull back to $40 as an entry and use a tight stop as share look overbought. http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-30/COF043003.gif ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- AMLN $19.10 - AMLN was on the Watch List on Monday and the stock has continued to climb. Shares are technically above serious resistance at $19.00 but the stock looks very extended. CKFR $27.57 - Still watching and waiting for that pull back. The $25 level may be the area to watch. GRMN $42.38 - Yet another one that brings back memories of the bull market. Shares of GRMN are up another 8% today. Earnings were today. Looks like the results were good. Volume was very strong today. We still wouldn't chase it. TRMB $25.18 - This one just won't stop now will it? Shares are up another seven percent since Monday. Earnings were last night after the close. Surprise, they were supposed to be today. Looks like the numbers were good. We wouldn't chase it here. CMGI $0.99 - Certainly not an optionable play for us, nor would we suggest trading CMGI as a stock due to its volatile swings. However, after reminiscing briefly over the go-go days we noted that CMGI was up 20% from its mid-April lows. ************** MARKET POSTURE ************** Bulls Still In Control To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_043003.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. 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